É Financial Assessment in Brownfield Revitalization É Concept of by ito20106

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									 SAFIRA II Megasite Management System –
 Financial Assessment Modules
 TASK – US EPA Workshop: Sustainability Assessment Tools – Practical Applications in Germany and the US
 Stephan Bartke and Reimund Schwarze.




Content

     Financial Assessment in Brownfield Revitalization
     Concept of Mercantile Value Reduction
     Valuation Modules in Planning
     Summary




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                                                                                                          1
Evaluation of Financial Risks (FR)

             Evaluation of FR is one of the most vexed issues with
             lingering shortcomings in valuation methodologies

             Consensus:
             (Potential) contamination from previous use
             severely impairs the marketability of derelict land
             and the creditworthiness and insurance premiums
             for rehabilitation projects

             No accepted and practicable methods for evaluating risks

           Need for quantified, monetary
           assessment of financial risks

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Actors in Brownfield Revitalization

                                              Legal Framework
                        Owner / Industry                              Assessors /
                         Associations                                  Surveyors
                                                  Owner
                                                                                     Economic Development
 Societal Development




                                               Appraisers
                                 Investor /                      Designer /
                                 Developer                      Constructor

                          Banks and                                  Researchers /
                           Insurers                                   Educators
                                               Policy Makers
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                                                                                                            2
Appraisal methods in Germany


   Comparative
  Value Approach
To which prize sold
   similar sites?
                                                                         *                   *
  Cost Approach
                                                                                             Environmental
 What is the cost to
                                                                                             expert‘s report
build the site as it is?

                                                                                             Quantified risk
 Income Approach                                                                              assessment
     to Value
What can be earned
  with the site?

 Page 5                    *German Valuation Ordinance – Wertermittlungsverordnung (WertV)




Financial value affecting risks

  Actors in brownfield revitalization
  face a number of detrimental conditions to be evaluated:
          Risks of liability under public and private law
          Investment cost risks
          due to uncertain remediation costs and related costs,
          e.g. disposal of polluted but non-hazardous materials
          Usability risks imposed by stipulated use restrictions
          Stigma (anticipation of) fear of negative impacts
          or follow-up costs after a fit-for-use remediation
          and Marketability risks
          as longer holding periods or increased marketing costs
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                                                                                                               3
FR as a function of time
 Uncertain Costs
                                            Upper boundary of
     Stigma
                                             expected costs
       and
   Marketability
      risks

          Reme-
    In-
          diation
  vest-   costs
  ment
  cost    Related
  risks   costs


  Usability risk

           Public
 Liability law
  risks    Private
           law                              Lower boundary of
                                             expected costs

                          No /     Orientating   Detailed   Remedial    Remedia- Remedia-    Subse-
                                                                                                      Time
                       Historical   investi-     investi-    investi-     tion     tion      quent
                     investigation   gation       gation      gation      plan   completed    use

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FR in Real Estate Appraisal

  Measurement of FR as good practice
  FR as land value diminution: Mercantile Value Reduction
  Concept Definition: Mercantile Value Reduction (MVR)

  equals the                                                                                          Currency
                                                                                                      unit
  difference between
                                                                                    Rehabili-
  the Market Value of an                                                             tation
  comparable as-if-clean site                                 Market                 Costs
                                                                                                       MVR
                                                              Value
  and the Market Value
  of the contaminated site                                                           Stigma
  minus                                                                               Market
                                                                                      Value
  expected rehabilitation costs                              Comparable              Brownfield
                                                            as-if-clean site
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                                                                                                                 4
MVR: Methodological Bases

    German & international literature study / review

    Semi-structured Interviews with
    appraisal and environmental experts (n=10)

    German expert poll (n = 90)

    Expert workshop




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MVR: Appraisal Method
                Applicability
                  Check
           No               Yes                    Yes if expected certain remediation costs are between
                                                       10 and 130 percent of unimpaired as-if-value.
Risk Scoring                     Risk Scoring
     not
 applicable                     Mercantile Value
                                  Reduction        MVR Scoring:

                                  Definition of
                                     MVR           0)    Definition of MVR

                                                   1)    Dimension: Locality (L)
                                       L
                                                         Risk scoring of plot features

                                                   2)    Dimension: Time (T)
                                       T
                                                         Adjustment for informational risk

                                                   3)    Dimension: Risk passing (R)
                                       R
                                                         Adjustment for market conditions

                                                         Appraisal of adjusted MVR
                                Adjusted MVR
                                                         for the local property
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                                                                                                           5
MVR: Appraisal Method
Dimension Locality                                         L


  Risk scoring of 13 easily traceable plot features
  to quantify local dimension of MVR
  for a specific site relative to average contaminated areas

  Local relevance is to be specified on a score card
  (“fully applies” – “average application” – “does not apply”)

     Determination of a local MVR between 5% and 30%
  (based on literature and expert poll analyses)



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MVR: Appraisal Method
Dimension Locality                                         L




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                                                                 6
MVR: Appraisal Method
Dimension Locality                                                                                                                     L




           Case study (idle, registered, groundwater pollution)                                                         local MVR ≈ 18.00 %
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MVR: Appraisal Method
Dimension Time                                                                                                                         T


  Level of uncertainty depends on time
  respectively on availability of information –
  more information emerges in progress of rehabilitation

  For planning stages till fit-for-use remediation
  completion    uncertainty factors* >1

  Beyond date of clean-up stigma diminishes over time
  (according to poll degressively within 10 years)

   Correction factor [>1] pre and [<1] post site clean-up


 Page 14         *Based on Kerth/Griendt (2000): "Monetäre Bewertung des Altlastenrisikos", HdA, 22. Erg,-Lfg (2), 9f




                                                                                                                                              7
MVR: Appraisal Method
Dimension Risk passing                                                        R


  Extent to which potential buyers can bring a price down due
  to perceived uncertainties depends on market situation

  In booming regions or in the case of premium properties,
  sellers can pass on most of the risks
  thus reducing normal value reductions

  In shrinking regions
  with little demand for particular types of property,
  buyers can invest in different alternative sites
  and hence obtain greater value reductions

   Correction factor between 0 and 1 for market condition
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MVR: Appraisal Method
Adjusted MVR                                                             Adjusted
                                                                          MVR


              L               Dimension Locality (plot features)      -18.00 %
                                                                          *
              T               Dimension Time (historical study)         1.40
                                                                          =
                      Time / information level adjusted local MVR     -25.20 %
                                                                          *
              R        Dimension Risk passing (weak demand)             0.55
                                                                          =
                                          Property specific MVR       -12.28 %
                                                                          *
                        Allocation base: Comparative land value
                        (as for developed land less rehabilitation   2,000,000 €
                                   and other development costs)
                                                                          =
           Adjusted
                             Estimated adjusted absolute MVR         -247,500 €
            MVR

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                                                                                    8
MVR: Conclusion

   Perceived risks related to (potential) contamination can be
   quantified in a Mercantile Value Reduction taking into
   account the dimensions Locality, Time and Risk passing
   Algorithm presented is one way of identifying
   market-perceived risks for sites polluted from earlier use
   in a transparent and comprehensible procedure
   For reliability, empirical validation needed
   The method proposed here, can provide harmonization,
   better transparency, and more objective results
   in the valuation of contaminated sites,
   leading to reduced perceived financial risks
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Valuation Modules in Planning

   Further directions of research:
           Investment (project calculation, e.g. DCF)
           Finance (lender due diligence, collateral value)
           Insurance (risk assessment, e.g. Value at Risk)
           Portfolio (diversification, e.g. CAPM)
           Sustainability (quantification and incorporation)

   SAFIRA II decision support
   Megasite Management System (MMS)

   and DE.SMARTe (            SMARTe)
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                                                                 9
Summary Financial Assessment – MVR

   Target audience: Real estate appraisers and other actors
   Level of application: site to inter-/ national (associations)
   State of development: First real world applications
     Expert with-and-without tests for first validation
     ITVA (German association of engineers)         Handbook
   International transferability: Yes
   Conditions for usage:
     As-if market value known (module for rough estimation )
     Knowledge about certain plot features and local market
     Inter-/ national implementation and validation
     Availability (currently as part of SAFIRA II MMS )
     Visibility   Acceptance
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Thank You!
For more detailed information on MVR see:
Bartke, S. & R. Schwarze (2009): “Mercantile Value Reduction: Accounting
for Stigma on Contaminated Land in Germany”, 16th Annual European Real
Estate Society Conference in Stockholm, Sweden, paper eres2009_353.
   http://eres.scix.net/cgi-bin/works/Show?eres2009_353

or contact:
Dipl.-Volksw. Stephan Bartke or Prof. Dr. Reimund Schwarze

Helmholtz Centre for Environmental Research – UFZ
Department of Economics
Permoserstr. 15 | 04318 Leipzig | Germany

Phone: +49 341 235 1683
Fax: +49 341 235 1836
E-Mail: stephan.bartke@ufz.de | reimund.schwarze@ufz.de
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