Contaminated properties, trespass, and underground rents

AuthorAndy Krause, Ron Throupe, John Kilpatrick, Will Spiess
DOIhttps://doi.org/10.1108/14635781211223842
Pages304-320
Publication Date20 Apr 2012
Contaminated properties,
trespass, and underground rents
Andy Krause
Department of Urban Planning, University of Washington, Seattle, Washington,
USA and Greenfield Advisors, Seattle, Washington, USA
Ron Throupe
Franklin L. Burns School of Real Estate and Construction Management,
Daniels College of Business, Denver University, Denver, Colorado, USA, and
John Kilpatrick and Will Spiess
Greenfield Advisors, Seattle, Washington, USA
Abstract
Purpose – This paper seeks to extend the literature on property damage assessment by incorporating
the right of exclusion as a compensable component to damages. The paper aims to go on to illustrate
methodologies to estimate as a rent this damage component.
Design/methodology/approach – The authors develop a conceptual framework from which to
examine the value of underground storage space with special reference to situations in which migrating
contamination from commercial operations have invaded private real property. Specifically they view
this invasion as a compensable violation of the right of exclusion. This underground storage analysis
uses the three approaches common to traditional appraisal (income, sales and cost) to estimate the value
of underground storage caused by migrating contamination.
Findings – Conceptually the paper finds that underground storage can be easily valued with existing
appraisal methods. Using contamination scenarios paired with actual market data from the
South-Eastern USA, the paper shows an example of each of the three methods for valuation. It
concludes by reconciling the estimated values and supply additionalissues to consider when valuing
underground storage.
Practical implications Contaminated properties analysis and damages have focused on the right
of transfer when estimating damages to real property. Other portions of the bundle of rights also
require examination.
Originality/value – This is the first discussion of underground trespass in relation to contaminated
property coupled with an empirical example to address the right of exclusion and estimated rents due
for use of adjacent properties as a storage facility.
Keywords Underground,Rents, Rental value, Trespass, Storage,Migration, Property rights
Paper type Research paper
I. Introduction
Traditionally the analysis of the effects of contamination as a detrimental condition to
real property has focused on the damages to the market value of a property, essentially
measuring the partial (or in extreme cases, full) violation of the right of transfer.
Neglected or often overlooked is the fact that the migration of the contaminant has also
violated the right of exclusion (via trespass) and created a de facto storage facility on the
adjacent – and now – contaminated property[1]. This paper presen ts an approach to
valuing this ancillary violation of exclusion.
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1463-578X.htm
JPIF
30,3
304
Journal of Property Investment
& Finance
Vol. 30 No. 3, 2012
pp. 304-320
qEmerald Group Publishing Limited
1463-578X
DOI 10.1108/14635781211223842
In many cases, by increasing the risk of investment and/or by diminishing the
utility of the property, contamination decreases the marketability of real property.
In situations where the effects on risk and utility are fully internalized by the market,
the impact of contamination can be best measured through changes in market prices.
However, there are circumstances where price changes due to the physical nature of
the contamination (i.e. underground, invisible particles, etc.), a lack of knowledge about
the existence and/or severity of the contamination and other idiosyncratic qualities
present in the market are not immediate or necessarily a reflection of market value
and do not immediately show the expected diminution in value (Case et al., 2006).
Traditional valuation of the impact of contamination on real estate has only concerned
itself with damages to the right of transfer.
Regardless of the impact to the right of transfer (market value), the offsite movement
of contamination inherently violates the right of exclusion. By violating this right,
the affected properties have been forced into a leased fee agreement with the polluter
(the leaseholder) to store the polluter’s contaminants. The reaction of the real estate
market (changes in sales price) to this storage is irrelevant in terms of the right of
exclusion. As a result, this paper is concerned wholly with estimating the value
of underground storage as caused by migrating contamination from commercial
operations, not diminution to market value due to risk and other negative effects
associated with environmentally impaired real property.
This research examines the theory behind this violation and presents a number of
methods to estimate the resulting storage value created by the trespass of
contamination. The remainder of this paper is divided into the following sections:
.an overview of subsurface rights in the USA;
.a review of the literature on underground storage and rent;
.a case study illustration of underground storage valuation methods to estimate a
compensable right; and
.a summary of the application of these methods and potential future research in
this direction.
II. Property rights and value in the USA
Ownership of property is often viewed as the possession of a group, or bundle of rights.
From an economic perspective, the rights enjoyed by a fee simple owner fall into three
categories:
(1) right of use;
(2) right of exclusion; and
(3) right of transfer.
It is important to note that in the USA property itself is not owned, but, rather, the rights
of the property are owned. The ability to delineate these rights, and the ability of owners
to transfer some or all of these rights voluntarily is a necessary condition for property
valuation. In a very practical sense, property rights represent the basis for all economic
transactions; by delineating “what belongs to whom under which circumstances,” they
serve as a dependable source of information and incentives for those engaged in the
market (Heine et al., 2002).
Contaminated
properties
and rents
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