Environmental Risks: Site Assessment and Valuation Techniques

Environmental Risks: Site Assessment and Valuation Techniques

Introduction

This chapter delves into the scientific principles and practical techniques used in assessing and valuing real estate affected by environmental risks. We will explore the methodologies for site assessment, the impact of contamination on property value, and the application of valuation techniques that account for environmental factors. This chapter addresses the appraisal of real property interests by examining the source, non-source, adjacent, and proximate sites.
Understanding the scientific basis for environmental contamination and remediation is crucial for accurate appraisal and risk management in real estate.

1. Environmental Site Assessment (ESA)

Environmental Site Assessments (ESAs) are crucial for identifying potential environmental liabilities associated with a property. The scope of an ESA can vary based on the property’s history, current use, and the objectives of the assessment.

1.1. Phase I ESA: Preliminary Assessment

    A Phase I ESA is a preliminary investigation designed to identify potential or existing environmental contamination liabilities. This process typically involves:

    *   Historical Records Review: Examining past uses of the property and surrounding areas. Common sources include:
    *   Sanborn Maps: Detailed maps showing building footprints and activities.
    *   Aerial Photographs: Assessing historical land use changes.
    *   Regulatory Databases: Checking for reported spills, leaks, and environmental violations.
    *   Site Reconnaissance: A visual inspection of the property to identify potential concerns, such as:
    *   Stressed vegetation.
    *   Unidentified containers or drums.
    *   Evidence of spills or stains.
    *   Interviews: Gathering information from current and past owners, operators, and neighbors.

1.2. Phase II ESA: Subsurface Investigation

    If the Phase I ESA identifies potential environmental concerns, a Phase II ESA is conducted to confirm or refute the presence of contamination. This involves collecting and analyzing samples of soil, groundwater, and soil vapor.

    *   Sampling Techniques:
    *   Soil Sampling:
        *   Direct Push Technology (DPT): Using hydraulic or percussive force to drive sampling tools into the ground.
        *   Auger Drilling: Using a rotating drill bit to extract soil samples.
    *   Groundwater Sampling:
        *   Well Installation: Installing monitoring wells to collect groundwater samples over time.
        *   Purging and Sampling: Removing stagnant water from the well before collecting a representative sample.
    *   Soil Vapor Sampling:
        *   Sub-slab Depressurization: Creating a vacuum beneath the building slab to collect vapor samples.
        *   Vapor Probes: Inserting probes into the soil to collect vapor samples at various depths.
    *   Analytical Methods:
        *   Gas Chromatography-Mass Spectrometry (GC-MS): Used to identify and quantify volatile organic compounds (VOCs).
        *   Inductively Coupled Plasma-Mass Spectrometry (ICP-MS): Used to determine the concentration of metals in soil and water.
        *   Enzyme-Linked Immunosorbent Assay (ELISA): Used to detect specific contaminants, such as pesticides and herbicides.

1.3. Phase III ESA: Remediation

    If contamination is confirmed during the Phase II ESA, a Phase III ESA involves developing and implementing a remediation plan to clean up the site to meet regulatory standards.

    *   Remediation Technologies:
    *   Soil Excavation: Removing contaminated soil and disposing of it at an approved facility.
    *   Soil Vapor Extraction (SVE): Using vacuum pumps to remove VOCs from the soil.
        *   Mathematical Model:
            *   Q = K * A * (dP/dL)
            *   Where:
                *   Q = Flow rate of vapor.
                *   K = Permeability of the soil.
                *   A = Area of the extraction well.
                *   dP/dL = Pressure gradient.
    *   Bioremediation: Using microorganisms to degrade contaminants.
        *   Example:
            *   Addition of nutrients to enhance the growth of indigenous bacteria that can break down hydrocarbons.
    *   Air Sparging: Injecting air into the groundwater to volatilize contaminants, which are then captured by SVE.
    *   Pump and Treat: Pumping contaminated groundwater to the surface for treatment.

2. Environmental Exposure Pathways

Understanding how contaminants migrate through the environment and affect human health and ecological receptors is crucial for risk assessment and valuation.

2.1. Contaminant Transport Mechanisms

    *   Advection: The transport of contaminants by the bulk flow of water or air.
    *   Diffusion: The movement of contaminants from areas of high concentration to areas of low concentration.
        *   Fick's First Law of Diffusion:
            *   J = -D * (dC/dx)
            *   Where:
                *   J = Diffusion flux.
                *   D = Diffusion coefficient.
                *   dC/dx = Concentration gradient.
    *   Dispersion: The spreading of contaminants due to variations in flow velocity and direction.

2.2. Exposure Routes

    *   Inhalation: Breathing in contaminated air or vapors.
    *   Ingestion: Swallowing contaminated soil, water, or food.
    *   Dermal Contact: Absorbing contaminants through the skin.

2.3. Risk Assessment

    Risk assessment involves evaluating the likelihood and magnitude of adverse effects resulting from exposure to environmental contaminants.

    *   Hazard Identification: Identifying the contaminants present and their potential health effects.
    *   Dose-Response Assessment: Determining the relationship between the dose of a contaminant and the severity of the health effect.
    *   Exposure Assessment: Estimating the amount, frequency, and duration of exposure to the contaminant.
    *   Risk Characterization: Combining the hazard, dose-response, and exposure assessments to estimate the overall risk.
        *   Risk = Hazard x Exposure

3. Valuation Techniques for Contaminated Properties

Valuing contaminated properties requires specialized techniques to account for the stigma, uncertainty, and potential costs associated with environmental contamination.
Appraisers must avoid substituting their judgement for that of the marketplace. All of the techniques require consideration of market data in arriving at the impaired values. Contamination does not always have an adverse effect on value. The influence of environmental impairment on real property must always be found in the marketplace.

3.1. Sales Comparison Approach

    This approach involves comparing the subject property to similar properties that have sold in the market. Adjustments are made to account for differences in environmental conditions.

    *   Paired Data Analysis: Comparing sales of contaminated properties to sales of comparable clean properties to determine the price discount associated with contamination.
        *   Example:
            *   Property A (Contaminated): Sold for $500,000.
            *   Property B (Clean): Sold for $600,000.
            *   Price Discount = ($600,000 - $500,000) / $600,000 = 16.67%.
    *   Regression Analysis: Using statistical models to isolate the impact of environmental factors on property values.
    *   Multiple Regression Analysis of property sales in a potentially impacted area or in proximity to a source site. The model can be designed to interpret the effect of issues such as remediation status, location in a contaminated area, distance from a source site, and other factors.

3.2. Income Capitalization Approach

    This approach involves estimating the income-generating potential of the property and applying a capitalization rate to determine its value. Adjustments are made to account for the risks and costs associated with contamination.

    *   Direct Capitalization: Adjusting the capitalization rate to reflect the increased risk associated with contamination.
        *   Formula:
            *   Value = Net Operating Income / (Capitalization Rate + Environmental Risk Premium)
    *   Discounted Cash Flow Analysis: Projecting future cash flows, including remediation costs, and discounting them to present value.

3.3. Cost Approach

    This approach involves estimating the cost to replace the property and deducting for depreciation, including environmental remediation costs.

    *   Cost to Cure: Estimating the cost to remediate the contamination and deducting it from the property's value.

4. Remediation Lifecycle

The remediation lifecycle is a cycle consisting of three stages of cleanup of a con-taminated site: before remediation or cleanup, during remediation, and after remediation. A contaminated property’s remediation lifecycle stage is an important determinant of the risk associated with environmental contamination. Environmental risk can be expected to vary with the remediation lifecycle stage of the property. Gathering and analyzing market data that matches up well with the appraised property’s remediation lifecycle stage on the date of value is critical because the effect of the contamination situation on prices and values can change as the investigation, remediation, and post-remediation monitoring move forward.

5. Case Studies

Analysis of environmental case studies can be used when a source site is being appraised or in a situation involving an impacted neighborhood or area where there are insufficient sales to understand the effect of the environmental issue on prices and values. Sales in another case study location involving a similar environ-mental situation are studied to estimate how the marketplace there responded to similar environmental issues. Typically that involves comparing sale prices in the impacted case study area to sale prices in a nearby similar, but unaffected, control area. The case study environmental situation is then compared to that of the impacted area using the relevant property characteristics. Great care must be exercised when using paired data, case studies, and interviews because of the special conditions and characteristics of contaminated properties. Also, surveys need to be properly developed.

6. Unapparent Environmental Hazards

Although the environmental liabilities associated with industrial plants are well known, many of the same liabilities may be present in other properties. Investors and analysts cannot assume that green rural properties that appear clean are actually free of environmental liabilities.

Conclusion

Environmental risk assessment and valuation require a multidisciplinary approach, combining scientific principles with real estate valuation techniques. By understanding the environmental processes, exposure pathways, and valuation methods, appraisers can provide accurate and reliable opinions of value for properties affected by environmental contamination. Recognizing the remediation lifecycle is also critical.