Valuing contaminated properties – “in use” or ”not in use”, that is the question. . . .

In Orient Way Corp. v. Township of Lyndhurst, the New Jersey Tax Court was confronted with the issue of valuation for local property tax purposes real property impacted by environmental contamination. This matter involved tax appeals for 2006 through 2008 on an old industrial property where the issue of contamination was undisputed. Also, undisputed was the value of the property if clean.

Over the years, our courts have taken a cautious approach in dealing with taxpayer claims of diminution in value due to contamination. In Inmar Associates, Inc. v. Borough of Carlstadt, 112 N.J. 593 (1988) our Supreme Court held that environmental contamination has an impact on property valuation for local property tax purposes. The Court found that the assessment process could not ignore market forces which would most certainly take into account remediation costs. However, as to how contaminated property should be valued, the Court recognized that the law was developing, but set forth one clear, bright line rule “is not simply to deduct the cost of cleanup from a putative value of the property.”

Just over one decade later the Appellate Division limited the reach of Inmar to hold that an adjustment for environmental contamination is not warranted where the subject property remains “in use.” The court in Pan Chemical Corp. vs. Hawthorne Borough, 404 N.J. Super. 401 (App. Div. 2009), directed that the “in use” determination should be driven by the property’s status under the Industrial Site Remediation Act more commonly known as “ISRA”, which imposes an obligation to clean up property if 90% of the operations ceased. When a property is still considered to be “in use” as defined under ISRA, then environmental contamination and the cost of clean-up may not be considered when arriving at the value of property for tax assessment purposes.

One issue before the Tax Court in Orient Way Corp was the incidental use of the property by an entity not responsible for the contamination, not related to the polluters of the property and which did not contribute to the contamination during the time the remediation plan was under review by DEP. The court held that this use did not preclude reduction in assessed value to account for the contamination. The court held also, relying on Inmar, that a government-approved remediation plan is not a necessary predicate for the consideration of contamination when determining assessable value.

Another interesting outcome of this case was that in establishing market value for the subject property, the court relied on a single sale. Here, plaintiff, Orient Way Corp., closed on the subject property on May 1, 2006. This was the only evidence of market value relied upon by the court, which noted that while “reluctant to accept a single sale as evidence of market value . . . the single sale is of the subject in close proximity to the first valuation date [and] the court cannot reasonably expect to uncover additional sales of contaminated properties sufficiently similar to the subject to serve as credible evidence of value.” This sale closed seven months after the first assessing date in this matter, October 1, 2005. Nonetheless, the court recognized that negotiations were ongoing as of the assessing date and that the parties had entered the contract of sale on November 28, 2005. As for adjustments for the future years, the court turned to evidence in the record regarding the stipulated value of the property if clean. The court noted that these values indicated an approximately 2.5% increase from tax year 2006 to 2007 and another 5% increase from 2007 to 2008. The court applied these rates of appreciation to the $2.5 million sales price to reach its final determination of value for 2007 and 2008.

A copy of the Court’s decision in Orient Way Corp. v. Township of Lyndhurst, may be found here.

Related articles:
Environmental Impacts in Real Estate Valuation Litigation

Appeals Court Refuses to Lower Tax Assessment for Environmental Cleanup Costs

Refunds for Environmental Remediation?   See also: P.L. 2012, c.19 (approved July 9, 2012)  which requires deposit of property tax refunds for certain industrial sites under federal or State orders for remediation with Commissioner of Environmental Protection to help ensure compliance.

Contaminated Property Would Be Assessed As-If Remediated Under Proposed Legislation