Cost to Remediate versus Reduction in Market Value

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Cost to Remediate versus Reduction in Market Value

A Texas Appeals Court ruling this month in Mieth v. Texical ( 2005

Tex. App. LEXIS 2079) may leave some readers with the impression of

a dog chasing its own tail (to use a common Texas analogy), but the

real estate valuation issues for impaired property are very

compelling. Under Texas law, much like other states, the basis for

damages in an impaired property case is the diminution in property

value. Often, appraisers use simplistic models based on the cost to

remediate (a variant on the " Cost Approach " ) to arrive at a market

value opinion. That's exactly what was done in this case, and the

trial court jury found in favor of Mieth with an award of $298,000,

including attorney fees.

Texical appealed, showing that Mieth's appraiser had based his

market value opinion strictly on the cost to remediate, and not on

market data. Absent the remediation costs, there was no basis for

determination of a diminution in market value. The Appeals Court

reversed and found for Texical. Lesson learned? For valuation

experts and plaintiff's attorneys, it is clearly important to

identify market value issues independent of remediation costs

proffered by the engineering experts.

AND

Speaking of " oops "

City of Atlanta v. Landmark Environmental Industries (2005 Ga. App.

LEXIS 274) is another great example of a case in need of better

valuation assistance. The facts of the case are fairly

straightforward -- City of Atlanta negligently caused a sewer spill

which ruined Landmark's business. Landmark had to shut down and

abandon some of their product (essentially, organic compost). The

business, as a going concern, was valued at about $1.6 million,

while the abandoned compost was valued at about $900,000. (Landmark

didn't own the land, so real estate was not part of the damages.)

The jury awarded Landmark $2.5 million, the sum of these two. The

Georgia Appeals Court overturned the award, claiming that this was

double-counting.

Was it? Attorneys and appraisers often don't communicate well on the

Scope of Work in a litigation problem. Appraisers don't understand

the big picture of the case and attorneys don't realize how

important it is to include appraisers in those discussions. What was

the true economic damage to Landmark? Was it $1.6 million (the

liquidation value of the business) or would a fair market value sale

as a going concern been at $2.5 million? Hopefully, the trial court

will get it right on the second try. For more on the Scope of Work

issue for appraisers, see the February 28th issue of MondayMundy (DOT)

http://www.mundyassoc.com/matm/matm032805.html