Environmental Risk Fundamentals in Real Estate Appraisal

Chapter 2: Environmental Risk Fundamentals in Real Estate Appraisal

Introduction

This chapter provides a foundational understanding of environmental risks relevant to real estate appraisal. It explores the scientific principles underpinning environmental contamination, exposure pathways, and the regulatory landscape. This knowledge is crucial for appraisers to accurately assess the impact of environmental factors on property value.

2.1 The Nature of Environmental Risk

Environmental risk in real estate refers to the potential for adverse effects on property value and human health due to the presence or suspected presence of hazardous substances or conditions. This risk stems from the intersection of three key components:

• Source: The origin of the contamination (e.g., a leaking underground storage tank).
• Pathway: The route by which contaminants migrate from the source (e.g., groundwater flow, vapor intrusion).
• Receptor: The entity affected by the contamination (e.g., humans, ecological systems, the property itself).

The absence of any one of these components eliminates environmental risk.

2.1.1 Scientific Principles of Contamination

• Chemistry: Understanding the chemical properties of contaminants is critical. This includes solubility (how easily a substance dissolves in water), volatility (how easily a substance evaporates into the air), toxicity (the degree to which a substance is harmful), and persistence (how long a substance remains in the environment).

• Example: Perchloroethylene (PCE), a common dry-cleaning solvent, is a dense non-aqueous phase liquid (DNAPL). This means it is heavier than water and does not readily mix with it, causing it to sink through the soil and accumulate at the bottom of aquifers, creating long-term contamination challenges.

• Physics: The movement of contaminants is governed by physical principles such as diffusion, advection, and dispersion.

  • Diffusion: The movement of contaminants from an area of high concentration to an area of low concentration. Fick’s First Law of Diffusion describes this:

    J = -D (dC/dx)

    Where:

    • J = Diffusive flux (mass per unit area per unit time)
    • D = Diffusion coefficient (area per unit time)
    • dC/dx = Concentration gradient (change in concentration with distance)

  • Advection: The transport of contaminants by the bulk flow of a fluid (e.g., groundwater).

  • Dispersion: The spreading of contaminants due to variations in flow velocity within a fluid.

• Hydrogeology: The study of groundwater and its interaction with geological formations. Understanding groundwater flow direction and velocity is crucial for assessing the migration of contaminants.

2.1.2 Types of Contaminants

• Petroleum Hydrocarbons: Gasoline, diesel fuel, oil, and other petroleum products. These can contaminate soil and groundwater and pose risks of fire, explosion, and toxicity.

• Volatile Organic Compounds (VOCs): Chemicals that readily evaporate at room temperature, such as benzene, toluene, ethylbenzene, and xylene (BTEX), PCE, and trichloroethylene (TCE). VOCs can cause indoor air pollution through vapor intrusion.

• Semi-Volatile Organic Compounds (SVOCs): Chemicals with lower volatility than VOCs, such as polycyclic aromatic hydrocarbons (PAHs) and polychlorinated biphenyls (PCBs). SVOCs tend to persist in soil and sediment.

• Metals: Lead, arsenic, mercury, cadmium, and other metals. Metals can accumulate in soil and water and pose significant health risks, especially to children.

• Asbestos: A naturally occurring mineral fiber that was widely used in building materials. Asbestos fibers can cause lung cancer and other respiratory diseases when inhaled.

• Mold: A type of fungus that can grow in damp or humid environments. Mold can cause allergic reactions, asthma, and other health problems.

2.2 Environmental Exposure Pathways

Exposure pathways describe how contaminants can come into contact with receptors. Common pathways include:

1. Ingestion: Swallowing contaminated soil, water, or food.

2. Inhalation: Breathing contaminated air or vapors. Vapor Intrusion is a key consideration here.

   • Vapor Intrusion: The migration of volatile chemicals from contaminated soil or groundwater into overlying buildings. This can occur through cracks in foundations, utility conduits, and other pathways.

   • The Johnson & Ettinger model is commonly used to assess vapor intrusion risk. It predicts indoor air concentrations based on soil or groundwater concentrations, soil type, building characteristics, and other factors.

3. Dermal Contact: Contact with contaminated soil, water, or surfaces.

4. Groundwater pathway Contamination spreading off-site

5. Surface water runoff Contamination spreading off-site

Each of these pathways has a different formula for assessing risk.

2.3 Regulatory Framework

A complex web of federal, state, and local regulations governs environmental contamination and remediation. Appraisers must be familiar with these regulations to understand the potential liabilities associated with a property.

2.3.1 Key Federal Laws

1. Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA): Also known as Superfund, CERCLA provides a framework for cleaning up contaminated sites and assigning liability for cleanup costs. CERCLA imposes strict, joint and several, and retroactive liability on potentially responsible parties (PRPs).

2. Resource Conservation and Recovery Act (RCRA): RCRA regulates the management of hazardous waste from “cradle to grave,” including its generation, transportation, treatment, storage, and disposal.

3. Clean Water Act (CWA): The CWA regulates the discharge of pollutants into waterways.

4. Clean Air Act (CAA): The CAA regulates air emissions from stationary and mobile sources.

5. Toxic Substances Control Act (TSCA): TSCA regulates the manufacture, processing, distribution, use, and disposal of toxic chemicals, including asbestos and lead-based paint.

2.3.2 State Regulations

State environmental regulations often supplement and strengthen federal regulations. These regulations may vary significantly from state to state.

2.3.3 Local Ordinances

Local governments may also have ordinances related to environmental issues, such as stormwater management, soil erosion control, and wellhead protection.

2.4 The Remediation Lifecycle

The remediation lifecycle describes the stages of assessment and cleanup of a contaminated site. These stages significantly influence the perceived and actual risk associated with a property. According to the source pdf, these are:

1. Before Remediation/Cleanup: Investigation and characterization of contamination. Uncertainty about the extent and cost of cleanup is highest at this stage.

2. During Remediation: Active cleanup activities, such as soil excavation, groundwater pumping, or vapor extraction. Disruption to property use may occur during this stage.

3. After Remediation: Post-remediation monitoring to ensure that cleanup goals have been met. Institutional controls, such as land use restrictions, may be in place to prevent future exposure.

Natural attenuation can also act as a method of remediation, even without direct human interference.

2.5 Impact on Property Value

Environmental contamination can significantly impact property value through several mechanisms:

1. Cost Effect: The cost of environmental cleanup can reduce the property’s market value. This cost can include investigation, remediation, and long-term monitoring.

2. Use Effect: Contamination may restrict the use of a property, limiting its development potential and reducing its income-generating capacity.

3. Risk Effect: The perceived risk of environmental contamination can deter potential buyers and lenders, leading to a decrease in property value.

• “Stigma”: An important risk effect is the “stigma” attached to contaminated properties, even after remediation. This stigma can persist long after the contamination has been addressed.

2.6 Source Sites, Non-Source Sites, Adjacent Sites, and Proximate Sites

• Source Sites: The origin of the contamination.

• Non-Source Sites: Sites to which contamination has migrated from a source site.

• Adjacent Sites: Sites that share a common property line with a source site but are not necessarily contaminated.

• Proximate Sites: Sites that are in close proximity to a source site but are not adjacent and are not necessarily contaminated.

2.7 Unimpaired Value

The unimpaired value is the market value of a contaminated property under the hypothetical condition that the property is not contaminated. Estimating the unimpaired value is essential for determining the diminution in value caused by the contamination.

2.8 Practical Applications and Experiments

While conducting a full scientific experiment is beyond the scope of most appraisals, understanding the principles behind common environmental testing methods is important.

• Soil Sampling: Collecting soil samples for laboratory analysis to determine the type and concentration of contaminants.

  • Experiment: A simple experiment to demonstrate soil permeability: Fill two clear tubes with different types of soil (e.g., sand and clay). Pour water into each tube and observe how quickly the water drains through the soil. This illustrates how soil type affects contaminant migration.

• Groundwater Sampling: Collecting groundwater samples from wells to assess groundwater contamination.

• Air Sampling: Collecting air samples to measure indoor air quality and assess vapor intrusion risk.

• Phase I Environmental Site Assessments (ESAs): A standard practice for evaluating potential environmental liabilities associated with a property. Phase I ESAs involve a review of historical records, site reconnaissance, and interviews.

• Phase II Environmental Site Assessments (ESAs): If a Phase I ESA identifies potential environmental concerns, a Phase II ESA may be conducted to collect and analyze soil, groundwater, or air samples.

2.9 Conclusion

Understanding environmental risk fundamentals is essential for real estate appraisers. By applying scientific principles, understanding regulatory frameworks, and considering the remediation lifecycle, appraisers can accurately assess the impact of environmental factors on property value. This knowledge is critical for providing reliable and defensible appraisal opinions.