Environmental Risk Assessment: Site Characteristics and Valuation Techniques

Chapter: Environmental Risk Assessment: Site Characteristics and Valuation Techniques

Introduction

This chapter delves into the critical aspects of environmental risk assessment within the context of real estate appraisal. Understanding site characteristics and employing appropriate valuation techniques are paramount to accurately assessing the impact of environmental issues on property value. This understanding is critical in the three phases of cleanup of a contaminated site: before remediation or cleanup, during remediation, and after remediation.

1. Site Characteristics: A Foundation for Risk Assessment

A comprehensive environmental risk assessment begins with a thorough evaluation of site-specific characteristics. These characteristics influence the potential for contamination, the pathways of exposure, and the severity of environmental impacts.

1. Geological and Hydrogeological Setting:

   • Geology: The geological composition of a site dictates the potential for contaminant migration and attenuation. Permeable soils like sand and gravel facilitate rapid contaminant transport, while less permeable materials like clay can impede migration. The presence of fractured bedrock can create preferential pathways for groundwater contamination.

     • Scientific Principles: Darcy’s Law governs groundwater flow through porous media:

       • Q = -K A (dh/ dl)

         Where:

         • Q = Volumetric flow rate of groundwater
         • K = Hydraulic conductivity (a measure of permeability)
         • A = Cross-sectional area of flow
         • dh/ dl = Hydraulic gradient (change in hydraulic head over distance)
           • Hydrogeology: Understanding the depth to groundwater, groundwater flow direction, and hydraulic properties is crucial. Shallow groundwater tables increase the risk of surface water contamination, while the flow direction determines the potential impact on downgradient receptors (e.g., wells, surface water bodies).
             • Practical Applications:
               Laboratory Experiments: Hydraulic conductivity can be determined by constant head and falling head permeameter tests.
               Field experiments: Pumping tests, slug tests, and tracer studies can assess the hydrogeological properties of a site and determine groundwater flow parameters.

2. Soil Characteristics:

   • Soil Type and Composition: The type of soil influences contaminant fate and transport. Soils with high organic matter content can bind contaminants, reducing their mobility. Soil pH also plays a crucial role in contaminant solubility and mobility. Soil surveys can be used to determine soil types on properties, appropriate crops, and expected production.

     • Scientific Principles: The distribution coefficient (Kd) describes the partitioning of a contaminant between the solid and liquid phases:

       Kd = Cs/ Cw

       Where:
       
       *Kd* = Distribution coefficient
       *Cs* = Contaminant concentration in the solid phase (soil)
       *Cw* = Contaminant concentration in the liquid phase (water)
       *   **Soil Permeability and Porosity:**  These factors affect the rate of contaminant infiltration and percolation through the soil profile.
           * **Practical Applications:**
           Laboratory Experiments: Grain size analysis, Atterberg limits tests, and compaction tests can determine soil properties relevant to contaminant transport.
           Field Experiments: Infiltration tests can measure the rate at which water enters the soil.
       

3. Surface Water Features:

   • Proximity to Surface Water Bodies: Proximity to rivers, lakes, or wetlands increases the risk of surface water contamination via runoff, erosion, or groundwater discharge.
   • Surface Water Flow Patterns: Understanding drainage patterns and flow rates is essential for assessing the potential for contaminant transport.
   • Sediment Characteristics: Sediment in surface water bodies can act as a sink for contaminants, potentially posing a long-term risk.
     • Scientific Principles: The transport of contaminants in surface water is governed by advection, dispersion, and chemical reactions. The fate of a contaminant can be modeled using transport equations.

4. Land Use History:

   • Past Industrial Activities: Sites with a history of industrial operations (e.g., manufacturing, mining, landfills) are more likely to be contaminated. Historical aerial photographs, city directories, and regulatory records can provide valuable information on past land uses. It is important to investigate and determine how properties were source, non-source, adjacent, and proximate sites.
   • Agricultural Practices: Past use of pesticides, herbicides, and fertilizers can lead to soil and water contamination. Lead-based paint, underground storage tanks, asbestos in farm buildings, and cattle vats are common environmental liabilities.
   • Waste Disposal Practices: Improper waste disposal practices can result in soil and groundwater contamination.
   • Special Characteristics of Rural, Agricultural, or Resource Land: Appraisers should investigate specific characteristics when describing properties adequately. Precise soil surveys are useful when comparing agricultural properties. The legal right to water is also important to the value of a property. General climatic conditions and growing seasons can affect crop production and selection, therefore land value. Cropping patterns are influenced by regulations on herbicides, insecticides, fertilizers, air and water pollution, and wildlife protection.

5. Climatic Conditions:

   • Precipitation: Rainfall can facilitate contaminant leaching and runoff, increasing the risk of water contamination.
   • Temperature: Temperature influences the rate of chemical reactions and volatilization of contaminants.
   • Wind Patterns: Wind can transport contaminated dust and vapors, potentially affecting air quality and human health.

6. Ecological Receptors:

   • Presence of Sensitive Ecosystems: The presence of endangered species habitats, wetlands, or other sensitive ecosystems increases the potential for ecological impacts.
   • Wildlife Usage: Areas frequented by wildlife can be at risk of exposure to contaminants.

7. Mineral Rights:

   *The presence of precious metals, oil and gas, sand and gravel, quarry red rock such as building stone, clay deposits, or gemstones on a plot of land can affect its value. As with water rights, the legal right to extract all minerals contained in or below the surface of a property is as important as ownership of the land itself.

2. Valuation Techniques for Environmentally Impacted Properties

Assessing the impact of environmental contamination on property value requires specialized valuation techniques that account for the cost, use, and risk factors associated with contamination. 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.

1. Cost Approach Modifications:

   • Contamination Remediation Costs: This approach involves estimating the cost of remediating the contamination and deducting it from the estimated value of the property if it were uncontaminated (the “unimpaired value”). These costs can be for the cleanup of on-site contamination as well as mitigation of off-site impacts due to migrating contamination.
     • Equation: Impaired Value = Unimpaired Value - Remediation Costs
     • Practical Applications:
       Cost estimating software and databases are used to estimate remediation costs based on the type and extent of contamination.
       Remediation cost estimates often include contingency factors to account for uncertainties in the cleanup process.
   • Diminution of Value Due to Stigma: Even after remediation, a property may suffer a loss in value due to the stigma associated with past contamination. This stigma can be difficult to quantify but should be considered.

2. Sales Comparison Approach:

   • Paired Data Analysis: This technique involves comparing the sale prices of contaminated properties to those of comparable uncontaminated properties to estimate the diminution in value due to contamination.
     • Equation: Diminution in Value = Sale Price (Uncontaminated) - Sale Price (Contaminated)
     • Practical Application: Paired data analysis is best applied where sales of impacted or potentially impacted properties are compared to prices paid for similar properties that sold outside the impacted area in order to estimate the effect of the location on the sale price.
   • Regression Analysis: Multiple regression analysis can be used to statistically analyze the relationship between property sales prices and environmental factors (e.g., distance to contamination source, remediation status). Model specification must also include the nonenvironmental independent variable factors (e.g., site size, age of improvements, date of sale, zoning, school district) that influence sale prices. Having a database that includes a sufficient number of sales to make the outcome of the model statistically significant is especially important. If the regression modeling is done as part of a mass appraisal assignment, the regression modeling must comply with Standard 5 of USPAP.

3. Income Capitalization Approach:

   • Adjusted Capitalization Rates: Environmental risk can affect the capitalization rate used to value income-producing properties. Properties with higher environmental risk typically have higher capitalization rates to compensate for the increased uncertainty.
     • Equation: Property Value = Net Operating Income / Capitalization Rate
   • Adjusted Income Projections: Environmental contamination can affect rental income, vacancy rates, and operating expenses, which need to be considered in income projections.

4. Case Studies:

   • Sales in another case study location involving a similar environmental 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.

3. Special Considerations

1. Regulatory Framework: Understanding the applicable environmental regulations (e.g., CERCLA, RCRA, state regulations) is essential for determining the potential liability and cleanup requirements associated with a contaminated site.
2. Responsible Parties: Determining the parties responsible for investigation and remediation costs is critical. This responsibility can affect the value of the property being appraised.
3. Remediation Lifecycle: The stage of remediation (e.g., pre-remediation, active remediation, post-remediation) influences the perceived risk and property value.
4. Data Sources: Accessing reliable environmental data from regulatory agencies, consultants, and databases is crucial for conducting a thorough risk assessment.
5. Environmental Exposure Pathways: Understanding how contamination can migrate, such as soil remediation, source, non-source, adjacent, and proximate sites are important for the appraisal.

Conclusion

Environmental risk assessment is an integral component of real estate appraisal for properties potentially affected by contamination. By carefully evaluating site characteristics and applying appropriate valuation techniques, appraisers can provide accurate and reliable estimates of property value, accounting for the cost, use, and risk factors associated with environmental contamination. It is important to always consider market data in arriving at the impaired values.