The Impact of Detrimental Conditions on Property Valuesrealestatedamage.com/Articles/PDF/DetrimentalConditions.pdf · The Impact of Detrimental Conditions on ... The Impact of Detrimental

Randall Bell, MAI

380

The Impact ofDetrimental Conditions onProperty Values

Detrimental conditions that affect property values range from temporary conditions andmarket perceptions to construction defects, environmental contamination, andgeotechnical issues. Quantifying the impact of DCs is significantly more complex andchallenging than working through the three approaches to value. The author hasdiscovered distinctive graphic patterns in his study of DCs and grouped them into 10general categories, each with unique characteristics. The article urges appraisers toaddress the costs associated with assessment, remediation, ongoing costs, and theeffects of any market resistance.

here are over 200 detrimental conditions(DCs) that can affect real estate values.

They include temporary easements, airport noise,construction defects, serious toxic waste,geotechnical issues, and natural disasters.Determining the diminution in property valuebrought about by a DC requires the applicationof specialized methods, procedures, andformulas. In fact, contamination and geotechnicalissues present some of the most involvedproblems in real estate valuation.

All DCs can be classified into 10 categories,each having unique patterns and attributes thatcan be illustrated on a graph. Further, a DC'simpact on value can vary from case to case. ADC could even be completely benign. Therefore,

each situation must be independently andcompetently analyzed. The Bell Chart1 defineseach classification and graphs the relationshipbetween property values and typical events (seefigure 1).

DETRIMENTAL CONDITIONS MODEL

All DCs involve some or all of six basic ele-ments that lead to an understanding of: the costsor losses associated with the assessment of thecondition, the repair or remediation costs, anyongoing conditions, and any residual marketresistance to the condition. The DC Model2

illustrates the costs before, during, and after theactual remediation (see figure 2). These costs areshown as A or the value as if unaffected by

_______________

1. Randall Bell, "The Ten Standard Categories of Detrimental Conditions," Right of Way (July 1996): 14-16.

2. Randall Bell, "Quantifying Diminution in Value Due to Detrimental Conditions: An Application to Environmentally ContaminatedProperties," Environmental Claims Journal (October 1996): 135.

Randall Bell, MAI, directs the real estate damages practice of PricewaterhouseCoopers in Costa Mesa,California. He specializes in the valuation of properties affected by detrimental conditions, and is the developerand an instructor of the Appraisal Institute's seminar, "Valuation of Detrimental Conditions." His book on thesame subject, titled Real Estate Damages, will be released in 1999. Mr. Bell earned an MBA from theUniversity of California, Los Angeles.

T

Bell: The Impact of Detrimental Conditions on Property Values 381

Figure 1 The Bell Chart: The 10 Classifications of Detrimental Conditions

the DC; B, the value upon the realization that aDC exists; C, the value upon assessment of thesituation; D, the value upon repair or otherwiseresolved; E, the value upon the consideration ofany ongoing costs; and F, the impact of anymarket resistance.

The value patterns of any DC will involvesome or all of these six basic elements. Forexample, Classes III through VI generally utilizeonly components of this model,

as may Classes VI and IX although they may haveall the elements of the model. The point is that allelements must be considered in any DCassignment.

SIX BASIC ELEMENTS

Valuation as if no detrimental condition.

The first step of a DC assignment is to value theproperty as if there were no DC.

382 The Appraisal Journal, October 1998

Figure 2 Detrimental Conditions Model

This establishes a benchmark for the followingstudies.

Assessment costs. These encompass all thecosts associated with monitoring and assessingthe DC before any repairs or remediation,including the Phase I and II studies, soils andgeotechnical studies, and other monitoring costs.These costs are provided by the engineeringfirms that do such monitoring, and becauserequests for this work are commonplace, thecost estimates are generally well established.

Remediation costs. The remediation costsrepresent all costs associated with the actualrepairs, cleanup, and correction of the condition.A vast spectrum of costs could be included,depending on the remediation method chosen.The costs would also include any agencyoversight, engineering, legal review, permits,sampling, improvement demolition,improvement reconstruction, additionalscientific analysis, and backfill. Again, thesecosts are often provided by the engineers of thefirm contracted to conduct the remediation.However, special care should be taken inreviewing the completeness of such estimatesbecause the original cost estimates are oftenexceeded. The firm providing the estimatesshould clearly set forth whether the costs arebest case, expected case, or worst case scenarios—an important point for implementing the nextstep.

As stated, remediation costs can exceed theiroriginal estimates. For this reason, a

contingency factor may be required to adjustremediation costs to reflect a complete andreasonable cost estimate, so that the real estatemarket is reasonably assured that all reasonableremediation costs are accounted for in theestimates provided. It is important to note that thecontingency factor applied to the remediation costsrelate to the hard costs of remediation and shouldnot be confused with intangible losses, such asonus or stigma. Because informed potentialbuyers must be reasonably assured that they have aclear indication of their potential cash liability, it isessential that the total remediation costs accuratelyreflect the total reasonable repair costs, not just acursory and optimistic estimate.

Carrying costs must also be considered. Duringthe remediation process, there may be disruptionsto the property's use, resulting in a loss of rentalrevenues or the utility of the property. In addition,operating expenses, which may be paid by thetenant under the terms of a net lease, would also beconsidered.

The final element of the repair process is theproject incentive. This is the entrepreneurial profitrequired for a buyer to purchase damaged propertyand make the repairs.

Ongoing costs. Some damaged properties incurongoing costs even after repairs or remediation iscompleted. For example, a contaminated propertymay undergo continued monitoring. Formallydamaged or contaminated properties may havedifficulty in


obtaining financing. Lenders may not considerfinancing an unremediated site and may also bereluctant to finance a property that has beenremediated, usually due to concerns thatgovernment agencies do not permanently certifya site as clean. The result could be anenvironmental review of the property, additionalloan points, a higher interest rate, or a lowerloan-to-value ratio. In the end, the propertyowner could pay additional financing costs.

A damaged property may also incur re-strictions in use. For example, a formallycontaminated site may be limited to industrialuses, even if it had previously been acommercial or residential use. This issue mustbe individually studied for any damagedproperty.

Market resistance. At this point, the totalcosts and losses are subtotaled, and an ad-justment is made for the overall market re-sistance to the property, if any. This adjustmentreflects the market's post-repair resistance topurchase the property when similar propertieswithout a history of defectiveness are available.

Valuation as is. To derive the value, as is,all the above issues must be addressed, quanti-fied, and deducted from the value as if no DCexists. The total losses attributable to a DC canrange from being nominal to exceeding theClass I value. Additionally, the costs ofremediation may actually be minor comparedwith all the associated costs.

DC CLASSIFICATIONS

Class I—No Detrimental Conditions or Be-nign Condition. Class I is the most straight-forward because it involves an absence of DCs.Many DC assignments include the initial step ofdetermining the market value as if no DC exists.The formulas relating to the concepts of ClassesI through X are summarized in figure 3.

This class also involves situations in which anact or event occurs, but the issue has no effecton value. Such cases can involve any one of theDC Classes II through IX. This concept isstraightforward, but it can be the grounds forlitigation.

For example, a plaintiff may contend thatsome condition affected his or her property

value, while the defendant claims that the eventhad no impact on value. One way to determine ifan issue is, in fact, a DC is with a paired-salesanalysis. In this process, market data that is clearlyunaffected by the issue is collected and thencompared with similar market data that is affected.If a legitimate DC exists, there will likely be ameasurable and consistent difference between thetwo sets of market data; if not, there will likely beno significant difference between the two sets ofdata. When a published study about aneighborhood adjacent to a well-designed landfillin the Los Angeles area was compared withcomparable neighborhoods some distance from thelandfill, the results indicated no significantdifference between the two neighborhoods ineither current prices or appreciation rates. 3

Class II—Non-market Premium. Class II in-cludes assemblage, redevelopment zones, andother situations where the buyer paid a premium.This is a detrimental condition in terms of thehigher price being paid by the buyer.

Class III-Market Condition. Class III includesthe normal cycle of the real estate market whenvalues increase, decrease, or remain level over aspecific period of time. These patterns of value aresimply the effects of the general economy coupledwith real estate supply and demand. This is asignificant classification because a certaincondition might be suspected to have affected thevalue when, in fact, the DC was benign, and themarket conditions caused the loss or gain in value.

In addition, each of the other graphs depictingthe common characteristics of the impact ofvarious DCs on value is based on level marketconditions. In reality, market conditions may havean added impact in and of themselves, therebyrequiring adjustments for market conditions withany one of the various classifications of DCs.

One way of measuring Class III conditions maybe to study several comparable sales that resold ata later date. By comparing the initial andsubsequent sales dates and values, a determinationcan be made about the market trends. Graphically,Class III simply reflects increased, decreased, orlevel market conditions over time.

Class IV—Temporary Condition. Because thisclass describes DCs that are only

_______________

3. Donald H. Bleich, M. Chapman Findlay, III, and G. Michael Phillips, "An Evaluation of the Impact of a Well-Designed Landfill onSurrounding Property Values," The Appraisal Journal (April 1991): 247.

During the

remediation

process, there

may be

disruptions to

the property's

use, resulting

in a loss of

rental revenues

or the utility of

the property.


Figure 3 Detrimental Conditions Valuation Formulas

temporary in nature, the loss in value is limitedto the disruption caused by the temporarycondition. The most common Class IV situationinvolves temporary construction easements inwhich a portion of a property is used by anotherparty while adjoining construction is underway.Upon the completion of construction, the fulluse of the property is returned to its originalstate..

This temporary disruption can affect value. Forexample, if temporary construction disrupts thetraffic patterns of a shopping center, thediminution in value may be extracted from the lostrevenues, higher vacancy rates, and other relatedlosses. The diminution in value would be inaddition to the rental rate of the land being usedduring the temporary construction. Further, whilethe effects of bankruptcy are often a benign Class IDC, this situation may be a Class IV DC if there issubstantial deferred maintenance or there are othertemporary conditions that affect the value.

Another type of Class IV DC involvesabsorption losses. For example, if a particularcondition causes a major tenant to vacate thebuilding abruptly, the property value would dropupon the tenant's departure and then increase overtime as the vacant space is absorbed. Absorptionlosses specifically include lost rents, leasingcommissions, and tenant improvements.

Class IV conditions may also be the result of acrime scene or other tragic event. Media coverageof the incident might negatively influence themarket's perception. Interviews with brokers andagents indicate that, when disclosed, a violentcrime committed within a residence adverselyaffects value4 As depicted by the graphs, thesetypes of conditions may either have a brief effectonly or have a long-lasting effect that coulddiminish with time. In some extreme situations,the memories caused by the tragedy may be sounpleasant that the improvements are eventuallydemolished; however, the stigma tends to impactthe site continuously.

Measuring Class IV DCs often involvecomparing the subject property to other propertiesin similar Class IV situations and subsequentlysold to buyers informed of the tragic event. (Alower sales price is often required to entice buyersto purchase these properties.)

The Class IV graphs may reflect only a shortand temporary drop in value if the condition isminor and forgotten by market participantsquickly. It may also reflect a sudden drop with agradual increase in value as the market eventuallybecomes more accepting of the situation.

Class V—Imposed Condition. Adverse ex-ternal factors, eminent domain, undesirable acts, orforced events by another person or entity constituteClass V conditions.

_______________

4. Sheila A. Little, "Effects of Violent Crimes on Residential Property Values," The Appraisal Journal (July 1988): 342.


Specifically, the DCs can be imposedgovernmental conditions such as down-zoning,special bond assessments, or the designation of aproperty as a historic site. Examples of adverseexternal factors are dumps, landfills, factoriesthat produce noise and bad odors, neighbors thatallow their property to deteriorate, and trans-mission lines. 5 They may also include the dis-covery that improvements were illegally con-structed, or the development of surroundingnuisances (or perceived nuisances) such as asewer treatment plant, airport noise, or a prison.For example, published studies illustrate thatthere is a measurable impact on values due tointernational airport noise. 6 In addition, ClassVI DCs apply to eminent domain situations,especially a partial taking, and to willful acts ofthe property owner, such as entering into aground lease.

In some situations, the effects of an imposedcondition may be relatively easy to assess. Inother cases, the imposed condition may beunclear and require special studies to predicthow the market will change. Upon fullinvestigation and assessment, the uncer taintiesare eliminated and the value of the propertygenerally increases.

Graphically, Class V often reflects a suddendrop in value upon the occurrence of the DC anda permanent loss in value as a result of theimposed condition. In a situation involvingdiminishing effects, such as a ground lease, theleasehold value gradually decreases over time.

Class VI–Building Construction Condition.The basic premise of both Class VI and VII DCsis that they are manmade, which means that theycan often be repaired. Class VI DCs involveconstruction issues above grade. As such, theyare relatively easy to assess, and often result inthe restoration of the property's full value uponcompletion of the repairs. Typically, theproblems are self-evident, and no special studiesare required to determine the scope of theproblem; however, all potential losses should beaddressed.

To quantify these types of DCs, the appraisermust study the cost of repairs, engineering,related services such as relocating the tenant,free rent for the tenant while repairs are being

made, post-repair cleanup, and so forth. Sometenant relocation costs can partially, if not entirely,be mitigated simply by waiting until the property isvacant to make the repairs.

Depicted on a graph, a Class VI situation mayshow a drop in value upon the discovery of thecondition and a return to full value upon the repairof the condition. In unusual circumstances, theremay be an ongoing condition that remains becauseit is not physically or economically possible tocure, thereby resulting in a permanent loss in thevalue of the improvements. For example, if aconstruction defect cannot be economicallyrepaired, it may be a situation similar to inadequateinsulation or asbestos abatement. The mostnoteworthy example of this situation is asbestoscontaining materials, which because they may beimpractical to remove from a building, are anongoing condition. Air monitoring may berequired throughout the life of the improvementsand special handing and disposal costs would beincurred if the building is eventually demolished. 7

Under this condition, the graphic illustrationreflects a permanent loss of value because thecondition remains, or is perceived to remain,unchanged over time.

Class VII—Soil or Geotechnical Construc-tion Condition. These DCs, which involveconstruction issues below grade, are more difficultto assess and repair than Class VI conditionsbecause of the challenges of as sessing conditionsbelow grade and the as sociated drilling, coring,and excavation. This category of DCs couldinclude site grading; soil cut, fill, and compacting;slopes; drainage; tunneling; or retaining walls.

Often, Class VII DCs can be assessed andrepaired even if the foundation must be reinforcedor the improvements underpinned. Like Class VIDCs, calculating the diminution in value wouldinvolve the review of the functional utility of theproperty, repairs that are necessary to prevent aloss to life or property, repair costs, engineeringcosts, disruption to the property, etc. Theseconditions are manmade and can usually becorrected although in some extreme conditions,they cannot be repaired and an ongoing conditionmay remain, affecting the value if the functionalutility of the property is diminished or the market

_______________

5. Hsiang-te Kung and Charles F. Seagle, "Impact of Transmission Lines on Property Values: A Case Study," The Appraisal Journal (July1992): 413.

6. Marvin Frankel, "Airport Noise and Residential Property Values: Results of a Survey Study," The Appraisal Journal (January 1991):96-110.

7. Randall Bell, "The Impact of Asbestos on Real Estate Values," Right of Way (October 1994): 10-21.

Class VI DCs

are relatively

easy to assess,

and often

result in the

restoration of

the property's

full value upon

completion of

the repairs.


or the market perceives the ongoing issue toimpact the value. Thus, the func tional use of theproperty and the necessary repairs must becarefully reviewed.

For example, if a site has fill soil that is up to100 feet deep and differential settlement occurs,it may not be economically or physicallypossible to install piles and extra buildingfoundations to the bedrock to support theimprovements and fully mitigate the situation.As a result, it may be reasonable to expect thatthe property will be more prone to earthquakedamage and continued settlement damage. Inthis type of condition, the value of the propertymay be permanently impaired and beyond theother Class VI and VII categories.

On the other hand, some Class VI and VIIDCs do not have any effect on the rental ratespaid by tenants, or the property's liability orutility and may, therefore, be questionable asClass VI or VII DCs at all, if the capitalizationrate is also unaffected.

For example, if improperly compactedshallow soils cause some minor settlementcracks on the floor of a warehouse building, andsimilar settlement cracks are commonly found incomparable properties with no known soilsproblems, the issue may not have any impact onvalue. This is particularly true if the tenants' useof the property is unaffected by the conditionand the marketability of the space is comparableto that of similar properties.

The Class VII graph indicates a loss in valuewhen the condition is discovered and a return tothe non-impacted value upon the assessment andrepair of the condition. As stated, in someunusual conditions, there may be a residualmarket resistance remaining even after repairsare made.

Class VIII—Environmental Condition.Class VIII involves environmentalcontamination such as hydrocarbons, asbestos,radioactive waste, solvents, and metals. In thesesituations, remediation costs must be analyzedcarefully. There may be a variance betweenestimated and actual remediation costs.8

However, in recent years, this concern hassubsided somewhat due to the introduction of costcap insurance and increased use ofindemnifications by responsible parties. In ad-dition, if the property is contaminated, there maybe continued and justified concerns aboutproblems and issues resurfacing in the future. TheEnvironmental Protection Agency maintains a listof problem sites, including those yet to beinvestigated. These lists are available on request,and if a problem arises, a Freedom of InformationAct officer can be contacted.9 No governmentagency will irrevocably certify a site as clean evenif the site has undergone remediation and has siteclosure status.10 In fact, once contaminated, a siteis always on a list and, as a result, may be reex-amined in the future. Further, it is difficult toprove that all contaminants were removed and nolonger exist. In other words, it is logically andscientifically impossible to prove a negativehypothesis and regardless of how much time,energy, or resources are expended, absoluteassurance is impossible.11 Figure 4 shows thegeneral flow of activity related to a contaminatedsite and the possible circular nature of this process:12 In recent years, "letters of nonresponsibility"and other mitigation techniques have elevatedmany of these concerns.

As shown on the chart, even with site closure,the sale, refinancing, or new use of a property maytrigger a Phase I survey, which in turn could leadto a Phase II study. This, of course, could result inanother review of the property by the governmentregulatory agency, with possible new politicalagendas or other factors altered since the previoussite closure was issued. This means that, in rareinstances, a formerly contaminated site could besubjected through the site assessment andremediation process again.

Stigma-related losses can be nonexistent,nominal or, in extreme situations, virtually destroya property's value.13 When environ mentalfeatures are viewed as repulsive, upsetting, ordisruptive, they are stigmatized as undesirable.14

While engineering experts may possess theexpertise to judge that a specific

_______________

8. Albert R. Wilson, "Emerging Approaches to Impaired Property Valuation," The Appraisal Journal (April 1996): 156. 9. Ralph K. Olsen,"Hazardous Waste Sites," The Appraisal Journal (April 1989): 234.

10. Wilson, 158.

11. Albert R. Wilson, "The Environmental Opinion: Basis for an Impaired Value Opinion," The Appraisal Journal (July 1994): 441. 12.Randall Bell, "Quantifying Diminution in Value Due to Detrimental Conditions: An Application to Environmentally ContaminatedProperties," Environmental Claims Journal (October 1996): 135.

13. Peter J. Patchin, "Contaminated Properties and the Sales Comparison Approach," The Appraisal Journal (July 1994): 408. 14. BillMundy, "Stigma and Value," The Appraisal Journal (January 1992): 10.

No government

agency will

irrevocably

certify a site as

clean even if

the site has

undergone

remediation

and has site

closure status.


situation is not a cause for concern, the non-engineer, who is also often the potential buyerand lender, may view a formerly damagedproperty with skepticism. In contaminationcases, the reduction in value results from theincreased risk associated with the contaminatedproperty.15 Such ongoing concerns may createmarket resistance-sometimes referred to asstigma, onus, taint, or impairmentagainstproperties that have a history of problems andhave potentially incurred future liabilities orhidden cleanup costs, as well as against thegeneral hassle involved with owning theproperty. With source contamination properties,all elements of the DC Model should beconsidered.

Class IX–Natural Condition. Class IX in-volves curable natural conditions that may beeconomically and physically repaired. Thesewould include earthquakes, tornadoes,

floods, landslides, endangered species, and othernatural conditions.

These DCs may involve a significant safetyissue to the occupants of the property. If the DCcan be fully assessed and repaired, the propertyvalue may return to the previous level before thecondition existed. However, if there is still aquestion about the ef fectiveness of the repair orremediation, there may be a residual loss of value.Again, the impact on value involves the costs toclean up or fortify the site, incidental costs, andany residual conditions. All the elements of theDC Model should be considered.

Class X—Incurable Condition. This classrepresents the most serious cases, for the propertymay not be economically or physically remedied,resulting in considerable or total loss in propertyvalue. The property may be a liability if thecondition creates a

Figure 4 Environmental Contamination: Flow of Events

_______________

15. James A. Chalmers and Scott A. Roehr, "Issues in the Valuation of Contaminated Property," The Appraisal Journal (January 1993): 33.


serious hazard or the cost to repair exceeds theproperty value.

Examples of Class X DCs would includeextreme toxic or hazardous waste issues andmajor landslides-situations that pose a risk tolife, health, and property, and cannot beeconomically and physically repaired. Even ifthe DC is curable, it would still be consideredClass X because the problem cannot be cured bythe property owner. For example, if a landslideoriginates in an adjoining canyon, the propertyowner cannot make repairs to the affectedproperty because it belongs to another person orentity.

Class X conditions bring about a total or anoverwhelming loss in value upon the discoveryof the condition and are so severe that propertybecomes worthless or even a liability if the coststo correct the DC exceeds the property's Class Ivalue.

Methodologies to QuantifyDiminution in Value

General research sources. Regardless of themethod used in quantifying the impact of a DC,market data must be collected and analyzed.The challenge is that comparable information onDCs is often not provided in typical appraisalreports. For this reason, specialized researchmethods must be employed. For example, if theDC is soils subsidence, a search may beconducted for all articles published on the topic.From this information, property owners andbrokers may be contacted and interviewed.Also, government agencies, environmentalengineers, and soils engineers often have logs ofcompleted remediation projects from whichspecific projects may be identified and studied.Of course, brokers and sales agents often pro-vide excellent leads on properties affected byDCs. Comps Infosystems, Inc., based in SanDiego, California, now publishes market datanationwide that is categorized by the Bell Chart.

Paired-sales analysis. This process involvescomparing sales affected by a DC with similarsales not affected by a DC. For example, agroup of properties under the flight path of anairport can be compared with similar propertiesnot located under the flight path.

Resale analysis. To conduct this analysis, theappraiser would study sales comparables and the

subsequent resales of the same properties, usuallyto determine the increase, decrease, or levelconditions of market values, or to determine theimpact of a DC by comparing values before andafter the DC is discovered. For example, if there isa discernible pattern to the selling prices of aspecific property type, the effects and direction ofthe market can be determined.

Cost-to-remediate analysis. Conducting thisanalysis means studying the costs to remediate aDC, including engineering, tenant relocation, lostrents, demolition, repair, cleanup, new tenantimprovement buildout, leasing commissions,carrying costs, etc. Market data analysis. Thisanalysis consists of studying the effects of DCs onother properties. Although the uniquecharacteristics of every DC makes directcomparison difficult, market data can help supportthe appraiser's conclusions. A study designed tocross-reference remediation and stigma costs andlosses illustrates the wide range of effects of DCsand provides market data on conditions of salescomparables (see table 1).

Direct capitalization analysis. This processcapitalizes permanent lost rents brought about by aDC. For example, if a property leases for a certainrate before the construc tion of an adjoining sewagetreatment plant and then leases for less upon thecompletion of the plant, the difference in the netoperating income may be capitalized to determinethe permanent impact of the DC. If the incomeand risks (capitalization or discount rates) areaffected, the situation must be addressed, usingspecific methods. 16

Discounted cash flow analysis. This analysisinvolves the calculation of the net present value ofa stream of income that reflects an affectedproperty's various costs and fluctuating revenues.If a property is undergoing asbestos abatement orsoils remediation, the cash flow study wouldincorporate all the costs cited in the cost-to-repairapproach. In addition, the cash flow would includeair or ground water monitoring costs and, if somecontaminants remain, any future demolition,disposal, or cleanup costs. Further, the discountrate may be increased to account for the perceivedrisks of property ownership, if supported by themarket.

Modified cash flow studies are also required tomeasure the impact of a ground lease on leaseholdestates. These leasehold

_______________

16. Richard A. Neustein, "Estimating Value Diminution by the Income Approach," The Appraisal Journal (April 1992): 283-287.


advantage studies involve the calculation ofmarket and contract ground rents and thecomputation of the net present value of anydifference.

ANALYZING DETRIMENTALCONDITIONS

The basic guidelines for analyzing DCs aresummarized in the following:

1. Always use market data when quantifyingthe impact of DCs on value. Quantifyingdamages based solely on experience andprofessional judgment is reckless andprobably unethical, particularly whenmarket data exists for virtually all DCs. Inthe absence of direct market data, surveysmay be used.

Failing to research and apply relevantmarket data is the single most commonflaw in DC analysis. Some in dividualstend to lump all DCs together whendiscussing or writing about variousconditions. Be careful to understand thelimitations of such information, as thereare distinct traits for each classification ofDCs.

2. Be cautious in using market data from oneDC classification when attempting toquantify the diminution in value of anotherDC category. This is the basic concept ofcomparing apples to apples. The commoncharacteristics of each class of DCs aregraphically distinct. Some DCs involverepairs and some do not; some involvepermanent residual conditions while othersdiminish over time; some involveengineering studies and others do not, andso forth.

3. An appraiser should never go beyond hisor her area of expertise. It is unethical forappraisers to go beyond their area ofexpertise, such as assessing soils con-ditions, making engineering calculations,identifying contaminants, estimating theextent of damages or contamination, orestimating the time to remediate.17

4. Consider the reliability of remediation es-timates. It is not uncommon for remed-iation projects to incur cost overruns.

Many issues and questions should be con-sidered, such as: Does the contractor have acontract clause that allows for additionalcosts? Is the property indemnified againstcost overruns? Are the estimates best case,most likely, or worst case scenarios? Dobonds, cost capitalization insurance, or in-demnifications exist that shift the liabilityoverruns to the contractor, insurancecompany, or other party? Are the estimatesitemized to reveal any additional incidentalcosts? Is the site assessment comprehensiveenough to yield a realistic cost estimate?18

5. Always review the remediation costs andrelated engineering costs for "rea-sonableness". While real estate appraisersand analysts are generally not also engineers,it is not only possible but appropriate thatthese costs be reviewed for basicreasonableness. 19

6. Consider all the associated repair costs. Theactual cost of repair can often be relativelyminor compared with all the associated costs,such as engineering costs, tenant relocation,lost rents, demolition, repair, clean-up, tenantimprovement buildout, leasing commissions,and absorption. All costs should be itemized,categorized, and analyzed.

7. Never attempt to quantify damages basedsolely on the Bell Chart. The chart is in noway intended to quantify any loss in value.This can be accomplished only by acomprehensive study by a qualified expert.However, the Bell Chart does show thegeneral issues, typical value patterns, andrelative impact on values for variousclassifications.

8. Exceptions do exist, but usually only in moreextreme circumstances. These charts reflectthe common characteristics of DCs, butexceptions do exist. For example, aconstruction defect may be so major that ittakes many years to repair. This situationmay involve considerable disruptions to thetenants and even create media attention. Inthese types of conditions, the property valuemay be impacted by negative marketreactions to the problems even after therepairs are fully completed.

_______________

17. Appraisal Institute, "Guide Notes to The Standards of Professional Appraisal Practice, Guide Note 8 - The Consideration of HazardousSubstances in the Appraisal Process" (Chicago, Illinois: Appraisal Institute, 1991): D21.

18. Ibid., Guide Note 6-Reliance on Reports Prepared by Others, D14.

19. Ibid.

Appraisers

should always

review the

remediation

costs and

related

engineering

costs for

reasonableness.


Tabl

e 1

So

ils C

on

tam

inat

ion

Su

rvey


9. Study the functional utility and mitigationissues carefully. The issues related to theDC's actual impact on the utility of aproperty must be addressed. For example,some DCs do not require immediate repair,and the costs may be significantlymitigated by merely waiting for a naturallyoccurring tenant vacancy before repairingthe problem. Other DCs may affect theproperty, but the rents, oc cupancy, andresale value remain unaffected. In thesecases, the DC may, in fact, be benign.How the DC has had a real or perceivedimpact on the day-to-day use of theproperty must be considered. For example,a few years ago asbestos abatement wasconsidered a necessity by many. Todaythe perception that asbestos is a heath riskhas diminished.

10. Recognize the various dimensions of usingthe Bell Chart. The applications for usingthe standard Bell Chart classifica tions arefar-reaching. In fact, it is possible that oneproperty issue will involve the use of threeor more classifications.

A property owner may contend that anadjoining development caused his or herproperty value to decline when marketconditions are actually to blame. Theproperty owner might inappropriately usethe Class V criteria and presume an impacton value, but the proper analysis wouldinvolve a Class I analysis

to demonstrate that the condition is benign.Class III would be used to illustrate the realcause of the declining value. By properlyclassifying DCs, selecting the appropriatemethod, and following these basic rules, eachindividual situation may be more effectivelyand accurately studied. Relevant market datacan then be researched and the propermethods applied.

CONCLUSION

Quantifying the value diminution of propertyaffected by a detrimental condition can be achallenging appraisal assignment. The appraisermust recognize six basic issues: (1) the value as ifthe property is unaffected by the DC; (2) the valueupon the DC's occurrence or its discovery; (3) thenecessity for a proper and thorough assessment ofthe situation; (4) the determination of value uponcompletion of repairs-i.e., the condition isotherwise resolved; (5) the necessity for the valueconclusion to take into account any ongoing costs;and (6) the need to examine the impact of anymarket resistance. In other words, the appraisermust examine the full spectrum of events-beforeremediation, the remediation process itself, post-remediation, and any post-repair market resistancecaused by the situation. The result should be ameaningful and accurate assessment of how a det-rimental condition has affected the value.

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