The economic effects of groundwater contamination on real estate

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WRC GRR 95-06

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  • H. Rabinowitz
  • G. W. Page

The effect of property contamination has been considerable in the real estate sector; other factors are transitory. Overbuilding is absorbed, difficulties in obtaining financing become less restrictive; and onerous taxes are moderated. Contamination has affected commercial real estate transactions including sales, leases, financing and assessments, and participants (single-family dwellings are different). Standard real estate forms have been modified; loan underwriting criteria now include hazards; specialists have been added to commercial real estate organizations; laws require notification and action; and technical firms involved in investigations and cleanup have increased. Legal problems with sites may be as devastating as cleanup costs. Many transactions have stopped due to contractual difficulties. For instance, some owners may require indemnification from the purchaser, i.e., they want to avoid future involvement with the site. The purchaser’s attorney usually advises against acceptance. Even after cleanup and inspection the buyer still not provide indemnification. The owner may also want such a clause. Financial institutions may require such warranties before committing mortgages. Owners may want to sell property “as is” at a discounted price — but without inspections. Effects of this issue on real estate change as the implications of hazardous material filter through the industry. Future effects may include: Lowering the assessed value of contaminated property for tax purposes; changing the law affecting existing substances not now considered hazardous; developing specialized zoning and building regulations in fragile areas; and allocating cost of cleanup. The trend is for tougher choices to be made in the future. Some properties cost more to clean up than their market value. Owners, lenders, operators, tenants, heirs, and governments do not want involvement with such sites and will give up their interests, creating “orphaned properties.” Sites are tainted with suspicion until proved immaculate and remediated sites are always suspect. Sales transaction are inevitably delayed by: 1. Inspections; 2. contractual language about contamination discovered in the future; and 3. difficulty of agreeing on a fair price. Standard contracts are being developed for commercial and residential real estate to deal with new situations.

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