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Environmental Case Studies: Ensuring Suitable Comparables

Posted on: Thursday, 11 August 2005, 03:01 CDT

abstract

The difficulty of using case studies in the appraisal of contaminated land has eased due to the increased number of redeveloped sites entering the marketplace. The key element of the case study approach is ensuring suitable comparables. The research presented in this article supplements the case study literature by assessing buyer knowledge in situations involving redeveloped and environmentally impaired residential property. The central message is that if buyers of comparable properties have no knowledge of contamination, use restrictions, and maintenance procedures associated with contaminated land, the case study approach could produce invalid and unreliable results.

The appraisal of contaminated land or brownflelds is a topic regularly addressed in states with a history of substantial industrial activity. The U.S. Environmental Protection Agency (EPA) defines brownfields as "real property, the expansion, redevelopment, or reuse of which may be complicated by the presence or potential presence of a hazardous substance, pollutant, or contaminant."1 Excluded from this definition are sites listed on the National Priorities List (NPL) or those that are subject to a planned or ongoing procedure under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA).2 The impacts of brownllelds are often severe, resulting in a reduced tax base, unemployment, blight, and health risks for those in close proximity to the sites.

To combat the negative effects of brownfields, state laws were developed to create a formula for cleanup, thus opening the door for site reuse. Known as voluntary cleanup programs (VCPs), the laws were designed to encourage parties not responsible for site contamination to initiate cleanup and redevelopment. The VCPs are characterized by several components essential to success including risk-based corrective action, lender and new owner liability exemptions, no further remediation letters, covenants not to sue, and memorandum of agreements with the federal EPA.3

Another important component of VCPs, not regularly addressed in empirical studies, is the use of deed restrictions to inform potential purchasers of any limitations on site use due to past contamination. Deed restrictions are documents specifying use and development limits for a particular site. Established by the owner, they have traditionally been used to preserve or enhance the value of the property. In the case of VCPs, deed restrictions are designed to help protect human health and the environment by indicating the existence of contamination, physical or institutional controls, and land use limitations on a particular site.

The general assumption made by appraisers, policymakers, and others is that deed restrictions are an effective way to notify property buyers of environmental concerns. This may be true in situations involving large development companies that employ a host of legal experts to identify any potential liabilities associated with a piece of property. It may not be the case, however, in less sophisticated transactions involving individual property owners buying homes.

This article examines the effectiveness of deed restrictions in notifying residential property owners of the existence of past contamination, pollution that is being managed on-site, and/or land use limitations. case studies of two separate developments consisting of 16 units in Chicago are used. Property owners are surveyed to determine if they know of their sites' participation in the state VCP and if they are aware of any institutional or physical controls associated with the property. In addition, they are questioned regarding their tolerance for specific contaminates, including those that existed or exist on the site.

Policy Overview

When buyers purchase property with deed restrictions, they are contractually obligated to abide by the terms of the restrictions, thus relinquishing some property rights. These restrictions can range from limits on the ability to build fences and outbuildings to the color of paint permitted on the exterior of a home. Many subdivisions include deed restrictions that are monitored by associations and supported through annual payments by homeowners.

Under the terms of most VCPs, deed restrictions are considered a form of institutional control. Institutional controls are typically recorded in the property deed and are therefore available in perpetuity. Examples of institutional controls implemented as deed restrictions include groundwater use restrictions and limits on digging and planting.4

Deed restrictions are also used to inform current and potential property owners of the existence of "caps" and any associated maintenance. Caps are barriers proven to limit human contact with contamination. Examples of caps include paved parking lots, polyurethane sheets covered with clean soil, and landscaping that encapsulates the contaminated areas. Buildings also can serve as caps.

In Illinois, successful participation in the Illinois VCP, known as the Site Remediation Program (SRP), results in the issuance of a No Further Remediation (NFR) letter by the state EPA. When Remediation Applicants (RAs) in the program are issued NFR letters, it indicates "that all environmental conditions at their remediation sites do not present a significant risk to human health or the environment" and that a release from further responsibility under the Illinois Environmental Protection Act has been granted.5

When the NFR letter is issued, it is the responsibility of the RA to submit the letter to the county recorder's office in which the remediation site is located. To comply with state law, the NFR letter must be submitted within 45 days of receipt, and then must be accepted and recorded so that it forms a permanent part of the chain of title for the remediation site.6

Literature Review

Research on the impact of the disclosure of contamination on property value and liquidity is well established. Mundy indicates that early disclosure of contamination regularly results in a loss of property marketability.7 Specifically referring to "disclosure requirement by the sales agent or seller" and "required disclosure statements," the author concedes that damages may be reduced as information about the effects of the contamination becomes available.

Deed restrictions are often the only tool available to notify prospective purchasers of issues associated with land contamination. Simons and Robertson identify deed restrictions as a tool that encourages brownfield redevelopment.8 Various programs integrate deed restrictions into VCPs; numerous states including Illinois, New Jersey, and Ohio require that restrictions be incorporated as part of the deed when sites have been issued an NFR letter.9

Lee and Jones question the effectiveness of deed restrictions as a tool of notification designed to protect human health and the environment in a case involving a Superfund site in Sacramento, California. The authors cite the necessity to implement long-term regulatory oversight in situations involving severe contamination, particularly when in close proximity to residential land use.10

Appraisers recognize the implications associated with deed restrictions when valuing impaired property. Robinson, Lucas, and Rasberry cite the stigma associated with deed restrictions indicating a history of contamination as one of several risks and liabilities that could negatively impact property value.11

While the majority of property appraisals are conducted in a reasonably efficient marketplace, there is a significant specter of litigation associated with brownfields. WaId and Nanney contend that the quality of environmental representations, changes in regulatory standards, and the discovery of additional contamination are all reasons that prospective purchasers may choose to discount the purchase of a brownfield site.12

Comparable properties are often hard to locate, thus the valuation of environmentally impaired property can be difficult. When appraising improved brownfield sites, the case study approach is an acceptable method to determine the effects of contamination on property value. Citing property characteristics and contamination issues as elements that should be considered in a case study, Jackson and Bell indicate several other issues as important in an "apples to apples comparison."13 Pervasive throughout the recommendations is the assumption that the purchasers of the comparable case study are knowledgeable of the site's cleanup status, use restrictions, and maintenance procedures. Proven incorrect, this assumption could result in the overvaluation of impaired properties.

Data Collection

The two cases that were selected for this study are located in Chicago, Illinois. Chicago provided an attractive housing market with almost 3,700 housing units on the market as of May 6,2002.14 In 2001, the Chicago Primary Metropolitan Statistical Area had over 39,000 building permits issued for residential housing. Chicago was also chosen due to the abundance of sites in that city that have successfully entered and completed the Illinois Voluntary Cleanup Program (VCP).

Case Study Sites

The case study sites were located by combining the SRP database, which contained detailed remediation information for over 800 active and inactive sites, with property record data from Cook County. Deed restrictioninformation in the SRP data set includes worker cautions, institutional and physical barriers, and date recorded.

Due to the limited number of brownfield sites redeveloped into residential housing, only two sites met the criteria necessary for inclusion in the study. Study criteria included the following characteristics: (1) developed residentially; (2) owner occupied; and (3) completed the SRP, receiving a No Further Remediation letter with deed restrictions.

Of the two sites, one consists of four newly constructed townhouse units and the other consists of twelve renovated condominium units.

Townhouse Site Description15

When application for participation in the SRP was made, the townhouse site was located within a predominately urban area that was primarily zoned for planned residential development, general service, and restricted central business districts. The neighborhood also included some general commercial and commercial-manufacturing districts and the site was devoid of any permanent buildings or structures. Historically, the site was once a cold-storage warehouse with fuel tanks, surrounded by eight-foot brick walls, bordering and possibly underlying a railroad spur that led into the building.

Environmental investigation discovered evidence that a 15,000- gallon aboveground storage tank had been located on the site in the 1930s and was removed in the mid-1960s. Testing was conducted over the entire site, and laboratory results indicated that there were concentrations of petroleum-related compounds that exceeded limits established by the Illinois EPA. The presence of the compounds was believed to be from a past petroleum release and was also possibly present due to historical alterations made to the property's subsurface. Environmental testing showed that the only area of contamination was where the tank had been located and indicated that the tank probably did not leak, but normal spillage occurred due to regular use. During the remediation process, the property title was transferred to the developer who assumed the responsibility of securing the NFR letter.

To clean the site, 165 cubic yards of soil were removed and replaced with clean soil. In addition, a five-inch concrete and asphalt cap was constructed to remain over the contaminated soil and eliminate exposure pathways, as well as impede contaminant migration to the groundwater. The NFR letter was issued in June of 1998, and deed restrictions were recorded as part of the requirements.

Condominium Site Description

A historical review of the condominium site shows a variety of past uses. Sanborn Maps from 1910 indicate that the property was improved with three residential dwellings. The present building was constructed in 1929, having had several uses over the years including a Marshall Fields store, steam generation plant, apartment, and local commercial use. Reviews of the historical aerial photographs show the property had been in the same general configuration since 1949.1fi

At the time the site entered the SRP, the surface of the property was improved and included a four-story residential/commercial building with a penthouse, interior concrete-paved parking area, and decorative landscaping. The building was constructed using a zero lot-line configuration and thus covers 100% of the site. A retail space was located in the east-central portion of the first floor and the parking area was located in the northern portion.

A Phase-One environmental study indicated that two 12,000-gallon underground storage tanks (USTs), inspected by the Chicago Department of Environment in 1968, had been located on the property. Subsequent soil tests indicated that they had leaked petroleum into the ground, leaving a residual sludge on the concrete slabs that formerly housed the tanks. In addition, oil was observed in the soil samples collected from two of the borings at the southwest corner of the parking garage.17

No physical remediation or cleanup was conducted on the site. Rather, the implementation of specific use restrictions indicated the site was suitable for residential use. The NFR letter was focused, signifying a release from further responsibilities for only specific recognized environmental conditions and related contaminants of concern at the site. Contaminated soil remains below the foundation of the building, consisting of petroleum-based chemicals.

The use restriction indicates that the installation of potable water supply wells is prohibited on this site. This was implemented as an institutional control consistent with the NFR letter.18 In addition, the NFR letter requires the building to remain over the contaminated soils. The building must be properly maintained in the future in accordance with the mandated guidelines as an engineered barrier to inhibit inhalation and ingestion of the contaminated media below the building.

Survey Instrument19 and Administration

The survey instrument was designed to determine if property owners knew of their homes' history with the SRP, contamination issues, and any regulatory controls associated with the site. Additionally, the survey questioned owners regarding their level of tolerance for specific contaminants on and near remediated property.

The survey accomplished three goals. The first goal was to determine if a defining site feature might have caused buyers to overlook contamination issues and purchase the property. Property owners were asked the following question:

Was there a specific defining feature that made you more inclined to purchase this home than others that you considered? An example of this would be a water view or nearness to place of employment or shopping.

The second goal was to determine if the owners knew about the sites' participation in the SRP and the subsequent NFR letter that was issued. The question language was taken directly from the recorded NFR letter. The contents of the NFR letter differed slightly for each site. Each question has a potential answer of yes, no, maybe, or do not know.

Would you ever purchase property that had participated in the State of Illinois Site Remediation Program?

Townhouse Version: Would you ever purchase property with a restriction in the deed stating "The five (5) inch concrete and asphalt barriers shown in the designated areas in the Site Base Map must remain over the contaminated soils. The asphalt and concrete caps must be properly maintained as engineered barriers to inhibit inhalation and ingestion of the contaminated media below the asphalt and concrete caps, as well as impede contaminant migration to groundwater?"

Condominium Version: Would you ever purchase property with a restriction in the deed stating "The building as shown in the Site Base Map must remain over the contaminated soils. This building must be properly maintained in the future as an engineered barrier to inhibit inhalation and ingestion of the contaminated media below the building?"

Finally, respondents were questioned about their tolerance for different types of contamination. Questions were designed to see if the owners had detailed knowledge about the type of contamination that is on site and what their level of acceptance is for specific contaminants; again, the possible responses included yes, no, and maybe.

Would you ever invest in property thathadbeen cleaned up but was once contaminated with:

* Underground storage tanks

* Volatile chemicals (e.g., PCBs)

* Toxic chemicals (e.g., arsenic, lead)

* Petroleum products or derivatives

* Radioactive materials

* Asbestos

* Heavy metals

Would you ever invest in property within 250 feet of property that had been cleaned up but was once contaminated with:

* Underground storage tanks

* Volatile chemicals (e.g., PCBs)

* Toxic chemicals (e.g., arsenic, lead)

* Petroleum products or derivatives

* Radioactive materials

* Asbestos

* Heavy metals

Respondents were also asked their education level, income, age, race, household size, and gender. The respondents were asked to describe their neighborhood, length of ownership, desirability of neighborhood, and from whom they purchased the home (builder/ developer or private owner).

The survey was conducted from September 25 through December 51 of 2002. It was initially conducted over the telephone, with each homeowner receiving two telephone calls. Seven surveys were administered in this manner. If the owners could not be reached after two phone calls, a message was left indicating that the survey would be placed in the mail with a postage-paid envelope. After two weeks, a reminder postcard was sent. Two surveys were returned via the U.S. Postal Service. The overall response rate for the survey was 56.3% or 9 of 16 potential respondents.

Results

Owner Profile

Responses to the demographic questions indicate that the homeowner respondents are relatively young (eight under age 40), are all college educated, and have no children. All but one purchased their homes directly from the builder/developer. As would be expected with well-educated individuals, their incomes are relatively high. Although three homeowners declined to answer the income question, the remainder stated their incomes as greater than $50,000 per year. Two of those reporting earned incomes over $111,000. Six of the respondents were male and eight were Caucasian.

Defining Site Feature

When asked if there was a specific feature that motivated them to purchase their home, three respondents answers ranged from "good value" to "28-foot ceilings" (in one condominium unit) to "neighborhood is similar to SOHO in New York." While each of these features may have been significant to individual owners, there was no evidence of a specific feature agreed upon by lhe group. The remainder of llie respondents did not answer that question. Eight of the respondents rate their neighborhood as at least somewhat more desirable than other neighborhoods in Chicago, while one indicated it was somewhat less desirable\.

Contamination Responses

Table 1 shows homeowner responses to questions regarding involvement in the SRP, deed restrictions, and on-site contamination. When asked if they would purchase a home that had participated in the Site Remediation Program, two said "no" and four did not know what the SRP was. Two respondents answered "maybe" and only one said "yes."

The next survey question specifically asked if the owner would purchase property with a deed restriction that was copied directly from the NFR letter, the actual language of record. Seven of the respondents indicated they would not, while two said "maybe" indicating they would with conditions.

Table I Homeowner Responses to On-Site Contamination

In the list of specific contaminants, none of the respondents indicated they would purchase a home that "had been cleaned, but was once contaminated with" volatile chemicals, toxic chemicals, or radioactive materials. Four respondents said they would purchase a home that was once contaminated by an underground storage tank and two said they would purchase a home site contaminated with petroleum products or derivatives. Interestingly, both the condominiums and townhouses are contaminated with petroleum products that are being managed on-site. Three respondents indicated they were willing to purchase property that had been contaminated with heavy metals.

Responses were somewhat more liberal when the contamination was located off-site, but within 250 feet of the subject property. One respondent would purchase property near a site contaminated with volatile chemicals, toxic chemicals, or radioactive materials. Three respondents indicated they would purchase property near a former asbestos contamination site. Six respondents indicated their willingness to purchase property near a site that had been contaminated by USTs or with petroleum products or heavy metals. Table 2 shows the responses of the respondents for contamination located within 250 feet of the site.

Table 2 Homeowner Responses to Contamination Within 250 Feet of the Site

Summary and Conclusions

The survey was designed to achieve three goals. The first goal was to determine if there was any common mitigating factor that helped persuade the owners to choose their homes. Of particular interest was anything that would minimize concerns with prior contamination and associated restrictions or a characteristic that was common to all purchasers. Examples of this type of factor include things such as a view of a river or a special structural characteristic such as a professional-grade kitchen. The answers varied, but from the responses that were given, no single mitigating factor associated with a development could be identified that prompted the purchase.

The second goal of the survey was to determine if the respondents had any knowledge of the former status of the site they purchased. In particular, it was designed to ascertain whether the homeowners were familiar with the SRP, if they knew the site had been involved with the program, and if they knew of any associated deed restrictions.

The respondents were asked if they would purchase a property that had been involved in the SRP. While only two homeowners said they would not (22%), nearly one-half (44%) did not know what the program was.

The respondents were then asked a question that reiterated wording taken directly from the respective NFR letter that was recorded as part of the site deed. They were asked if they would consider buying a property that had recorded site-specific restrictions. Seven of the nine respondents (78%) said they would not, and furthermore, not one identified the restriction as being a part of the property deed they did purchase. Both this and the responses to the prior question show a current lack of knowledge regarding the commitments that were assumed when they purchased the property.

The final goal of the survey was to assess the respondent's knowledge of the type of contamination that was (is) on their property and their level of tolerance for it. These questions were especially important if the respondents were unaware of the past history of the site and its participation in the SRR The responses to these questions show a clear discrepancy between the stated preferences of the buyers and their actions. It is evident from the surveys that were collected that the purchase outcome may have been different had the homeowner known of the specific contamination that existed on the site.

For example, a historical study of the condominium site indicated that two 12,000-gallon USTs had existed on the site. Although the tanks had been removed, soil tests showed residual petroleum contamination.

The conditions of the NFR letter allowed the contamination to remain and be managed on-site. When the residents from the condominiums were asked if they would purchase a property that had been cleaned up but was once contaminated with USTs, only one-third of the respondents indicated they would without conditions. Another one-third indicated they would with conditions and the final third said they would not. When asked the same question applied to petroleum products or derivatives, only one respondent indicated "yes," three answered "no," and two said "maybe."

Since none of the condominium units came into direct contact with the contamination (it remains under the parking garage, which encompasses the entire ground floor), the question regarding the respondent's willingness to purchase a home within 250 feet of a property with specific contamination is also relevant. On both petroleum products and USTs, four respondents indicated a willingness to purchase such a home. However, two indicated they would not purchase a home within 250 feet for petroleum products and one would not for USTs. One respondent indicated they would purchase a property if it were within 250 feet of UST contamination.

Finally, the townhouse development was also contaminated with petroleum products. One of the three respondents indicated they would purchase a site that had been contaminated with petroleum and two said "no." The respondents were slightly more generous to properties located within 250 feel of such contamination with two answering that they would purchase the property and one answering that they would not.

Although the number of respondents included in the study is relatively small, some preliminary conclusions can be drawn from the data.

First, the study was able to show that in at least in these two cases, deed restrictions do not provide sufficient notification to insure that properties are maintained in accordance with the terms established under voluntary programs.

second, although property owners indicate that they are concerned with the existence of specific contaminants, they are not uniformly averse to purchasing property that has been exposed to regulated substances.

Third, although case studies can be useful in the valuation of impaired properties, significant research should be conducted to determine if similar properties are indeed suitable comparables, thus ensuring an "apples to apples" comparison. As is shown in this study, finding the right comparable may be more difficult than initially thought. When using case studies in property valuation, appraisers should confirm that property owners are aware of contamination and any subsequent maintenance issues. If property owners are not aware, the case study may not prove to be a suitable comparable and discounts may not be apparent, thus providing incorrect and unreliable results.

1. This definition is found in The Small Business Liability Relief and Brownfields Revitalization Act, Public Law 107-118 (H.R. 2869), signed into law January 11, 2002; see U.S. Environmental Protection Agency Web site, "Brownfields Glossary of Terms," http:// www.epa.gov/brownfields/glossary.htmifbrow, accessed on February 27, 2004.

2. Comprehensive Environmental Response, Compensation, and Liability Act of 1980, U.S. Code 42, Chapter 103.

3. Robert A. Simons, Turning Brownfields into Greenbacks (Washington, DC: Urban Land Institute, 1998).

4. Todd Davis and Kevin Margolis, eds., Brownfields: A Comprehensive Guide to Redeveloping Contaminated Property (Chicago: American Bar Association, 1997).

5. http://www.epa.state.il.us/land/more-info-about- bol.htmWOffice-of-Brownfields-Assistance; accessed on March 12, 2004.

6. Illinois Environmental Protection Agency Bureau of Land, http:/ /www.epa.state.il.us/land/site-remediation/overview.html, accessed on January 31, 2003. The Site Remediation Program is a voluntary cleanup program administered by the Remedial Project Management section, Bureau of Land, Illinois Environmental Protection Agency. Regulations identifying program procedures and standards are found in 35 HI. Mm. Code 740 and 742.

7. Bill Mundy, "The Impact of Hazardous Materials on Property Value," The Appraisal Journal (April 1992): 155-162.

8. Robert A. Simons and Heidi G. Robertson, "Deed Restrictions and Other Institutional Controls as Tools to Encourage Brownfields Redevelopment," Environmental Law and Practice 7, no. 1 (Summer 1999): 31-38.

9. Robert A. Simons, J. Pendergrass, and Kimberly Winson- Geideman, "Quantifying Long-Term Environmental Regulatory Risk of Brownfields: Are Reopeners Really an Issue?" Journal of Environmental Planning and Management 46, no. 2 (March 2003): 257- 269.

10. G. Fred Lee and R. Anne Jones, "Redevelopment of Remediated Superfund Sites: Problems with Current Approaches in Providing Long- Term Public Health Protection" in Proc. Environmental Engineering 1991 Specialty Conference, 505-510 (New York: ASCE, 1991).

11. Rudy R. Robinson III, Scott R. Lucas, and Garland G. Rasberry, "Watersbend: Appraising a Brownfield Redevelopment Project," The Appraisal Journal (July 2002): 309-317.

12. David WaId and Donald C. Nanney, "Appraising Brownfield Sites," Brownfield News (July/August 2003).

13. Thomas O. Jackson a\nd Randall Bell, "The Analysis of Environmental case Studies," Trie Appraisal Journal (January 2002): 86-95, 86; and Thomas O. Jackson, "case Study Analysis: Environmental Stigma and Monitored Natural Attenuation," The Appraisal Journal (Spring 2004): 111-118,112.

14. Information acquired from the multiple listing service on May 6, 2002.

15. Leyden Environmental, "Subsurface Investigative Report" (June 27,1996).

16. Phase I Environmental Study conducted by Mostardi Platt of Elmhurst, Illinois, dated August 28,1996.

17. Phase Il Site Assessment conducted by Law Engineering and Environmental Services, Inc. dated April 12, 2000.

18. Sections 11-8-385 and 11-8-390, Municipal Code of Chicago as amended by Ordinance Number 097990 ("Potable Water Supply Well Ordinance") effectively prohibit the installation of potable water supply wells (and the use of such wells) and are an acceptable institutional control.

19. Survey derived from an instrument developed in Sandy Bond, "Post-Remediation Stigma: Fact or Fiction? Measuring the Effects of a Previously Contaminated Site on the Redeveloped Residential Property Values" (thesis, Curtin University of Technology, Perth, Australia, 2002).

by Kimberly Winson-Geideman, PhD

Kimberly Winson-Geideman, PhD, is an assistant professor in the Department of Landscape Architecture and Urban Planning at Texas A&M University. Winson-Geideman has published several articles on brownfields, and her research interests include land contamination; residential and office property valuation; and coastal development. Contact: T 979-845-1046; E-mail: kgeideman@archmail.tamu.edu.

Copyright Appraisal Institute Summer 2005

Source: Appraisal Journal, The

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