Assessment of Contaminated Properties August 5, 2015 © Gaylord A. Wood, Jr. 2015.

Assessment of Contaminated Properties

August 5, 2015© Gaylord A. Wood, Jr. 2015

Commercial!

• Alan S. Dornfest, AAS, of the Idaho Department of Revenue, was largely responsible for the IAAO’s Standard on the Valuation of Properties Affected by Environmental Contamination (2001)

• Alan has updated this and will be presenting at the IAAO Legal Seminar in Boston on December 10 and 11.

• Y’all come, y’heah?

The Bucolic Burg of Bucksport

The Bucolic Burg of Bucksport

Dry cleaner

Oil tanks…………..Verso Paper Mill

Buried Munitions

Mercury fromHoltraChem(Orrington)

Gas

Sta.

The Former Verso Paper Mill

Irving Oil Tank Farm

Contamination

What is it?

Two major Federal laws – CERCLA and RCRA

Legal definition of contamination

• Comprehensive Environmental Response, Compensation and Liability Act (CERCLA):

• “Introduction into water, air, and soil of microorganisms, chemicals, toxic substances, wastes, or wastewater in a concentration that makes the medium unfit for its next intended use. Also applies to surfaces of objects, buildings, and various household and agricultural use products.”

CERCLA

• National Priorities List – sites determined to pose enough risk to be determined “Superfund” sites, 14 in the State of Maine.

• The point of a Superfund site is that it WILL be cleaned up, the inquiry is who will pay for the remediation.

• CERCLA has no statute of limitations.

The Potentially Responsible Party

• Owner of a contaminated property

• Anyone furnishing contaminants to the property

• You touch it, it’s yours!

• Lenders beware!

“Cradle to Grave” Responsibility

• The generator of waste remains responsible for it.

• Example: You have your oil changed at Quirky Motors. Quirky hires a licensed hauler to dispose of the used oil. The hauler disposes of the oil at a licensed facility, whose employee “Slope” pours it onto the ground.

• You are jointly and severally responsible for the cost of the cleanup.

“Make a law, make a business!”

• Saying of New Jersey gangsters

• The owner of property from whom the Federal Government seeks reimbursement for cleanup costs has the right to implead (bring in) those who furnished the contaminant.

• For example, those people who had oil changes at Quirky Motors!

RCRA Hazardous Waste

• Resource Conservation and Recovery Act

• Hazardous waste must first be defined as solid waste

• Solid waste means garbage, refuse, sludge, or other discarded material (including solids, semisolids, liquids, and contained gaseous materials)

• Hazardous if on the F, K, P or U Lists

Maine UHSSL (38 MRS §1361-71)

• Uncontrolled Hazardous Substance Sites Law• A “Site” is any area where hazardous

substances are handled or came to be located.• Responsible party is owner, operator,

transporter, but not a person who accepts a hazardous substance for transport and delivers it to a licensed facility not a RP.

• Joint and several liability to the State for all cleanup costs incurred (§1367)

Maine UHSSL (38 MRS §1370)

• Real estate and structures used directly or intended to be used directly in violation of Chapter 13-B and moneys intended to be used in violation of Chapter 13-B

• Subject to forfeiture to the State in accordance with the procedures in Section 1319-U!

• Section 1371 establishes a super priority lien for costs incurred by the State.

Assessment Definition

• In assessment usage, contamination is any recognized physical or nonphysical environmental influence that must be considered to determine value.

• Contamination may take various forms including physical, aesthetic, and perceptual. Contamination is recognized through federal, state, or local agencies that regulate environmental contamination.

Physical Contaminants

• Substances present in, on, or near a subject property in measurable quantities and identified as having a harmful environmental impact. Some substances are deemed hazardous because they are ignitable, corrosive, toxic, or reactive.

• Examples: Acid rain, asbestos, dioxin, PERC (perchloroethylene), fertilizer, lead paint, oil, PCB’s (polychlorinated biphenyl), radon, petroleum products, methamphetamine

Your Town’s Shopping Center…

Loring Air Force Base

Superfund Site (Loring AFB)

• Volatile Organic Compounds (VOC’s) such as Trichloroethylene (TCE), fuel related compounds such as benzene and toluene.

• Polynuclear aromatic hydrocarbons (PAH)

• Polychlorinated biphenyls (PCB)

• Heavy metals

• Methyl Tertiary Butyl Ether (MTBE, replaced tetraethyl lead to raise octane)

Nonphysical contaminants

• Intrusive light

• Proximity to noise sources (including wind generators)

• Electromagnetic radiation from power lines

• Proximity to cel and broadcast towers

• Proximity to nuclear facilities

• Stigma that toxic substances may not have been completely cleaned

Visual contamination?

First Wind 186MW Blue Sky West

Maine Wind Power

• 25th in the nation with 431 megawatts of installed capacity in 13 projects

• Wind provided under 6% of Maine’s power in 2012.

• Potential of 156 GW of capacity in offshore generating.

Friends of Lincoln Lakes v BEP

• 989 A.2d 1128 (Supreme Jud.Ct. 2010)

• Board of Environmental Protection affirmed an order of DEP approving issuance of permits for a 60 MW wind energy generating facility in the Town of Lincoln.

• Issues – sound level, 8 eagle nests.

• “Substantial evidence” supported BEP.

Passadumkeag Mtn Friends v BEP

• 102 A3d 1181 (Maine Sup.Jud.Ct. 2014)

• Property located on Passadumkeag Ridge in Grand Falls Township.

• “NIMBY” arguments

• Similar holding to Friends of Lincoln Lakes case – Court would not substitute its views for those of the Board of Environmental Protection.

HoltraChem (Orrington)

• Made chemicals for papermaking

• Produced 23,000 pounds of mercury waste every year

• EPA: “Dig and Haul,” cost $250,000,000

• Mallinckrodt: Encapsulate, cost of $40,000,000

HoltraChem (Orrington)

• The Town of Orrington became the owner of the site through foreclosure of a property tax lien!

• "Responsible party" is defined, in relevant part, as "[a]ny person who owned or operated the uncontrolled site from the time any hazardous substance arrived there." 38 M.R.S. § 1362(2)(B) (2013)

• Town is a “Responsible Party!” However..

Mallinckrodt v Dept. of Env. Prot.

• 90 A3d 428 (Supreme Judicial Court of Maine 2014)

• 77 of 235 acres contaminated with mercury, chloropicrin, carbon tet, TCE.

• Board of Environmental Protection ordered Mallinckrodt and its parent corporation to “dig and haul” two landfills and secure five others.

• Court approved the BEP action.

“Innocent Landowner Defense”

• If a purchaser of property undertakes a good-faith investigation of the history of the property, including a “Phase I Audit” and further investigation if necessary, the owner will be deemed an “innocent landowner” and not responsible for costs of cleanup and mitigation.

The Oil Pollution Act of 1990

• In 2013, more than 1,150,000 gallons of crude oil was spilled from rail cars

• Section 311 of the Clean Water Act deals with responsibility for spills.

• Under the OPA, a “responsible party” is strictly, jointly and severably liable for cleanup costs and other damages “for a … facility from which oil is discharged, or which poses the substantial threat of a discharge of oil, into or upon the navigable waters or adjoining shoreline….” The term “responsible party” is defined to mean the owner or operator of a “facility,” which is, in turn, defined to include any structure, equipment or device used for storing, handling, transferring or transporting oil.

The Industry Position

• Establish market value of the subject property as if not contaminated

• Subtract all estimated/actual cleanup costs

• Subtract “stigma” based on the fact that the property would still have diminished value once cleaned up

• Result = just value of the contaminated property

IAAO Standard

• Seems to go along with the industry position, although the costs of dealing with the contamination if spread out over time reduces the valuation effect.

Mitigating Factors

• Article by Allen E. Gluck MAI, Donald C. Nanney, Esq. and Wayne C. Lusvardi, in Real Estate Issues, Summer 2000

• “If a future owner may incur little or no cost or loss, there may be little or no reduction in market value.”

• Factors: Cleanup Prior to Sale• Cost recovery from responsible parties

(The Tar Baby)

Mitigating Factors Continued

• Anticipated revenues from PRP’s properly considered, appraiser may need to associate additional experts

• Insurance recoveries, including payments by state funds for cleanup of leaking petroleum underground storage tanks

• Cleanup by government without recovery• CERCLA liens may be wiped out by

foreclosure

Mitigating Factors Continued

• Environmental Risk Allocation by Private Agreement (remember Holtra Chem?) Suppose a major oil company owns a gasoline station site and agrees to be responsible for any environmental problems. Any effect on market value?

• Cleanup not required or unlikely?• Time value of money – inappropriate to

deduct full cost of cleanup now.

A Hypothetical Question:

• Farmer Brown’s barn burned to the ground on March 30.

• The barn was completely insured and the insurance company has an iron-clad obligation to rebuild the barn.

• As of April 1, is the Assesor going to value the barn as if rebuilt because of this situation?

• Suppose the barn MUST be rebuilt? (Nuke Plant decommissioning expense fund)

Finkelstein v DOT (Florida)

• 1990 - Florida DOT filed petition to condemn property used as a Tenneco gas station. Florida law provides owner will be paid “full compensation” (just value + costs incurred in the eminent domain action)

• Prior to 1988, Tenneco discovered petroleum ground-water contamination and reported it to the Department of Environmental Regulation.


• DER determined the property was eligible for the Early Detection Initiative program, ensuring the owners of property reimbursement for remediation costs. Estimated cost of the cleanup, $750-800K.

• DOT’s appraiser estimated the contamination would reduce the Just Value of the property by 20-25%.


• Trial court ruled that since the cost of remediation was being reimbursed through the Early Detection Initiative program, the fact that the property was contaminated was not relevant; trial held on that basis.

• Jury never informed about the contamination, found for the owner’s value.


• Supreme Court did recognize the concept of “Stigma,” which is that a property that has been cleaned up still bears a risk of how clean is clean and a knowledgable buyer may pay less for such a property.

• Owner exposed to increased risk of liability

• Lenders wary of contaminated properties especially if they have to foreclose.


• District Court of Appeal (intermediate court) said, “Hey, hey, hey, that was relevant and the jury should have known about it!”

• Supreme Court: “We agree testimony as to remediation cost was not relevant,” quashed decision of the District Court.

• 656 So.2d 921 (Fla. Supreme Ct. 1995)


• “An opinion as to a decrease in value cannot be a mere surmise that because property is contaminated, it logically follows that the value of the property is decreased. There must be a factual basis through evidence of sales of comparable contaminated property upon which to base a determination that contamination has decreased the value of the property. If there is no evidence in the record upon which the fact finder can determine that the value of the property has been decreased, then the petitioner would be entitled to the fair market value of the property valued as uncontaminated.”

The Inmar Associates case

• Inmar Associates v. Borough of Carlstadt 549 A.2d 38 (NJ Supreme Court 1988)

• Inmar owned 6 acre parcel in the Meadowlands. Prior use was industrial solvent recovery operation by tenant Scientific Chemical Processing Company.

• Scientific abandoned, parcel placed on the Superfund list, no cleanup begun.


• 1983 – NJ DEP sued Scientific and Inmar. NJ impressed liens on the assets of Inmar for the cost of the cleanup (150,000 gallons of liquid and 2,500 tons solid waste)

• Inmar estimated cleanup cost in excess of $2,000,000 plus $500,000 to remove tanks.


• Inmar argued property was unmarketable and should have no value or alternatively, the cleanup costs are “repairs” and should be deducted dollar for dollar.

• Tax Court affirmed the assessment because no firm obligation had occurred.

• “The regulatory programs perhaps have shifted costs but not values.”


• Court pointed out that Scientific could have increased its costs by operating a clean facility, and sold a clean site.

• Or, it could have deferred its maintenance until it sought to sell. “In either case, the cost must be incurred, either as you go or before you sell.”

• Market Value would be the same.


• “The seller cannot avoid the cost of cleanup, but cost is not invariably equated with value.”

• Court equated financial obligation of a business entity to clean up property as a debt dischargeable in bankruptcy, but which may remain a lien against the property.


• Court rejected the dollar-for-dollar deduction of cleanup cost as reflecting only the owner’s cost accounting practices: “If the owner borrowed funds to clean up and did so, that debt would not reduce the value of the property.”

• Court equated failure to keep the property clean with bad management.

Gatlin Oil Co. v. United States

• Fourth Circuit Court of Appeal, 1999• Vandal opened the valves of Gatlin Oil

Company’s tanks, releasing 20-30,000 gallons of oil. Fire resulted. 5,000 gallons escaped.

• Gatlin sought reimbursement of its cleanup costs from the U. S. Government, held – entitled to 100% of $850,000 cost, including removal of soil/gravel under tanks.

• Question: Effect on just value of Gatlin’s property?

A Cautionary Tale from Florida

• Gulf Coast Recycling operated a battery recycling and secondary lead extraction facility on a 9 acre site in Temple Terrace (north of Tampa) from 1953 – 1963.

• The company chopped off the tops of used lead batteries. Extensive heat used to melt the lead; sulfuric acid and lead released into the environment.

Gulf Coast Recycling (Cont’d.)

• In 1970, Gulf Coast Recycling built a 144 unit apartment complex on the site. Low income residents, including children, live in the complex. Buildings, swimming pools, tennis courts, paved parking and roadways cover most of the site.

• Gulf Coast Recycling dug up/removed contaminated soils, covered soil with mulch.


• Gulf Coast Recycling challenged its 1997 assessment of $1.7 million.

• GCR argued that the cost of cleanup exceeded the market value of the property, so the value of this operating 144 unit apartment property was zero.

• Value Adjustment Board (BAR) lowered the assessment to $100. Circuit Court ruled in favor of the Assessor.


• Second District Court of Appeal, 753 So.2d 712 (2000) held that the Assessor failed to consider the present cash value of the property and condition as required by a statute.

• Value of the 144 unit apartment complex set at $100.

• Remember who created the contamination!


• In 2000, the EPA issued a cleanup order:

• Remove top two feet of exposed soil

• Remove the wooden deck, soil

• Gulf Coast Recycling placed two concrete caps over contaminated soil in 1992 and in 1995 built a wooden deck over the contaminated soil.


• The aftermath:

• Property sold in 1999, indicated sales price $100

• Property sold in 2007, price $9,000,000

• Current assessment, $5,476,800

• EPA continues to monitor, Gulf Coast Recycling continues to accept responsibility for cleanup.

Estates in Property

• Fee Simple – highest estate, subject only to the four governmental exceptions – taxation, eminent domain, police power, escheat.

• Leased Fee: Whenever property is leased, the tenant has the right of possession; the owner of the leased fee has the right to receive the rent plus the reversion at the end of the lease.

Encumbered Fee

• Many conditions generate an encumbered fee.

• Deed restrictions

• Neighborhood (community) covenants

• Deed of Trust (mortgage)

• Difference between the value of an owner’s title to property and the value of the property in fee simple

The Weedy Lot

• (From my article in A Business Enterprise Anthology, First Edition, page 348 © The Appraisal Institute 2001)

• A lot, Halfacre, has a just value of $10,000. The Town has an ordinance requiring the owners of lots to keep their properties free of noxious weeds.

• Halfacre is loaded with such plants, the Town code enforcement sends a notice.

The Weedy Lot (continued)

• The Town gives the owner two choices – (1) have the weeds cut down or (2) the Town will do it and place a lien on the lot.

• Assume it would cost the owner $500 to cut the weeds, but if the Town does it, the cost would be $1,000.

• Prospective buyer wishes to acquire Halfacre, and has four options.


• Option 1: The seller agrees to cut the weeds before the closing and is paid $10,000. Net to seller, $9,500.



• Option 2: Buyer agrees to accept a deed to the property and cut the weeds himself, pays the seller $9,500.




• Option 3: Owner does nothing, Town cuts the weeds, forecloses its lien, Buyer bids in the weedless property for $10,000.




• Option 3: Owner does nothing, Town cuts the weeds, forecloses its lien, Buyer bids in the weedless property for $10,000.

• Option 4: Town cuts the weeds, no buyer at the auction, resells the property for $10,000.

Does anybody have a problem with the proposition that the just value of Halfacre is still

$10,000?

Does anybody have a problem with the proposition that the just value of Halfacre is still

$10,000?

We are not talking about net proceeds to the seller here!

Can the just value of a property ever be less than

zero?

Can the just value of a property ever be less than

zero?

Can the cost to remedy pollution be more than the market value of the

property? Can a mortgage exceed the market value of a property?

The REALLY Weedy Lot

• Now let’s assume Halfacre is REALLY weedy, just value still $10,000, cost to cut the weeds $12,000 if the owner does it and $22,000 if the Town does the job.

• What is the market value of Halfacre?

• (A) $10,000?

• (B) Negative $2,000?

• (C) Negative 12,000?

REALLY Weedy Lot Continued

• Option 1: The seller agrees to cut the weeds before the closing and is paid $10,000. Net to seller, negative $1,000.



• Option 2: The seller gives the buyer a deed to the property and a check for $1,000; the buyer assumes the cost of cutting the weeds.




• Are either of these scenarios real-world?




• Option 3: Owner does nothing, Town cuts the weeds and forecloses its lien, buyer at the auction pays $10,000 for the weed-free lot.




• Option 3: Owner does nothing, Town cuts the weeds and forecloses its lien, buyer at the auction pays $10,000 for the weed-free lot.

• Option 4: Owner does nothing, Town cuts the weeds and forecloses its lien, obtaining title to the property, resells it for $10,000.

The Double Whammy

• Is anyone else old enough to remember Evil Eye Fleegle?

• What in the world does this have to do with the valuation of property?

Moorhead Economic Development Authority v. Anda (MN 2010)

• On June 29, 2001, MEDA condemned Anda’s property, a ’60’s office building, in a “quick-take proceeding” to turn over to Marriott to build a hotel.

• MEDA valued the property at $455,000, deposited that sum with the court and took the property.

• MEDA discovered a LUST – leaking underground storage tank.


• MEDA signed a development agreement with Moorhead Holiday Associates (MHA) which in turn had an agrement with Hegg Companies to develop the Marriott.

• MHA hauled away 10,751 cubic yards of soil and paid $1,600,000 to do so.

• MHA informed MN Pollution Control Agency and received a grant of $600K from MN Department of Trade to reimburse its cleanup costs. Did not apply to the “Petrofund” which could have reimbursed up to 90% of cleanup costs.


• In 2003, the eminent domain commissioners awarded Anda $488K as compensation for its property. However…

• In the same action, MEDA commenced a tort action against Anda for the cleanup costs.

• Jury found the value of the property, taking into account the contamination, was $0.


• Bottom line: Anda lost his office building, was paid nothing for the eminent domain, and MEDA obtained a judgment for $366,452.50 plus interest for the unreimbursed cleanup costs.

• Minnesota went with the “Exclusion Approach” – valuing condemned property as contaminated is unfair to the owner as the value is reduced dollar for dollar. Valued as if remediated, i.e., cleaned up.

• To do otherwise is to do a “Double-Take.”


• Minnesota Supreme Court recognized that New Jersey and New York solved the problem by paying the eminent domain award into an escrow account but declined to do so.

• The problem was that Anda was not able to bring other PRP’s (Potentially Responsible Parties) into the eminent domain action or assert defenses.

Unitrode v. City of Westbrook

• 43,123 sf building on a 7.35 acre lot in Westbrook, 1992 assessment $1,295,600.

• Commercial broker unsuccessfully tried to market the property between 1990 and 1993, eventually conveyed to City for $1.

• Contamination cleanup costs not done yet.

• MAI testified as to “zero” value; hysteria causes value of the property to plummet.

Unitrode v. City of Westbrook

• Cost to rehabilitate the building exceeded $600,000.

• Assessor Jessen said she would not have made a direct deduction for the cost of remediation because it is a deferred expense of semiconductor manufacturing.

• The board finds that Petitioner submitted no credible evidence as to the value of the property other than zero or negative value.

MSC, LLC v. Transmontaigne, Inc.

• U. S. District Court, Western District of Arkansas (Case 07-5153, Order of February 2, 2009)

• Defendant Transmontaigne’s pipeline released petroleum products onto Plaintiff’s property.

• MSC sought damages asserting claims of trespass, nuisance and negligence.


• Issue was whether a commercial real estate broker could testify that in his opinion, the value of MSC’s property was diminished by $2,400,000 due to the contamination, even though pipeline company agreed to clean it up.

• Daubert hearing.• Plaintiff’s expert testified that the property could

be remediated in 10 years using a “Biosparge System”


• Court excluded the testimony of the witness. The real issue was that his opinion that after 10 years the property bore the 10% stigma was totally based on his opinion without any data to support that opinion.

• Court cited Player v. Motiva Enterprises, 2007 WL 2020086 (3d Cir. 2007) – the witness’ “survey” was unreliable.

Appraisal Institute Resources

• “Valuing Contaminated Properties” Vol. I The Appraisal Institute, 2002.

• “Valuing Contaminated Properties,” The Appraisal Institute Vol. II (2014) – Updates the 2002 volume. “Contamination’s effect on value is largely temporary,” “Shifting focus to valuing residential properties,” $75

Questions?

Assessment of Contaminated Properties August 5, 2015 © Gaylord A. Wood, Jr. 2015.

Documents

used oil

hazardous substances

cleanup costs

state of maine

oil changes

responsible partyowner

quirky motors

superfund sites