TelferYoung Limited
Valuation Issues Surrounding Contaminated Land
12 June 2007
When faced with valuing land that is known to be, or could possibly be contaminated, there are many issues valuers must consider as part of their assessment. We attempt to outline some of these below:
Definition of Contamination
A site at which hazardous substances occur at concentrations above background levels and where assessment indicates it poses, or is likely to pose, an immediate or long term hazard to human health or the environment.
Market Place More Aware
There is increased environmental consciousness within the general community, and this is evidenced by environmental protection legalisation, and litigation associated with pollution and land contamination. Incidents where property users suffer financial loss, directly or indirectly, have made the marketplace more aware of potential adverse effects. Conversely the market seems to be increasingly aware that contaminated properties can be redeemed and redeveloped into viable assets.
Considerations for the Valuer
The importance of contamination to valuers, in particular, depends on:
- The state of knowledge at any time of the existence and effect of the particular form of contamination.
- The current interpretation of the law.
- The effect of possible changes in legislation.
- Current technology and expected changes in technology.
- The previous use of the land/buildings.
- The existing use of the land/buildings.
- The proposed use of the land/buildings.
- The financial effect of the above.
The dilemmas faced by a valuer include:
- What is the extent of the contamination?
- What are the likely remediation costs?
- How would a potential purchaser regard these?
- What timeframe is involved in this process?
- Does the delay adversely affect potential developers?
- What conditions will be placed on the land by the local authority following remediation?
- What are the likely or practical uses for the land following remediation?
- Do they materially differ from the hypothetical uncontaminated parcel?
- Are there any additional costs that will be incurred?
- What liability will any future owner have in relation to the contamination issue?
Examples of Contamination
Land
- Naturally occurring ground problems (geology)
- Chemical contamination (waste tips, industrial sites, gas works, chemical works, sewage works)
- Mineral extraction and processing
- Disposal of waste by landfill tipping
- Agriculture and related industries
Buildings
- Air conditioning systems
- Bacteriological problems
- Chemical problems (CFCs or replacement of CFCs)
- Asbestos
The value of land is focussed on its 'highest and best' use .
Factors involved include:
- Supply or the availability of other similar types of land.
- Current demand for such property
- Where this type of property sits in the property cycle.
- The physical attributes of the land.
- Current economic and market factors.
A significant hurdle is placed in front of any valuer who is requested to value a parcel of land and is aware or informed that the property has a serious contamination issue.
This contamination has a bearing on both physical and market factors.
- The property may not be able to achieve its highest and best use.
- There may be considerable costs associated with remediation.
- There may be considerable time delays in achieving the altered highest and best use.
- There will be a continuing stigma attached to the property.
It is clear that the valuation process is not simply an arithmetic equation. The value as if uncontaminated less the cost of remediation does not necessarily represent the market value. There are many other factors that can continue to affect the value of the property and should be considered in any assessment.
These are:
- The continuing stigma of previous contamination.
- Uncertainty of liability for any historic contamination or ongoing issues.
- Ongoing monitoring costs?
- Any future hidden costs.
- Downstream effects on water quality.
- Can a mortgage be raised on the property?
- Will the public always consider the site to be 'contaminated' even though remediation work has been carried out?
- How thorough is the clean up job required, for the site to be considered 'clean'.
As valuers we can provide several pieces of the jigsaw, however require considerable specialist advice from environmental scientists, engineers, planners and local authority staff. We can from general experience and analysis of each specific market provide an unencumbered, 'uncontaminated' highest and best value assuming the site is free from contamination.
We are reliant upon expert estimates of remediation costs. We are also reliant upon local authorities as to specific conditions that may be imposed that would likely affect the use, and therefore value. We then make appropriate deductions for costs that a prudent and typical purchaser would allow for the remediation process.
In an uncertainty of cost situation people take a conservative approach and allow for escalation and contingency levels. In this regard the assessment of the appropriate contamination remediation cost is not dissimilar to issues associated with leaky homes and sales of partially complete structures. Buyers of these properties allow a deduction of sometimes well in excess of the likely costs associated with risks, cost escalations, and unforeseen additional costs.
There are likely to be delays to the completion time of remediation work. These time delays impact on the value to the owner, as they extend any potential realisation period for development. We are guided by expert advice as to the length of remediation time required and would typically allow a buffer, or additional time for overrun.
Negative Land Value
- There have been instances where the cost of remediation exceeds the market value (unaffected).
- This infers a negative land value.
- The established practice is to adopt a figure of no less than zero value.
- In this instance the valuer should advise that the cost of remediation or liability is in a negative figure.
Liability
- If consent for a particular land use is required, and this has conditions attached to it:
- Who pays? - This can be unclear.
- Depending on relevant legislation it is usual the responsible party bears the clear up costs.
- Where responsibility cannot be determined, the chain of title is generally followed with the current owner most likely to be liable.
Finally allowance for ongoing 'stigma' or public knowledge that the site had a 'contamination' issue, must be considered. This is a very difficult component to analyse as it requires sales of contaminated land to quantify the margins.
Advice from a number of appropriate professions should be obtained prior to purchasing land that is known to be, or potentially could be contaminated.
Jerome McKeefry
This monthly paper reflects the views of the writer and may not represent the views of all TelferYoung staff.