We live in a polluted world, the effects of which are increasingly apparent. Contamination appears in many forms, from the asbestos insulation in our older buildings to the oil leaks at our neighborhood gas stations or in residential oil tanks. However, the taxpayers of contaminated property sites may be entitled to some relief, even as they face escalating clean-up costs.
In a far reaching decision, New York State’s highest Court requires local real estate tax assessors to acknowledge the negative effect contamination has on a property site’s fair market value.
In Commerce HoMing Corp. v. Assessor of Babylon, a unanimous Court of Appeals held ‘that when environmental contamination is shown to depress a property’s value, the contamination must be considered in property tax assessment.’
Pollution or contamination, per se, does not give rise to a decreased tax assessment. Rather, the decrease in market value due to the cost of cleaning up the contamination and related issues, such as the stigma associated with such polluted parcels, must be considered by the assessor.
There are situations where pollution renders properties uninhabitable. For instance, the pollution in the ‘Love Canal’ area of Upstate New York caused a tremendous loss in market value for all the homes in the vicinity. We also know that a restaurant contaminated by leaking solvents from the dry cleaner next door will be put out of business by the health department until the pollution is remedied.
The Commerce case details the particular concerns which should be addressed when evaluating the effect of the contamination on the market value of the property that continues in business. The Town of Babylon was joined by the City of New York and other municipalities in arguing that reduction of tax assessment due to contamination would effectively shift the clean-up costs to the innocent public at large and actually reward polluters with a ‘windfall’ award.
Although the Court observed the taxpayer of the polluted property might obtain a tax benefit under its holding, it further recognized that any such advantage would pale in comparison to the potential liability for failing to take appropriate remedial action. The ‘cardinal’ principal underlying the Court’s decision is the constitutional requirement that properties be assessed at full value.
Clean-up cost for contamination are usually broken down over several years. There are the initial costs for investigation and analysis of the pollution and how to remedy and control the same. Remediation of a contaminated site can easily encompass several years, because additional sources of contamination may be uncovered during the various remedial stages. Of course, government-required monitoring procedures add to a land-owner’s costs, both during and after the actual clean-up work. There is also a ‘stigma’ attached to many contaminated sites, so that the clean-up may not return the property to its original market value (as clean property).
As decided by the Commerce Court, the full cost associated with the contamination may be deducted by the amount of work accomplished each year. Since the clean-up of the contaminated site in Commerce spanned several years, the Court endorsed an appraisal methodology using calculations based upon the present value of clean-up costs as a deduction for each individual tax year.
A flexible approach to valuing is required, since each property and its pollution situation is unique. Among the several factors enumerated by the Court to be considered in assessing the value of polluted sites are:
- The property status as a Superfund site;
- The type and extent of contamination;
- The current and past use of the property;
- The ability to obtain financing;
- Potential liability or indemnification by third parties; and
- The continuing stigma that the property is left with after the clean-up.
The Court’s approach is designed to provide a sound measure of the reduced price a knowledgeable buyer would pay for the property each year. The Court, however, did state that such an approach might be inappropriate ‘when the property is capable of providing productive use, but the high clean-up costs yield a negative property value.’
It is recommended that once a property is found to be contaminated, an analysis should be made if the ‘cost to cure’ as deducted from the market value proves an over-valuation by the assessor. Rather than the innocent public paying for the clean-up costs, this is an appropriate and constitutionally correct way to have each property pay its fair share of taxes based on its market value as of each tax status date.
(Richard G. Fromewick is a partner in the Mineola, NY law firm of Meyer, Suozzi, English & Klein, P.C. He heads up the firm’s Certiorari and Condemnation Department. Fromewick has served as Assistant Corporation Counsel for New York City and Deputy Chief of the Tax Certiorari Bureau of Nassau County.)