Know What You Are Buying. Know What You Are Selling. Contamination Effects Property Values.
Recently, while reviewing an appraisal report with a client, he asked why my appraisal report included so much information in the Property Description section. He stated “I am well aware of the ‘description of the property.’ My parents owned this property for decades. All I really want to know is what is it worth.”
Upon review of the report, my client became very interested in the ‘property description.’
He quickly realized that there was a lot that he was not aware of.
My team completes a thorough due diligence of every property we value. In this case, upon environmental review, we uncovered that our client’s property had a contamination conveyance or detrimental condition – meaning a condition which would adversely affect the value of the property. The property sat on land that previously held underground storage tanks which stored petroleum. The tanks were no longer on the site but the groundwater on the site was deemed to be contaminated by benzene. For dwellings located above contaminated groundwater, benzene vapor can migrate through the soil and foundations and effect indoor air quality.
These findings led to a deed restriction being indefinitely placed on the property, preventing the site from residential land use. This was a blow for our client, as he had a potential buyer that planned to use the land for multi-family housing development. The good news was that the contamination would not prevent my client from selling his property, but it would affect the Highest and Best Use of the property, as well the value of the property.
Though the governmental regulating agency deemed the property safe for commercial use, a prudent buyer would expect a discount to offset the risk of potential future claims brought forth by employees of the source site or by owners, employees and customers of adjacent and proximate sites. For our client’s appraisal, we calculated a discount to the valuation based on several assumptions. In this case, we assumed:
• A buyer would need to buy air quality insurance to mitigate risk.
• The insurance premium would be subject to inflation over the payment period.
• The need for a holding period for the remaining economic life of the subject property, which in this case was 30 years.
• A present value of the cash to be discounted at a safe rate equal to a U.S. backed government security, e.g. a 30-year treasury note.
These assumptions resulted in a valuation discount for our client. In the end, though not the outcome he expected, our client was happy to be better informed on his property.
This client isn’t the only one to be amazed and sometimes overwhelmed by the level of detail found in our commercial real estate appraisal reports. This is one of the reasons that the FRG team is always available to review in detail our final reports with our clients to ensure a thorough understanding of the driving factors of their valuation.