.

Journal of Urban Economics 47, 414442 2000

doi:10.1006rjuec.1999.2147, available online at http:rrwww.idealibrary.com on
Urban Industrial Land Redevelopment and
Contamination Risk
1
Daniel T. McGrath
Senior Fellow, Great Cities Institute, Uniersity of Illinois at Chicago, 412 S. Peoria
Street, Suite 400, Chicago, Illinois 60607-7067
E-mail: dmcgrath@uic.edu
Received December 6, 1996; revised July 22, 1999
This study examines the role of contamination risk on urban industrial redevel-
opment in the City of Chicago. The theoretical framework is the myopic optimal
redevelopment rule which states that the redevelopment of an urban parcel will
occur when the parcels value through conversion to a new use, net of construction
costs, exceeds the value of the same parcel continuing in its current use. Contami-
nation liability is modeled as a land demolition cost that is capitalized into bid
value. Assuming that the magnitude of this land demolition cost is a function of the
a priori probability of contamination, the effects of contamination risk on land
value and on the probability of redevelopment are estimated. 2000 Academic Press
1. INTRODUCTION
Over the past few years, intense discussion in the legal, urban planning,
and economic policy literature has concerned the relationship between
land contamination risk and the redevelopment of urban industrial prop-
erty. The general view is that the current federal and state regulatory
requirements regarding remediation of any discovered contamination
places substantial legal and financial barriers to the redevelopment of
urban industrial land. This is believed to be one of the forces contributing
to employment deconcentration and to the acceleration of industrial
development at the urban fringe of our metropolitan areas. This view has
prompted municipal officials to begin to take on the financial responsibil-
ity for the remediation of contaminated industrial properties; the belief is
1
This research was funded by the John D. and Catherine T. MacArthur Foundation and
conducted for the City of Chicagos Brownfields Forum. I express my thanks to Commissioner
Henry Henderson of the City of Chicagos Department of Environment for assistance in
assembling the data for this research. I also express thanks to Joe Persky, John McDonald,
and Gib Bassett of the University of Illinois at Chicago and to the anonymous referees for
their helpful comments and suggestions.
414
0094-1190r00 $35.00
Copyright 2000 by Academic Press
All rights of reproduction in any form reserved.
REDEVELOPMENT AND CONTAMINATION RISK 415
that this public investment will make the central city more competitive in
attracting industrial users for these properties. However, despite the
importance of this issue to the economic viability of our central cities, no
empirical estimates utilizing current urban economic theory exist of the
impact of uncertain contamination liability on industrial redevelopment.
The purpose of this paper is to begin to fill this gap by presenting an
empirical estimation describing the effect of contamination risk on the
industrial land market in the City of Chicagoin terms of both the impact
on land value and the effect on the probability of redevelopment.
The theoretical framework for this investigation is the myopic optimal
w x w x
redevelopment rule put forth by Brueckner 1 and Wheaton 13 in their
independent development of spatial growth models of metropolitan areas.
This rule states that the redevelopment of a parcel will take place when
the value of the parcel converted to a new use, net of construction costs,
exceeds the value of the parcel remaining in its current usethat is, when
there is a positive value differential on a given parcel. The myopic optimal
redevelopment rule has been supported empirically by two recent studies.
w x
The first is Rosenthal and Helsley 12 who present empirical support for
this theory to explain residential redevelopment in the City of Vancouver,
w x
BC. The second is Munneke 10 who finds support for this theory to
explain commercial and industrial redevelopment activity within the City
of Chicago.
Following the econometric methodology utilized by Rosenthal and Hels-
w x w x
ley 12 and Munneke 10 , this paper explores the question: Of the
industrial properties in the City of Chicago for which there is evidence of
redevelopment, what role has contamination risk played in their redevel-
opment? This is accomplished by modeling contamination liability as a
demolition cost, the magnitude of which is a function of the parcels a
priori probability of contamination. Assuming that this demolition cost
would be capitalized into a parcel bid value, an estimate of the extent to
which investors discount land value to account for contamination risk is
determined. The determination of the effect of contamination risk on land
value thus produces a way to identify the relationship between contamina-
tion risk and the probability of redevelopment.
The principal dataset for this research is a group of 195 industrial
properties that were sold within Chicago during the 10-year period from
August 1983 through November 1993. Of the total, 95 properties represent
parcels that were sold for redevelopment. These observations were created
through matching industrial property sales records from the City of
.
Chicagos land use database The Harris-REDI file with the Citys indus-
trial building and demolition permit databases. The rest of the observa-
tions, a control group of 100 properties, were chosen randomly from the
Harris-REDI file. The probability of contamination was assigned according
DANIEL T. MCGRATH 416
w x
to a scale developed by Noonan and Vidich 11 and based on a land-use
investigation for each of the 195 parcels in the dataset within the 1949 and
1979 Sanborn Fire Insurance Maps.
The next section presents a more detailed discussion of the myopic
optimal redevelopment rule, identifies the assumptions used in this empiri-
cal application of the theory, and then derives the functional forms for the
land value and structural probit models. The third section discusses the
econometric methodology and identifies the specific econometric tech-
nique utilized to correct for possible selection bias. The fourth section is a
discussion of the data used for this research, and the last two sections
present the empirical results and conclusions.
2. THE MODEL AND ASSUMPTIONS
2.A. Literature Reiew
The development of dynamic urban redevelopment models began with
w x w x
Brueckner 1 and Wheaton 13 in response to the inadequacies of static
equilibrium models of urban land-use for describing growth and change in
urban structure. These authors derive an optimal redevelopment rule that
identifies the economic conditions under which redevelopment will occur:
that the present value of revenue obtainable from a parcel converted to a
new use, net of capital development costs, must equal or exceed the
present value of the gross revenue from the existing capital stock on the
parcel. This is expressed as
r t , S*rL L r t , SrL L . .
yc t S* G , 1 . .
i i
.
where r t, S*rL is the revenue per acre obtainable from optimal capital
redevelopment, which depends on time t, and the ratio of optimal, new
.
capital S* to the amount of land L; i is the discount rate; c t is the unit
cost of capital at time t; and S is the existing capital on the parcel. The left
.
side of Eq. 1 is the present value of the parcel in its redeveloped state,
denoted V
R
. The right side of the equation is the present value of the
C
.
parcel remaining in its current use, denoted V . Thus, Eq. 1 is rewritten
most simply as
V
R
yV
C
G0. 2 . .
Restating, a parcel will be redeveloped when the present value of the
parcel in its new use, which capitalizes the construction costs, minus the
present value of the same parcel remaining in its current usethat is, the

R C
.
value differential, V yV is greater than or equal to zero.
REDEVELOPMENT AND CONTAMINATION RISK 417
The first empirical exploration of the optimal redevelopment rule was
w x
undertaken by Rosenthal and Helsley 12 in an examination of the
redevelopment of single family dwellings in Vancouver, BC. In addition to
finding strong empirical support for this theory in residential redevelop-
ment, Rosenthal and Helsley argue that if net demolition costs are zero,
then a new method for determining the value of vacant land emerges that
avoids some of the problems of hedonic estimation methods. These co-
authors also present the most generalized expression of the optimal
redevelopment rule: that the marginal costs of delaying redevelopment
must equal or exceed the marginal benefits of delaying redevelopment.
Incorporating the assumptions that:
.
1 landowners are myopic; that is, they act as if the level of income
obtainable from redevelopment will remain constant into the future,
.
2 capital costs are constant,
.
3 no structural depreciation occurs, and
.
4 demolition costs are zero,
the optimal redevelopment rule reduces to the form derived by Brueckner
and Wheaton.
w x
Munneke 10 presents empirical support that the optimal redevelop-
ment rule describes the redevelopment of commercial and industrial
properties in the City of Chicago during the decade of the 1980s. Addition-
ally, Munneke asserts that the assumption of a zero demolition cost might
not be appropriate for industrial properties and makes an argument that if
demolition costs are a significant component of the redevelopment deci-
sion, then these costs must be incorporated into the redevelopment rule.
In Munnekes analysis, the structural demolition costs are incorporated

R C
.
outside the value differential term V yV , and the parcels capital-to-
land ratio SrL is found to be a statistically significant proxy variable for
the structural demolition costs.
2.B. Contamination Liability as Demolition Costs
Assume that the contamination liability for a given industrial parcel can
be modeled as two separate demolition costs. The first is associated with
the existing structure, as would be the case for asbestos or lead contamina-
tion. The second is associated with the land, as would be the case for PCB
w x
or heavy metal soil contamination. As identified by Munneke 10 , the
structural demolition cost D
S
would be a function of the existing capital-
to-land ratio for the parcel, SrL. However, it makes intuitive sense that
structures of a certain vintage andror prior industrial use would have a
higher likelihood of contamination and thus have a higher structural
demolition cost. Increases in demolition cost associated with any possible
DANIEL T. MCGRATH 418
structural contamination would be readily apparent to a redeveloper
through inspection of the existing structure. Therefore, in addition to
being a function of the parcels capital-to-land ratio, the structural demoli-
tion cost would also be a function of the conditionrdepreciation level d, or
S S
.
D sD SrL, d .
The estimation of remediation costs associated with land contamination
is more uncertain for a redeveloper, and this fact is at the center of the
brownfields debate. However, over the 19 years since the passage of
CERCLA,
2
as industrial redevelopers have gained more experience with
the legal requirements and subsequent financial implications of this act,
one might reasonably expect that contamination liability would, over time,
become to some extent predictable and capitalized into parcel bid value.
This paper takes the view that there exists an observable environmental
variable E that can accurately determine a priori the land contamination
liability associated with a given parcel to be redeveloped. Thus, the land
demolition costs would become a function of the environmental variable,
L L
.
or D sD E .
2.C. Value Equations and Functional Forms
Every industrial location can be represented by a quantity of industrial
real estate R, which is a function of the land area L and the amount of
w x
capital on the site, S 8 . The value of any given parcel of industrial real

estate would be expressed as the quantity of industrial real estate units of

. .
unknown scale , R L , S , times the unit price of industrial real estate, P.
i
w x
Consistent with the functional form proposed by Mills 9 , the per real
estate unit price P is a function of the temporal market conditions and of
the locational and neighborhood characteristics that distinguish the differ-
ent spatial real estate markets within an urban area. Thus, for an ith
industrial parcel in its current use, the value V
C
is written as
C C
P X =R L , S
. .
i i i
C
V s
i
i
P
C
e

C
0
q
C
X
C
i
.
s =R L , S , 3 .
.
i i
i
where P
C
is the price per real estate unit of industrial real estate in its
current use, R is the units of industrial real estate, L is the amount of land
area, S is the measure of existing capital in units of floor space, i is the
interest rate, and X
C
is the vector of explanatory variables other than land
i
2
The Comprehensive Environmental Response, Compensation, and Liability Act, other-
wise known to as Superfund.
REDEVELOPMENT AND CONTAMINATION RISK 419
and capital for the ith current-use parcel that determines the temporal
and spatial variations in the unit real estate price within the urban area.
Another simplifying assumption is that the elasticity of substitution of L
for S is equal to 1, which allows the use of a CobbDouglas functional
form, or R sL

. Dividing this expression by the land area of the

i i i
parcel, L , would produce an expression for the observed per-square-foot
i
value. Taking logs, the functional form for the current-use value equation
is written as
C
V
i
C C C
ln sA q y1 ln L q ln S q X , 4 . .
i i i
L
i
C
w
C
x
where A is a constant which equals ln P q , is the elasticity of
0
land value to land area, is the elasticity of land value to floor space, and
the other variables are as previously defined.
Accounting for the two demolition variables produces a functional form
for redeveloped parcels that is fundamentally different from the above-de-
.
scribed current-use functional form, Eq. 4 . The value function of an ith
optimally redeveloped parcel is written as
R R R
R q X
0 i
P e S .
i
U U
R S
V s =R L , S yc t S yD , d . .
i i i i i
/
i L
i
L yD
L
E L , 5 . .
i i i
where S* is the optimal level of structural capital following parcel redevel-
opment, which is not directly observable at the time of sale and where D
S
and D
L
are the respective demolition costs defined on a per-square-foot
basis. Assume that the optimal capital for an ith parcel of industrial land is
a function of the amount of land, L , and its location within the urban
i
area, X
R
, and is written as
i
S
U
ss L , X
R
. 6 .
.
i i i
Thus, for redeveloped parcels, the per-square-foot present value equation
becomes
R R R R
V P X R L , s L , X
. .
i i i i i
R
s yc t s L , X .
.
i i
L i
i
S
i
S L
yD , d yD E . 7 . .
i i
/
L
i
DANIEL T. MCGRATH 420
It would be convenient if the value equations for V
C
and V
R
were of
similar form, that is, if the left side of the estimating equations for both
C R
w x
V and V was expressed as ln VrL . Therefore, in its most generalized
i i
w
R
x
form, an expression for ln V rL can be written as
i i
R
V S
i i
R
ln sg X , L , , d , E , 8 .
i i i i
L L
i i
where X
R
is the vector of variables determining the spatial and temporal
i

variations in the parcels unit price and is not necessarily the same vector
C
.
of variables that determine V , L is the land area of the parcel, S rL is
i i i
the existing capital-to-land ratio, d is some measure of the depreciation of
i
the existing capital on the parcel, and E is the a priori measure of land
i
contamination for the parcel. Assuming a log-linear specification for the
function g gives
R
V
i
R R
ln s q Y , 9 .
0 i
L
i
where Y
R
is defined as the full vector of independent variables expressed
i
.
on the left side of Eq. 8 . This approach is justified as a Taylor series
. .
expansion of Eq. 7 . In the actual estimation of Eq. 9 , the expansion is
carried out as far as it has explanatory power. The rationale here is to
linearize and produce an easily estimatable and comparable functional
expression for V
R
that can be utilized in the two-stage method to correct
for possible selection bias between the redeveloped and current-use prop-
erties and thus obtain consistent estimates for the value differential,

R C
.
V yV , for each parcel in the dataset.
3. ECONOMETRIC METHODOLOGY
The industrial redevelopment decision can be tested empirically through
the use of a structural probit model. Following closely the estimation
w x w x
procedure used by Rosenthal and Helsley 12 and by Munneke 10 , this
model is written as

R
s V
R
yV
C
q i s1, 2, . . . , N, 10 .
.
i i i i
where
R
represents the criterion function or index which indicates when
i

R C
.
redevelopment will take place upon sale, V yV is the parcels value
i i

2
.
differential, and is the error term which is assumed to be N 0, . A
i
parcel is redeveloped upon sale if
R
)0 and remains in its current use if
i

R
F0. In the probit estimation over the entire sample,
R
is assigned
i i
the value of 1 for parcels that were redeveloped upon sale and 0 for
REDEVELOPMENT AND CONTAMINATION RISK 421
parcels remaining in their current use. If the criterion for redevelopment is
determined by a parcels value differential, the probit estimation proce-
dure will identify the coefficient, , as significant and of a positive value.
.
R
To accomplish the probit estimation of Eq. 10 , estimates for both V
and V
C
are required to calculate the value differential for each parcel.
However, only one value, either V
R
or V
C
, is ever observed at the time of
a parcels sale. It is assumed that in a competitive land market, the sale
prices of industrial parcels sold for redevelopment will reveal V
R
and that
the sale prices for current-use parcels will reveal V
C
. The estimation of
both V
R
and V
C
for each parcel is accomplished by separating the dataset
into these two groups and then regressing the observed sale prices on the
vectors of observable spatial and temporal variables that determine value
for each group respectively. Using the estimated coefficients from each
value function, an estimate for the value differential is thus obtained for
each parcel in the combined dataset.
If one assumes that these estimated value equations take on a linear
form, then the value differential can be written as
V
R
yV
C
s
R
Y
R
y
C
X
C
q y , 11 . .
.
i i i i i i
where Y
R
and X
C
are the vectors of the observable spatial and temporal
i i
characteristics determining redeveloped and current-use value, respec-
tively,
R
and
C
are the respective coefficients of the redeveloped and
current-use value equations, and the error terms and are assumed to
i i

2
.
2
.
be ;N 0, and ;N 0, .
i i
. .
Substituting Eq. 11 into the original structural probit model 10 , the
reduced-form probit model is derived as
sZ y , 12 .
i i i
where is the vector of all coefficients, Z is the vector of the union of all
i
.
explanatory variables, and the error term s y q .
i i i i
.
The estimation of the structural probit equation 10 follows the two-
w x w x
stage procedure developed by Lee 5 and outlined by Maddala 7 . This
method involves the substitution of estimated endogenous variables into
the criterion function prior to its estimation via a probit analysis. The first
step in this procedure is to use the probit method to estimate the reduced
.
form probit equation 12 to obtain estimates for based on the dichoto-
mous observations of Rthat is, whether or not the ith parcel was
redeveloped.
The second step is to estimate the respective redeveloped and current-use
value functions in a way that produces unbiased estimates for the coeffi-
cients
R
and
C
. As discussed above, only one value, either V
R
or V
C
,
DANIEL T. MCGRATH 422
will ever be observed when a parcel is sold. However, the original criterion
.
function, Eq. 10 , requires the calculation of the value differential for all
observations in the dataset. The individual value functions for V
R
and V
C
are estimated separately by regressing parcel sale prices on the vectors of
observable spatial and temporal characteristics for each parcel Y
R
and X
C
,
i i
respectively. Since the data have been divided into two separate groups,
unobserved characteristics favorable to each group may exist, and selection
bias becomes a possibility. Expressed more formally, when selection bias is
present, the conditional expectation of the error terms of the value
equations will not be zero. Consistent and unbiased estimates of the value
equation parameters are obtained by defining new error terms,
U
and
i

U
, and by the introduction of new estimated explanatory variables W
R
i i
and W
C
, the Mills ratios, into their respective equations. By including the
i
Mills ratios into the value functions, the conditional expectation of both
U
i
and
U
is now zero. The values of W
R
and W
C
are computed for each
i i i
observation in the combined dataset using the estimates of obtained
.
from the initial probit estimation of the reduced form probit equation 12
identified in step 1. The respective redeveloped and current-use value
equations to be estimated are written as
z .
i
U
R R R
V s Y y q
i i i
/
z .
i
s
R
Y
R
y W
R
q
U
13 .
i i i
and
z .
i
U
C C C
V s X q q
i i i
/
1 y z .
i
s
C
X
C
q W
C
q
U
, 14 .
i i i
where
U
s q W
R
,
U
s y W
C
, is the covariance be-
i i i i i i
tween and , is the is the covariance between and , is the

standard normal density function, and is the cumulative normal density

. .
function. Estimation of Eqs. 13 and 14 using OLS produces the re-
quired consistent and unbiased estimates for the value function coeffi-
cients
R
and
C
. Additionally, statistical significance of the Mills ratio in
the OLS estimation signals the presence of selection bias between the data
subsets.
One problem resulting from the insertion of the Mills ratios into the
value functions is that it results in a downward bias in the estimated
standard errors of the coefficients. This downward bias could result in
REDEVELOPMENT AND CONTAMINATION RISK 423
variables erroneously being identified as significant. To correct for this
w x
bias in the standard errors, a procedure developed by Lee et al. 6 must be
implemented to produce the correct asymptotic covariance matrix. In this
analysis, all models utilizing the two-stage method have utilized this
procedure, built into the econometrics software, to obtain unbiased esti-
mated standard errors for the value function coefficients.
Obtaining consistent and unbiased estimates for
R
and
C
in step 2
allows the estimation of the value differential for each observation in the
dataset. Thus, the structural probit equation to be estimated becomes
R

Diff
s V q ,
.
i i i

Diff

R R

C C
where V sV yV s Y y X . 15 .
i i i i i
4. DISCUSSION OF DATA
The principal dataset is a group of 195 redeveloped and current-use
property sale transactions that occurred within the City of Chicago from
August 1983 through November 1993. These records were obtained from
the City of Chicagos Harris-REDI database maintained by the Citys
Department of Planning and Development. The Harris-REDI database is
a combination of the Citys Harris Land-use Data with land sale transac-
.
tions compiled by Real Estate Data, Inc. REDI , which have been
gathered from all real estate transfer declarations filed with Cook County.
The redeveloped property data subset is a group of 95 redeveloped
industrial properties. This subset was created by matching the 8043 indus-
trial land sale transactions with 1867 industrial building permit records and
the Citys 881 industrial demolition permit records that were issued by the
City of Chicago Department of Buildings from January 1984 through
December 1993. Information concerning the neighborhood racial composi-
tion for the parcels in the database was obtained by matching the records
with 1990 census information.
The criterion used to identify whether a parcel was purchased for
redevelopment is whether the sold parcel had an industrial demolition
permit andror an industrial building permit filed with the Department of
Buildings within 24 months of the sale date and is currently zoned for
industrial use. If so, then the property is considered to have been pur-
chased for redevelopment. Including industrial building permits in addition
to industrial demolition permits produces a softer redevelopment rule.
Often, existing structures are not completely removed by the new user, but
through additional construction, the existing structure is substantially
modified for a new use. This situation falls somewhere in between the
DANIEL T. MCGRATH 424
hard redevelopment criteria in which all existing capital is removed and
the case where a parcel is purchased for current use and remains essen-
tially unchanged. The intention here is to identify those industrial parcels
that show evidence of investment by a redeveloper, whether through
complete demolition or through modification of the existing structure.
The salerpermit address matching was verified by visual investigation of
each parcel in the Sanborn Fire Insurance Maps of the City of Chicago.
Additionally, to ensure that the identified address match represents a
property that is currently in industrial use and was not purchased for
conversion to either residential or commercial use, the current zoning of
each property was verified as industrial by site identification in the 1994
Chicago Zoning Ordinance zoning maps.
The current-use group of sales is a set of 100 observations chosen
randomly from the industrial sale record. These properties were verified to
have no building or demolition permits associated with them any time after
their sale and are also currently zoned for manufacturing.
The environmental variable E, which has been hypothesized to be a
significant determinant of the land contamination liability faced by a
buyerrredeveloper and subsequently a determinant of the land demolition
costs, is represented by the a priori probability of the parcels contamina-
tion. This continuous variable was identified for specific land uses by
w x
Noonan and Vidich 11 in a survey of completed cleanups by 17 environ-
mental engineering firms in the northeast U.S. Table 1 outlines the
individual a priori probabilities of contamination for 25 specific categories
of land use. Denoted as PROBCON in the redeveloped and current-use
valuation models, this variable is used to signal higher liability costs
because, at present, there are no publicly available remediation cost
databases which might be used to produce an accurate remediation cost
estimate or to produce statistically significant contamination risk factors.
In an effort to duplicate the process a buyer would have undertaken in a
Phase I environmental investigation, a historical land-use investigation was
undertaken for each of the 195 properties in the database. To determine
this land use, each property was researched in both the 1949 and 1975
versions of the Sanborn Fire Insurance Maps. These maps, available on
microfilm, provide a wealth of land-use information, identifying the spe-
cific company using the site at the time and often the specific nature of the
industrial activity. From this investigation, each property has been assigned
an SIC-code interpretation which best represents the historical land use.
From this SIC-code interpretation, a value of the a priori probability of
contamination has been identified from Noonan and Vidichs classifica-
tion. The definitions and the summary of the statistics of the variables
used in this analysis are presented in Table 2.
REDEVELOPMENT AND CONTAMINATION RISK 425
TABLE 1
The A-priori Probability of Contamination Based on Historical Land Use
Probability of
Commercial and Industrial Land Use Categories Contamination
1. Former coal gas plants, fuel distributors, chemical distributors, .99
airports, incinerators
2. Auto salvage yards, plastic manufacture, electric utility, refining, .95
hazardous waster storagertransfer
3. Oil and other petroleum storage .92
4. Metal plating, landfills, chemical manufacture, metal finishingr .90
tool & dye, laboratories
5. Heavy industrial manufacturing, power plants, paper manufacturing, .88
gas stations
6. Tanneries .87
7. Urban vacantrabandoned land, furniture repair and stripping, .85
circuit board manufacturers, tank farms, waste treatment plants
8. Metal working and fabrication .83
9. Railroad yards and right of ways, vehicle maintenance facilities .82
10. Refuse recycling facilities, machine shops, electronics assembly .80
facilities, agricultural mixersrformulators, high technology
manufacturing
11. Junkyards, electronics manufacture .79
12. Industrial parks, automotive assembly facility, light industrial .75
manufacturing
13. Dry cleaners .74
14. Auto repair shops .72
15. Chemical research facility .70
16. Trucking terminal, textile printing and finishing .65
17. Resource recovery facilities, electricalrplumbingrHVAC service .60
18. Photographic .53
19. Auto dealerships, fabric dyeing establishments, pharmaceutical .50
establishments
20. Highways, research facilities .40
21. Warehouses .35
22. Gas utilities .35
23. Retail property .25
24. Residential, rural vacant property, hospitals .20
.
25. Offices non-manufacturing .13
w x
Source: Noonan and Vidich 11 .
DANIEL T. MCGRATH 426
TABLE 2
Statistical Summary of the Land Use Data
Full Redeveloped Current-Use
Sample Parcels Parcels
. . .
Ns150 Ns95 Ns100
Std. Std. Std.
Mean Dev. Mean Dev. Mean Dev.
LNUP 2.5811 1.1494 2.5150 1.2315 2.6438 1.068
Natural Log of the
Parcel per sq. ft.
sale price
LNA 10.3329 1.1841 10.5885 1.1977 10.09 1.1239
Natural Log of the
land area in sq. ft.
LNSPACE 9.9283 2.9283 9.6997 3.9631 10.1455 1.3391
Natural Log of the
building area in
sq. ft.
LAND 69,341 142,584 82,905 158,991 56,546 124,471
Parcel land area in
square feet
CBD 5.6384 2.8056 5.7687 2.8966 5.5146 2.7251
Distance in miles
from the central
business district

intersection of
LaSalle and
.
Jackson Streets
LNORTHD 0.5538 0.4984 0.6316 0.4849 0.4800 0.5021
1 if the parcel is
north of Lake St.,
0 otherwise
AGE 54.33 23.74 54.29 23.98 54.37 23.65
Age of the building
in years
COND 1.5897 0.6255 1.5158 0.5809 1.6600 0.6547
Condition Code of
the building based
on external survey
by City of Chicago:
1 sexcellent,
2 sgood, 3 sfair,
4 spoor
DAYS 2018.9 966.9 1877.3 862.2 2153.3 1043.4
Number of days
from the initial
saledate in
the dataset,
8r1r83
REDEVELOPMENT AND CONTAMINATION RISK 427
TABLE 2Continued
Full Redeveloped Current-Use
Sample Parcels Parcels
. . .
Ns150 Ns95 Ns100
Std. Std. Std.
Mean Dev. Mean Dev. Mean Dev.
PCNTAFAM 0.2953 0.3804 0.2184 0.3197 0.3683 0.4188
Percentage of
African-American
population within
census tract of
parcel
CAPINT 1.4526 2.1187 1.2632 2.0079 1.6324 2.2139
Capital Intensity as
measured by the
building floor area
divided by parcel
land area
PROBCON 0.6778 0.2240 0.6785 0.2248 0.6770 0.2243
The a-priori
probability of
parcel
contamination
based on
historical
land use
VALDIFF y24.493 634.603 190.511 569.232 y228.747 628.497
The estimated value
differential
R C
.
V yV
of the parcel in
000s of 1995$
5. EMPIRICAL RESULTS
5.A. The Reduced Form Probit Results
As previously discussed in Section 3, the two-stage method requires the
.
initial estimation of the reduced form probit equation 12 . Although the
purpose of this initial step is to facilitate the calculation of the Mills ratios
W
R
and W
C
, which are then included as estimated variables in their
respective value functions, the estimation results are by themselves of
particular interest. The estimation results, presented in Table 3, identify
two separate estimations, Model 1 and Model 2. Model 2 includes the
structural and land demolition variables, CAPINT, the capital intensity of
the parcel, and PROBCON, the a priori probability of contamination
DANIEL T. MCGRATH 428
TABLE 3
Estimation Results of the Reduced Form Probit
Model 1 Model 2
Intercept y3.616 y3.650
. .
2.533 2.540
LNA 0.652 0.778
. .
Natural Log of land area in sq. ft. 3.876 3.805
LNSPACE y0.287 y0.414
. .
Natural Log of the building area in sq. ft. 2.499 2.567
LAND y1.743E-06 y1.841E-06
. .
Parcel land area in square feet 1.830 1.915
CBD y0.345 y0.038
. .
Distance in miles from the central business 8.745 0.949

district intersection of LaSalle and Jackson

.
Streets
LNORTHD 0.385 0.400
. .
1 if the parcel is north of Lake St., 1.940 1.962
0 otherwise
AGE 0.009 0.009
. .
Age of the building in years 1.889 1.881
COND y0.099 y0.112
. .
Condition Code of the building based on 0.586 0.658
external survey by City of Chicago
DAYS y1.556E-04 y1.483E-04
. .
Number of days from the initial saledate in 1.468 1.386
the dataset, 8r1r83
PCNTAFAM y0.587 y0.626
. .
Percentage of African-American population 2.155 2.260
within census tract of parcel
CAPINT 0.079
.
Capital Intensity as measured by the building 1.158
floor area divided by parcel land area
PROBCON y0.076
.
The a-priori probability of parcel 0.167
contamination based on historical industrial
land use of the parcel
LLF y116.653 y116.640
LRI 0.1365 0.1366
Note: The absolute values of the t statistics are presented n parentheses. The dependent
variable in the reduced-form probit is REDEV which takes on the value of 1 if the parcel was
redeveloped and 0 otherwise. The LRI is analogous to the R
2
statistic in an OLS model. See
w x
Greene 2 , p. 651.
REDEVELOPMENT AND CONTAMINATION RISK 429
TABLE 4
OLS Estimation Results of Redeveloped Value Equations
Model VR1 Model VR2
Intercept 2.350 4.114
. .
2.379 3.903
LAND y1.296E-05 y1.525E-05
. .
Parcel land area in square feet 2.577 3.197
LANDSQ 3.083E-11 3.779E-11
2
. . .
LAND 1.654 2.142
LANDCB y1.635E-17 y1.994E-17
3
. . .
LAND 1.508 1.947
CBD y0.984 y0.773
. .
Distance from the central business district 2.506 2.080
.
intersection of LaSalle and Jackson Streets
CBDSQ 0.178 0.150
2
. . .
CBD 2.877 2.527
CBDCD y0.009 y0.008
3
. . .
CBD 3.053 2.795
LNORTHD 0.499 0.385
. .
1 if the parcel is north of Lake St., 2.293 1.714
0 otherwise
DAYS 1.722E-03 1.859E-03
. .
Number of days from the initial saledate 4.064 4.740
dataset, 8r1r83
DAYSQ y4.400E-07 y4.430E-07
2
. . .
DAYS 4.120 4.522
PCNTAFAM 2.760 3.116
. .
Percentage of African-American 2.151 2.661
population within census tract
of parcel
PAFAMSQ y3.526 y3.713
.
2
. .
PCNTAFAM 2.574 2.969
Demolition variables
COND y0.520
.
Condition code of the building based 3.623
on external survey by City of Chicago
CAPINT 0.293
.
Capital intensity as measured by the building 1.991
floor area divided by parcel land area
CAPINTSQ y0.017
2
. .
CAPINT 1.668
PROBCON y4.593
.
The a priori probability of parcel 2.005
contamination based on historical land use
PCONSQ 3.242
2
. .
PROBCON 1.667
R
W y0.679 y0.175
R
. .
Mills ratio for V 1.614 0.359
2
Adj. R 0.542 0.623
Note: The absolute values of the t statistics are presented in parentheses. Ns95. The
dependent variable is LNUP, the natural log of the per square foot sale price in real 1995$.
DANIEL T. MCGRATH 430
TABLE 5
OLS Estimation Results of Current-Use Value Equations
Model VC1 Model VC2
Intercept 7.418 7.667
. .
7.617 7.928
LNA y0.669 y0.731
. .
Natural log of the land area in sq. ft. 4.204 4.991
LNSPACE 0.397 0.426
. .
Natural log of the bulding area in sq. ft. 3.848 4.331
CBD y0.350 y0.349
. .
Distance from the central business district 2.986 2.969
.
intersection of LaSalle and Jackson Streets
CBDSQ 0.023 0.023
2
. . .
CBD 2.441 2.497
LNORTHD 0.405 0.374
. .
1 if the parcel is north of Lake St., 2.060 1.968
0 otherwise
AGE y0.006 y0.008
. .
Age of the building in years 1.254 1.704
COND y0.321 y0.273
. .
Condition code of the building based on external 2.153 1.864
survey by City of Chicago
PCNTAFAM y0.687 y0.565
. .
Percentage of African-American population 2.676 2.287
within census tract of parcel
PROBCON y0.281
.
The a priori probability of parcel 0.799
contamination based on historical land use
C
W 0.076 0.273
C
. .
Mills ratio for V 0.128 0.511
2
Adj. R 0.5086 0.5080
Note: The absolute values of the t statistics are presented in parentheses. The dependent
variable is LNUP, the natural log of the per square foot sale price in real 1995$.
based on historical land use, for the estimation of Mills ratios for the value
equations, VR2 and VC2, presented in Tables 4 and 5, respectively. Model
1 excludes these variables, as they are not included in the specifications of
either VR1 or VC1.
3
The results of these two initial probit estimations can be interpreted as
identifying the contribution of the explanatory variables to the probability
of redevelopment outside their role in determining the level of value
3
Note that while the variable COND, the condition code of the existing structure, is also
considered a determinant of the structural demolition variable D
S
, it is included in both
Model 1 and Model 2 because the variable COND is one of the variables in vector X
C
which
i
determines current-use value V
C
.
REDEVELOPMENT AND CONTAMINATION RISK 431
differential. Of particular interest is the contribution of PROBCON. Its
insignificance in Model 2 identifies that there is no systematic contribution
of the a priori probability of contamination to the probability of redevelop-
ment between the redeveloped and current-use data groups. If the redevel-
oped and current-use data subsets are indeed representative samples, this
initial result suggests that there is not a fundamental investor bias against
contaminated properties within Chicago due to contamination risk.
5.B. Redeeloped Value Equations
The OLS estimation results of the two specifications of the redeveloped
value equations are presented in Table 4. Model VR1 excludes the
structural and land demolition variables, CAPINT, COND, and PROB-
CON, whereas Model VR2 is specified with these variables.
The log-linear functional form is justified as a Taylor series expansion of
.
Eq. 7 . Explanatory variables were expanded out as far as they were
significant in the OLS estimations. A number of variables exhibit complex,

R
.
non-linear relationships to ln V rL . The redeveloped value function
exhibits statistically significant cubic relationships with respect to both
. .
land area LAND and distance from the central business district CBD ,
w x
which is consistent with the results presented by Munneke 10 . The cubic
relationship with respect to CBD identifies a rapid decline in value as
parcel distance from the CBD increases with a local minimum at 3.7 miles

representing a 70% decline in average unit bid value from a CBD

.
location and with a local maximum at 8.7 miles representing a 50%
.
decline in average unit bid value from a CBD location . Also significant is
the dummy variable, LNORTHD, which identifies whether a parcel has a
north or south location within the City. North-side parcels command on
average a unit price about 47% higher than similar south-side parcels. The
spatial pattern described by these spatial variables identifies the lowest
industrial land values to be the near southern locations between 2.5 and 5
miles from the CBDlocations generally regarded as the Citys most
socially and economically distressedand the highest to be on the north
side between 7 and 10 miles from the CBD, areas close to OHare Airport.
While land contamination exists in all the industrial areas of the City of
Chicago, there are many contaminated sites on the predominantly
African-American south side, and there is a general perception that the
Citys African-American neighborhoods bear more environmental contam-
w x
ination risk, despite empirical evidence to the contrary 2 . Thus, it was
important to control for race in determining the effect of contamination
risk on land value, in order to eliminate the possibility that the reductions
in land value are in fact due to the impact of distressed social and
economic conditions associated with African-American neighborhoods in
Chicago. The variable PCNTAFAM identifies the percentage of African-
DANIEL T. MCGRATH 432
American population within the census tract of the parcel. Both Models
VR1 and VR2 exhibit statistically significant quadratic relationships with
respect to neighborhood African-American population percentages. Parcel
unit bid value declines from a central maximum of about 40% African-
American population. In other words, parcels in census tracts of about
40% African-American population have the highest bid values. One expla-
nation for this result is that the quadratic form for the variable PC-
NTAFAM may be capturing a value discount effect associated with areas
of high Hispanic population. It is well documented that in the City of
Chicago African-American neighborhoods are typically segregated from
w x
Hispanic neighborhoods 2 , and areas of high Hispanic population tend to
have low African-American population.
4
Both redeveloped value models, VR1 and VR2, exhibit a strongly
significant quadratic temporal trend in unit bid value. The quadratic
expression of the variable DAYS, which is the number of days from the
.
first sale-date observation 8r1r83 , identifies a trend of substantial
increase in unit land bid value that peaked around the end of April 1989,
followed by a decline which brought unit bid value back to a level only
slightly above their average level in 1983. On average, the April 1989 unit
bid value is about 600% above the unit bid value in August 1983. This date
is consistent with the peak of real estate speculation that was occurring in
land markets nationwide and the high regional and national economic
growth period of the late 1980s. Interestingly, by the last date in the
dataset, November 1993, average unit prices had returned to approxi-
mately their original level.
The vector of structural and land demolition variables, CAPINT, COND,
and PROBCON, respectively, all exhibit significance in the redeveloped
.
value equation VR2. Capital intensity CAPINT , as measured by the
structure floor space divided by building land area, exhibits a significant
quadratic relationship to parcel unit bid value. Parcel unit bid value
increases with increasing capital intensity, with a local maximum at a
capital intensity value of about 9, and exhibits declines in unit value at
higher capital intensities. The variable COND represents the condition
code of the building as identified by visual inspection of the structure by
the Chicago Department of Buildings. COND is a whole number from 1 to
4, with 1 representing a sound structure with no obvious repair needed, 2
4
Further analysis supports this hypothesis. An analysis of the parcels in the dataset shows a
significant inverse relationship between African-American and Hispanic population percent-
ages. Additionally, when the quadratic form for the variable PCNTAFAM is substituted with
a dummy variable that takes on the value of 1 when the census tract is greater than 75%
African-American or greater than 75% Hispanic or greater than 95% African-American and
.
Hispanic combined 0 otherwise , statistical significance of the dummy variable and all other
variables are maintained in both the redeveloped and current-use value models.
REDEVELOPMENT AND CONTAMINATION RISK 433
representing a structure needing minor repair, 3 representing a structure
needing major repair, and 4 identifying an uninhabitable, dilapidated
structure. In both the redeveloped and current-use data groups, the
COND variable ranged from 1 to 3 with no structures of condition code 4
being represented in the data. As expected, the estimation results of
Model VR2 show that a unitary increase in COND results in a 40%
decrease in a parcels unit value. Clearly, if a high quality structure exists
on a parcel purchased for redevelopment, the redeveloper will have to pay
the salvage value of the existing structure. Also, given that this study uses a
softer redevelopment rule, it is possible that the existing structures were
incorporated into the redevelopment of the site.
Of most importance is the impact of the environmental variable PROB-
CON, which represents the a priori probability of contamination based on
historical land-use. Model VR2 exhibits a significant quadratic relationship
with respect to the contamination risk associated with the parcel. The
relationship between the probability of contamination and parcel unit bid
value is presented in Fig. 1. There is a rapid decline in parcel unit bid
value as contamination risk rises, which comes to a local minimum at
contamination probability of about 75%, with a very slight increase at
higher probabilities of contamination. This slight rise in value effect could
be an artifact of the data, and perhaps a better functional form for
FIG. 1. Impact of the probability of contamination on average unit bid value.
DANIEL T. MCGRATH 434
PROBCON would be a negative exponential form rather than a quadratic.
5
However, parcels of greatest public concern have tended to be those with
highest contamination risk. The slight increase in value at high levels of
contamination risk could be interpreted as evidence of redevelopment
following more intense governmental scrutiny and response on the most
contaminated of sites and thus perhaps identifies the capture of scale
economies in remediation technology for the most contaminated sites by
responsible parties.
Figure 2 presents the distributions of the estimated sale price discounts
per parcel associated with the structural and land demolition variables.
The estimated structural demolition discounts were calculated for each of
the 95 parcels in the redeveloped group by identifying the total combined
discount associated with the variables COND, CAPINT, and CAPINTSQ.
Similarly, the land demolition discounts were calculated for each parcel by
identifying the combined discount associated with the variables PROB-
CON and PCONSQ. The respective structural and land demolition dis-
5
Statistical significance is maintained in the model with the contamination variable speci-
fied in natural log form.
FIG. 2. Frequency distribution of estimated sale price discounts per parcel to account for
structural and land demolition costs.
REDEVELOPMENT AND CONTAMINATION RISK 435
counts were then assembled into normalized distributions. As expected,
the structural demolition discount has a median value of about y$287,000
per parcel and exhibits only a 4% probability of actually being positive.
Further investigation of the four observations that exhibit positive struc-
tural demolition discounts shows that their average discount was substan-
.
tially positive q$342,000 and all four parcels have a condition code equal
to 1, identifying a high quality structure on the parcel. This is consistent
with the view that when high quality structures exist on parcel, investors
seeking to redevelop the parcel have to pay the salvage value of the
building, whether it is utilized or razed for redevelopment.
The distribution of estimated land demolition exhibits a somewhat
skewed distribution, and the land demolition or contamination discounts
are quite high on a per parcel basis. The median land demolition discount
is approximately y$1.9 million dollars per parcel or about y$1 million per
acre, although discounts between y$400,000 and y$800,000 occurred
w x
with the most frequency. For comparison, Noonan and Vidich 11 calcu-
late from their survey of site remediations that the total cost of remedia-
tion, which includes Phase I, Phase II, and cleanup, is on average about
$290,000, with a minimum and maximum cost identified at $111,000 and
$914,000, respectively.
6
The contribution of the structural and land demolition variables to the
explanatory power of the redeveloped value function is significant, improv-
ing the adjusted R
2
by six percentage points, from 0.542 to 0.623. Lastly,
the coefficient of the Mills ratio in the redeveloped value function VR1 is
nearly significant, which could be interpreted as indicating a model mispec-
ification without the inclusion of the demolition variables. More impor-
tantly, however, the Mills ratio is insignificant in Model VR2, identifying
that, with the inclusion of the demolition variables, model specification is
improved and selection bias is likely not present between the redeveloped
and current-use data groups.
5.C. Current-Use Value Equations
The results of the two specifications of the current-use equations, VC1
and VC2, are presented in Table 5. Model VC1 is specified without the
land demolition variable PROBCON, and Model VC2 is specified with this
variable to test if the probability of contamination is a significant determi-
nant of current-use value as well as for redeveloped value. The variable
COND, the condition code of the structure, is included in both VC1 and
VC2. This is because the condition of the structure is relevant to purchase
of a parcel remaining in its current use, and it is not intended as a proxy
6
Dollar values converted to 1995$. It is not clear if these dollar figures represent cleanup
costs per site or per acre.
DANIEL T. MCGRATH 436
for any structural demolition costs as is the case for the redeveloped value
equation. The variable PROBCON in Model VC2 is insignificant, al-
though, consistent with expectations, the sign of the coefficient is negative.
C
.
The functional form for V , Eq. 4 , resulted from the imposition of a
CobbDouglas functional form for the real estate variable, or R sL

.
Focusing on the results for Model VC2, the coefficient of LNA is negative
and significant, indicating that, for current-use parcels, the per-square-foot
unit value declines with increasing land area. The coefficient of LNA is
.
equal to y1 , where represents the elasticity of land value to land
area in a CobbDouglas functional form. is estimated within the
current-use data group to be equal to 0.269. The coefficient of LNSPACE
in the model is equal to , which represents the elasticity of land value to
floor space. In Model VC2, the coefficient of LNSPACE is positive and
significant and identifies that the elasticity of land value to building space
is equal to 0.426.
Of the locational variables, the influence of CBD and LNORTHD on
unit bid value are significant for current-use parcels, with unit bid value
exhibiting a quadratic relationship with respect to CBD. The average unit
bid value declines to a minimum reduction of about 70% at 7.5 miles from
the CBD, rising thereafter. A north location relative to a south location
gains 35% in unit bid value. Similar to the redeveloped group of parcels,
the sector with highest average unit value is the northwest sector of the
city, outside nine miles from the central business district.
Both of the site-specific explanatory variables, COND and AGE, are
statistically significant. Each unit increase in condition code decreases unit
bid value by 39% and each additional 10 years to the structures age
decreases unit value by about 8%. The racial population variable PC-
NTAFAM, which identifies the percentage of African-American popula-
tion within the census tract of the parcel, also has a large and significant
effect on current-use unit value. A 10% increase in census tract African-
American population reduces parcel unit bid value about 6%. Lastly, the
coefficient of the Mills ratio is not significant, again identifying no selec-
tion bias between the redeveloped and current-use data groups.
5.D. Structural Probit Results
The redeveloped and current-use value equations estimated above are
used to calculate the value differential for each property in the full
dataset. The value differential for each property is the difference in the
estimated value identified by the redeveloped value equation minus the

R C
.
predicted value identified by the current-use value equation, or V yV .
This measurement of estimated parcel value differential is then used in the
.
structural probit model, Eq. 15 , to test the hypothesis that redevelopment
REDEVELOPMENT AND CONTAMINATION RISK 437
occurs when the value of parcel converted to a new use exceeds the
parcels current-use value.
Similar to the previously mentioned situation caused by the inclusion of
.
an estimated variable the Mills ratio in the value equations, since the
probit model is estimated using a variable that is itself estimated from the
value equations, there may be bias in the standard errors of the probit
model. In this probit analysis, the standard errors shown are uncorrected,
so there is a possibility that they may be biased downwards.
7
The results of the various specifications of the structural probit equa-
tions are presented in Table 6. The dependent variable of the probit model
is REDEV, which takes on the value of 1 if a parcel is among the
redeveloped properties and 0 if it is among the current-use properties. The
estimated values of the dependent variable REDEV are interpreted as the
probability of redevelopment occurring contingent upon a sale. The ex-
planatory variable in the structural probit model is VALDIFF, which is the
estimated value differential calculated as the difference between the
predicted redeveloped value and the predicted current-use value for all
observations.
For Probit Model 1 in Table 6, which uses as a measure for VALDIFF

the difference between VR1 and VC1 model specifications that exclude
7
Recognizing the possibility of standard error bias but leaving the standard errors uncor-
rected is the standard approach to this problem, due to the complexity of the correction
w x w x
procedure. This approach is the same as used by Munneke 10 . See also Lee 4 .
TABLE 6
Estimation Results of the Structural Probit
Value
differential
.
Constant VALDIFF LLF LRI
Model 1 0.000698 y127.748 0.054
.
Excluding demolition variables 3.342
VALDIFFsVR1 yVC1 y0.119778 0.000809 y127.039 0.060
. .
1.185 3.398
Model 2 0.001470 y118.076 0.126
.
Including demolition variables 4.426
VALDIFFsVR2 yVC2 y0.027682 0.001469 y118.034 0.126
. .
0.290 4.437
Note: The absolute values of the t statistics are presented in parentheses. The dependent
variable in the structural probit is REDEV which takes on the value of 1 if the parcel was
redeveloped and 0 otherwise. The LRI is analogous to the R
2
statistic in an OLS model. See
w x
Greene 2, p. 651 .
DANIEL T. MCGRATH 438
.
the demolition variables , the impact of VALDIFF on the probability of
redevelopment is positive and significant. The significance of VALDIFF in
Probit Model 1 is maintained for probit model specifications that both
include and exclude a constant term, although the constant is statistically
insignificant. The insignificance of the constant term is an interesting
result, given the fact that the demolition variables have been excluded
R
w x
from the redeveloped value function V . Munneke 10 argues that if the
value differential is the only determinant in the criterion function, then a
significant constant term would represent a fixed demolition cost for
industrial property. However, Munneke finds in his probit analysis of
industrial properties that the inclusion of a constant term, while statisti-
cally significant, eliminates the significance of the value differential vari-
able for industrial properties.
8
In this analysis, the insignificance of the
constant term in the Probit Model 1 supports the view that demolition
costs are likely to be systematically related to some characteristic of the
parcel that would certainly be capitalized into land value and thus become
part of the parcels value differential.
Model 2 uses the value equations specified with the demolition variables
VR2 and VC2 to calculate VALDIFF. The mean value for VALDIFF is,
as expected, positive for the redeveloped subset of parcels, and, on

average, parcels in the redeveloped group have realized about $190,500 in

.
1995$ gain in value through conversion to a new use. The standard
deviation of VALDIFF is quite large, however, at $558,000. Also, as
expected for the current-use group, the predicted value differential is
negative with a value of y$229,000 and a standard deviation of $635,000.
In Probit Model 2, the significance of the VALDIFF variable is substan-
tially enhanced, and, as in Probit Model 1, the constant term is insignifi-
cant. Probit Model 2 identifies that, for industrial properties in the City of
Chicago, a value differential on the order of $957,000 will result in a 90%
probability of redevelopment by the private market. The estimated rela-
tionship between the magnitude of the value differential and the predicted
probability of redevelopment, as estimated by Probit Model 2, is presented
in Fig. 3.
The significance of the coefficient for the VALDIFF variable in the
structural probit model allows identification of an estimated relationship
between the a priori probability of land contamination and the probability
of industrial redevelopment. This relationship, presented in Fig. 4, is
produced by calculating the value differential at the sample means of the
8
w x
Also in Munnekes 10 analysis, he finds the inclusion of a capital intensity variable into
the probit model is statistically significant. From this result, he argues that demolition costs
are systematically related to the amount of capital on an industrial parcel and that this is a
significant determinant of redevelopment.
REDEVELOPMENT AND CONTAMINATION RISK 439
FIG. 3. Estimated relationship between value differential and probability of redevelop-
ment for industrial real estate in Chicago for Model 2: Valdiff sVR2 yVC2.
redeveloped parcels for all variables other than PROBCON. The value of
PROBCON is allowed to vary between 0 and 1. The change in the value
.
differential VALDIFF associated with the change in PROBCON is then
translated into a change in the probability of redevelopment, as specified
by the structural probit model. In a separate evaluation, hypothetical
FIG. 4. Estimated relationship between the a priori probability of contamination and the
probability of redevelopment evaluated at the sample means.
DANIEL T. MCGRATH 440

reductions of contamination risk to zero i.e., setting the variable PROB-

.
CON to zero for each parcel in the redeveloped group produced an
average increase of 35 percentage points in the probability of redevelop-
ment for each parcel, to an average probability of redevelopment of 92%.
6. CONCLUSION
The results of this study support two major conclusions. First, this
analysis provides strong support for the view that investors who are
purchasing land for industrial redevelopment are discounting their bid
value to account for contamination risk in a systematic fashion, and within
the City of Chicago contamination risk appears to have been fully capital-
ized into industrial land values. The magnitude of this discounta median
76% unit value discount which translates to about a median $1.9 million
per parcel discount or about a $1.0 million per acre discount in 1995$is
somewhat higher in comparison to the limited information we have for the
magnitude of private voluntary cleanup costs, including Phase I, Phase II,
and remediation expenditures. Therefore, it is possible that investors are
perhaps either overestimating the financial liability or that the discounts
incorporate the present value of required legal costs certain to be part of
any site redevelopment. However, the results suggest that contamination
risk is not, per se, a detriment to redevelopment. Contamination risk
reduces the value of land, which in the short term reduces the value
differential available to an investor and increases the scale of financial
capital required for redevelopment. The evidence here suggests that in-
vestors, at least those in Chicago, could expect to recoup the expenditures
required to remove contamination liability through increase in land value
after site remediation.
Second, this study provides additional empirical evidence to support the
myopic redevelopment rule in explaining industrial redevelopment activity
in an urban area, and this analysis is the first to utilize the myopic optimal
redevelopment rule to estimate the relationship between land contamina-
tion risk and the probability of urban industrial redevelopment. On aver-
age, a hypothetical cleanup of the average parcel in the dataset, with a 0.67
probability of contamination and a value differential on the order of
$190,000, improves the probability of redevelopment about thirty-five
percentage points, from 0.57 to 0.92.
The evidence presented here concerning the capitalization of contami-
nation risk shows that, while there is not a fundamental bias against
contaminated industrial parcels within the urban core, the financial bur-
den, estimated at approximately $1 million per acre, without question
increases the scale of financial capital required for private market redevel-
opment. The evidence here also suggests that a publicly funded cleanup
would substantially increase land value and thus increase the parcels value
REDEVELOPMENT AND CONTAMINATION RISK 441
differential. This could substantially increase the probability of a parcels
redevelopment by the private market, as well as increase the property tax
revenue from the parcel. For these reasons, combined with the reduction
in risk to human health and ecosystems, more aggressive municipal gov-
ernmental intervention in site remediation might indeed be justified. The
evidence here suggests that it quite possible for a publicly funded remedia-
tion of a contaminated site to increase, in the short term, the probability of
redevelopment by the private market, but only after some serious scrutiny

of the other systematic determinants of land value and thus value differ-
.
ential for the parcel in question. Intervention would be optimal on
marginal properties that have the locational and other site characteristics
which, but for the existence of contamination risk, would clearly be
desirable to an industrial user. For such properties, the gain in land value
and the subsequent increase in value differential resulting from a site
remediation might indeed bring the parcel into a more competitive posi-
tion in the private industrial real estate market and could be viewed as a
viable strategy to attract jobs to a central-city location. Therefore, under-
standing the spatial patterns of value differential for industrial parcels
within the urban core could be a very important strategy for local govern-
ments to optimize their efforts, specifically publicly funded site cleanups,
to attract new industrial users for brownfield properties within the urban
core.
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