The Impact of Contaminated Land on the Valuation of Property - Essay Example

The Impact of Contaminated Land on the Valuation of Property Table of Contents Introduction 3 Impact of Contamination 4 Valuation of Contaminated Property 5 Standard on the Valuation of Properties Affected by Environmental Contamination 7 Concept of Value and Cost Associated with Property Contamination 9 Concept of Stigma 10 Approaches to Value 11 The Development of Legislation, Policy and Practices in the UK 12 Conclusion 13 References 14 Bibliography 15 Introduction Contamination means to make things impure or unclean by mixing up certain elements. Contamination can be defined as a process or any act that makes the material or surface to be grubby with contaminating substances (Lawson Fairbank, 2010). Since the past few years, the industrial revolution saw the expansion in steel, coal, chemicals and other industries which has resulted in the economic and social growth. During this expansion, the impact of industrialization on the environment was not exactly known. There was inadequate disposal of waste materials which was contaminating the land. The solid as well as the liquid waste were disposed off in the land through which the soil was being damaged. Even though the waste are well regulated in order to prevent such contamination but still there are certain unintentional spills and leaks which might damage the land at the sites. Contaminants may range from oil, petrol, heavy metals and solvents to radioactive substances. The various sources of contaminant are not just industries, there are certain other sources like agriculture activities, dry cleaning, petrol distribution, deposition from the atmosphere, inadequate waste disposal, etc. These contaminants cause severe harm to human health and adversely affect the normal living condition of a human being. There are various contaminant elements that occur as a range of compounds among which some are highly soluble, accessible for biological uptake and toxic, whereas others are not much hazardous. For instance, arsenic is a common chemical addition to soils for older industrial sites and exists in various inorganic and organic forms. Toxicity depends on actual compound oxidation state, yet chemical analyses of suspect soils seldom reveals any such details and it usually indicates the metal concentration present (SEPA, n.d.). Interaction takes place between the various contaminants in the soil environment. These increases the potential toxicities of different contaminants involved where as in many cases competition between individual contaminant reduces the overall toxic potentials (SEPA, n.d.). The effects of contamination don’t last long once the contaminant reaches the soil. It breaks down or becomes neutralized, might be washed away by the rain, or remain in the soil building up to a high concentrations. When contaminants are made up, they may not be enduring. However soil can sometimes remain polluted for an indefinite period (SEPA, n.d.). Impact of Contamination It doesn’t mean that there is a problem if the ground is contaminated. It is found that in certain cases there are minimal amount of risk. Most of the contaminated sites are being continuously used for high quality housing and working environment. Some sites are so contaminated that they poses unacceptable risk to the human health or to the environment. Human being gets exposed to such contaminants when a person inhales dust or gases that are present in the environment or it may be when he gets in touch with with the soil or consumes the food that is grown in that soil. Leachates that are a pollutant that drains from the site in liquid form can pollute the ground water and rivers or pools. There are certain contaminants that may be corrosive while some poses risk of explosive fire. The special effects on human as well as environment depend on the type and amount of contaminants involved. Valuation of Contaminated Property The valuation of the property can be defined as the expectation of the benefits which is accruable to that property that is to be consequent in the future. In terms of marketable real estate, the market value can be the predictable price upon which the property can be exchanged for, in an open market between the buyer and the seller. Valuation of the property is a complex task which involves utilization of the data from a wide variety of economic, administrative, demographic and engineering sources so that there is reasonable estimates of a given property can be found. The mission becomes especially difficult when the land is contaminated. In highly developed as well as emerging nations land contamination is a serious issue with regard to the value location on such properties. The valuation of contaminated land has a connotation in property tax appeal, real estate transactions and investment choice making among a crowd of other concerns. As the countries are developing more and more industries are created which carries out manufacturing that produces certain type of hazardous by-products in its process. There are thousand acres of land that are being used as gas filling stations, waste water treatment plants, waste dumps, landfills and storage site for large amount of radioactive and other hazardous substance which is continuously attracting many entrepreneurs for further development of housing units, shopping complexes etc. This type of land that has been discarded for modern and recent technology in the handling of waste materials etc must not be used for development of housing units or shopping complexes but they must be used for some other purposes as they will have adverse affect on the living condition of human residing in those places Valuing of contaminated land can arise because of different types of situations that include real estate transaction, property tax appeals, bankruptcy, litigations and probate proceedings. It is often found that certain value exist for contaminated lands too. This is evident in the response given to property owners who claims that contamination has reduced the value of their lands to zero or, including cleanup costs, gives a negative value. A contaminated land has no value if it is not in use. If certain uses of the land exist then there must be some value of that particular land. The value of a property may increase or decrease depending upon how adversely land has been affected by contamination. It may depend upon various factors like nature of the contamination, the status of any cleanup efforts, level of contamination that exceeds government health based standards, government agency that mandated a cleanup, present use of property, power of the real estate marketplace in which the belongings are situated, potential future uses for the property either as contaminated or after remediation etc (Wurtzler, 1999). Standard on the Valuation of Properties Affected by Environmental Contamination This standard provides information and direction that is concerned with the special effects of environmental contamination on the valuation of property for appraisal purposes. Environmental factors are increasingly significant in valuation of the property as the market is mostly aware of the potentially harmful effects of chemical, radiation, and other contaminants on air, water, soil and overall environment. There are very less information about the contaminants in some cases as there is absence of market data and the effects on the value are quite difficult to ascertain. The owner of the property may have a propensity to force down for a lower assessment in many of these cases. However, it is the market that recognizes that even the contaminated property can be redeveloped and redeemed in to a valued asset. In fact the nations, states and the local community are putting efforts in order to revitalize urban brown fields (PDF Cast, 2001). It is important that the assessing officer is knowledgeable about contaminants and there are sound effects on the property value. In addition to understanding contaminating substances, the appraiser must also understand the likely for change in list of substance or condition thinking to produce contamination. State of detection, cleanup technology and monitoring must be recognized (PDF Cast, 2001). Concept of Value and Cost Associated with Property Contamination There are two concepts of value at hand which must be considered with reference to environmentally distressed property. First is the unencumbered value which means value that the property would have if no adjustment were made for any environmental encumbrance. This type of value can be gained using standard appraisal method. There is always a tendency to discount this value based on cost linked to remediating or isolating environmental contamination. Value in use, means that a property which is still in use, or which can be used in near future, has a value to the owner. The value in use reflects the market price of the property. There are different types of cost associated with the environmental contamination. The first cost associated is the cost of discovering the presence or extending the presence or rather, extension of any problem. To enable the new owner to use the innocent landowner protection, and as a preliminary step in establishing cleanup costs, an environmental assessment report must be obtained before purchasing. The cost that can cure a particular problem must be determined, but may understate or overstate the effects on value. The cost to cure a contamination problem includes all cost associated and necessitated with the cleanup. These include cost of physical cleanup, legal fees, monitoring and ongoing costs. Actual cost of physical cleanup must be ascertained. Estimates that are provided by the property owner must be overstated. If deferrals are granted they allow more time for cleanup and reduce current costs as well as the present value of the property. In the expenses cost of monitoring and testing must be added. These costs are subtracted from the income of the property that is subjected to cleanup. This cost must be established from proof that is provided by the assets owner and regulatory authority. Legal cost may be incurred in contaminated property that deals regulatory agencies and other potentially responsible parties. Ordinary legal costs don’t have any influence on property value but is a part of management. There are many other types of cost that are associated with contaminated land but those costs are not known in many circumstances. Actual risk or perceived risk that remains even after cleanup results in high insurance costs and reduced ability to use the property as security for loans. There are also many types of indirect cost that are associated with contaminated property and have an adverse effect on the valuation of the property. This cost can be anything which affects the income of the properties and income producing capability during or after cleanup. Financing also affects the value of the property. There are two types of financing effects that must be taken into consideration when dealing with the contaminated property. The prospective buyer must be able to finance the purchase of the property and the terms of financing the actual costs so that the contamination problem can be cured. If the buyer is not able to arrange for financing then the cash equivalency of the property diminishes (PDF Cast, 2001). Concept of Stigma Stigma is not measured in terms of costs to cure and is an intangible factor but it affects the market value of the property. It is a type of stain on a property that results from the real or perceived risk that is associated with the property. Even after the cleanup is done stigma makes the property unattractive for the buyers. It also affects the neighboring previously contaminated property. Stigma is overstated in these cases as because the value is demonstrably not affected in spite of the presence of the nearby contaminated land. If no action is taken by the property owner to overcome the stigma, but accepts a lower price for the property, then in that case the price doesn’t accurately reflect the market value (PDF Cast, 2001). Approaches to Value It is a difficult task to value a contaminated property because there are different circumstances for each affected property. There are three approaches to value that should be used in all types of property valuation. They are income approach sales comparison approach, cost approach and alternative approach to value. In case of sales comparison approach, the property has to be appraised through a comparison with similarly affected properties that was recently sold. There must be sufficient sales of similar properties. The cost approach is based on the belief that market value of an improved parcel is equal to the market value of the land plus the current construction cost of the improvement less accrued depreciation. This approach is applicable in cases of environmental contamination when the present worth of direct and indirect cost is calculated and used and the necessary adjustment is made for underestimation or overestimation of cost and impact. The income approach to value estimates the property value by determining the present value of the projected typical income stream for the type of property. Properties like income producing are most common property type that is influenced by environmental regulation and is subjected to contamination. There are many other alternative approaches to value which are the possible means of valuing contaminated property. Contingent Valuation Methods can be used where the survey methods are employed in order to investigate and determine the values. Although, it is not mentioned in this standard such alternative methods must be investigated when the reliable information is absent and it lessens the applicability of more conventional techniques (PDF Cast, 2001). The Development of Legislation, Policy and Practices in the UK After the 1996 Aberfan Colliery spoil heap disaster, restoration of land dereliction started in UK. The main objective was to remove the worst effects of older industrial activities through financial grants. Contamination remediation was included in this but it was not the main objective, even after 1976 when soil contamination was identified as an issue. In anticipation of the passing of the 1995 Environment Act, there was no exact legislation that addressed the problem of soil contamination. Rather other legislation was used to force necessary land clean-ups and to prevent the continued formation of more areas of contaminated land. The most important in this process are the Town and Country Planning Act 1990, the Building Regulation Act 1991, the Environment Protection Act 1990, the Water Resource Act 1991. A similar body of legal constraints exists in the different legal systems which apply to Scotland and in Northern Ireland. The use of these various items of legislation has been successful, for instance when considering development application local authority planners should treat contamination as an important issue, and therefore should require proper remedial actions in cases where there is future risks. The Waste Regulatory Authority should insist on waste disposal practices that are suitable to ensure that further areas of land do not become contaminated. These separate regulatory bodies having its own interest and emphasis created difficulties. Because of these types of difficulties, the most recent element of the UK’s environmental protection legislation – the 1995 Environmental Act has found it necessary to combine the water, inspectorate of pollution and waste regulatory functions into single Environmental Agency for England and Wales. Conclusion Valuation of the contaminated land is a very complex task. Contamination has a severe impact on the valuation of the property. The valuation of contaminated land has an association in real estate transactions, property tax appeals and investment judgment making among a host of other concerns. It is the duty of the assessing officer to have knowledge about the impacts of contaminated land and he must be able to monitor the contaminant that causes such contaminants so that the life of people remains safe from the hazards. References PDF Cast, 2001. Standards of Valuation of Property Affected by Environmental Contamination. International Association of Assessing Officers. [Online] Available at: http://pdfcast.org/pdf/standard-on-the-valuation-of-properties-affected-by-environmental-contamination [Accessed July 26, 2010]. Wurtzler, L. G., 1999. Environmental Law: Even Contaminated Land Invariably Has Some Value. Value Exist. [Online] Available at: http://www.dgslaw.com/attorneys/ReferenceDesk/291570.pdf [Accessed July 26, 2010]. Lawson Fairbank, 2010. Contaminated Land F.A.Q. What is Contaminated Land? [Online] Available at: http://www.lawsonfairbank.co.uk/contaminated-faq.asp [Accessed July 26, 2010]. SEPA, No Date. Contaminated Land. How land is contaminated. [Online] Available at: http://www.sepa.org.uk/land/contaminated_land.aspx [Accessed July 26, 2010]. Bibliography Asante-Duah, K. D. Managing Contaminated Sites: Problem Diagnosis and Development of Site Restoration. Wiley, 1996. Cairney, T. & Hobson, M. D. Contaminated Land : Problem and Solution. Taylor & Francis, 1998. Cairney, T. The Re-use of Contaminated Land: a Handbook of Risk Assessment. Wiley, 1995. Nathanail, P.C. & Bardos, P. Reclamation of contaminated land. John Wiley and Sons, 2004. Petts, J. & Et. Al. Risk-based Contaminated Land Investigation and Assessment. Wiley, 1997. Syms, P. Contaminated Land: the practice and economics of redevelopment, Blackwell Science, Oxford, 1997. Read More