A site is a former gasoline station with known soil contamination. How should the appraiser proceed?
Correct Answer
D) Identify the issue and address it in the analysis
Why this is correct: Appraisers must identify known environmental conditions (like contamination) that could affect value, disclose them in the report, and address their impact in the valuation analysis. This typically involves relying on an environmental expert's report for cost estimates and reflecting market reaction (stigma) to the condition. Why the other choices are wrong: 'Assume remediation is complete without disclosure' is wrong; that would be misleading. 'Value it as though the contamination never existed' is wrong; that ignores a material fact. 'Decline, since contaminated sites cannot be appraised' is wrong; they can be appraised with proper analysis and disclosure. Exam tip: Known environmental issues must be disclosed and their impact analyzed. You rely on experts for specifics but must reflect the market's view.
Why This Is the Correct Answer
The appraiser must identify the known contamination and address it in the analysis, disclosing it and relying on qualified expertise or a properly disclosed extraordinary assumption.
Why the Other Options Are Wrong
Option A: Assume remediation is complete without disclosure
Assuming remediation is complete without disclosure conceals a material condition and makes the report misleading.
Option B: Value it as though the contamination never existed
Valuing as though contamination never existed is a hypothetical condition, permissible only if disclosed and appropriate to the intended use.
Option C: Decline, since contaminated sites cannot be appraised
Contaminated sites are routinely appraised. The competency issue is addressed by disclosure and expertise, not by refusal.
Disclose, Then Get Help
Disclose, Then Get Help. You must address what you know; you need not be the expert who measures it.
How to use: Separate the two questions: what must be disclosed, and who is competent to quantify it.
Exam Tip
An extraordinary assumption about remediation cost is often the practical answer, but only if reasonable and prominently disclosed.
Common Mistakes to Avoid
- -Assuming remediation without disclosure
- -Applying a hypothetical condition silently
- -Declining rather than addressing the competency question
Concept Deep Dive
Analysis
Known contamination is a fact about the property, and an appraiser who is aware of it must address it — the assignment does not become impossible, and it does not become permissible to pretend the condition away. What the appraiser typically cannot do is quantify the remediation cost, which requires environmental expertise outside appraisal competency. The usual course is to identify the condition, disclose it, and either engage or rely on a qualified environmental professional's estimate, or state an extraordinary assumption about remediation cost or status, prominently disclosed, if the client's intended use permits. Where an extraordinary assumption is used it must be reasonable, identified as such, and its potential effect on the conclusion made clear. The distractors describe three ways of going wrong: assuming remediation is complete without saying so is undisclosed and misleading; valuing as though contamination never existed is a hypothetical condition requiring disclosure; and declining outright treats a manageable competency issue as an absolute bar.
Background Knowledge
USPAP requires appraisers to analyse known conditions affecting value and to operate within their competency. Environmental contamination is addressed through disclosure, qualified expertise, or a properly disclosed extraordinary assumption or hypothetical condition.
Real-World Application
An appraiser valuing a former service station discloses the known contamination, relies on an environmental consultant's remediation estimate, and reports the basis clearly.
More land-or-site-valuation Questions
Under which condition is the land residual technique most applicable?
What is the appraiser's obligation when a site's legal description does not match its apparent physical boundaries?
Why can the same physical parcel carry different values in two assignments?
A site differs from land in that a site is best described as which of the following?
In a built-up area where no vacant land has sold for years, which approach to site value is the usual fallback?
How is entrepreneurial profit treated in the subdivision development method?
A land comparable sold 18 months ago in a market rising about 4 percent a year. What adjustment direction applies?
In a land residual analysis for a proposed office development, the appraiser estimates total annual net operating income (NOI) will be $1,250,000. The improvement value, derived via the cost approach, is $15,000,000. Market evidence indicates a 7.0% overall capitalization rate is appropriate for similar improved properties. What is the indicated land value?
A developer plans a 36-lot residential subdivision on raw land. Each lot is expected to sell for $85,000. Total development costs (excluding land) are $1,420,000, including $220,000 for entrepreneurial incentive. The developer requires a 12% annual yield on invested capital over a 3-year development period. Using the subdivision development method, what is the maximum price the developer should pay for the land if all lots sell at the projected price and timing?
In applying the land residual technique to a proposed subdivision, an appraiser estimates that the time required to fully absorb all lots will be 6 years. The developer requires a 10% annual yield on invested capital. Which discounting approach is most appropriate for converting future net proceeds to present value?
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