Environmental Issues & Their Impact on Value

1. Environmental Issues & Their Impact on Value Eminent Domain and Land Valuation Litigation ALI-ABA Conference San Diego, California January 26-28, 2012

2. Thomas L. Stokes, Jr.Stokes Environmental Associates, Ltd.4101 Granby Street, Suite 404Norfolk, Virginia 23504757-623-0777 www.stokesea.comstokesea@aol.com

3. Environmental Review Purpose • Broad overall initial assessment, pre- and post-construction • Determine relevant factors, costs, and damages • Identify all potential positive or negative impacts on value • Comprehensive analysis

4. Environmental Review Potential factors include: • wetlands, streams, mitigation feasibility, buffer zones, habitat, stormwater, drainage and hydrology • erosion, soil disturbance, foundation impacts • wastewater feasibility, drainage issues • contamination, odors, noise, light pollution • viewshed impacts, vibration, traffic, air quality, dust, • maintenance, impervious surfaces, cut and fill, excavation, • dams and impoundment effects, underground structures, • aesthetic and scenic amenities, recreation, • forest impacts, timber feasibility, drinking water wells, • protected species, coastlines, dunes, caves, sinkholes, • unique landforms, natural heritage resources, historic resources, significant topography or structures.

5. Environmental Review • Site environmental evaluation • Hidden value, such as feasible mitigation sites or conservation tax credit potential • Wetland as privacy buffer • Damages, such as pollution, erosion, loss of mitigation areas, buffer area impacts • Report with methods, findings, conclusions, and recommendations, data forms, lab certificates, chain of custody, drawings, photographs, etc.

6. Environmental Review • Verifiable expert • Industry standard methods • Approval by an objective third party or environmental agency • Environmental documents • Wetland delineation reports, Phase I/II Environmental Site Assessment, on-site soil evaluations, odor surveys, noise measurements, visual impact assessments, groundwater analysis, soil vapor surveys, slope and topography analysis, ecoasset valuation.

7. Credentials for Environmental Professional • State certifications or licenses for some subdisciplines • Certified Professional Wetland Delineator, Professional Geologist, or On-Site Soil Evaluator • Self-regulating industry association credentialing programs • Professional Wetland Scientist, Registered Environmental Manager, and Certified Environmental Professional • Regulatory definition: Environmental Professional • based on education and years of experience 40 CFR 312.10 • Many well-qualified environmental experts have no available certification programs.

8. Wetlands • Major factor affecting land value • Once thought of as worthless unusable bayous, bogs, fens, marshes, poquosins, potholes, quagmires, sloughs, swamps, wet meadows winter wet woods, soft ground where your feet got wet • Management method: drain it, so it could be used productively

9. Wetlands • Scientists showed wetlands have ecological value • Some wetlands did not look wet, similar to dry land • Net primary productivity of wetlands among the highest of all ecosystems on earth • Filter and store storm water • Recharge groundwater aquifers • Protect water supplies • Rich species diversity, contain the majority of rare, threatened or endangered plants and animals on earth

10. Wetlands • Regulators developed a system of permits for disturbing wetlands. • Regulations may reduce economic value of wetlands, because not all land uses in wetlands can be approved. • Permit system created economic value in wetlands which could be used for mitigation purposes, such as preservation, rehabilitation, or restoration. • Wetlands are abundant and ubiquitous, and may have a significant impact on property value, negative or positive.

11. Wetlands Wetland Definition: • “Those areas that are inundated or saturated by surface or ground water at a frequency and duration sufficient to support, and that under normal circumstances do support, a prevalence of vegetation typically adapted for life in saturated soil conditions.” • Soils remain saturated long enough to create anoxic conditions • High water table within 12 inches of the ground surface for 5% to 12.5% of the growing season • 3 or 4 weeks (in Virginia) • Soil may be very dry for the rest of the growing season

12. Wetlands • Anoxic conditions cause gray, mottled hydric soils. • Plant community that is adapted to survive the anoxic soil conditions. • Hydrophytes: obvious wetland plants e.g. cattails. • Common plants, e.g. loblolly pine trees, red maples, and oaks. • Flat poorly drained areas, often with clay soils, could be used for development sites, except for the presence of jurisdictional wetlands.

13. Wetlands Wetlands may look wet. Wetlands may look dry nearly all year.

14. Wetlands Permits: • U.S. Army Corps of Engineers regulations at 33 CFR 320-332 • Clean Water Act permit to place fill material in a wetland • Definition of fill material: nearly any surface modification of wetlands • Includes mechanized land clearing, excavation - “incidental fall-back” • Individual permits for major impacts • >0.5 acres of wetlands or >300 linear feet of streams • analysis of alternatives • rebuttal of the presumption that an upland area exists which does not require wetland impacts • avoid and minimize impacts • mitigation for unavoidable impacts

15. Wetlands Simplified permits, Nationwide permits and General permits • Facilitate approval of projects with minor wetland impacts • Outfalls (NWP7) • Utility lines (NWP12) • Linear transportation projects (NWP14) • Minor fills (NWP18) • Residential construction (NWP29) • Commercial and institutional development (NWP 39) • Agricultural activities (NWP 40) • Reshaping existing drainage ditches (NWP 41) • Storm water management facilities (NWP 43)

16. Wetlands • State wetland permit system • City/County wetland permit systems • Agency Reviews: • SHPO mandatory, Section 106 of the National Historic Preservation Act • U.S. Environmental Protection Agency • U.S. Fish and Wildlife Service • Applicable state and local agencies.

17. Wetlands Mitigation: • Restored or rehabilitated wetlands, created wetlands, or preserved wetlands • Pre-constructed wetland banks • In-lieu fee programs (generally post-constructed mitigation) • Site-specific mitigation

18. Wetlands Mitigation Ratios: • Typically two acres of restored or created wetlands for each acre of impacts, or • 5 to 20 acres of preserved wetlands for each acre of impacts • Wetland mitigation bank credits, $10,000 to $540,000 per acre (or per mitigation credit)

19. Wetlands • Mitigation price based on: • Habitat type (tidal vs. nontidal) and rarity • Plant or animal species of concern, special habitats • Mitigation areas separated by drainage basin and tidal vs. nontidal condition • Cost of mitigation (value of mitigation sites) depends on supply and demand • Wetland habitats can have extraordinary value

20. Buffer Areas • Protected, unbuildable buffer areas around sensitive environmental features. Many types of buffers. • Chesapeake Bay Preservation Act,100-foot Resource Protection Area (RPA) buffer landward of wetlands, perennial streams, and other environmentally sensitive areas. • Reservoirs are often protected by a 100-foot or larger buffer zone. • 50-foot buffer is required around sensitive soil types “Southern Watershed” of Virginia Beach, Virginia • Bald eagle nest buffer: 750 feet unbuildable radius • Buffer zones can have devastating impacts on property valuation.

21. Buffer Areas • Construction project may create or alter buffer zones by: • Creating or moving a perennial (always flowing) stream • Need to review land development design constraints before vs. after changing stream/buffer.

22. Buffer Areas Intermittent stream may become perennial, creating a buffer requirement: • 100-foot buffer on each side of the newly perennial stream, creating a 200-foot wide swath of unusable land centered along the stream. • Construction of storm water best management practices (BMP wet pond, for example) • Intermittently-flowing stream is deepened for drainage purposes • Bottom of the stream intercepts the water table

23. Buffer Areas • A new ditch routes water from drainage sub-basin “A” into sub-basin “B.” • Streams and wetlands in sub-basin “A” become dry • Land owner is freed from wetlands and stream buffers • May lose actual or potential wetland mitigation areas • Streams in sub-basin “B” become wetter and perennial • Creates 200-foot wide protected buffer centered along the stream. • Wetland areas in “B” expand, reducing developable land • Also reduces wetland restoration options • Causes significant impacts on property value.

24. Contamination Assessment • Contamination usually reduces valuation, but not always • May delay or negatively impact decisions by lenders, tenants, and future buyers • All buyers of property should perform due diligence • Phase I Environmental Site Assessment (per ASTM Method E-1527-00) • Discover contamination before purchase • Provide innocent landowner protections • Adjust land valuations

25. Contamination Assessment • If contaminated, prospective purchaser may proceed without becoming responsible for cleanup. • Must comply with limited “continuing obligations.” • Did not cause the contamination, is an arms-length third party in the purchase. • Must allow others to cleanup the site if necessary. • Must perform risk assessment (Phase II Assessment) to reasonably inform users or occupants about the nature and extent of environmental conditions at the site.

26. Contamination Assessment Liabilities after EA1: • EA1 protects against government mandated cleanups, but not: • liabilities with respect to suits from neighboring properties, tenants or occupants • compliance with continuing obligations • future construction • groundwater usage

27. Contamination Assessment Acquirer needs to determine costs related to: • Disposal and handling procedures for: • contaminated building materials, • excavated soils, • dewatering effluent, • preventing contamination from spreading off-site duringconstruction. • Migration of pollutants from contaminated areas to neighboring properties. • Underground utility lines with bedding gravel, conduit for flow. • Can be major budgetary impact. • Assess during the planning and appraisal stage of the acquisition.

28. Contamination Assessment Environmental damage caused by condemnor’s construction: • spreading of contamination from off-site sources mobilized by the construction, • erosion by altered stormwater flows, • sedimentation from disturbed soils, • contamination of wells caused by rerouting of stormwater, • and numerous other possible impacts.

29. Contamination Assessment Appraisal needs to consider reimbursement for cleanup costs: • Third party obligations and government programs • State reimbursement for leaking underground petroleum storage tanks, testing and cleanup • Fund for remediating contamination at dry cleaner sites • Federal and state programs for cleaning up brownfields sites, including grants, loans, tax incentives, partnering options, and reimbursements • Responsible party may have reimbursement obligations

30. Contamination Assessment Eligibility for reimbursement? • Original owner vs. condemnor • Individuals vs. small businesses vs. large businesses vs. government agencies. • Non-reimbursable costs • soil compaction and testing • non-mandatory cleanup -- minor contamination, aesthetic purposes

31. Contamination Assessment Estimating the extent of contamination and valuation impact • Can be subjective process with far reaching effects. • High levels of contamination and high cost estimates can: • delay or prevent property closing, • create more legal costs, and • cause large escrow requirements.

32. Contamination Assessment • Underestimates of contaminant levels can: • create liabilities for improper reporting • cause accidental spreading of contaminants • increase disposal volumes (this can be an extreme liability for listed wastes) • cause unanticipated renovation or demolition expenses (e.g., unidentified asbestos) • cause loss of collateral value, and • cause an underestimate of ongoing cleanup/management costs.

33. Contamination Assessment Valuation of contaminated site for private, voluntary transactions • Willing buyer and willing seller • Estimate value of the property as clean • deduct testing and cleanup costs • deduct intangible costs (difficulty of finding tenants, lenders, etc.). • Prudent buyer to determine all costs, and negotiate mutually acceptable purchase price.

34. Contamination Assessment Deducting cleanup cost from value may not be valid in eminent domain. • land not causing hazard • seller not required to cleanup • difficult to estimate cleanup costs, subsurface factors not known with certainty • government risk assessors opinions can vary

35. Contamination Assessment If owner undertakes cleanup, he may eligible for reimbursement. • would lose right to reimbursement without performing the cleanup. • would bear the entire cost himself if appraisal deducted cleanup cost.

36. Contamination Assessment • Some state courts have formally recognized this problem. • Illinois, Iowa and Michigan do not allow deduction of remediation costs from the property value in eminent domain takings. • California, Colorado, Florida, Georgia, Kansas, and Tennessee do allow it.

37. Contamination Assessment Illinois Eminent Domain Act • Does not allow eminent domain takings to make adjustments for contamination or estimated remediation expenses, unless there is a violation of a specific environmental law or regulation. • Protects the land owner from unfairly losing his property value (cleanup costs may approach property value). • Makes landowners financially responsible for violations on their property.

38. Development Constraints On-Site Wastewater Treatment • Soil characteristics for wastewater treatment – necessary for development. • On-site soil absorption systems, or “septic systems.” • Requires appropriate soil types. Good soils may be hard to find or limited on small area of site. • Soil structure can be destroyed quickly by excavation, grading, or compaction. • temporary construction easements • Partial taking may render the entire property undevelopable.

39. Development Constraints Alternative on-site soil systems. Wastewater treatment “package plants.” Proof of feasibility of such plants includes cost estimate, property line setback feasibility, outfall feasibility, and local and state regulatory feasibility.

40. Development Constraints • Water supply well locations. • Constrained by required setback distances, typically 50 to 100 feet from: • property lines, • septic systems, • storm water conveyances, • other pollutant sources. • Feasible location of wells and septic systems may be limited to small area. • Condemnation may cause setbacks to cover entire site. • Risk of contamination to wells or damage to septic systems.

41. Eco-Asset Valuation • Value of ecoassets or cost of environmental liabilities. • Highest and best use as a commercial environmental mitigation site? • Inventory of significant environmental features on the property. • Tidal and nontidal wetland delineations, habitat characterizations, protected buffer delineation, endangered species assessment, historic resources evaluation, and special environmental features evaluation, contamination issues, etc.

42. Eco-Asset Valuation Determine the location and quantity of feasible: • wetland or habitat restoration areas, • approvable preservation areas, and • buffers. Compute mitigation types and yield on the property.

43. Eco-Asset Valuation Inventory and delineations: • used by appraiser and land planner • assess developability • show type and number of wetland/environmental mitigation credits • show service area within which ecoassets may be sold

44. Eco-Asset Valuation Ecoasset valuation • estimates supply and demand within the service area, • provides comparable sales and pricing, • absorption rates, • cost to implement a mitigation bank • (planning, design, permitting, bank approval, grading, hydrology controls, planting, monitoring and reporting, contingency for corrective action invasive species control, restoration of plantings in the event of drought, financial assurance/bonding, credit sales and bank operation, and long-term maintenance).

45. Eco-Asset Valuation Bottom line: • Net present value of the prospective mitigation areas • Define developable areas • Other valuation adjustments

46. Case Summary 1. Case: Swamp or Not Swamp • 36 acre piece of rural land in southeastern Virginia. • Neighboring hospital needed the property for expansion. • Hospital claimed the entire property was wetlands. • Offered to pay $3,000/acre for “all wetlands.”

47. Case Summary 1. Case: Swamp or Not Swamp continued • Owner’s consultant found only 0.1 acre wetlands. • United States Army Corps of Engineers approved 0.1 acre wetland. • Appraised value $72,000/acre or 24 times the original offer price.

48. Case Summary 2. Case: Borrow Pit Mitigation Bank Site • Borrow pit was condemned as wetland mitigation site. • Compensation offered was approximately $20,000/acre. • Pricing was based on agency’s ecoasset valuation. • Commercial mitigation banker and team employed. • Team found more economical method to build mitigation. • Low-cost grading and planting plan, saved $33,000/acre. • This raised the net value to $53,000/acre, more than 150% above original offer. • Earthmoving highest mitigation cost item. • Excessive earthmoving is not practical. • Mitigation valuation must use private-sector real-world cost and income figures, based on detailed site-specific analysis.

49. Case Summary 3. Case: Conventional Valuation vs. Ecoasset Valuation Conventional valuation on 90 acre parcel of vacant land. • wetland forest with no timber value • no public water or sewer • minimal road frontage with some areas totally landlocked, • 15 acres of wet ditched cropland • soils not suitable for septic drainfields • property was undevelopable Conventional value was $1000/acre, $90,000 total.

50. Case Summary 3. Case: Conventional Valuation vs. Ecoasset Valuation continued Ecoasset valuation with highest and best use as wetland mitigation bank. • 15 acres of cropland restored as wetlands yielding 15 mitigation credits • 75 acres of wetland forest preserved yielding 15 mitigation credits • total of 30 mitigation credits at $10,000 net per credit Ecoasset value was $3,333 per acre, $300,000 total. Ecoasset value was 3.3 times the conventional value.