ABSTRACT
More and more once productive land in Lagos Metropolis and Nigeria on the whole is being rendered vacant, derelict and waste as a result of contamination. Coloured, industrial and heavy metal-laden effluent from our textile, tannery, petrochemical and plant industries are dumped on all parts of the major cities thereby contaminating the land.
It is quite obvious that we are now paying the price of our rapid industrialization with the economic, social and environmental consequences impacting on land use and value. As a result there is excessive requirement and demand for space for residential , industrial and commercial ventures such as Industrial estates, Hotel and Hostel accommodation, Business and Retail park development, Shopping centres and an undefined leisure use, all putting an excessive pressure on available land. As the problem grows, more important are the costs to address the problem of contamination and the bigger is the challenge to reuse the land. The huge costs of remediation within a short time frame make effective tackling of these problems difficult for the government and individuals. There is need therefore for an accurate valuation technique adopted by Nigerian Estate Surveyors and Valuers.
A qualitative research methodology approach was adopted using telephone interviews of key and active stakeholders of the Estate Surveying industry in Lagos together with case studies and the data emanated from this was analysed. The study established that valuers in Nigeria are not aware, and do not use most valuation techniques and most basically value properties as if it were uncontaminated. The implication is the overall undervaluation and overvaluation of most properties in Nigeria.
Recommendations were proposed for valuers to receive moreeducationand training d. Valuers with a better understanding ofhealthand the resultant financial risk of contamination will be more able to cope and translate environmental reports for their clients.
CHAPTER ONEINTRODUCTION
This chapter deals with the general framework of the study by giving an insight into the mainmotivation/statement of the problem of this study, the research objectives, the study expectations, the methodology employed and the problems encountered during data collection.
This chapter also contains the outline of the study and the literature review of some of other related studies carried out on land contamination issues in Nigeria and other countries.
The study intends to investigate fully what contaminants are, the causes and its effects on theenvironment, the human health and value of land in Nigeria. It would then recommend ways of improvement in valuation practices that can lead to environmental sustainability and subsequent sustainable development.
It is firmly believed that on completion of this study, it would provide key guide to policymakers and other stakeholders in Nigeria and other countries to make informed decisions in relation to valuation of contaminated properties.
According to Pereiro, L (2002) ‘ Valuation is one of the most interesting frontiers infinanceand business today. There is no single ‘ best practice’ approach to valuation on which all professionals agree, but the various approaches offer interesting responses to market conditions, and therefore shed more light on where the ‘ best practice’ approach of the future is likely to lie.
Valuation plays essential roles in the property market either for loan purposes, sale transactions, and portfolio management or performance measurement Ajibola, M (2010).
The property industry in Nigeria mainly Lagos metropolis has been beleaguered with pressure due to population growth and urbanization challenges, which has in turn, triggers the incessant rise in the need for both residential and commercial spaces.
To meet space requirement for increasing spate of activities from economic growth and oil boom, has resulted in change of focus.
Pereiro(2002) discovered a profound change in the structure of industries and individual companies based on a jump in economic activities thereby pushing firms to approach international standards of competitiveness, a reported growing rate of mergers and acquisitions, joint ventures, large-scale corporate reengineering and divestment, makes property market extremely attractive,.
According to Ajibola,(2010), ‘ Property is now seen as a good investment vehicle which requires proper pricing so as to ensure that the parties involved in any transaction are not economically short-changed’.
According to Cheng et al( ), ‘ Investors are becoming increasingly more selective in organizations to which they provide financial support, and clients are increasingly looking for value-added construction solutions, all to reinforce their commitment to sustainability’.
A number of initiatives have been created in the United Kingdom such as environment profiles and sustainable communities to achieve wide-ranging improvements aiming at sustainable construction industry (BRE, 2004; Integer, 2005; ODPM, 2005).
Likewise, Nigeria, however the long-term benefits of the implementation of the appropriate approaches have not been clearly known, and implementation itself is still evolving.
This thesis investigates current valuation techniques in use in Nigeria by examining methods used, and draws up from literature, the specific issues and challenges encountered when applying traditional valuation techniques.
This chapter provides the background, the objectives and the description of the aim of this research.
1. 1BACKGROUND AND MOTIVATION OF THE STUDY
The legacy of past polluting practices as a result of massive industrialization and spurt of economic activities in Lagos metropolis has led to contamination which today presents complex and challenging problems. One which has received growing public attention both internationally and nationally in the last three decades, as the extent of contamination has been known, the average cost of a site clean-up is estimated at between US$29 million and US$35 million, in the UK, dealing with contaminated derelict land alone costs GBP20 billion Kingsbury, (1998).
Olayiwola et al (2006) also stated the importance of cities in societal development is due to their unique role as centers of innovation, adoption, diffusion and growth points.
According to Olayiwola et al (2006) cities therefore propel the growth of societies and are able to attract foreign investment.
Nigeria has experienced one of the most staggering population explosion, and the fastest rate of urbanisation in the world, and this experience is unique in scale, pervasiveness, and in historical background resulting in very dense network of urban centres matchless anywhere else in Africa Alkali(2005).
1. 2 NATURE AND EXTENT OF PROBLEMS FOR RESEARCH
According to Gibson & Nwuba (1994) ‘ Property assets that is, land and buildings are a key resource for all types of organization, including local authorities and public sectors. They are fundamental to existence of life.
Contaminated land can be problematic for businesses because it can create uncertainty as to the potential clean-up and regulatory liabilities and resultant costs which may have to be met Richard, T (1996).
As economies of the world globalize and capital becomes more mobile, valuation gains momentum in importance for privatization, joint ventures, mergers and acquisitions, restructuring to create value. Yet valuation is much more difficult in these environments because buyers and sellers face greater risks and obstacles than they do in developed markets James & Koller, (2000).
According to Coming Clean, Supra note 7, at 1-2 ‘ Most of the nations contaminated land is caught in a vicious cycle of decline as thus:
(a) The landowner is unable to sell the land.
(b)Vacant properties deteriorate and invite arson, illegal dumping, and vandalism.
(c) Unaddressed contamination may spread further eroding the land value, escalating cost of clean up and threatening the economic viability of other adjoining properties.
(d)Potential investors are faced with uncertainty costs and legal liabilities, seek development opportunities elsewhere.
(e) Contaminated land becomes unwanted, legal and regulatory, and financial burdens in the community and the nation.
This is now the case of land contamination in Lagos State. Lagos State is a Mega city, a status conferred on it by the United Nations as a physically smallest but the most populated state in the country, with an estimated population of about 10 million people, which is about 10% of the total population of Nigeria Iwugo, K (2003).
Presently, Lagos Mega city is estimated to have a population of 17 million persons out of a national estimate of 150 million, and projection of 24. 4 million people by the year 2015 thereby becoming the third largest city in the world World Bank Report (1996).
According to Ademola & Onishi (2006), ‘ No where in West Africa is the rate of urbanization in the last few years as unprecedented as Lagos city, the economic focal point of Nigeria. As the economic nerve-center, it accounts for over 70% of Nigeria’s industrial and commercial establishments that accounts for up to 70% of the country’s manufacturing value-added’.
This rapid population explosion and urbanization in Lagos poses a number of serious issues such as great pressure on the land, shortage of housing, growth of slums and shanty, heavy traffic, urban sprawl, industrialpollution, andfailureof the urban community to adopt to changing conditions caused by the incessant influx of migrants to its institutional and social services.
According to Goldberg, (1970) ‘ rapid and continued rise in housing and land prices are expected in cities with transport improvement, and rapid economic and population growth’.
He stated that the population increase has a direct impact on the land use and the resultant demand on land. Some of the challenges arising from this are the serious encroachment on conservation zone and impact of industries. There is a massive reclamation works carried out in areas such as Lekki Peninsula, Festac Town, Victoria Island and Ogudu foreshore which destroys fauna and flora. Encroachment has also occurred on areas zoned conservation belt in the master plan by desperate private developers.
Real property was suddenly seen in a new light, no longer as something to leave behind to the children, but as quickmoney- spinning venture. Similarly to the development world (especially, United States of America and the United Kingdom), property has been seen as money making venture. Hence the industry is undergoing stiff competition from all facets ranging from Estate Agency, Property management, and quantity Surveyors.
The implication is that the Nigerian Estate Surveyors and Valuers are now faced with not only increasing client requirement for valuation, valuation accuracy, but also stiffer competition from related professionals. These double issues calls for valuers to respond with pacesetting levels of accuracy and style in his valuation. Besides, there is a high possibility that the public may abandon the services of the Estate surveyors in favor of the accountants and the engineers who may be able to provide more concise and reliable valuations.
The problem is not limited to Nigeria alone; internationally Accountants, Management Consultants and Investment Managers are competing for Asset management briefs. The current economic environment makes it practically impossible to confine professionals to their areas of specialty.
It is therefore imperative that the Nigerian valuers should sit up, and wake up to the challenges ahead and take valuation seriously.
Equally, Ogunba and Ajayi (1998) our conventional valuation methods are shrouded in mystery and indefensible to the extent that valuers in Lagos are not interpreting their market with anything remotely close to the accuracy of their counterparts in Britain.
Baum, (1998) raised suspicion that: ‘ Property valuation is now a mystery, art orsciencedevoted to the practice of estimating market price subject to a series of often ridiculous assumptions. Property valuers can no longer value properly. None of this would matter if it had no impact on the market. But it does, and we increasingly realize that the property market affects the economy’.
By studying and outlining the various techniques that can be used for valuing contaminated properties and investigating the extent to which they are used in Nigeria, investors and practitioners can gain a better understanding of the risk they face and have a set of tools on which to base a more convincing judgment on investment actions.
1. 3 The aim, and Objectives of the study.
The main aim of this study is to determine how valuation techniques are used in the valuation of contaminated land and to establish a best practice approach for Nigeria.
? To determine Stigma attached to contaminated land.
? To determine the valuation techniques used in Nigeria for contaminated land and to determine how risks and uncertainties are incorporated in the valuation process.
? To determine the level of awareness and experience of practitioners regarding valuation approaches to contaminated lands.
The researcher is interested in doing this study because there are many properties including vacant lands that are contaminated in Nigeria. The reseasrcher is going to conduct interviews of key stakeholders in the estate and valuation industry and case studies as data collection methods. The region of lagos metropolis is to be used for thecase studyof this work and the analysis of interviews and case studies will show how to evaluate contaminted land in Nigeria.
CHAPTER TWOLITERATURE REVIEW
This gives an overview of literature and past research work related to these areas. It gives background information required for the understanding of the entire work.
Relevant literature reports from international and local journals, textbooks, relevant government agencies report (RICS), documents from Environmental protection Agencies and non-governmental and community based organizations, internet websites are used in this study.
There have been numerous suggestions by professionals and academicians all over the world on solutions to the problem of valuation of contaminated land, but no single solution appears to meet all requirements. The basic reasons for carrying out valuation and the procedures involved need to be well discussed and understood.
According to Syms, P and Weber, B (2003) In actuality, neither the literature nor current guidance from professional bodies indicate recognized methods and techniques for the valuation of contaminated land and there is no clear indication of when or to what extent they would be applied if there were any.
According to Kilpatrick, John (2007) ‘ Normal appraisal techniques frequently fail and appraisals must rely on more advanced techniques, such as contingent valuation, case studies or statistical analysis’.
What investors, regulators and users of valuation services require are consistency, reliability, clarity and transparency in valuation reporting worldwide A single international standard has to encompass or recognize property laws, tenures, accepted rules of conduct, languages, concepts and ‘ best practice’ benchmarks Edge,( 2000).
Property remains one of the biggest investment assets closely followed by shares and bonds Hoesli & Macgregor (2000).
Valuation plays an essential role in the property market either for loan purposes, sale transactions. And portfolio management or performance measurement. Ajibola, M (2010)
According to Ajibola, M (2010) The role of valuation as the basis of transaction figure, should not be compromised, with the establishment and multiplicity of industrial and commercial economic activities, and coupled with prime role property holdings play especially as collateral for the release/production of capital funds. However, since most interactive human activities are fraught with dispute, claims and counter claims, the valuation practice is no exception.
The case of inaccuracy manifested recently in the valuation of the assets of Nigerian telecommunication Limited (NITEL) for privatization/disposal purposes when members of staff of the company, stakeholders and the public openly voiced out their concerns against excessively low valuation estimates the estate surveyors ascribed to the assets of the company. It was based on such complaints that the federal Government under President Olusegun Obasanjo cancelled the whole privatization exercise, and ordered a re-valuation.
While Accountants, stockbrokers and other financial consultants have been progressive in refining their financial analytical techniques to meet and satisfy their changing client’s needs, this cannot be said of estate surveying field which have been slow and lukewarm in their attitude and approach towards accuracy changes in valuation practice. OJO, (2004)
In his paper ‘ Showing What You Know’, Weber (2001) states that: ‘ Appraisers need to show the reasoning behind their value opinions by discussing important spatial relationships and their likely effect on value. Geographic Information Systems (GIS) can be used to analyze these relationships and to show why a client should select an appraiser who has this level of information’.
Valuers in Nigeria are generally not skilled in the art of determining the extent and degree/nature of contamination that may exist in a given property.
Bond (2000) states that problems faced by valuers of contaminated property is the difficulty and inability of values to identify contamination in a given site, lack of specialized skills to determine the extent of contamination, and the cost of remedying it.
Appraisers should have specialized and basic knowledge of contamination types, nature, its proportion and the effects it is capable of causing. This should be added to the basic curriculum of the appraisers in schools. This is just one reason why knowledge in the area of ground contaminants as it relates to property valuation is important.
The application of these techniques enables properties to be regenerated and returned to an economically feasible, socially suitable and productive use.
One of the most well known areas in the United States for Brownfield development is Pittsburgh Pennsylvania, which successfully transformed numerous former steel mill sites into high-end residential shopping centers and offices. Reclamation of Brownfield can become a major asset to a city and significant part of new urbanism. In many of the most populated areas of the country, it is a necessity that plays a critical role in countering suburban sprawl.
2. 1 WHAT IS LAND CONTAMINATION?
A PRESENT FROM THE PAST
There is no universal definition of contaminated land. The term is dealt with differently in different countries.
Contaminated land is a general term to describe sites or wider areas of land where elevated concentration of chemicals or other substance (Contamination), usually resulting from man’s use of the land, may exist. It focuses on contamination resulting from past practice, that is historic or legacy contamination CARINET, (2002).
State of the Environment report (2007) defines Land Contamination as land that has a pollutant above background concentrations causing, or with the potential to cause, adverse impacts to human health, the environment or any environmental value.
Article 3 of the Waste Act defined contaminated land as: ‘ All land the physical, chemical or biological characteristics of which have been negatively altered by virtue of the existence of dangerous components of human origin, in concentrations such that they pose a risk to human health or the environment according to the criteria and standards set forth by the government. This definition excludes natural contamination and occurs according to the standards set forth in each case by the government. This definition leads us to conclude that not all actually contaminated land may be legally considered contaminated.
The Planning Regime uses a slightly different definition of contaminated land which is not based sorely on the legal definition set out with Part2. A wider range of contamination and receptors is relevant to planning. The Planning Regime uses the wider term ‘ Land affected by Contamination’. This is intended to cover all cases where: ‘ the actual or suspected presence of substances on or under the land which may cause risks to people, human activities and the environment, regardless of whether or not the land meets the statutory definition in Part 2A.
This is the United Kingdom legal concept of land contamination. According to section 78A(2) of Environmental Protection Act, 1995: Contaminated land is ‘ Any land which appears to the local authority in whose area it is situated to be in such a condition, by reason of substances in, on or under the land, that-
? Significant harm is being caused or there is a significant possibility of such harm being caused; or
? Pollution of controlled waters is being caused or is likely to be, caused.
The key element of UK definition is the Source-pathway-Receptor pollutant linkage concept. All three elements of the pollutant linkage need to be present for there to be a risk of any magnitude. Without the clear identification of all three elements of the pollutant linkage, land cannot be identified as contaminated land under the regime.
It has since been used as a model for ecological impact, and the right appraiser should be up to date with its changes.
Equally, the use of the word significant in the main definition of contaminated land narrows its scope considerably’’ Denner and Lowe, (1995).
Information from Syms’s feedback in January 2001 reveals that this definition refers to most seriously contaminated land, probably no more than 10% of all contaminated land in England.
One implication of this concept is that not all land containing contaminants therefore is contaminated , and the definition relies upon the concept of harm to human and the environment and it explains as to how significant the harm must be for the land to be defined as ‘ contaminated’ thus setting a high threshold before land will fall under the regime. The aim of the UK definition of contaminated land in part 2A is to focus only on problematic land, and to avoid inadvertently catching non-problematic land.
The principle difference between the UK and Planning definitions of contaminated land is that under the planning system, risks have to be assessed based upon the new or intended use of the land, rather than the existing use.
However, the principles underlying both regimes are fundamentally the same namely- the identification and remediation of land that may pose a risk to human health and /or the environment. The Part 2A deals with contamination risk from a site in its current use, but the Planning System requires that the proposed use is considered. Therefore the remediation requirement under the planning system can be wider than under Part 2A.
It should be noted that a contaminated land is also referred to as ‘ Brownfield’. United States Environmental Protection Agency (EPA) defines Brownfield as: ‘ abandoned, idled or underutilized industrial commercial facilities where expansion or redevelopment is complicated by real or perceived contamination’.
2 . 2 WHAT ARE THE CAUSES OF LAND CONTAMINATION?
Land may be affected by contamination as a result of historical land use, principally from industrial processes, waste disposal and accidental spillages.
Table 1 lists some of the most commonly encountered contaminants, the sites where they are likely to occur, and the principal hazards they produce.
CONTAMINANTLIKELY TO OCCURPRINCIPAL HAZARDS
INORGANIC –Toxic metals e. g. cadmium, lead, arsenic copper, nickel, and radionuclide. Metal mines, Iron and steel works, foundries, smelters. Electroplating, Anodizing and galvanizing works. Engineering works. Harmful to health of humans or animals if ingested directly or indirectly. May restrict or prevent the growth of plants.
ORGANIC-combustible or flammable substances like coal and coke dust, methane, Petroleum products, gasoline, pestcides, additives and aggressive substances like sulphates, chlorides, acids and asbestos. Gas works, power stations, railway land, landfill sites, chemical works, refineries, tar distilleries, industrial buildings and waste disposal sites. Underground fires and explosions within or beneath buildings, chemical attach on building materials e. g concrete foundations, contamination of water supplies. Dangerous if inhaled.
BIOLOGICAL-bacteria, viruses, yeast, mould, mycoplasma. Are or were living organisms which can travel through the air. Transmission by people, plants and animals. Biological growth is supported by nutrients and moisture. Triggers allergic reactions from repeated exposure. Infectious diseases are transmitted through the air. Releases disease causing toxins that can damage vital organs.
SOURCE- ICRCL GUIDIANCE NOTE 59/83 SECOND EDITION JULY 1987.
2. 3WHY IS CONTAMINATED LAND IMPORTANT?
Contaminated land has caused major concern; critics even viewed the problem as a toxic time bomb in land Pearce, (1992).
According to Oldershaw (2001), where there is contamination, the potential impact on health, the environment and development will depend on:
(a) contaminating substance(s);
(b) The ability to migrate(depending on local geology and hydrogeology) and
(c) The intended use of the land.
He also stated that these problems stems from the fact that there is a historical lack of care over industrial and waste management, inadequate planning or failure to recognize that land might be put to other uses in the future.
There are also fairly substantial economic losses due to the decline in land productivity as a result of contamination and the ensuring impact on worldfoodsecurity.
According to The Environment Agency (2011) Land contamination or the possibility of it is a material planning consideration. This means the planning authority must consider the potential implication of contamination both in preparing development plans and when considering applications for planning permission. The development phase therefore is the most cost-effective time to deal with the problem. Town and country planning system controls dev elopement and the use of land in the wider public interest. Local planning authorities are responsible for ensuring that land contamination is dealt with through the planning system and that remediation takes place where it is required.
According to ( Patchin 1988, Spencer 1993, Syms, 1996b) ‘ The fact that the property is contaminated requires a valuer to have a thorough understanding of land contamination issues including regulations under relevant environmental laws, the nature of contamination on land, the type of remediation required and the market conditions, etc. As far as valuation is concerned, the main difficulty is the lack of accessible data’.
The appraiser must diligently recognize and report all forms of contamination through an environmental assessment process.
2. 4EFFECT OF LAND CONTAMINATION ON VALUE
The primary purpose of valuation is to determine value which is an opinion, an impartial activity that is based on current market evidence, no matter what form or state the property is in Antai, I (2003).
According to Chalmers (1993) ‘ Contamination or the risk of contamination can result in diminished utility for a property. The type of impact for this diminished utility may be of a short term nature and will determine the particular valuation technique to be applied.
The value of a property can be defined as the expectation of the remuneration, accruable to that property, to be derived in the future. (Appraisal Institute 2001, Appraisal of Real Estate, 12th Ed.
In the extreme case, the owner may not be able to let or sell the property or use it as security to obtain loan. The land therefore has become a liability to the owner. Furthermore, land contamination may affect the ease of putting the land to the next best use thereby affecting the value on the whole.
Patchin, (1991) noted that the decline in value is often greater than the cost-to-cure. “ There is virtually no chance of obtaining mortgage financing for a seriously contaminated property”
According to Wiltshaw, G (1996), ‘ Stigma has been identified as a key factor in lowering the value of land which is actually or potentially contaminated’
According to Bond (2000) ‘ Stigma is the blighting effect on property value caused by perceived risk and uncertainty- uncertainty which relates to inability to affect a total cure, risk of failure of remediation, risk in changes in legislation, difficulty in obtaining finance, or simply, a fear of the unknown’.
Stigma may have an impact on contaminated land value before; during or after clean up process Roddewig, (1996). Apart from the environmental risks, they also worry about the likely future financial and legal liabilities.
Mundy (1992) describes two major problems that affect such properties as the marketability effects which try to determine the loss of financial returns on the property due to the perceived damage and the income effects, which estimates the present value of this loss from lack of marketability.
It is therefore important to note that a property may be affected by either one or both influences (loss of value due to cost of clean-up and loss of value due to stigma).
Analyzing the impacts of asbestos on a property, Fisher et al uses the formula below to estimate loss in value.
VA= PV of expected NOI + PV of expected NSP-PV of expected remedial cost.
Where PV- Present Value;
VA- Value of a property contaminated with asbestos.
NSP- Net Sales price.
NOI- Net Ordinary Income.
In effect from the given equation, the loss in value is expressed as;
Loss in value = PV of property with asbestos-PV of property without asbestos.
2. 5EFFECT OF LAND CONTAMINATION ON THE ENVIRONMENT
According to Chan (2001) ‘ contaminated land is a major environmental problem apart from causing actual or potential threats to human health and the environment, contaminated land also leads to liabilities and financial losses in form of costs to meet legal requirements in relation to clean-up, and long term monitoring expenses’. Moreover, they may be losses due to a drop in market value/rental of the property, longer vacancy periods, high remediation and monitoring costs.
According to Environmental Agency: Guiding Principles for Land Contamination (2010), ‘ Land contamination has the potential to cause considerable harm to ecosystems, humans, property and pollution of controlled waters (including ponds, groundwater, lakes, coastal water and surface watercourses) because of the existence of substances in, on or under the ground’. There is wide loss of fertile soil, pollution of air and water, degradation of farmland, damage to aquatic ecosystems, destruction of wildlife and biodiversity all of which cause serious health problems to humans.
Thus, removing environmental contamination from the land not only removes the contamination from the land, it prevents contamination from entering the food web. State of the Environmental Report (2007).
2. 6FACTORS AFFECTING VALUATION
The value of any given property is not arrived at in isolation; it is highly dependent on factors as demand and supply. Valuers should assess trends in these forces while trying to determine the speed, direction, strengths and limits of these trends. Some of these factors known to affect the value of a property withrespectto either the demand for or the supply of a property are:
Economic Forces
This is one of the most important factors to be considered when carrying out valuation process. The economic prospect and forecast are a vital part of analysis in value determination. The anticipated trend in the economy, the geographical area and many other different aspects of the economy are very important when carrying out valuation assignments. These includes income, inflation, employment, purchasing power and general price levels, interest and bank lending rates, availability of mortgage credit, construction costs, vacant and improved properties.
Social Forces
The value of real estate is one of those areas highly predisposed by social forces. This involves the social structure of the society that can affect the way the societies perceive things. These forces include age distribution, marital status, lifestyle, locations, education, law and changes in society type all could affect value of property. These effects could either be positive or negative depending on what society is tending towards at that point in time.
EnvironmentalForces
This refers to the natural and man-made environmental conditions of the area in which the land is located. Climatic conditions, infrastructure, topography and soil, contaminants such as asbestos and radon, natural barriers to more development should all be considered before valuation.
GovernmentalForces
The provision of governmental amenities and services around the administrative areas may affect land use patterns and thus affect the value of properties near them. Proximity to good public social services could affect the value of any given property e. g. security, zoning, public service, communication, conformity to building codes, fire service, fiscal policies in the three tiers of government, rent regulations and restrictions on forms of ownership etc.
2. 7 WHY THE VALUATION OF CONTAMINATED LAND IS A COMPLEX PROCESS
According to Javadi A and Bello- Dambatta (2008) ‘ Contamination and its management are very complex, risky and uncertain multidisciplinary processes with the high cost overruns and stringent time constraints, that rely on inputs from not only broad range of expertise, but from different groups of stakeholders, making it virtually impossible for any group of experts or stakeholders to effectively manage contaminated land problems on time, and on budget’.
Lapinskas (1998) stated that the legacy of past polluting practices has resulted in contaminated sites, which today present complex and challenging problems. Any solutions will require a multidisciplinary approach combining civil engineering, chemistry, geology, hydrology, toxicology, Geographical Information System, /micro station and environmental science.
According to Antai, I (2003) ‘ the entire process of placing a value on a property is a very complex process’. This is because it utilizes inputs and data from a variety of economic, demographic, administrative and engineering sources to come up with concise and reasonable estimates for a given property. This process becomes much more difficult when the land is identified as being contaminated. Moreover, the valuation process can be significantly affected by a number of forces covering a whole range of human and professional interaction. This ranges from social, economic, environmental, and governmental. Therefore understanding the full context of Real Estate Valuation is imperative especially as fast growing changes is taking place in and around the valuation of contaminated property such as the laws, methods and regulations are constantly undergoing changes.
The problem caused by land contamination in relation to the issues concerning the extent of contamination, the way in which the contamination is perceived, the effects to utility of the property, the appropriate standards concerning the contamination type and the remediation process Chalmers et al.,( 1993). This also shows that the valuation process is a complex exercise.
There is always an element of uncertainty when faced with contaminated property. This is because when faced with contaminated land, one never knows what range or class of contamination might be contained in it, the uncertainty of the element type/s that might be causing contamination, i. e. what is it, how much, and how dangerous.
According to Reddy et al (1999) a contaminated land poses unique problems because many are located in heavily populated urban centers, therefore additional attention must be paid to using site characterization and remedial methods that will accommodate the often inflexible nature of urban sites. Specialist knowledge is therefore required because of
? The property market is an imperfect one-supply and demand are always changing and are different in each location, and for each property and information on transactions is often restricted;
? Each Individual property and the interest therein tend to be unique, or at least never exactly the same as others;
? Legislation- The complex and inter-related laws relating to property are forever changing , and only a specialist with full knowledge of them which needs to be constantly updated can successfully interprets them correctly.
The profession has become international in scope, and challenges faced in the future come from increased use of informationtechnology, global clients, market, and the effects ofclimate changeon valuation.
Developed countries such as United Kingdom and United Sates have a long history in using valuation techniques, and a desk study will explore these and relate them to current practice in Nigeria from the perspective of those implementing and delivering it.
CHAPTER THREE
3. 1 V ALUATION TECHNIQUES AND APPROACHES FOR CONTAMINATED LAND: AN
INTERNATIONAL COMPARISON.
This chapter compares other developed countries such as United States of America and United Kingdom method of valuation of contaminated land to that employed by Nigerian practitioners and the lessons to be learnt. These countries are chosen because they have a long history of industrialization and that there is need in both countries to re-use Brownfield land on a fairly extensive basis. Moreover, earlier introduction of environmental legislation in those countries made them a perfect reference guide.
Concerns about land contamination issues were reinforced with the introduction of legislation governing the environment for example, the 1986 Superfund Amendment and Reauthorization Act (SARA) in the US, and the 1995 Environmental Act (EA) in the UK. Together, these statutes have brought contaminated land issues to the mind of valuers, and have highlighted the need for them to take contamination and stigma into account in calculations of value.
By identifying and studying other countries valuation techniques, one can analyze how it can be applied to Nigerian situation. This will enable valuers to understand some of the implications involved in the valuation of contaminated land, and to compare British and American research practice with that of Nigeria. This ultimately gives the reader a wider view of current issues and best practice.
There is need therefore for a set of interviews and exploratory case studies focusing on the challenges presented on the ground around Lagos State.
3. 2 CONTAMINATED LAND: THE UNITED KINGDOM APPROACH
According to Higgins (1998), the legacy of the industrial development in the United Kingdom has been an issue that has taxed politicians and regulatory bodies significantly over the last 10 to 15 years.
As the first industrialized country in the world, it is estimated that as many as 370, 000 sites covering an area of 400, 000 hectares are potentially contaminated land. A legacy of the industrial revolution and the mining industry. To date, some 67, 000 hectares have been identified with over 34, 000 hectares successfully remediate in UK alone.
The Parliamentary Office ofScience and Technologyin its report Contaminated Land (1993) estimated between 50, 000 and 100, 000 potentially contaminated sites across the United Kingdom, with estimates of the extent of land ranging between 100, 000 and 200, 000 hectare.
UK is rapidly becoming a global center. A significant investment in research and development enables them to offer a wide range of cutting-edge, innovative and transferable contaminated land management and remediation across the globe.
This sector is worth ? 1 billion annually and comprises 220 companies including specialists and multidisciplinary consultancies and laboratories all complimented by expert legal, financial and insurance firms CLR1.
According to DETR(2001), 60% of new housing to be provided on previously developed land or through conversion of existing buildings and Brownfield land to be reclaimed at a rate of over 1, 100 hectares per annum by 2004, reclaiming 5% of current Brownfield land by 2004 and 17% by 2010. Figures released by the DTLR in May 2002 indicate that the target is currently being exceeded with 61% of new housing built on Brownfield site.
According to CLR1, typical prestigious sites and events such as 2000 Manchester Commonwealth Games, the 2014 Glasgow Commonwealth Games, the Millennium Dome and London gateway Port have been or are due to are developed on contaminated land. The ultimate regeneration project is 312 hectare London 2012 Olympic Park, where over 800, 000m3 of contaminated land has been treated for reused to provide development platform.
Regulation in the UK is based on ‘ Polluter pays principle’. The key strength of the UK contaminated land sector is the ability of its environmental consultants and lawyers to understand diverse regulatory regimes across the globe and how these impact on liability.
There is significant role of legislation, and the highly structured use of statutory control to manage land contamination in both the United Kingdom and the United States to induce responsible attitudes and behavior towards the environment and serves as an effective instrument for environmental protection, planning, pollution, prevention and control.
According to CLR1 ‘ Due to the UK’S long industrial heritage, its consultants have been exposed to broad range of contaminating industries and the full scale of contaminants in both man-made and complex natural soil and ground water settings. Equally, the UK financial services sector is skilled in funding of even the most complex contaminated land remediation projects especially in forming successful public private partnerships to deliver regeneration and their insurance companies have provided policies across the globe to provide risk cover for environmental liabilities and projects utilizing a range of specialist products and solutions.
3. 3 NEGIGENCE VALUATION OF CONTAMINTED PROPERTY IN THEUNITED KINGDOM
According to (Miles, 2001), due to the complex nature of the valuation of contaminated assets, many practicing valuers in the global world might still not be discharging their professional duty to an adequate degree.
In the United Kingdom, a valuer who is on notice of the possible presence of contamination, doing nothing is a hazardous option, there is an obligation to make the client at least aware of the issue and, where appropriate, the need for further help (RICS, 1999).
Thus provided the valuer advices on the existence of contamination problem and the need for any expert advice, it cannot automatically be said that a duty ‘ to follow the trial has been neglected.
3. 4CONTAMINATED LAND: THE UNITED STATES APPROACH
‘ ON THE BROWNFIELD’S OF YESTERDAY, WE WILL BUILD THE GREEN INDUSTRIES OF TOMORROW’. PREDIDENT BUSH, APRIL 5, 2001.
The United States of America General Accounting Office estimates that there may be as many as 650, 000 underutilized or abandoned properties across the country due to perceived or actual release of hazardous materials.
The sheer enormity of the Brownfield dilemma has drawn it into the national spotlight, provoking the United States conference of mayors to declare the situation as ‘ an emergency’, a ‘ dead zone’ and as ‘ pockets of disinvestment, neglect and missed opportunities that exist within American cities.
According to Browner, C (1998), the current estimate places the cost of cleaning up the nation’s Brownfield at $650 billion. Brownfield’s also represents millions of unreached tax dollars and millions in lost wages.
The valuation practice is regulated by the various states best known as the Appraisal Institute and all the real estate valuers must be state licensed and certified.
The method most widely used for remediation is the “ Multiple-for-use approach which requires a high standard of clean up which normally allows land to be used for most purposes.
Reusing land in the United States is a fairly new trend. This is because manufacturing is more recent there and also because the land mass is more extensive, thereby reducing the need to rebuild on previously used land.
Until recently, clean-up in the United States has been to the highest standards helped by superfund.
The land may also remain stigmatized because it was once contaminated even though subsequently cleaned Chalmers, (1993).
As a result, there is a move towards a more realistic approach to decontamination such as the ‘ suitable for use’ approach in the United States as well.
The concentration of research in this field on both countries is due to the need to reuse Brownfield land on a comparatively extensive level.
In United States, access to information regarding land, its contamination and its subsequent selling price is publicly available unlike the United Kingdom and Nigeria.
In the United Kingdom, data regarding property transactions are treated as confidential and there is no public access to such information.
3. 5 NEGLIGENCE VALUATION OF CONTAMINATED LAND IN THE UNITEDSTATES OF
AMERICA
To reduce liability, the appraiser must understand the impacts that contaminants can have on the property and how their effects on market value should be estimated.
Jackson and Powel (1997) opine that ‘ appraisers should keep themselves acquainted with the law and changes in the law so far as his skills are affected.
In the United States of America, the primary legislation of contaminated land is the Comprehensive Environmental Response Compensation and Liability Act (CERCLA) which dates from 1980 and the United States of American Environmental protection agency.
The law states that before a valuation of contaminated land or property can be done, the environmental risk assessment must be carried out. Also, the law requires the valuer to complete an environmental review check list form or a similar property condition questionnaire at the time of a required field inspection leading to the completion of an appraiser report. Without appropriate qualifier, the valuer may be exposed to unnecessary liability.
Commonly sites are rezoned to ‘ higher uses’ such as high density housing to give land a higher value so that after deducting clean up costs there is still an incentive for a developer to purchase the land, clean it up, redevelop it and sell it on.
3. 6VALUATION IN NIGERIA AND THE CHALLENGES FACED BY VALUERS
Recently in Nigeria, it is notable that other related professionals such as Accountants, Bankers and Engineers are gradually; not only encroaching into areas traditionally preserved for valuers, but are claiming to be much more competent. The invasion of unqualified estate and land agents, and their activities has a negative effect on property valuation. This is because they do not understand the factors necessary to be considered to determine property values and do not access the property values based on any sound economic analysis. They also charge exorbitant fees as commission for their services and often inflate such values in order to increase their take-home pay regardless of the effect this might have on the general level of property values. The values of lot properties in Nigeria are therefore informally assessed and are not subject to any formal valuation standard. Moreover, Nigerian valuers find it difficult to identify if contamination exists on a land, specialized skills required to determine extent of contamination and cost of remediation, identify the presence, degree and duration of post-remediation stigma is difficult due to limited market sales data.
This constraint is a problem that cuts across the use of all the methods. The structural method of data collection in the country is weak and does not provide sufficient information on which to base valuations. This makes it difficult to make critical analysis and achieve a sound base for valuations using the open market values. Many valuations carried out therefore do not represent the true open market value of the property.
Adair et al (1996) emphasize that data deficiencies often lead valuers to work with secondary and incomplete information. The uniqueness of every property implies that a high level of data availability and analysis is required to facilitate increasingly analytical procedures. The valuation task becomes more difficult, given the severe limitations on the availability of information.
Parker (1998) remarked that if valuations have only slim chance of accuracy, clients are likely to question the necessity of valuations and this renders the professional advice of
Valuers useless. Thisobservationis very different from the United Kingdom and United States.
There is equally lack of a developed property market in Nigeria. Though there is open trading of properties done informally, and knowledge about the property market is scrappy, there are no clear legal basis amd policies on trading on properties. Property owners especially in urban areas aided or unaided by valuation professionals sell and determine their own terms and conditions without recourse to any established formal guideline on property values or valuation principles.
Michael Malison also declared that ‘’some valuers are working themselves out of jobs by clinging to old methods… and if nothing is done soon, surveyors are going to run into sand’’.
The Nigerian Institute of Estate Surveyors and Valuers in one of its editorial comments NIESV (1998) noted that “ despite the training in the institution of higher learning in more dynamic methods of valuation which are able to take account of various market conditions, we still insist on traditional methods in practice. We continue to base our practice on comparable evidence without taking into account local and national trends, demographic factors, consumer expenditure and others.
This method becomes more archaic, ineffective and unreliable when considering the various investment vehicles (securitization, unitization) which will dominate finance market in the next millennium.
There is also general lack of dedication to duties and willingness to pull out of employment immediately after registration because of low salary and high rate of unemployment. Working in Banks, development companies and oil companies are better options for most valuers in Nigeria.
3. 7 NEGLIGENCE VALUATION OF CONTAMINATED LAND IN NIGERIA
The regulatory bodies in Nigeria include the Constitution of the Federal Republic of Nigeria (1999), National Environmental Standards and Regulations Enforcement Agency (NASCREA) Act 2007, the Land Use Act 2004.
It can be noted that the Nigerian legislation and regulation of contaminated land does not have the same level of governance driving the improvement of contaminated land.
While concerns in the developed countries attach greater significance to environmental risk, remediation and valuation methodologies in contaminated properties and possible negligence that may arise while carrying out valuations, there are indications suggesting that little or no emphasis is made in this regard in Nigeria.
Evidenced from refuse dumps located at Abule Egba, Oke-Afa(Isolo) and Ojodu in Lagos metropolis, Bello,(2005) established that rental values of the properties adjoining these locations have been reduced by as much as 37% in Oke Afa(isolo) for block of flats and 33% in Ojodu for tenement buildings. Similarly, the reduction in capital value of adjoining vacant plots ranges from 20% in Abule Egba to 33% in Ojodu.
Significantly, these findings indicates that while empirical evidence supports the damaging effect of these contaminants on land value, the Nigerian estate surveyors and valuers usually ignored this in their valuations.
There is no recorded case of negligent valuation in this area reported against any practitioner either with the Nigerian Institute of Estate Surveyor and Valuers or with the Estate Surveyors and valuers Registration Board of Nigeria.
For example, there is no specific regulation at this time on the use of, and likely effects of asbestos use locally. No such litigation proceedings have been brought to the courts to the best of our knowledge owing to the prevalent use of asbestos for construction purposes.
This portrays the ignorance of clients of their rights and the fact that negligence valuation has not assumed an alarming proportion. However the case, Nigerian valuers should brace up to the challenges ahead in the best interest of the profession.
3. 8 WHAT ACTIONS IS TAKEN ONCE CONTAMINATION IS IDENTIFIED
Once potential sites have been known, they will be recorded and evaluated based on their potential risk, allowing properties to be ranked into an order of high to low priority. Investigation will commence on high priority sites, in-depth site information will be collated and sampling will be required before a decision can be made as to the degree of contamination on site.
Once the nature of contamination is ascertained, how it is perceived or evaluated by relevant section of the public must be understood.
According to Syms P (1996) Perceptions and policies are therefore linked and have the potential to impact on each other, with the resultant implications for valuation and the redevelopment of contaminated land.
According to Guiding Principles for Land Contamination (2010), understanding the risks from contamination is the first stage in the process of effectively managing it. Risk and the need to have an accurate valuation of land, and this risk is an important part of sorting the problem.
These are the three phases of contaminated land investigation and management that may be undertaken once contamination is identified:
Desk Study (Preliminary Risk Assessment)
A key document in any contaminated land assessment which has fast become a statutory requirement (under PPS23) to accompany a planning application for a sensitive development such as housing. This involves the collation of relevant environmental information for the site such as historical mapping, aerial photographs, water quality data, landfill data, coal mining, ground instability and geology.
Site inspection/Walkover
This involves walking over the land to establish if any contamination is present as well as to establish or confirm the potential pollutant pathways or receptors. A site walkover survey should be made to confirm the information gathered by the desk study.
Site/ ground Investigation
This focuses on important risks with the use of latest non-invasive techniques to raise confidence at minimum cost (e. g. geophysics, soil vapor extraction).
This should always commence with a desk study so that consideration can be given to health, safety and environmental hazards prior to fieldwork commencing.
Site investigation generally involves huge expense, and if the investigation is not well planned, considerable resources may be wasted. Consideration should be given to the type, quantity and quality of the data required before any investigation, sampling and testing takes place.
The combination of these three procedures- preliminary investigation, desk study and site investigation will increase the likelihood of detecting contamination at an early stage, allowing analysis and remediation to occur.
Remediation
This is clean-up focused on key liabilities and ‘ suitability for use’ requirement in order to manage risks at minimum cost. Remediation action usually requires some form of treatment to be carried out to reduce the risks and can also include a change in the proposed use or layout of the development. Such changes are often the most cost effective solution.
Insurance
This means partnership with independent risk management advisers to provide cost-effective, tailored risk solutions of adequate duration and assign ability for long term peace of mind.
Monitoring (Aftercare)
This refers to monitoring and performance review to meet regulatory requirements.
This is very imperative to ensure that the decision either to precede with unchanged development plans or to take remedial action remains justifiable.
It is recognized that Nigerian valuers do not have the necessary requisite skills to determine the existence and extent of contamination, or to estimate the costs involved in remediation. The resultant perceived financial and investment risks must be accounted for in their estimates of value.
3. 9 VALUATION TECHNIQUES OF CONTAMINATED LAND IN NIGERIA
There is need to provide a critical evaluation of the procedures currently in use by valuers as related to valuation methodologies in Nigeria. The study does not include wide analysis of valuation methodologies, nor does it attempt to prove which is the best approach to adopt in valuing contaminated lands.
In Nigeria the valuation methodologies are used for pricing properties and the methods ranges from the cost method, the direct comparison method to the income approach.
Sound valuation measures can enhance a firms risk management operations, better preparing and positioning the business for the economic, regulatory uncertainty that lies ahead.
COST APPROACH
According to Acks, (1995), this is based on the premise that the value of the property is approximated by the investment necessary to replace the property.
The cost of replacement includes land acquisition, the cost of the site and building improvements, and an allowance for the developer’s profit, less accrued depreciation Acks, (1995).
This is mainly used to assess unique types of properties such as hospitals, churches, libraries schools and new projects. This is because it is difficult to find recently sold comparable properties in the local market, and public buildings do not earn income, so the income approach cannot be used either. Generally, the cost approach considers what the land, devoid of any structures, would cost, then the cost of actually building the structures is added and depreciation is subtracted.
Marchitelli (1992) questioned the use of the method, and suggested that the method should be abandoned in the valuation process in most situations because depreciation Which is one of the components used in cost approach is difficult to measure especially when the land is close to environmental hazards.
According to Wilson (1994), since contaminated properties are unique, they have to be valued as other unique properties are- principally using the cost approach which he says Is ‘’probably the least vulnerable to distortions resulting from environmental impairments’’. But Jan deRoos, & Rushmore, S (2010) stipulated that the Cost Approach provides a reliable estimate of value in the case of new properties, but as buildings and other improvements grow older, and begin to deteriorate, the resultant loss in value becomes more difficult to quantify accurately. The danger here is overstating the costs of remediation or attributing excessive value loss from stigma.
INCOME APPROACH
In many ways the Income Approach is the most fundamental of the valuation methods. It is the ability of the asset to generate future income. This underlying characteristic ‘ Intrinsic’ value of the asset captured by the ability to directly or indirectly generate a positive cash flow. This cash flow when appropriately discounted is the underlying premise of the income method.
According to Connor, P (2009) this is usually given primary emphasis when appraising a commercial real estate used to generate income. Estimates of value through income approach are highly sensitive to changes in revenue, expense and capitalization rates. However, correctly preparing the analysis requires three criteria:
? An understanding on the type of value
? Accurate data
? accurate application of the income approach.
An appraiser ‘ should look through the eyes’’ of market participants when selecting an in Income approach Methodology. Although slightly complicated, this method is an essential element to the valuation of any property; it is almost always employed by financial investment professionals when valuing assets.
The potential gross income is computed first by analyzing lease and rental comparable data then subtracting vacancy and expenses, and then capitalizing the net in come. This is done by dividing the net operating income by the capitalization rate.
The Income method while highly analytic is also quite subjective, while care is required for all valuation methods, the subjectivity involved in the Income method can be especially tricky.
SALES COMPARABLE APPROACH
Sales Comparison Method is utilized by carefully analyzing the market of similar properties and comparing these properties to the subject property thus
Value of subject property = Price of comparable and competitive properties +? Adjustments for differences.
According to Jan deRoos, Stephen Rushmore (2010) factors such as the lack of recent sales data, the numerous insupportable adjustments that are necessary, and the general ability to determine the true financial terms and human motivation of comparable-transactions often make the results of this technique que