PROPERTY TAX POST: CONTAMINATED WATER LEAVES FLINT PROPERTY OWNERS THIRSTY TO SELL

tap water

By now you’ve heard all over the news about the water crisis in Flint, Michigan. It’s not a far stretch to say that of all the potential environmental issues that can affect a home’s value, from California’s brush fires to Florida’s sink holes, contaminants in surface and ground water are pretty high up on the list.  Residents in Flint are relying on donations of bottled water, and homeowners are justifiably concerned about the public awareness and perception of damage from contaminants that will affect their ability to sell.

Local news coverage, Local 4 News (Click On Detroit), recently interviewed Governor Rick Snyder about the long-term goals and the distress Flint homeowners feel over being able to sell their homes. When asked how long it would take to overcome the crisis, the Governor stated that he hoped the length of time would be shorter than longer. Gov. Snyder also stated, “[t]he long term plan is reestablishing trust with Flint….it’s not about how fast or how long it takes, it’s about how safe.” In the meantime, Flint residents are already preparing a class action lawsuit to hold the State of Michigan financially responsible for the losses in property value.

Environmental Contamination Valuation

Generally, real estate and tax professionals recognize three approaches to valuing property: the cost approach, the income approach, and the sales-market approach. Assessors and appraisers use these methods to determine whether environmental conditions, among many other factors, will influence the supply and demand for property, the ease of transferring property, and the ability to satisfy the needs of future homeowners.

The International Association of Assessing Officers (IAAO) provides guidance for valuing properties affected by environmental contamination. The Association notes that:

Contamination can range from mild, requiring minimal cleanup costs and having little, if any, effect on value, to severe, with virtually no use of the property possible for the present or the foreseeable future and with prohibitive costs to correct the problem. The degree to which contamination affects the present and future utility of the property must be established.

According to the IAAO, there are two concepts of value for environmentally stigmatized properties: (1) the unencumbered value, which is the value of the property without an adjustment for the environmental issue. This value can be obtained using standard appraisal methods; and (2) value-in-use, which suggests that the property has future use and has value to the owner. In spite of whether the costs to cure environment problems exceed nominal value, the value for this property will most nearly reflect the market value.

The Cost

Assessors will likely obtain independent estimates of clean-up costs, similar to independent appraisals that are used to defend property values that are appealed. If Flint residents are unsuccessful in their class action, those costs will be imposed on the entire community. Bloomberg BNA’s Daily Environment Report quoted the executive director of government affairs for the American Water Works Association who explained that “[t]he responsibility for financing removal of all lead service lines will require financial support from private property owners, municipalities, the Department of Housing and Urban Development, private philanthropy, and others.” The Association estimates that it will take about $1 trillion for new drinking water infrastructure, which does not include removing lead service lines on private property. When you factor in the costs of discovering the extent of the problem, the cost of clean-up, continued monitoring, the loss of highest and best use of property, and legal costs (to name a few), the bill gets larger.

The overall tangible and intangible costs of this crisis are yet to be determined. The water system infrastructure in Flint and across the nation is deteriorating and increasingly becoming obsolete. Federal, local, and state agencies have a role to play in developing policies for more effective and sustainable approaches to water management. If they don’t do something fast, people will continue to get sick and property owners are left to drown in sinking property values.   

Continue the discussion on LinkedIn: How long will it take Flint residents to recover property values?

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By Cynthia N. Wells