Evaluating the Costs of Environmental Property Damage

How do businesses, appraisers and courts evaluate the economic impact of environmental contamination on real property or neighboring property? If the contamination results in no health impacts and no restrictions on business, does it impact value?

In its recent BSK Enterprises v. Beroth Oil Co. decision, the North Carolina Court of Appeals upheld an award of $108,500 for diminution in value caused by contamination, even though the contamination was 25 feet below ground and could not “be seen, smelled, touched, nor is it otherwise disruptive, intrusive, dangerous, or harmful.” Further, mother nature would eventually take care of it so the harm was not permanent. Nevertheless the Court would not characterize the award as “stigma damages,” finding it was based on nuisance, trespass and state law. While $108,500 might seem like significant damages for no clear harm, it was far less than what plaintiff requested, i.e., the nearly $1.5 million it would take to clean up property.

Appraisers commonly assume a property is free of contamination and note that they are not qualified to detect hazardous substances. This can be frustrating to property owners. In a case before the North Carolina Property Tax Commission involving such matters, a property owner explained that she had talked with appraisers and real estate agents and “they all said that they do not and will not get involved with environmental issues.” In this case the property owner, who ran a child care business, contended that a neighboring facility polluted and therefore devalued her property. The Chairman of the Commission stated to her “You’re here contending that your property has been devalued . . . for pollution reasons, but yet it’s okay to have children there. I mean, that’s kind of a hard argument to make.” It did not help the property owner when she testified that, in borrowing money on the property and seeking the highest possible appraisal, she told neither the appraiser nor the bank about the alleged air, water and soil contamination of her property.

Contamination comes in countless varieties, gradations and impacts, and its impact is different depending on the property’s location, e.g., an industrial park, a national park, a home, or a shopping mall.  Seemingly pristine agricultural properties may have decades of insecticide and herbicide applications and the chemicals needed to maintain tractors and heavy machinery. Primary analytical techniques, as discussed in literature such as “When Bad Things Happen to Good Property” by Robert A. Simons, include literature review, hedonic regression analysis, predictive regression analysis, multivariate analysis of variance, real estate trends analysis, contingent valuation, conjoint analysis, matched pairs, sale-resale analysis, income-cash-flow analysis and case studies.  Corroborative techniques include market surveys, interviews, evidence of failed transactions, mortgage defaults, failure to get insurance, property tax value decreases and so forth.  Regardless of the method, it can be very difficult to isolate the environmental variable.

There may be no perfect method for determining the impact of contamination on the value of real property, and experts can battle it out in litigation when necessary, but failure to investigate before acquiring property is the fastest road to a costly mistake.

Image by Carol Stoker, NASA Ames Research Center, Rio Tinto region, Spain, July 2002.  Available as in the public domain in the United States because it was solely created by NASA.