Watersbend: Appraising A Brownfield Redevelopment Project
Originally published inThe Appraisal Journal, July 2002
By: Rudy R. Robinson, III, MAI, Scott R. Lucas, and Garland G. Rasberry
Telephone: (512) 328-8122
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Website: www.austinval.com
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This paper examines issues affecting the appraisal of a brownfield apartment property in Austin, Texas. These issues include the contamination that forced the property�s evacuation, its eventual remediation, the creation of the legal framework permitting its reoccupation, market acceptance of its safety, and ongoing stigma risks. The authors describe the research and methodology needed to quantify the risks of owning a brownfield property. They conclude that complicated and long-term redevelopment projects such as this one can be successfully and profitably redeveloped while suffering only a modest post-remediation stigma.
One of the most notorious events in the real estate history of Austin, Texas, took place in 1991 when approximately 1,000 tenants were forced to evacuate on forty-eight hours notice from the Watersbend apartment complex. State environmental officials had discovered that potentially explosive levels of methane had seeped into ground-floor units overlaying a former municipal landfill. Eight years passed before the property accepted new tenants. During that time, the property was looted, new legislation was enacted to facilitate its remediation, and millions were spent on its rehabilitation.
Watersbend is one of the most unusual but ultimately successful brownfield redevelopment cases in Texas. This property was appraised just prior to its reopening, and the appraisal required research of the property�s history, laws that expedited its remediation, the potential for tenant resistance, and environmental risks that could affect its value. This article discusses the complete history of the property: the bizarre circumstances of its construction, evacuation, and abandonment; its lengthy and groundbreaking remediation project; the recently enacted laws that permitted its rehabilitation; its reopening and market acceptance; and the multiple risks affecting its value then, now, and into the future. The authors believe the property suffers from a small but definite residual stigma, but on the whole its redevelopment is a resounding success that could serve as a model for other brownfield sites.
The impact of contamination on real estate is established in several articles. In 1991, Peter Patchin, MAI, in "Contaminated Properties Stigma Revisited," noted the development of data proving the existence of stigma in contaminated properties.[Citation Omitted] Patchin described stigma as a "negative intangible" caused by fear of hidden cleanup costs and public liability, lack of mortgageability, and the trouble factor, defined as monetary compensation for going to the "trouble of making a necessary improvement" to a contaminated property.
In 1992, Bill Mundy, MAI, PhD, discussed how contamination affects property value over time in his article "The Impact of Hazardous Materials on Property Value."[Citation Omitted] He maintains that property damages are manifested in lost income, utility, and marketability. In the early stage when uncertainty is highest, loss in value is greatest as a result of loss in marketability caused by "disclosure requirement by the sales agent or seller, required disclosure statements, concern on the part of the lender, and appraiser uncertainty." Damages decrease as the situation is understood and uncertainty is lessened. Mundy also describes residual stigma as "the difference between cured value and full market value," noting that cured value may never reach unimpaired value because of public perception of health risks.
A more recent article, "Post-Repair Diminution in Value from Geotechnical Problems" by Michael V. Sanders addresses the case studies approach and its applicability to estimating damages to properties affected by contamination and construction defects.[Citation Omitted] Sanders states that "the measurement of residual loss in value or stigma best employs the use of case studies." He further states that "case study properties need not be in the same area as the subject property, and data limitations usually necessitate searching a broader geographical area. While the circumstances surrounding the loss in value may be similar, properties selected for case studies are in many cases not directly comparable to the subject."
Robert Simons, PhD, discusses brownfields and their redevelopment in several articles and books listed in the bibliography. In his book Turning Brownfields into Greenbacks, Simons notes that the primary obstacles to brownfield redevelopment are the cost of cleanup and liability.[Citation Omitted] Regarding the cost of cleanup, he describes a relatively common situation in which the "net price of urban land [the cost of purchasing and remediating the land] possibly contaminated by a prior use would be higher than a comparable suburban property on virgin farmland." He also notes that the "strict, joint, and several liability" clauses of the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) and Superfund Amendments and Reauthorization Act (SARA) have impeded the involvement of developers and lenders in remediation of contaminated property.
In this article, rather than discuss brownfields or contaminated properties in general, we will describe in detail the evolution of a single brownfield property.
The History of Watersbend Apartments, 1984�1994
Watersbend is located on U.S. Highway 183 in northeast Austin along a creek. Improvements were constructed in 1984 at a cost of $13 million during a period of economic prosperity and unprecedented real estate construction in Austin. Watersbend was originally a 358-unit, garden-style complex of aver-age-quality construction consisting of 25 buildings with wood frames on concrete slabs and a combination of brick and cedar siding. Amenities included two swimming pools, a clubhouse, and laundry rooms. The primary tenants were college students and middle-class families.
By the late 1980s, the Austin real estate market had collapsed. New tax rules, a slowing statewide economy overdependent on oil, and a glut of recently completed projects pushed the citywide apartment occupancy level below 80%. Watersbend suffered through this downturn along with other properties in Austin. At the turn of the decade, Watersbend and similar properties achieved a 90% occupancy level, albeit with rent levels well below those attainable in the period of 1984�1986.
Landfill Discovery and Tenant Evacuation
By 1991-1992, approximately 1,000 people called Watersbend home. Unbeknownst to residents, however, Watersbend was constructed over a closed municipal, solid-waste landfill. Reportedly, Travis County used the site and surrounding area as a county landfill from 1950�1960, and then the City of Austin used it as a landfill from 1960�1968. From 1966�1968, the city used much of the subject site for filling purposes, including most of the area where the apartment buildings would be constructed.
Two reports published prior to the construction of Watersbend described the landfill, but on the whole, recordkeeping on municipal landfills during this time was poor, and information regarding the landfill�s boundaries, types and amounts of waste accepted, and environmental controls is sketchy and vague. Still, in the early 1980s, the project builder convinced the City of Austin that construction of the apartments over a closed landfill would not pose an undue health risk. The builder and architect asserted that the fireplace chimneys would properly ventilate residual methane gas emitted from the closed landfill. Absurd as that seems, the builder must have offered his explanation very persuasively because the apartments were completed within three years.
In 1991, environmental consultants performed the first known Phase I Environmental Site Assessment specific to Watersbend. The study revealed high concentrations of methane in two subsurface areas beneath the apartments. The report also raised concerns about structural settling, health problems caused by methane-gas migration into the apartment units, and leachate contamination of Walnut Creek.
The following year, officials with the Texas Natural Resource Conservation Commission (TNRCC) discovered unacceptably high levels of methane in several first-floor units. Because methane is odorless and colorless, the tenants could not have detected it themselves. While the risk of explosion was very low, the results of an explosion obviously would have been catastrophic. Within two days, state and local authorities forced the complete evacuation of the complex. This action received widespread publicity and exacerbated an already tight rental market.
In an instant, Watersbend became an insoluble liability to its owners. They defaulted on the loan, but the primary lienholder initially declined to foreclose on the property because it was unwilling to assume the risks of ownership. The property eventually became a foster child of the unwilling American taxpayer as a holding of the Resolution Trust Corporation (RTC).
The RTC�s stewardship of Watersbend could best be described as indifferent. With security consisting of nothing more than a hastily constructed chain-link fence, the property was repeatedly vandalized and inhabited by squatters. Thieves stole most of the water heaters, appliances, carpet, and even doors and fireplaces. Vandals set some buildings on fire. Water damage from neglect and poor building design irreparably damaged many of the exterior walkways. As reported by the subsequent owner, the City of Austin used the property to train firefighters and in one case deliberately set one building ablaze, a SWAT team conducted exercises on the property. Both parties apparently believed they had clearance to destroy government property; whether they did is doubtful. In fact, the property had already been sold to a private developer when these incidents occurred. The developer received undisclosed compensation for the trespasses and damages.
Watersbend Purchased
In 1994, Limited Liability Corporation purchased Watersbend �as is� from the RTC for $1 million, or just $2,793 per unit. This sale price was drastically lower than prices of similar complexes built during the same period, as described in Table 1. If not for its evacuation and other problems, Watersbend probably could have sold for a price within the range of these comparable sales. In fact, Watersbend sold at a discount of 85%�90% compared to these properties.
These comparable transactions involved private parties, but at the time the RTC and other receivers were a dominant force in Austin real estate. Sales of similar properties from banks and the RTC ranged from $13,000-$15,000 per unit, indicating Watersbend sold for a discount of 79%-81% even when compared to properties with disadvantageous selling conditions.
To further illustrate the severity of the landfill�s impact on the property, Table 2 describes five sales of apartment complexes that needed major rehabilitation and had a very low occupancy level.
These properties were chosen more for similarities in condition and vacancy than for similarities age, size or location, but they effectively demonstrate the magnitude of the environmental problems beyond mere reconstruction. Watersbend sold at a discount of 13%�48% per unit compared to several older, vacant or near-vacant apartments needing less extensive rehabilitation than Watersbend would ultimately require. Its sale price of $2,793 per apartment unit was roughly equivalent to the price of vacant land during 1994, indicative of a 100% loss in the contributory value of the improvements just ten years after their construction.
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