Three issues stand out in the extensive, near global, review of the brownfield valuation literature by Syms and Weber (2003):
A complete disregard for the health risk that causes remedial and financial risk
A disregard for remedial uncertainty by assuming it away, as discussed below
The assumption that inferences can be made from other sites with soil contamination
Almost all of the U.S. literature on the valuation of contaminated, with the exception of Weber (1997) fails to discuss the essence of problem (item 1), which is quantifying the variables that cause a health risk and the variables able to quantify and control this risk.
This literature also assumes away the uncertain remedial costs (item 2), required to reduce this health risk to an acceptable level, as did Chalmers and Jackson (1996) which discusses the risk of contaminated property when the owner is not the responsible party, which results in the uncertainty of the cost of cleanup not being the main issue for the appraisal. The responsible party takes full responsibility for the cleanup, “so (page 47) the question for the appraiser becomes: Beyond the cost of cleanup, is there any impact of contamination on property value? Their focus is on cases where remedial costs are not at issue, which completely disregards the causal factor of stigma on property value.
Weber (2005) followed advice of Kinnard and Worzala (1999) and Kinnard et al. (2002): test the reliability of brownfield appraisals via empirical data, since data on the reliability of the valuation of a fee-simple interest (i.e. not value subject to indemnification, which is a value subject to an intangible) in contaminated land is absent from the appraisal literature.
Weber et al (2006a), presented at the ARES meeting , summarized sales data in the thesis from Case Study 1 and compared it to the tabular sales adjustment table of sales of contaminated land found in Jackson and Bell (2002) and also the adjustment grid used in Jackson (2004). The subject property in the thesis was almost identical in that Jackson and Bell suggest should be used for adjusting the 'comparables'. The problem-the example in the literature suggested to the authors that their subject property would not suffer from a loss in value due to stigma. The conclusion of the appraisers in Case Study 1 was that there would also be only a small reduction in value, if any, due to site contamination. Two years of intensive marketing revealed that the property could not be sold for $45 million less than what it was previously appraised for as a result of stigma.
Why did sales comparison fail? It was irrelevant because this methodology does not solve Redeveloper Problem 1 or Redeveloper Problem 2. The appraisers did not use variables found in the literature to quantify the value of any of the comparables as retail sites, let alone the case study property. These valuers thus had no support for either the present or future value of the subject-a requirement for solving Redeveloper Problem 1. It was also apparent that the appraisers did not understand risk-based remediation. There was also no indication that any of them understood the methods used to quantify remedial costs and their uncertainty. The location and extent of contaminants that remained in the soil as a result of risk-based remediation might have required an additional $43 million remediation expense and none of the potential buyers of the site would buy it subject to this risk.
Thus, the established appraisal approach to quantifying stigma is completely clueless.
Appraisers have no way to tell if a buyer of a comparable sale is well-informed, since the appraisal trade does not realize that Redeveloper Problems 1 and 2 have to be solved for a buyer to truly understand the risks inherent in the purchase of a brownfield. No one has been found that has relied on an appraiser to value a property with contaminated land to purchase the property for remediation and redevelopment, but if one were found, it is highly unlikely that this buyer would be considered well-informed. The sophistication of appraisal methods relies upon, at most, second-grade mathematics, not those of the EPA.
Presented at the ARES meeting in Key West, Fl. in April, 2006 (http://www.aresnet.org)