17 Jul

Real estate pricing research provides evidence that properties potentially exposed to perceived or actual risks may experience price impacts. Looking Under the Hood reviews publications that illustrate the theoretical, methodological, and data challenges faced by scholars and practitioners studying detrimental conditions and their impacts on property values. 

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Jackson and Pitts [1] conducted a study to examine the impacts of innocent landowner programs in Texas and Arizona. Government agencies had established these programs to facilitate the redevelopment of contaminated properties by third parties, relieving them of any liability associated with the contamination. To qualify for an Innocent Owner/Operator Certificate (IOC) in Texas, property owners had to demonstrate that they purchased the property without knowledge of any non-source contamination and were not involved in causing it. In return for receiving an IOC, property owners would be exempt from any future costs related to the contamination. The Arizona Prospective Purchaser Agreement (PPA) differed from the Texas IOP as it was intended for potential buyers of contaminated properties and granted them a written release of liability and a covenant not to sue for existing contamination, regardless of whether the property was a source or non-source site, as long as the prospective buyer was not responsible for the contamination. To investigate the effects of these programs on property values, the authors adopted a case study approach, comparing the values of unimpaired properties with properties that had received an Innocent Landowner Program designation. 

The first case study focused on a retail strip center in Austin, Texas, contaminated with chlorinated solvents from a nearby dry cleaner. During the property evaluation before the purchase in 2001, a Site Investigation Report was prepared, and the buyer obtained an IOP from the Texas Natural Resource and Conservation Commission. The buyer expressed confidence in securing the IOP, as it reassured them that the contamination from the adjacent dry cleaner would not diminish the property's value, given the dry cleaner's responsibility for cleanup. Surprisingly, despite contamination, the subject property sold for slightly more than unimpaired comparables, indicating no decrease in its value due to the IOP. 

The second case study examined an older industrial warehouse in the Dallas-Ft. Worth metroplex with potential contamination from various sources, including volatile organic compounds and metals. The property quickly sold once an IOC was obtained, and its price aligned with unimpaired comparables, affirming the positive impact of an IOC on property value and marketability. 

The third case study focused on a non-source, vacant industrial site in Dallas, contaminated from an adjacent truck stop's leaking underground storage tanks. Investigations confirmed that the subject property was not the source of contamination, and the seller obtained an IOC before the sale. The property's selling price fell within the range of unimpaired comparables, further confirming the beneficial influence of an IOC on property value. 

The case studies demonstrated that innocent landowner programs positively affected property values. Properties within these programs maintained their values similar to unimpaired properties, indicating no diminution in value for non-source properties with a formal release of liability. The Innocent Landowner Program proved beneficial to property owners, preserving their property's value despite previous contamination issues.

[1] Jackson, Thomas & Pitts, Jennifer. (2006). Innocent Landowner Programs and Their Effects on Environmental Risk and Property Value Impacts. The Appraisal Journal. 74. 117-124.

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