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Taxing authorities are frequently asked to review proposals for a reduction of the appraised value of property that has been environmentally contaminated, which may result in confusion and uncertainty about appraisal standards and methods, engineering estimates of the costs to remediate, and "stigma" definitions. This article provides appraisal guidelines, technical guidelines for site assessment and remediation, and cost analyses. The case study is about an early brownfields development in National City, California, where the site, the Fox Auto Agency, also known locally as the former Duck Pond Landfill (DPLF), was not properly characterized or remediated before the new auto facility was built. In addition, tax court guidance and a case study are presented.

Introduction

The appraisal of environmentally contaminated property presents unique challenges to the tax examiner (TE) and the appraiser. Challenges include the nature and degree of impairment, the potential health problems for occupants of the contaminated property and the community, and the separation of economic obsolescence from damages due to contamination, as well as basic appraisal methods and taxing policy issues.

The tax assessment problem arises when a property owner notifies the county assessor that his or her property is contaminated. The property owner may submit "evidence" of environmental contamination and a "loss of value" appraisal. At a hearing, the property owner may provide witnesses for testimony o: 11 stigma," an inability to sell the property, or an inability to obtain mortgage financing. The TE will most likely seek guidance from such authorities as the Appraisal Standards Board, the International Association of Assessing Officers (IAAO), and the Appraisal Institute. The TE may also seek technical guidelines for site assessment and remediation of contaminated properties and for cost analyses from such authorities as the Environmental Protection Agency (EPA). In addition, tax court guidance from the state will need to be reviewed.

Characteristics of Contaminated Properties

To understand the issues in the valuation of contaminated property, it is useful to look at the types of contamination, the nature of the impairment, and the economic situation the property owner faces.

Types of Contamination

The most common type of property contamination results from a leaking underground storage tank (UST), typically from a gasoline station. Most often, the contaminant is gasoline, diesel fuel, or petroleum wastes. These sites are well understood in the environmental technical and regulatory community, and documentation of the contamination is often straightforward. Cleanup costs are also well understood as cleanup funds are available from most states, and the criteria for payments are well documented (SWRCB 1995). The uncertainty of cleanup methods and costs is minimal in a simple UST leak.

However, in situations where a "plume" of contamination reaches groundwater and extends under many properties, the remediation of fuel leaks can be very difficult to understand, and the cost of remediation can be very uncertain. Recently, regulatory agencies in California have recommended that some "fuel only" contamination be left in the ground for "natural attenuation"-letting the natural bacteria devour the carbon over time. The timing and cost of cleaning up these sites can vary depending on geotechnical and hydrological considerations, as well as the vagaries of the opinions and motivations of the regulatory agencies and property owners.

Many sites are contaminated with toxic substances that are more difficult to remediate. Chlorinated hydrocarbons such as PCE (tetrachloroethylene) are found at many sites including drycleaners, machine shops, and auto repair facilities. These contaminants are more toxic and more difficult to clean up than fuel spills because they can penetrate deep into groundwater and, in effect, hide from the site inspectors. Cleaning methods, costs, and timing may result in greater uncertainty than a simple fuel spill.

Also, many sites suffer from multiple contaminants. Former military sites are notorious for having aviation fuel leaks, range munitions, and on-site hazardous waste landfills, and it may take years to characterize the site effectively, before remediation can be considered. It is also typical that as many as twenty different engineering studies may have been conducted, many piggybacked on others resulting in a wide variety of conclusions regarding limitations on the future use of the property. The El Toro Naval Base in Orange County, California, is just such a site. For years, community advocates have been locked into debates about future use, including parkland, airport, or shopping center, because the cleanup methods and costs are not well defined.

Many of the contaminated sites have undergone a health-risk assessment. However, such reviews may not have been done well or are difficult to understand. In addition to the contaminated industrial and commercial properties, the TE may encounter residences that have been exposed to toxic mold or pesticides, making the question of "fit for habitation" a major consideration.

Due to the variety of contamination and geotechnical problems, health risks presented, and the uncertainties of the future of the properties, it is much more difficult to assess the damage that has occurred at contaminated properties than those properties that have been the subject of disasters, such as fires, floods, or construction defects.

Nature of Contaminated Property Impairment

Contaminated properties may be classified as contaminated land, contaminated industrial or commercial properties, and contaminated residential properties. Contamination may be "contained" or "uncontained." Another consideration is areawide contamination compared with localized contamination. Stigma may be another important consideration in the cleanup cost analysis. These factors become important to the consideration of appraisal methods and cleanup methods and costs.

* Land-Contaminated land may include farmland, properties held for investment, landfills, and industrial properties that have been so severely damaged that the property is essentially reduced to a "start over" economic category. In many of these situations, the cost to investigate and remediate the contamination exceeds the value of the property. However, some taxing authorities refuse to accept a "zero" valuation and insist that the land is useful even if that use is a parking lot. (See Bentz Foundation v. Franklin County.)

* Industrial/Commercial Properties-Contamination of these properties calls for a close review of the income potential of the properties. Not all contaminated properties must be evacuated, and rents may continue to be collected. The method of accounting for income streams versus cost-to-remediate streams may be important to the valuation. Concepts of highest and best use of the property when cleaned may lead to disagreements between TE and appraiser.

* Residential Properties-Contamination of residential properties is often more difficult for the TE to assess adequately than the contamination of industrial properties. Lacking funds to obtain professional help to prove contamination and loss of value, home owners rarely provide adequate documentation of loss of value.

* Contained or Uncontained-Wilson (1996) described contamination as contained when it is bounded (such as asbestos in a building) or uncontained (such as fuel leakage from a UST to groundwater that would not respect property boundaries). The risks resulting from uncertainty would be much higher in uncontained scenarios.

* Areawide Contamination-Contamination of a broad spectrum of properties can be found at Superfund sites. The contamination is widespread, and the investigation and remediation are well documented. However, substantial uncertainty exists as to the prospects for economic recovery of the area. Special economic/political organizations, such as economic development agencies and brownfields, are often needed to get the cleanup done and establish economic viability in the area. The TE will often need environmental appraisal consulting assistance, including market studies, to sort out the valuations of a large group of properties. Often, property owners resist the cleanup program because they foresee increases in property taxes. Renters resist the development because they foresee future rents as unaffordable. Community input and economic justice become additional factors for the TE to review. One example of this is the San Diego Padres ballpark redevelopment project, which has been held up for about three years by dissident lawsuits.

* Stigma-Decreased salability of a property is a major factor that leads appraisers to include stigma in their loss-of-value calculations. Many appraisal articles have been devoted to this subject. Chalmers (1993) defined stigma as "the reduction in value caused by contamination resulting from the increased risk associated with the contaminated property." Patchin (1991) referred to stigma as a negative intangible. He included fear of hidden costs, the trouble factor (in which the buyer wants compensation for the trouble of cleaning up), fear of liability, and inability to obtain a mortgage. The preferred definition of stigma used here is "a perception of economic risk related to the uncertainties of the cleanup process." Market studies can clarify the extent of such perceptions among potential buyers, real estate brokers, and lenders (Weber 1997). The TE should insist upon documentation of stigma within the appraisal method.

Economic Situation Facing the Property Owner

Property owners face many economic problems related to contamination on their property, and property tax relief is often the best choice for recovering some compensation for the damages. Often, these problems are devastating to the property owner as income is diminished and costs of environmental investigation and remediation increase.

* Property Owner Liability-A unique characteristic of the contaminated property scenario is that liability for cleanup rests, in most cases, with the current property owner who may not have contributed to the contamination in any way. A frequently encountered situation is the shopping center owner who has leased a corner lot to a gas station. If a release of hazardous materials at the gas station occurs, it is the shopping center owner who has the responsibility of investigating and remediating the property. That situation often leads to long and arduous negotiations between the current property owner and gasoline suppliers, lessees, previous lessees and owners, and regulatory agencies. Sorting out the restitution often takes precedence over cleanup of the property, and the property may remain in its contaminated state for years while the property continues to deteriorate. The current property owner may seek relief from the burden of property taxes.

* Insurance Coverage-Insurance companies keep the environmental courts busy with their persistent denial of lawsuit defense and their exclusions for environmental damage coverage. Hence, a traditional means of economic damage recovery is often unavailable to the owner of contaminated property.

* Damage Recovery Lawsuits-Property owners face difficult odds in their effort to obtain environmental damages from the responsible parties in court. Federal laws may be used to stop contamination from spreading, but state courts are the venue of choice for recovery of damages. Most often, the tort of nuisance must be claimed to recover contamination damages, and stigma damages are denied in many states and very difficult to achieve in others.

Standards for the Valuation of Contaminated Properties

Guidelines for performing the various technical and economic evaluations, including valuations and appraisals, began to appear around 1990 amidst the collapse of the savings and loan industry. A contributing factor to the industry problems was the overvaluation of real estate included in many bank portfolios containing contaminated properties. Leadership in standards development came from the Federal Deposit Insurance Corporation (FDIC), which forced banks to evaluate their portfolios for environmental risk.

ASTM Standards

Standards for assessing the risks of environmental contamination of commercial properties were prepared by the American Society of Testing Materials (ASTM) with the comprehensive Phase I Environmental Site Assessment (ASTM E-1527) published in 1993. The standard follows the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA)-known as Superfund because it provides federal funding for cleanups-which was reauthorized in 1987. This standard focused on providing an "innocent landowners' defense" to CERCLA's draconian "strict and several" liability scheme. The standards have been revised frequently, and they have multiplied into a variety of environmental investigative tools and now are written into many federal and state laws regarding property investment (Ross 1994, 1995).

The ASTM Phase I is a document with which all appraisers should be familiar. It covers the history of use of the property with documentation including (1) review of ownership records of the property back fifty years or when the property was first developed commercially; (2) collection and analysis of source documents located in recorders' offices and building departments; (3) review of aerial photographs, again back fifty years or to first commercial development; and (4) comprehensive site inspection to identify hazardous materials and waste practices, evidence of spills, and location of USTs (Ross 1994).

A Phase I is an essential document for review when conducting an appraisal of contaminated property. Many engineers skip this step when presenting evidence of contamination and remediation. Therefore, potential contamination can be missed by ignoring a property's history of use.

Appraisal Standards

The appraisal industry has contributed substantially to the understanding of the process of valuation of environmentally contaminated properties, but the development of standards has lagged.

* Appraisal Foundation-The Appraisals Standards Board of the Appraisal Foundation issued its Advisory Opinion G-9, Responsibility of Appraisers Concerning Toxic or Hazardous Substance Contamination, on December 8, 1992. The opinion advised appraisers (1) of the ethics of the "competency test," (2) warned them not to undertake appraisal of contaminated properties unless they were qualified to do so, (3) told them they may reasonably rely on the findings of other professionals, and (4) encouraged them to work with environmentally trained professionals when such issues arise.

* Appraisal Institute-The Appraisal Institute began publishing articles about the appraisal of environmentally contaminated properties in the 1980s and conducted a groundbreaking symposium in Philadelphia in 1991 to present its findings (Appraisal Institute 1992). The institute issued its Guide Notes to the Standards of Professional Appraisal Practice (Guide Note 8 1993, 2001) emphasizing professional ethics and in particular, the issuance of disclaimers or limiting conditions to the appraisal report stating that the appraiser did not consider environmental conditions in his or her appraisal or relied on others. Throughout the years, publications from the Appraisal Institute have shaped the development of appraisal practice in this area. Kinnard, Mundy, Patchin, Wilson, and many others have produced reference quality work.

* Fannie Mae-Fannie Mae issued its revised Uniform Residential Appraisal Report (URAR) in 1993 and identified limiting conditions such as the "presence of hazardous wastes, toxic substances, etc." (Coffay 1993).

* IAAO-The International Association of Assessing Officers issued its Standard on the Valuation of Properties Affected by Environmental Contamination in 1992 and revised it in 2001. Unlike other appraisal organizations, the IAAO established its "concepts of value" (IAAO 2001, p. 11) as (1) unencumbered value and (2) value in use. The unencumbered value is described as "the value that the property would have if no adjustment were made for any environmental encumbrance." It states that "this value can be obtained using standard appraisal methods." In addition, "value in use suggests that a property that is still in use, or which can be used in the near future, has a value to the owner." The standard also cautions the appraiser that "fully deducting the (remediation) costs may overstate the decline in value because the value in use concept would then be ignored." The importance of this standard to the appraiser and to the TE is that costs to cure are itemized, giving a better feel for the legitimacy of a loss-of-value report.

Standards for Remediation Work and Cost Estimates

The appraisal literature has generally ignored what in most cases is the largest and most uncertain element in the appraisal of contaminated property-the method and cost to remediate the property. Standards for remediation concepts generally originate from the EPA following CERCLA or Response Conservation and Recovery Act (RCRA) models that involve rigorous evaluation of remediation alternatives. These standards are also replicated by state and local regulatory organizations. In San Diego County, California, the Site Assessment and Mitigation (SAM) Program in the Department of Environmental Health issues an annually updated manual for very specific activities in a remediation work plan (SAM 2002). It is important that the appraiser and TE be familiar with accepted standards and practice of engineering work and cost estimates in the local area.

Laws and Protocols for Site Assessment and Remediation

Any environmental engineering report and cost estimate should rigorously follow the established environmental laws and protocols.

* National Contingency Plan (NCP)-The National Oil and Hazardous Substances Pollution Contingency Plan, more commonly called NCP, is the federal government's blueprint for responding to oil spills and hazardous substance releases. In effect, the NCP authorizes CERCLA, RCRA, and and all other laws and regulations regarding investigations and cleanup of contaminated sites. The various laws offer rigorous models for site assessment and cleanup, but there is one thing they have in common: Any remediation plan must be either "consistent with" or "not inconsistent with" the NCP (Steinway 1990; Wilson 1996).

* Applicable or Relevant and Appropriate Requirements (ARARs)-Remediation plans that follow the CERCLA and RCRA models require attainment of all federal and state laws applicable or relevant and appropriate requirements of the NCR That means that the site assessment and remediation plan must contain a review of environmental laws and note any plan deviations or inconsistencies.

* Remedial Investigation/Feasibility Study (RI/FS)-All legitimate remediation plans contain some version of CERCLAs Remedial Investigation/Feasibility Study (EPA 1999). A detailed document, Guidance for Conducting Remedial Investigations and Feasibility Studies Under CERCLA, Interim Final can be obtained from the EPA (1988).

* Remediation Goals-No remediation plan is complete without the determination of remediation goals. This answers the question of "How clean is clean?" In California, one set of goals, known as preliminary remediation goals (PRGs), are issued by the EPA. Other goals may be set by the Regional Water Quality Control Board or, in San Diego County, by SAM.

* Features-Key features of the engineering plan applicable to a site with soil contamination would include the following: (1) the site must be fully characterized-any contamination must be specified as to vertical and lateral dimensions and movement; (2) groundwater and all geotechnical and hydrological influences must be determined; (3) health risk assessments must be completed; (4) alternative scenarios of remediation must be detailed and evaluated; (5) health and safety plans are an integral part of the engineering proposal; (6) disposal of all wastes generated by the RI/FS process must be accounted for; and (7) some form of uncertainty analysis must be performed.

* Regulatory Orders-The TE and appraiser will want to carefully examine any orders by regulatory agencies. The absence of an order does not necessarily mean there is no need for a cleanup; rather, the issue should be explored by the TE (see Carson v. Unocal.

Standards for Remediation Cost Estimates

The cost area has not had much scrutiny, even by the EPA. Guidance is limited primarily to the experience of the engineering contractors. TEs and appraisers would be well advised to have a third-party cost expert review all cost proposals.

* EPA Guidance-A wide variety of cost analyses are available from the EPA. One, The Role of Cost in the Superfund Selection Process, is referenced at the end of this article. The discussion parallels the RI/FS documentation discussed above.

* Standard Costs-The Army Corps of Engineers has a standardized environmental remediation cost database, which is accessible for a fee. There are also a number of vendors who can provide such contractual services. One advantage of using standardized cost analysis models is that a variety of cost and remediation options can be explored without obtaining competitive bids (Means). Another source in California is the State Water Resources Board UST Fund Cost Guidelines.

* Competitive Bids-Competitive bids should be obtained for all major cost projects. The TE should insist that the property owner provide cost estimates that reflect the competitive business environment.

Case Study: Auto Agency Adjacent to Old Landfill

This case study is about an early brownfields development in National City, California, where the site, the Fox Auto Agency, also known locally as the former Duck Pond Landfill (DPLF), was not properly characterized or remediated before the new auto facility was built. Methane gas emanated from below the surface at the Fox Agency and contaminated the groundwater under the property. The result was differential subsidence (sinking) of the Fox Agency buildings, causing substantial costs (and embarrassment) to the property owners, governmental entities, and regulatory agencies.

The client, South Bay Volkswagon (SBVW), located adjacent to the Fox Agency (old DPLF), had been contacted by a property tax reduction specialist who found that the existing property tax appraisal of approximately $2 million was comparable to that of existing sales of specialized automobile agency properties in the area, and no tax reduction would be justified unless it could be shown that there was environmental damage.

Camtec Environmental Consultants was called upon to provide engineering and appraisal assistance to SBVW. The purpose of the studies was to determine if SBVW had suffered environmental damage, and if so, what the costs to remediate the property would be.

Work Plan

The work plan was based on a team approach. Work was divided into three parts: (1) engineering analysis based on the ASTM Phase I Standard-Camtec and Keller Engineering; (2) cost to remediate and loss of value report-Camtec and Keller; and (3) appraisal report-property tax representatives.

The engineering analysis and cost to remediate studies consisted primarily of the analysis of documents, site inspections, and interviews with a wide variety of property owners, regulators, city and county officials, and industry experts. Key to the analysis was a review of more than 10,000 pages of documentation at various agencies detailing environmental activities at DPLF and SBVW. The team did not conduct tests at the site because the contamination existing at the SBW property could be documented from records.

History of SBVW Property and the Duck Pond Landfill

The old DPLF site was once a San Diego County landfill that was abandoned in the 1960s. A variety of small businesses were built on the site where water would accumulate after rains, and ducks would appear; hence, the name Duck Pond Landfill. The SBVW site and the Fox site were part of a redevelopment agency project in the early 1980s to reclaim underutilized properties and expand the National City Mile-of-Cars. Herb Fox became owner of the two parcels after a bidding process. Fox sold the SBVW property, which was not considered to be contaminated, and assumed the liability of building on the old DPLE

Substantial environmental engineering studies were conducted on the Fox property, and permits were obtained by Fox to build the new auto agency. However, after construction of the new agency, subsidence appeared, and the environmental regulatory agencies ordered Fox to monitor the groundwater under the DPLF and install a gas migration control system.

Under the burden of environmental costs, building repairs, and lawsuits, Fox went bankrupt, and six different regulatory agencies and the city, county, and state could not agree upon a plan and funding for remediation of the Fox Agency property.

Contamination at the Sites

Consultants began their site investigations in early 1997. At that time, the National City Fire Department had recorded methane gas at higher than the lower explosive limit (LEL) in vaults within a few feet of the property line between Fox and SBVW. The fugitive emissions put automobiles and people at SBVW at considerable risk. Consultants found the gas control system at Fox to be poorly designed and constructed. Further, it was operated inconsistently. Groundwater monitoring wells at the sidewalks and on the SBVW property showed groundwater contamination of chlorinated hydrocarbons were of such composition as to leave no doubt that SBVW property was contaminated, and the source was the old DPLE

Remediation Plan

The consultants made key assumptions in developing alternative remediation scenarios:

That the contamination invading the SBVW property could not be stopped by remediating the source of the contamination at the adjacent Fox property. The reasons were that complete removal of the gas emissions and the leachate were not likely to occur. No stakeholder, including the city, county, state, or other agencies, would step forward with the funds or the will to correct the problem. There was no outside investor to solve the problem. The best that could be hoped for was to dedicate a park on the Fox site with about the same controls as before.

2. That no agency would require that SBVW clean up its own site unless SBVW pursued that option. The potential political and economic risk of that action might be worse than the environmental risk.

3. That SBVW was left only with the option of controlling the contamination coming from the Fox property so that the health and safety risk could be minimized.

Thus the concept proposed by Kinnard for appraising contaminated properties, the "cost to control" rather than the "cost to cure," fits this case exactly (Kinnard 1992).

A model for the RI/FS procedure was then developed. Consultants concluded that a rigorous CERCLA or RCRA model was too costly to use in this case, primarily because extensive physical and chemical testing would be required. Instead, consultants proposed a model that resembled an ASTM risk based corrective action (RBCA) model that had been adopted (in part) in the SAM manual.

Four technical scenarios were then proposed ranging from the least extensive contamination and least rigorous containment scenario to the most extensive excavation and full-cure scenario. Each scenario was detailed into the supporting activities required to implement the scenario, and the various scenarios were estimated to keep costs, technical effectiveness, and health and safety risks in balance. The major elements of each scenario were assessed (probability analysis) as to the likelihood of passing all the criteria including acceptance (permitting) by four regulatory agencies: SAM, Air Pollution Control District, Regional Water Quality Control Board, and Integrated Waste Management Board. The scenario that the team (plus reviewers) judged most likely to pass all the tests is described below.

The scenario chosen for cost estimating assumed the following conditions and site characterization and remediation decisions:

1. The investigation will show a substantial amount of methane gas under the northwest portion of the site and limited to the car lot.

2. Only a small amount of trash underlying the property will be found and that is limited to the car lot.

3. Cooperation with the agencies and the DPLF responsible parties will be achieved.

4. DPLF will satisfactorily control the ambient gas discharges on its property.

5. Additional gas controls will be required to be installed at SBVW site at the car lot and the sales office.

6. The risk assessment will show some exposure to employees, cars, and facilities on the subject property.

7. Gas and groundwater monitoring the subject site will be mandated by regulatory agencies but paid for by the owner.

8. A small amount of trash will be excavated.

9. There will be extensive car lot modifications: The lighting system will be modified extensively, and some areas will be restricted in use.

10. A vapor barrier will be installed between the Fox and Bay Cabinet and SBVW properties.

11. These actions will require closure of portions of the facility for a period of time, and the rental of space to store the cars will be required.

Cost-to-Control Estimate

Using the Means cost analysis manual and the consultants' experience, the total cost-to-control was projected at $1,225,000. Major work elements were as follows:

1. Preliminary Assessment 6- Cost Analysis-Work elements included cost analyses/funding, liaison with regulatory agencies, project initiation, and associated expenses and staff support.

2. Management Planning and Support-Work elements included selection of management team, preparation of engineering work specifications, preparation of contractor work specifications, other work specs, solicitation and analysis of bids, preparation and negotiation of contracts, design quality assurance project controls, and associated expenses and staff support.

3. Litigation Support-Work elements included selection and review of third party reviewer work, surveyors' support, reviews with attorneys and insurance firms, and associated expenses and staff support.

4. Economics Planning and Support-Work elements included project funding planning and support, project contingency plans, provision of financial data, valuation study, project cost analysis and controls, and associated expenses and staff support.

5. Engineering Work Plan-Work elements included preliminary engineering work plan, surveyors' study, logistics, and traffic plan.

6. DPLF Environmental Records Review-Work elements included environmental records review, geological assessment, engineering conceptual design, regulatory workplans, permits, analysis of analytical tests, health risk assessment, staff support, and final engineering report.

7. Soil, Groundwater, Soil Gas, and Ambient Air Testing-Work elements included traffic control, preparation of property site, car storage and removal, asphalt preparation and maintenance, taking soil borings, installing groundwater monitoring wells, installing gas monitoring wells, maintaining wells, installing air monitoring stations, monitoring DPLF well, equipment rental/purchase, laboratory fees, and staff support.

8. Remediation er Construction-Work elements included physical barriers, excavation, loading, hauling, manifesting, and gas migration controls.

9. Project Closure-Work elements included final engineering report, environmental closure reports, ongoing maintenance for three years, final economic evaluation report, and management and engineering support for three years.

In this analysis, all anticipated costs were considered including those associated with management and litigation. As a guide to costs, the Means manual and the Standard on the Valuation of Properties Affected by Environmental Contamination (IAAO 1992) were reviewed. Consultants made extensive contacts with remediation contractors and equipment suppliers for cost proposals.

Loss of Value Analysis

* Valuation Standards-The development of standards for valuing environmentally impaired property has been emerging slowly. It had become accepted that the method for determining the value of environmentally impaired property was to first establish the value of the property on an unimpaired basis, and then subtract the impaired value, the residual (after adjustments) being fair market value. The IAAO had established standards for valuing environmentally impaired property that identified many items of expense in costing the effect of contamination, and consultants used these guides in the cost analysis (IAAO 1992).

The approaches considered to determine the unimpaired value included the income approach, the cost approach, and the sales comparison approach. The consultants' studies of the appraisal literature showed that the income approach is preferred when operating data for a facility is readily available (revenues, vacancies, operating costs, and so on), and the uncertainties are readily quantifiable (Neustein 1992; Mundy 1994).

The sales comparison approach was chosen by the appraiser on this assignment to determine the unimpaired value because comparable property sales were available. The income approach was not used because income data were not available to calculate comparable returns.

* Highest and Best Use-The highest and best use for the property was as an auto agency. The property was located on the Mile-of-Cars, and the area was tightly zoned for this special purpose.

* Stigma-When costs of cleanup are known with some certainty and are quantifiable, the uncertainty and fear associated with stigma is reduced. Thus, there is a real trade-off between the cost to cure the problem and the related stigma. Applying that reasoning to the subject property, the owner could (1) do nothing, and the property becomes very difficult to sell, and value goes down to its basic utility of about 50 percent of its unimpaired value, or (2) take steps to control the contamination, and invest to make the property saleable and gain full utility. Stigma is lessened, and the property has value of perhaps 80 percent to 95 percent of the unimpaired value.

Consultants estimated the residual stigma in this case at 20 percent because of the ugliness and the obvious remaining hazardous problems adjacent to the subject property. The DPLF is likely to remain a factor creating stigma for SBVW for many years to come. The SBVW is adjacent to the DPLF, and it has been shown that proximity and line of sight are major factors in increased stigma (Greenberg 1993). Landfills generally must be monitored and maintained for twenty to thirty years after their closure (Robbins 1991).

* Other Considerations-Some additional factors that were considered include value in utility-the owner has the choice to lease the property to another car dealer. The lower limit of the value of this environmentally impaired property is the value in leasing the property less carrying costs. Lack of reliable data prevented the consultants from a careful examination of this factor. A second factor is loss of use of property-an often overlooked consideration is the time required to clean up. During this period, the property may not be used, either entirely or partially. This deferred use is a reversion of the use and, therefore, a value deduction (Rinaldi 1991). Consultants considered this factor, and to a certain extent, some associated costs were factored into the cost analysis. The prospect of future payments was too speculative to be considered. A third consideration was time value of the expenditures-the consultants did not consider this item in the analysis. Although many appraisers have attempted to adjust the cleanup costs to a present value determination because expenditures may be delayed (Rinaldi 1991), the consultants found this adjustment, in this case, to be specious. The cost to cure or contain is usually the major cost element in the diminution of value, and this can change significantly with knowledge gained in the investigative phase. For a variety of reasons, funds for cleanup may be deferred. In the meantime, stigma remains strong because of the uncertainty of the cleanup ever occurring. A fourth consideration is time value of future repayments-the consultants did not consider this item in the analysis. The prospect of future payments was too speculative to be considered. Finally, bank financing was considered-the consultants concluded that financing for a new buyer would be very difficult to achieve on favorable terms, and that fact was considered part of the stigma analysis.

Opinion of Impaired Value

The consultants relied on the cost and engineering-- based formula described by Albert Wilson and modified by wording, not substance, as follows (Wilson 1994, 1996):

Impaired Value= Unimpaired Value - Cost-to-Control - Cost of Restricted Use - Impaired Financing Cost + or - Market Intangible Costs (Including Stigma)

The consultants' opinion was that the amount of the environmental impairment of the SBVW property was $1,250,000:

The adjustment was made to reflect a 50 percent maximum deduction because of the utility of the facility. A major factor in the discussions among the consultants, the appraiser, and the TE was the value in the current and future utility of the property.

Enlarge 200% Enlarge 400%

Final loss of value as determined by TE was approximately $1,150,000, but applied over two years. An appeal was considered, but the consultants and appraiser recommended that SBVW spend its money on a legal damages remedy.

Advice from the Courts

Three of the issues that were present in the SBVW case have more recently been addressed by the courts in two cases of significance. Both cases involved California properties and may not be fully applicable to other states.

Necessity of Cleanup

Voluntary cleanup of a contaminated facility in a CERCLA damage case was recently addressed by the United States 9th Circuit Court of Appeals in Carson Harbor Village (CHI v. Unocal (Carson 2001):

On summary judgment, the district court ruled that CHV could not show that its remedial action was "necessary" within the meaning of CERCLA because there was no evidence of an actual and real threat to human health or the environment, and because CERCLA was not designed to permit owners to clean up their property unnecessarily for business reasons, and then shift the costs to prior owners.

The appeals court ruled that "The district court erred in finding that there was insufficient evidence of an environmental threat, and that CHV's response costs were unnecessary.

Thus, substantial evidence of an environmental threat can be applied in California and other western courts in damage cases even if no regulatory order exists. There was no regulatory order in the SBVW case for cleanup of the SBVW property. Other states may disagree (see Hufford v. Montgomery County).

Valuation Method in Property Tax Case

In Mola Development v. Orange County Assessment Appeals Board (Mola 2000), the California courts made it clear that "fair market value" meant what a willing buyer would pay for a property, other factors notwithstanding. It also suggested that the full deduction of the cost to cure was applicable and that repayments to the property owner by other parties constituted intangible assets and were not part of a real property tax assessment. The California State Board of Equalization thought enough of the decision that it sent a letter referring to the case to all tax assessors.

Tax Assessment and Public Policy

The court admonished Orange County for trying to exercise public policy with tax assessments. At issue is the possible rewarding (by tax relief) of a property owner who has not yet cleaned up his property.

Summary and Conclusions

Valuation methods as they relate to property tax reduction are still evolving. The issues are very complex, and the property owner and the TE are advised to obtain professional assistance in evaluating proposals for a tax reduction. A team approach is recommended, which includes a property appraiser as well as an environmental engineer.

A remediation plan is critical to the development of a loss-of-value proposal and must follow protocol consistent with the NCP The remediation cost analysis must follow protocols acceptable to the EPA. The cost and work elements must be detailed for the total cost projections to have validity, and a probability analysis should be conducted.

The next round of critical thinking on the subject has already begun, as seen in court cases such as Mola v. Orange County (Mola 2000). Appraisal organizations should review the issues of cost analysis and stigma for more guidance on how the work is to be performed.

[Reference]

Steinway, Daniel M. (April 6) 1990. Private cost recovery actions: What is the impact of the consistency requirements? Environment Reporter, 1947-52. California State Water Resources Control Board. 1995. Cost Guidelines. Sacramento, California: