Initially, impacted properties do have reduced value—but sometimes, that is exactly what can make them strong investment opportunities. Because if the environmental impact can be quantified, the value of the property (including the impact) can be appraised. Decisions regarding the purchase price, loan amount, loan to value, resale potential, and overall credit decisions can all be based upon the adjusted value after investigating and quantifying the risk.
If lending decisions were made using corrected values like these from the outset, foreclosure pressures would not be as extreme, because the outstanding balances would be less than the actual property values. A sale of impacted property based on corrected values is also feasible; in fact, many investor groups are affiliated with remediation companies, and actively pursue impacted properties based on adjusted values.
Diligent environmental assessment, precise remediation-cost estimation, and expert appraisal services will generally be necessary to accurately quantify the risk. While the costs of these services (and the reduced value), may dampen the enthusiasm of some parties in the transaction, this approach will nonetheless provide a more realistic baseline to value.
Indemnifications and warranties will always play a major role in real estate transactions, and this is especially true for impacted properties. Seller indemnification and escrow of cleanup funds still may be the easiest and most practical method to transact property. But there are some flaws to this approach, primarily for the buyer.
The buyer’s risks include the solvency of the seller, the scope of the indemnification, resale considerations, and the uncertainty of the overall cost of cleanup. For sellers, the federal government is typically not part of the transaction, and that small piece of legislation called Superfund that created this regulatory stew may not consider the resources of the country to be indemnified!
Each property has its own set of circumstances, including the potential for pollution, eligibility status, extent of pollution, concentration and location of contaminants on the property, site-specific hydrogeology, types of adjacent and nearby property land uses, financial security of the borrower, potential to insure against site specific risks, value of the property, and intended future land use of the subject property. All of these (and other factors) should be considered when preparing an effective risk management strategy for impacted properties. Yes, it is a lot to think through—so be sure you seek the advice and involvement of those with substantial experience in the evaluation of impacted properties.