Contamination: AULs

When government in the 1980s sought to solve the problem of contamination by imposing the cost of remediation on property owners, the solution created a problem of its own: standards so stringent that clean-up in many cases became nearly impossible to achieve. The result was that actual progress toward clean-up was often painfully slow. In recent years, Massachusetts has taken steps to make remediation more practical. Part of Massachusetts' solution is the Activity and Use Limitation.

An Activity and Use Limitation, or AUL, is a restriction that allows certain uses of a property but not others. Where contamination is underground, a limitation may, for example, allow use of the surface of the site but prohibit unsupervised excavation and forbid vegetable gardening. Or, it may allow a commercial property owner to perform remediation appropriate to a commercial use, with the understanding that no conversion to residential use will take place unless further clean-up to meet the more stringent requirements for residences is performed. The AUL allows government to accept as a solution a program of clean-up appropriate to each property type.

The question for appraisers and those who seek appraisers' advice is what effect the imposition of an AUL has on a property's value. Appraisers seek answers in the behavior of market participants.

A survey of lenders in Greater Boston indicates that, so long as an AUL does not impair the use that produces the property's value, for the most part a lender is as willing to take a property with an AUL as collateral as any other. In the six years since AULs' institution, sufficient sales of limited-use properties have taken place to allow analysis of the effect of AULs on value. Analysis of sales produces a view consistent with the larger body of data for properties affected at some point by contamination.

In the Northeast, in neighborhoods with a long history of commercial/industrial use, a degree of contamination for commercial property is common. Contamination is often widespread. To be a participant in this market means to accept that the property one wants to acquire may contain fill with unknown materials, may have been used for manufacturing during the period when solvents were routinely disposed on-site, or may be underlain with groundwater carrying contaminants from where they originated on neighboring property decades ago. Typical Phase 1 environmental surveys are limited in the degree to which they probe a property's status. Without an environmental survey that has gone into the ground to test at depth all across the face of a property, market participants operate with the possibility that, though a property may be given a clean bill of health, in fact, contaminants may remain present and undetected. For the buyers of property in Everett, Peabody, Waltham, or Milford, a guarantee of absolute cleanliness is a remote ideal.

A common assertion is that contamination destroys a property's value. Industrial property has been as hard-hit by the need to conduct remediation as any property class. This office has studied the industrial market in depth. Our observation is that the effect of contamination is more often not to permanently eliminate all value but, instead, to make a property temporarily unmarketable. When a contaminant is found on a property, its extent is typically not fully known. Testing is required to determine the extent of the contamination. A program for clean-up must be presented to and accepted by government agencies. At that point, the cost of clean-up can be calculated.

Just as few of us will buy a package without knowing what is inside, few buyers of real estate will make a purchase without reasonably complete information. Reasonably complete information for contaminants requires determination of their extent and knowledge of remediation cost. Unless clean-up costs and the other effects of contamination are equal in magnitude to the value of a property as if "clean," it is inaccurate to assert that the value is reduced to nothing. Contamination and its resulting uncertainty may for a time make a property unmarketable. But when cost is found, uncertainty ends, and value returns.

The effect of an AUL on value is a question of highest and best use. If an AUL prevents a property from being put to its highest and best use, the limitation can produce a substantial impact on value. If, on the other hand, the AUL does not impair operation of the property under its highest and best use, the limitation has little effect. In the case of AULs, if a residential use of a property is its highest and best use, a limitation against such use can produce a substantial impact on value. If, on the other hand, residential use is no more than a remote possibility, a limitation against residential use has little effect. For commercial properties subject to AULs, where highest and best use remains the same, the effect on value appears marginal.

The Reenstierna Associates Report is published as a service to the clients of Eric Reenstierna Associates and other real estate professionals. The views expressed are those of the articles' authors and do not necessarily reflect those of other members of the organization. Copyright 1998. All rights reserved.

Eric Reenstierna Associates
24 Thorndike Street
Cambridge, Massachusetts 02141
(617) 577-0096

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