As California continues to expand and improve its infrastructure, public agencies are more frequently running into contaminated property. A frequent question for eminent domain attorneys is: “how does contamination impact ‘fair market value’ in a condemnation action?” My general advice is that the contamination should be treated just as it would in an open market transaction. But how is contamination handled in a typical transaction — and how does it impact value? Aside from potential clean-up costs, are there lending issues, and is there a general stigma with contaminated property?
Luckily, my colleagues will be covering some of these issues in great detail tomorrow at Nossaman’s 2015 Eminent Domain Seminar. Nossaman eminent domain attorneys Rick Rayl and Michael Thornton, along with appraiser Orell Anderson and environmental/contamination expert Opjit Ghuman will be presenting on “Valuation, Cleanup Costs, & Other Scary Things: Acquiring Contaminated Property,” so we’ll learn quite a bit more from them (hopefully!).
But as a preview, and if you’re not attending tomorrow’s seminar, I came across a great study prepared by Retail Petroleum Consultants (RPC), “‘Clean’ Versus Contaminated Gas Stations: How Do Market Buyers and Lenders Address Contamination?” RPC has been involved in appraising thousands of gas stations, so they know what they’re talking about. According to RPC, many gas station properties involve an indemnity from the major gas station company that previously owned or operated the site. RPC concluded that where these indemnities exist, purchase prices usually are not discounted:
Surveyed buyers of gas stations for continued gas station use do not support a discount for contamination or stigma, unless the responsible party is not a Major Oil Company or the ongoing remediation somehow increases their cost of capital or impairs the utility of the site. In summary it seems as long as there is an indemnity agreement as is the case with most contaminated gas stations and the Major Oil Company is the responsible party, the market does not support a material discount for contaminated gas stations.
What about securing loans from lending institutions? RPC interviewed a number of lenders, and here was the conclusion:
The responses varied amongst the lenders surveyed, though it was apparent that none could identify a particular increase in the interest rate due to contamination (or stigma). More so, the contamination issue was dealt with on case by case basis with nominal effect on lending rates as long as the site has been remediated or is being remediated by credit rated responsible party such as a Major Oil Companies.
Gas station properties may be unique or different than other contaminated properties, especially because the indemnities tend to exist with the major oil companies. However, gas stations are the properties condemning agencies run into most frequently with contamination issues, so this is useful input. To get some more insight, take a look at RPC’s article, attend our seminar tomorrow, or feel free to give us a call.