Urban Industrial Land Redevelopment and Contamination Risk

Abstract

This study examines the role of contamination risk on urban industrial redevelopment 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 parcel's value through conversion to a new use, net of construction costs, exceeds the value of the same parcel continuing in its current use. Contamination 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.