Solutions to the five key brownfield valuation problems

Published date08 February 2008
DOIhttps://doi.org/10.1108/14635780810845145
Date08 February 2008
Pages8-37
AuthorBruce R. Weber,Alastair Adair,Stanley McGreal
Subject MatterProperty management & built environment
Solutions to the five key
brownfield valuation problems
Bruce R. Weber
Market Foresight, Newport Beach, California, USA, and
Alastair Adair and Stanley McGreal
University of Ulster, Newtownabbey, UK
Abstract
Purpose – The purpose of this study is to solve five key brownfield valuation problems.
Design/methodology/approach – This aim is achieved by using doctoral research on integrating
the scientific process into the appraisal process. The first objective is demonstrating why four of the
problems require solutions prior to solving the first problem, a valuation procedure for formerly used
sites. A second objective is to use empirical data from appraisals to reveal why existing methodology
is not reliable – because it does not solve the four problems.
Findings – The resulting findings are that a developmental model that incorporates the Triad
approach to quantifying environmental uncertainty, initially used in the USA, simulates a process
used by buyers to establish the price paid for brownfields with contaminated land.
Practical implications – The practical implication that results from this research is that valuers
need to emulate the buyer’s process when valuing this property type. Prescriptive procedures for
valuation requiring the use of scientific methods, as used in the Triad process, need to be set forth to
quantify the atypical uncertainties in valuing this property type. The results of this research should be
of significant interest to all stakeholders that are involved in brownfield redevelopment, so that they
can insure that their needs will be met by improved feasibility analysis.
Originality/value – This research is unique in that it is the first empirical test of the reliability ofthe
valuation of brownfields that need to undergo a time-consuming and often expensive soil remediation
process.
Keywords Brownfield sites,Assets valuation, Regeneration
Paper type Research paper
1. Introduction
The US Environmental Protection Agency (USEPA or EPA) and the German Federal
Ministry of Education and Research (BMBF) formed a bilateral working group to
exchange information and share new tools for the redevelopment of contam inated sites.
Steffens and Vieten (2000) prepared the final report for the bilateral working group that
listed brownfield issues that needed to be resolved from the German perspective. Both
countries agreed on the need to solve five problems that hinder brownfield
redevelopment[1]:
(1) Problem a – valuation procedures for formerly used sites;
(2) Problem b – market analysis for the reuse;
(3) Problem c – cost benefit analysis;
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1463-578X.htm
This paper was presented to the European Real Estate Society, Weimar, Germany, June 10, 2006.
JPIF
26,1
8
Received July 2006
Accepted October 2006
Journal of Property Investment &
Finance
Vol. 26 No. 1, 2008
pp. 8-37
qEmerald Group Publishing Limited
1463-578X
DOI 10.1108/14635780810845145
(4) Problem d – cost-financing calculation; and
(5) Problem e – financial risk management report.
The rationale for this paper is Problem a. Those most experienced with brownfields
have no confidence in existing valuation procedures. It may be that these procedures
are not reliable. This hypothesis was answered by following advice of Kinnard and
Worzala (1999) and Kinnard et al. (2002), which is to test the reliability of brownfield
appraisals via empirical data.
A need for reliably estimating market value begs an initial question: what methods
do those in the market that specialize in purchasing contaminated land use in deciding
the price to pay for brownfields? The doctoral thesis of Weber (2005) researched this
question and the answer provides a focus for searching the literature in section 2.
Davis and Margolis (1997a, b), Fishman and Amjad (2002), and those in the
brownfield redevelopment business such as Arnold (2004), Hashem (2004), Hernandez
(2004), and Miner (2004) answer this question by stating that the brownfield valuation
problem is a feasibility problem and that the price they pay for this property type is
predicated on solving two component problems: Redeveloper Problem 1 and
Redeveloper Problem 2. Weber (2005) found that each of the EPA problems b-e need to
be solved by the buyers in order to solve problems 1 and 2:
.Problem 1 – the property value subsequent to remediation and redevelopment.
.Problem 2 – the risk to equity capital required to reme diate the contamination.
Table I illustrates a basic developmental model. It indicates that the pre sent values of a
brownfield (Price/value) in the year 2003 as a result of three scenarios, A, B and
C. These scenarios result from uncertain discount rates due to remedial risk (Problem
2) used in the IRR column, the cost and timing of remediation and redevelopment
(shown in columns labelled at the bottom as years 2004 to 2007), and the Value of the
property after redevelopment (Problem 1). This table simulates retail redevelopment,
so Problem 1 requires a forecast of the cap rate that the property will attain after
completion. Cap rates are a function of retail Sales/SF with retail redevelopment.
Weber (2005) and Weber et al. (2005) integrated the scientific process into the
appraisal process to solve Redeveloper Problem 1, the prospective property value when
it will be available for its initial occupancy (the end of 2007). Problem 2, quantifying the
uncertainty of the remedial process (shown in 2004 and 2005 in Table I) was the
research problem of Weber (2005) and Weber et al. (2006a). Scientific methods are
required to find remedial cost and time with a 95 percent level of confidence, so that
risk rates from greenfield redevelopment can be used to value brownfields.
EPA Problem b – market analysis for the reuse – req uires solution because the
present value in 2003 is highly dependant on supply and demand conditions for the
property type, in this case retail (that is typically expressed in retail sales/retail floor
area) in 2007/2008. In 2003, buyers stated that a strong location resulting in sales/SF of
over $500 would warrant a capitalization rate of 7.5 percent. Future net income in this
example is $5 million, resulting in a feasible Price (price/value) of $12 million. If retail
sales only ended up being $300 to $400/SF, buyers would have capitalized this net
income at 10 percent, which would result in a feasible price in 2003 of only $4.7 million.
Problem c – cost benefit analysis – is critical for proper valuation because it
establishes a feasible price to pay for this brownfield in 2003 in light of its most likely
Brownfield
valuation
problems
9

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