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Stop, Collaborate, and Listen

Creative Settlement Strategies for Real Property Damages

In challenging financial and operational times, parties need more creative tools than ever before to reach settlement and bring swift resolution before issues can become protracted litigation. Particularly in the realm of real estate and environmental damages, where mass tort and class action lawsuits are common and the stakes can be very high, Value Assurance Programs and other solutions that leverage settlement funds and create opportunities for collaboration rather than conflict should be in every litigator’s repertoire.

Stop, Collaborate, and Listen: Creative Settlement Strategies for Real Property Damages

In challenging financial and operational times, parties need more creative tools than ever before to reach settlement and bring swift resolution before issues can become protracted litigation. Particularly in the realm of real estate and environmental damages, where mass tort and class action lawsuits are common and the stakes can be very high, Value Assurance Programs and other solutions that leverage settlement funds and create opportunities for collaboration rather than conflict should be in every litigator’s repertoire.

What is a Value Assurance Program?

When residents are concerned about adverse environmental conditions in their neighborhood, a Value Assurance Program is a guarantee that property owners will receive the market value of their home (or other property) if they choose to sell. It directly addresses residents’ concerns regarding property value diminution and realigns the parties’ interests. Value Assurance Programs can also help the program sponsor gain much needed access to private property, implement institutional controls (e.g., deed restrictions), or perform remedial activities that may be necessary.

Value Assurance Programs are not new. One of the first high profile programs was rolled out by Eastman Kodak in Rochester, New York, in the late 1980s.[1] In the decades since, programs have been implemented throughout the United States, including: Alabama, Mississippi, California, Oklahoma, Michigan, Ohio, Pennsylvania, West Virginia, and others.

Some of these programs were rolled out proactively by a corporate sponsor to address property owner or regulatory concerns. Other programs were agreed upon via class or individual settlements and have been recognized by numerous courts.[2] When a property owner receives a payment through a Value Assurance Program, he or she typically releases the program sponsor from any future property damage claims.

The mechanics of determining a payment under a Value Assurance Program are simple, as shown in the example below.

However, it is the details of the program design, a well-communicated rollout, and ongoing engagement with the property owners and other stakeholders that collectively drive a successful outcome.

Advantages Over Traditional Settlement Structures

Value Assurance Programs, and related programs such as Institutional Control Programs and Neighborhood Restoration Programs, provide a new vocabulary and framework for discussion among the parties, often facilitating collaboration and cooperation where there may have been a stalemate before. Recasting the corporate entity as the program sponsor shifts to a non-adversarial position that can begin to realign the parties’ interests and create additional lines of communication between the program sponsor, program participants (e.g., property owners), and other community stakeholders (e.g., regulators, local governments, etc.).

In addition, a Value Assurance Program can refocus the parties on the property owners’ true concerns, which are often the fear of diminished property values. By assuring property owners that reduction in property values will be compensated, claims of property value diminution can be met and alleviated head on.[3]

One significant advantage is the timing of payments under each structure. Traditional settlements typically involve a cash payout to all settlement participants (e.g., all property owners within a given area), regardless of demonstrated damage, and usually occurring at a single point in time. A Value Assurance Program spreads the payouts over the life of the program and only requires payment when actual damage is demonstrated. While the benefits of a Value Assurance Program are available to every property owner in the program area, compensation is made on a case-by-case basis and only when actual damage is demonstrated (i.e., if an eligible property owner sells his or her property for less than market value).

Participation in a Value Assurance Program is voluntary for eligible property owners—no one is being required or even encouraged to sell. To that end, Value Assurance Programs are carefully constructed to protect property values for all properties in the program area. A well-designed Value Assurance Program includes many features that support property values: the corporate sponsor’s right of first refusal, utilizing local and experienced real estate agents and real estate appraisers, providing reimbursement for real estate agent commissions for qualified transactions, and focusing quickly and strategically on community outreach and positive public relations.

Key Program Design Elements

Value Assurance Programs and other collaborative settlement structures have numerous details that can be negotiated, customized, and adapted to fit the situation at hand. Many of these details can be altered without a significant effect on the overall cost of the program, which is one reason careful modeling of any potential program should be performed during the program design stage.

Other aspects of program design, some of which can affect the overall cost of the program, also have significant strategic implications, which should be carefully vetted early in the planning and modeling stage. Two of the most important design aspects—geography and program length—are considered in more detail below.

Eligible Geography

Value Assurance Programs have been designed for as few as a single property to upwards of 60,000 properties. Each site is different but common considerations for the program boundary include: regulatory investigation areas, environmental modeling (e.g., air emissions or a groundwater plume), neighborhood boundaries, or other natural or manmade barriers or boundaries. When litigation is involved, it is important to consider the location of all potential plaintiffs or impacted parties to find the balance between too large of an area (thus providing benefit to those not affected) and too small of an area (which may leave the program sponsor vulnerable to future claims).

Program Length

A Value Assurance Program is designed to calm property owner fears and restore market activity to typical levels. In determining program length, consideration should be given to any regulatory timetables, including phases of continued investigation or active remediation where access to private property may be required or where the investigation or cleanup may have a heightened visible presence in the community.[4] When timetables are still being developed or contain many unknown factors, additional length may be included as a buffer. Alternatively, the program can be rolled out for an initial phase, with the possibility for renewal at the sponsor’s discretion. A balance is sought between too short of a period that may fail to alleviate property owner concerns and too long of a period that extends benefits well beyond a return to normal market activity. At sites where there is no investigation or where the investigation has reached a passive monitoring stage, program length may be shaped more by the amount of media attention or community activism the issue is receiving. As media attention wanes, market fears will naturally be reduced and real estate market impacts, if any, will be lessened. The stage of any active litigation should also be considered to ensure consistency and maximum effectiveness across regulatory, legal, and other strategic objectives.

Institutional Control Programs

A Value Assurance Program may also be offered to property owners when access to their properties is needed for sampling or monitoring as part of a regulatory investigation. Offered as a proactive measure, a Value Assurance Program can alleviate property owners’ concerns that the regulatory investigation will have a negative impact on surrounding property values. In this circumstance, a Value Assurance Program may often include, or be offered in conjunction with, an Institutional Control Program.

An Institutional Control Program is a set of administrative and legal controls devised to prevent exposure and achieve or preserve regulatory compliance.[5] Institutional controls may also be used when physical controls are not physically possible for a given situation or are cost prohibitive. The most common type of administrative controls for private property are deed restrictions such as easements or restrictive covenants, and may include provisions such as prohibiting access to groundwater or barring disturbance of soil below a certain depth.[6] Because the deed restrictions may be highly individualized to each property, they are well suited for individualized compensation via a Value Assurance Program.

Neighborhood Restoration Programs

A Neighborhood Restoration Program provides home improvement grants for property owners to complete eligible projects on their homes.[7] This type of program may be most attractive to property owners when there is no regulatory investigation or in an area where the majority of residents express a desire to stay in their homes. A Neighborhood Restoration Program can also be an extension of or used in conjunction with a Value Assurance Program to address concerns of residents on whether or not they want to sell, or to encourage residents to invest in and stay in an area that is subject to an environmental investigation or experiencing other issues.

In a Neighborhood Restoration Program, the program sponsor designates a certain amount of funds from which it can provide home improvement grants to eligible property owners. Criteria may be placed on the grants—for example, limiting projects to exterior renovations or landscaping related to improving “curb appeal”—and the process would typically involve submitting an application, gaining approval from the program administrator, completing the project, and then submitting documentation and receipts for reimbursement. Focusing on exterior projects improves not only the property value where the project occurs, but also supports surrounding property values. As with Value Assurance Program design, many aspects of a Neighborhood Restoration Program are fully customizable to fit the needs of the situation at hand.

Best Practices for Collaborative Settlement Solutions

Value Assurance Programs, Institutional Control Programs, and Neighborhood Restoration Programs are all focused on balancing individual property owner concerns with the strategic or regulatory needs of the corporate sponsor. By enabling creative collaboration and flexible program design, parties may reach agreement where none seemed likely before. Whether the issues at hand affect a handful of properties or tens of thousands, the best practices summarized below will lay the foundation for a successful program outcome.

  1. Stop:

Perform sufficient due diligence and research on the front end to enable accurate modeling of potential payouts and expenses.

Avoid one-off deals, property purchases, or individual settlements while program terms are being finalized and program is being rolled out.

  1. Collaborate:

Consider the end users of the program and convey all terms clearly, including an easy-to-read map of the program area, a clear outline of program timeline and deadlines, and prominent contact information for easy follow-up.

Develop a community outreach plan and communicate often and consistently through multiple channels.

  1. Listen:

Clearly articulate program goals to ensure program design meets property owner concerns and strategic or regulatory objectives of the corporate sponsor.

Leverage the expertise and knowledge of local market stakeholders, including real estate agents and real estate appraisers.

This article was originally published in Alvarez & Marsal’s Raising the Bar newsletter and republished here with permission. Copyright © 2021 Alvarez & Marsal Holdings, LLC.

 

[1] https://www.nytimes.com/1988/06/05/nyregion/kodak-to-back-home-values-at-chemical-site.html

[2] For example, the U.S. District Court for the Northern District of West Virginia, the U.S. District Court for the Western District of Oklahoma, the Circuit Court of Calhoun County Alabama, and the Circuit Court of Jefferson County Alabama.

[3] As noted by Ruskin and Moore, “A VAP also discourages class actions by demonstrating that a class action is not necessarily ‘superior to other available methods for fair and efficient adjudication of the controversy,’ a requirement of class certification under Fed. R. Civ. P. Rule 23(b)(3). Once a VAP has been implemented, a company can argue that a class action is no longer necessary because claims are being fairly and efficiently resolved individually, without the need for judicial intervention.” William A. Ruskin and Jennifer M. Moore, “Value Assurance Programs, International Association of Defense Counsel, Toxic and Hazardous Substances Litigation, July 2009.

[4] This is due to the effect of the remediation life cycle on real estate market activity: “There is ample empirical evidence that the adverse effects of environmental contamination on property values can be temporary, and that prices and values recover following remediation. Over the years, studies have found a consistent pattern of a rebound in prices of previously impacted residential, commercial, and industrial properties following the remediation and cleanup of the contamination source. This pattern reflects the increased knowledge about the sites and their environmental condition, the resolution of environmental compliance issues, and the positive effect of this in reducing perceptions of environmental risk and uncertainty.” Thomas O. Jackson, “When Good Things Happen to Bad Property”, The Appraisal Journal, Spring 2009.

[5] U.S. Environmental Protection Agency, Superfund: Institutional Controls, https://www.epa.gov/superfund/superfund-institutional-controls

[6] U.S. Environmental Protection Agency, Institutional Controls: A Guide to Planning, Implementing, Maintaining, and Enforcing Institutional Controls at Contaminated Sites, December 2012, https://www.epa.gov/sites/production/files/documents/final_pime_guidance_december_2012.pdf

[7] Home improvement grants have also existed for many years, through many federally funded programs, for example the Section 504 Home Repair Program which is intended “to help families remain in their homes and keep them in a good state of repair, which in turn strengthens communities” and other assistance programs. See, for example, https://www.governmentgrants.us/home-improvement-grants/


Christy McLean is a Managing Director with Alvarez & Marsal Dispute and Investigations in Birmingham. Ms. McLean specializes in the modeling of complex economic and real estate damages claims, development and implementation of Value Assurance Programs and other real estate solutions, and the development of geographic information systems (GIS) in toxic tort matters. Over the last 17 years, Ms. McLean has advised on numerous matters involving alleged property value diminution, including residential, commercial, agricultural and industrial properties. She brings expertise in sensitivity analysis and the development of models used to evaluate potential settlement alternatives in class action and mass tort matters.

Ms. McLean can be contacted at (205) 994-3611 or by e-mail to cmclean@alvarezandmarsal.com.

The National Association of Certified Valuators and Analysts (NACVA) supports the users of business and intangible asset valuation services and financial forensic services, including damages determinations of all kinds and fraud detection and prevention, by training and certifying financial professionals in these disciplines.

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