OF CONTAMINATED LAND – INTERNATIONAL NOTE
OF HAZARDOUS AND TOXIC SUBSTANCES IN VALUATION
The objective of this Guidance Note (GN) is to assist Valuers in
preparing valuations when specific hazardous or toxic substances may
influence property values.
Hazardous and toxic substances are included among a number of
possible environmental factors that, when appropriate, are
specifically considered by Valuers. This GN is limited to
consideration of hazardous and toxic substances because other
environmental factors that may be encountered in valuations typically
have less involvement with scientific and associated technical
issues, including related law.
This GN addresses general concepts, principles, and considerations
that guide Valuers in preparing valuations when hazardous or toxic
materials that may influence property values are present. It also
discusses concepts that must be understood by accountants, regulatory
authorities, and other users of valuation services.
1.4 Valuers rarely
have special qualifications in legal, scientific, or other technical
areas that involve evaluating risks associated with hazardous or toxic
substances. When considering the market effects of such risks in
property valuations,Valuers commonly rely upon other experts’ advice.
As specified in the IVSC Code of Conduct, paras. 5.2 and 6.6,
significant reliance upon other experts’ advice must be disclosed and
explained in the context of the property addressed in the Valuation
Fundamental to the application of this GN are the Valuer’s
adherence to market-based valuations, objectivity, and full
disclosure of relevant matters.
are obliged to write Valuation Reports that may be reasonably
understood by clients and others. The obligation for clarity and full
disclosure is particularly important when scientific, technical, and
legal issues are involved.
1.6 This GN also
provides for proper treatment and disclosure of hazardous and toxic
substance issues when valuing specialised properties and in other
situations, which preclude the application of Market Value concepts.
This GN applies to all valuations of property including plant and
equipment. Special provisions of the GN should be observed when
hazardous or toxic substances that may influence the property’s
Market Value or other defined value are known or reasonably
believed to be present.
Hazardous or toxic substances within the context of this GN
involve specific materials that, by their presence or proximity, may
have adverse effect on property value because of their potential to
cause harm to life forms. Such materials may be incorporated into
improvements to or on the site, or they may be found in or on the
land. They may also be offsite, but nearby. In some instances they
may be airborne.
In a more general use beyond this GN, environmental factors
may be characterized as influences external to the property being
valued which may have positive effect, negative effect, or no effect
at all on the property’s value. Hazardous or toxic substances may
be found either on or off the site of the property valued.
Hazardous substance within the context of a valuation is any
material within, around, or near the property being valued that has
sufficient form, quantity, and bio-availability to create a negative
on the property’s Market Value.
3.3 Toxic describes
the status of a material, whether gas, liquid, or solid, that in its
form, quantity, and location at the date of valuation has capacity to
cause harm to life-forms. Toxicity refers to the degree or
extent of such capacity.
Relationship to Accounting Standards
While the expressions Market Value and Fair Value may
not always be synonymous (see International Valuation Standards 1 and
2 [IVS 1 and 2] and International Valuation Application 1 [IVA 1]),
each type of value reflects market behaviour under conditions
contained within the respective definitions.
the extent that property values reported under either type of value
may be affected by hazardous or toxic substances, proper disclosure
and the application of proper valuation procedures to the
necessary in making and reporting valuations.
This GN is applicable to all circumstances involving public
disclosure of property values, whether reported individually or in
the aggregate, when hazardous or toxic substances may have adverse
effect on such values. In addition to the possible effect of such
considerations on the properties valued, it is possible that there
are other accompanying issues such as curative or restoration costs,
maintenance or monitoring costs, third-party or regulatory
liabilities, and the like. Thus, proper disclosure and handling are
essential in valuations used for preparation of financial statements
and related accounts.
In the ordinary course of conducting an asset valuation, the Valuer
will be instructed by the Directors of the entity as provided in IVA
1. Any special instructions to the Valuer concerning the handling of
hazardous or toxic substance issues that may have negative impact
upon propert value
are, under IVA 1, important disclosures to be discussed by the Valuer
in the Valuation Report.
disclosures shall be accompanied by the Valuer’s explanation of how
the issues are handled in the Valuation Process; any assumptions that
are made; and the effect, if any, such considerations have upon
the value reported.
Although the value effects of hazardous or toxic substances are
derived from the market in a Market Value assignment, such
effects may not be as readily discerned when valuing property for
which a Depreciated Replacement Cost method is appropriate. To
comply with IVA 1 when applying the DRC method,Valuers should apply
of this GN to the extent possible and should fully disclose the
extent of their analysis and the basis for their conclusions.
The accounting definition of impairment loss is the amount by
which the carrying amount of an asset or a cash-generating unit
exceeds its recoverable amount (IAS 36, para. 6).The negative impact
of hazardous or toxic materials that are present in a property may
contribute to its impairment. The impairment loss incurred by a
property where such substances are present may include the adverse
effect of those substances upon property value (see para.5.4 below).
In dealing with a client or prospective client in matters pertaining
to the valuation of property when known or reasonably discoverable
environmental conditions that may have adverse influence on property
values are present, the Valuer should disclose to the client the
his or her knowledge, experience, and competency to deal with the
If the environmental factors are known or are suspected to exist
at the time the Valuer and prospective client are discussing the
potential engagement, the Valuer should satisfy himself or herself
that the client understands the Valuer’s competency and disclosure
obligations and that undertaking the engagement will in no way
compromise these obligations.
If the environmental factors are discovered after commencing the
engagement, the Valuer should make known to the client the knowledge,
experience, and competency disclosures specified by this Guidance,
and should then comply with all other IVS disclosure requirements.
Recognising that many environmental situations will require advice on
physical, legal, scientific, and other technical issues, if the
engagement is otherwise acceptable to both the client and the Valuer,
the Valuer should take the necessary steps to complete the assignment
steps may include appropriate personal study; association with
another Valuer who has the requisite knowledge, experience, and
competency; or obtaining the professional assistance of others who
possess the requisite knowledge, experience, and competency.
Disclosure of the existence of any hazardous or toxic substance that
may have adverse effect upon a property’s value is included among
the general reporting requirements of IVS 1, 2, and 3.
required is the Valuer’s disclosure regarding how that factor has
been dealt with in the engagement. If the engagement calls for
valuation of the property as though no such environmental factor
existed, full disclosure must be made of the limiting assumption, and
reporting must comply with the statements above (see para. 5.1 and
requirements for valuation reports are addressed in the Code of
Conduct and IVS 3, Valuation Reporting.
Where impairment is present in a property, the Valuer should estimate
the value of the property as if the impairment had been removed.
Where possible, the Valuer should identify the cost of remediation;
but if this is not possible, the Valuer should disclose the fact that
the property is impaired.
If a property is valued as if unaffected by hazardous substances, and
such substances are known or suspected to exist, the Valuation Report
should contain a qualification that clearly limits the scope of the
valuation, an appropriate statement of purpose, properly qualified
conclusions, and a restriction against use of the valuation
conclusion without accompanying disclosure of the qualification and
5.6 The names and
nature of expert assistance of others who contributed specific
information concerning effects of environmental factors on the property
valued should be acknowledged in the Valuation Report.
When there are no known environmental factors that may have adverse
effect on property value, the Valuer should, as a matter of routine
practice, include within the Valuation Report a contingent and
limiting condition or other disclaimer affirming that the valuation
was made on the assumption that no such factors were known to exist
at the date of valuation, but if such factors did exist they could
well have an adverse effect on value.
5.8 There is growing
worldwide concern about the effects of hazardous and toxic substances
upon lives and property. Many potential hazards have been recently
identified, and others are likely to be added over time as new and
additional discoveries are made and subsequent controls are invoked by
governments or are required by the market.
Some hazardous or toxic
substances can have material effect on property values. However, as
Valuers normally deal with Market Values, it is the market’s
reaction to these substances that is at issue in Market Value engagements.
Over time, substances once believed to have no adverse effect on
property value may be determined to have such an effect. Conversely,
materials once believed to have substantial effect may be found to have
little or no property value effect, or to have such effect only under
certain market conditions.
The handling of physical, legal, scientific, and technical issues
involved with hazardous or toxic substances is frequently beyond the
skill of the Valuer. However, the Valuer’s role in consideration of
such factors will be facilitated if;
situations involving environmentally sensitive substances are
recognised and dealt with in accordance with this Guidance, whether
they are encountered prior to undertaking an engagement or subsequent
to its commencement;
proper reliance is placed upon the professional advice and
assistance of others when special skills, knowledge, training, and
experience are required, and any such assistance is acknowledged and
in the Valuation Report;
proper treatment is given to the influence of hazardous or toxic
substances in the Valuation Process, or alternatively, if the
Valuation Process is to exclude consideration of such matters, proper
disclosure is made of any assumptions made, the purpose of the
analysis, and the likely effect of the assumptions on the defined
5.10.4 reasonable effort
is made to ensure that reports and the value estimates they contain are
not misleading and can be reasonably used only for the purpose for
which they are intended.
Valuers are expected to correctly apply those recognised methods and
techniques that are necessary to comply with this Guidance. When
valuing property subject to some hazardous or toxic substance that
adversely influences property value, the Valuer should apply those
processes necessary to adequately reflect any such value losses,
taking care to neither over- or understate the value effects. In a
Market Value engagement, it is the Valuer’s responsibility
to reflect the market effect of the particular condition or
Valuers are cautioned that there can be considerable controversy
among legal, scientific, and other technical experts upon whose
advice the Valuer may need to rely. Particular differences may be
found in the methods experts use to determine the extent of clean-up,
maintenance, or monitoring that may be associated with hazardous or
toxic substances and the costs required to accomplish such clean-up,
maintenance, or monitoring.
Engagements may require valuation of the affected property under
an assumption that any value effect of the hazardous or toxic
substances is excluded from the reported value. Such engagements are
acceptable, provided that the resulting valuation is not misleading,
that the client is informed of and agrees to this limiting
assumption, and that the Valuation Report clearly sets forth the
limitation and the reasons therefore.
Because of technical issues frequently involved in environmental
matters, it is common for Valuers, directly or through the client, to
seek the counsel of and rely upon the opinions of those who hold
appropriate qualifications to evaluate problems involving hazardous
or toxic substances. Valuers should disclose the level and nature of
upon such opinions.
Valuers and users of valuation services should recognise that the
effect of a particular hazardous or toxic substance may vary widely
with differences in properties, locations, and markets. Adverse value
effects may range from none to those that are more than costs of cure
and remediation. The latter may occur, for example, where highest
and best use of the property affected is changed by the condition
and where marketability or other usefulness of the property is
altered. In any case, it is the role of the Valuer to research and
reflect the effects of the environmental factor on a particular
property in its market.
In the typical valuation engagement, the Valuer will not have the
skills to make legal, scientific, or technical findings regarding
hazardous or toxic substances, or other environmental factors that
may have adverse effect on value. It is important to the credibility
and usefulness of the reported value that if any such conditions
exist, they be properly considered and reported.
5.14.1 When the Valuer knows that a hazardous or toxic substance is
present in the property specified in a valuation engagement, the Valuer
should follow all requirements of this Guidance. Normally, any
technical experts upon whose advice the Valuer may rely will be engaged
by the client or by others.
5.14.2 When the Valuer has
some reason to believe that a potentially adverse hazardous or toxic
substance may be present, the Valuer should immediately make the client
aware of the concern and request that the client take steps to resolve
handling this concern on a private, confidential basis, the Valuer
keeps information confidential that in itself could affect the
Guidelines for Valuers’ responsibilities to observe,
and identify hazardous or toxic substances or circumstances may vary
from time to time within and among jurisdictions. In general,
determination of the nature, extent, and physical effects of
environmental conditions is beyond the scope of service of Valuers.
5.16 In dealing with
hazardous or toxic substances, the Valuer should research all related
issues in a confidential manner so as not to raise undue speculation
concerning the property.
It is not uncommon for individuals unfamiliar with hazardous or toxic
substances issues to assume that if there is a physical effect of
such substances, there must be an adverse economic reaction.
experience shows there can be, and frequently are, important
differences between general public perceptions and actual market
effects of the presence of such substances. The Valuer’s role is to
avoid such generally held but possibly erroneous assumptions and to
carefully consider all significant factors, perform competent market
research, and reflect relevant market attitudes towards the situation
in Valuation Reports.
5.18 Qualification if No Obvious Matters
there are no obvious matters of contamination evident on inspection
of a site and no environmental expert’s report is made available to
the Member, then the Member’s report should be suitably qualified
to reflect the limited extent of the Member’s expertise in relation
to environmental factors and to place the onus upon parties relying
upon the report to make their own enquiries. Although any
qualification used should be specifically worded to suit the
particular circumstances of the valuation or report, the following
clause provides an example of the type of qualification that should
visual site inspection and (detail other enquiries, eg. enquiries of
local government authorities) has not revealed any obvious pollution
we are not experts in the detection or quantification of
environmental problems and, accordingly, have not carried out a
detailed environmental investigation. Therefore, the valuation (or
report as applicable) is made on the assumption that there are no
actual or potential contamination issues affecting:
value or marketability of the property; (or...)
site (... as applicable).
the property is free from contamination and has not been affected by
pollutants of any kind may be obtained from a suitably qualified
environmental expert. Should subsequent investigation show that the
site is contaminated this valuation (or report) may require revision.
5.19 Four Main Approaches
a Member becomes aware of contamination or suspects a property has
contamination, there are four main approaches to choose from:
5.20 Unaffected Valuation Basis
an assessment on an unaffected basis, together with an outline of the
preliminary indication of actual or possible contamination and the
inclusion of a qualification in the report indicating that the
valuation assumes that the land is not contaminated and recommending
that expert advice be obtained before reliance is placed upon the
5.21 Affected Valuation Approach
the client’s approval is first obtained, have the extent of
contamination assessed by appropriate environmental consultants with
inclusion of costing for various remedy options and then calculate
discounted value. This process would include consideration of the
liability for cleaning up adjoining properties that may be affected,
plus the influence of any residual market ‘stigma’ after the
anticipated contamination remedy.
5.22 Detail on How Valuation Reached
a discount for environmental factors is applied by a Member, it is
always preferable to give the client information as detailed as
possible as to how the final assessment is reached. Therefore, the
use of the Environmental Balance Sheet Approach described below is
generally to be preferred.
in some circumstances it may not be possible to adopt that method. In
such circumstances the Member should state clearly in the report that
the discount applied was arrived at based upon information obtained
from an environmental expert and that the Member has not formed an
opinion as to the veracity of that information. A copy of the
environmental expert’s report should be annexed to the Member’s
5.23 Environmental Balance Sheet Approach
is a method to build-up a profile of the property’s attributes in
terms of positive and negative factors affecting the property’s
current market value, and is complimentary to the Affected Valuation
Approach detailed above. For instance, the asset entry would be the
value of the property as if it had no environmental impairments
whilst the liability entries would be environmental offsets to value
the cost of
determining if a problem is likely to be present, ie. a full or
partial environmental investigation before purchase;
costs associated with
quantifying the magnitude of the problems from an environmental
consultancy viewpoint and developing alternative
of action, from which an owner can choose to thoroughly identify and
remedy a problem situation;
the estimated cost of
putting an appropriate management plan and remediation strategy into
the actual cost of
pumping-out or of locating pollutants and so on;
the cost of
liabilities imposed on the owner as a result of prior actions, such
as licensing breaches, etc;
present value of future remediation, management, and related costs
affecting future cash flows to be derived from the property;
an estimate of offset
to value resulting from perceptive effects, ie. the stigma or
negative intangible offset which can prove difficult to quantify.
net worth under this method is represented by the owner’s impaired
position. As some of the above negative effects will have a time
deferment factor, it is suggested that Members consider a discounted
cash flow approach where appropriate.
example of an Impaired Value Opinion Balance Sheet is shown in
Appendix 4, while Appendix 5 provides A Method of Assessing Stigma.
5.24 Obtain Expert’s Environmental Cost Estimates
should not provide their own estimates of environmental costs. These
figures should be obtained from a suitable environmental specialist
and a copy of that expert’s report should be clearly annexed to the
valuation. The Member should make it clear in the report that these
figures have been obtained from an environmental expert and that the
Member has not formed an opinion as to the accuracy of those figures.
A failure to include a qualification to this effect could result in
the Member being held to have adopted these figures. A qualification
in the following form or to a similar effect may be appropriate where
this method is adopted:
Impaired Valuation Opinion contained herein has been calculated by
subtracting the Total Environmental Liabilities of the property from
the Unimpaired Valuation Opinion. It has been provided in this form
for convenience only. The figures which comprise the Total
Environmental Liabilities, have been obtained from (stage name of the
environmental expert) on instructions from you.
copy of (the environmental expert’s) report is annexed to this
valuation as Annexure ‘X’. (The Member) has not formed an opinion
as to the accuracy of these figures and accepts no responsibility for
them. Any enquiries in relation to these figures should be directed
to (the environmental expert) directly.
5.25 Comparative Approach
Comparative Approach may be possible in limited circumstances where
this type of sales data is available.
5.26 Where Sales are Available
of the ‘unaffected value’ indicated above would, where sales are
available, involve the comparative approach. It is also advisable to
use the comparative approach in the assessment of environmentally
contaminated property. There are only limited instances where direct
comparison of contaminated property sales can be made, but efforts
should be made to establish whether this sales data is available just
in case the comparative approach can be applied. Members should,
however, use great caution to ensure that the properties being
compared are truly comparable. Members should not make judgements as
to the comparability of contaminated sites without access to the
reports of suitable environmental experts in relation to both the
subject property and any properties sought to be used as comparables.
5.27 Valuation Qualification
a member has relied upon contamination reports and costings provided
by other experts, the Member should advise the client of such
reliance and that the assessed value is qualified to the extent of
the veracity of that information. The Member should also advise the
client that should the information relied upon vary, then the
be referred back to the Member for further comment as there is the
potential for the valuation figure to alter.
5.28 Negative Land Value
have been instances where the cost of remediation exceeds the market
value (unaffected) of the land and this infers a negative land value.
The established practice is to adopt a figure no less than zero
value. However, in these instances, the member should advise that the
cost of remediation or liability for clean up costs required for the
land results in a negative figure.
5.29 Future Liability
should consider potential and value impacts future liability,
particularly in terms of highest and best use, when completing these
valuations or reports.
5.30 Client Considerations
considerations are also important. For, example mortgagees and
purchasers (where advising for acquisition purposes), can be
particularly worried by the prospect of contamination and should be
informed about the suspicion of contaminants on any property.
This International Valuation Guidance Note became effective 31