From a small northwestern observatory…

Finance and economics generally focused on real estate

Archive for September 11th, 2020

Stigma revisited, yet again…

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In 2018, I presented a paper at the American Real Estate Society titled “Stigma Revisited, Again…” It was a play on a seminal piece published by Peter Patchin in the Appraisal Journal some 30 years ago about environmental stigma and real estate value implications. Much was written on this topic over the ensuing decades, and I thought it was time to perhaps bring the literature up to date. As it happens, I and some fellow researchers found that the breadth and depth of the literature is too broad for just one paper. Instead, I’m aiming for a series of essays I’ll collect in a new book in early 2021.

In the meantime, it’s helpful to take a very brief glance at where we stand today. Fundamentally, stigma is the label we put on the loss in market value of an impaired property over and above any cost to remediate. My former business partner, Dr. Bill Mundy, is credited with introducing the term stigma into the appraisal lexicon with “Stigma and Value”, also published in the Appraisal Journal, in 1992. The scholarship in this field has been robust, with intertwined writings on the fundamental psycology of stigma, legal implications, methods, and valuation standards.

Stigma can arise from a property being directly contaminated, contaminated and then remediated, being adjacent to a contaminated (or remediated) brownfield, or even being proximate (that is, in the same neighborhood) as such a property. Kevin Haniger of the USEPA, Lala Ma of the U. Kentucky, and , and Christopher Timmons of Duke, writing in the Journal of the Association of Environmental and Resource Economists in 2016, documented the impact that a brownfield can have on residences within 5 kilometers of a brownfield, in the context of how remediation of that brownfield can impact the values of those surrounding houses. Zie Zhuang of Michigan State, along with a host of co-authors, wrote a piece in the American Behavioral Scientist, also in 2016, acknowledging that the behaviors of market participants, when faced with a contamination problem, were frequently at odds with the facts and even their understanding of the facts. Indeed, this is consistent with a stream of behavioral finance literature calling into question the rational expectations model.

Courts generally understand how stigma works. For example, In Re Bilmar Team Cleaners (Sup Ct of Vermont, 2015 WL 1186157) the Court acknowledged that a property could be stigmatized to the extent of future estimated remediation and other costs. In Harley-Davidson Motor Co. V. Springettsbury Township (Sup Ct of Penn, 2015 WL 5691056), the Court acknowledged that potential for future environmental claims constituted a stigma impact on the property’s value.

I’ll keep you posted as this next book progresses. Wish me luck!

Written by johnkilpatrick

September 11, 2020 at 2:19 pm

Posted in Uncategorized

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