Valuing Contaminated Property Continues to be Difficult in Tax Appeals
In ACP Partnership v. Garwood Borough, the Tax Court was asked to revisit the holding of our Supreme Court’s decision in Inmar Assocs., Inc. v. Bor. of Carlstadt. The Supreme Court in Inmar recognized that environmental remediation costs have an impact on the assessment valuation process. However, regardless of the cost associated with remediation of contaminated property, the Inmar Court dismissed the notion that one can simply deduct the cost of the cleanup from the value of the property. The Inmar Court also recognized that despite the conditions of the contaminated property which may render it non-marketable, there is a distinct ‘value in use’ to the owner so long as the owner continues to operate the facility. Thus, the critical holding of Inmar was that ‘normal assessment techniques’ must be utilized in the appraisal process when the property is ‘in use’ regardless of its contamination.
In ACP Partnership v. Garwood Borough, the plaintiff argued that environmental contamination and the costs associated with remediation of the property must be accounted for in determining the true market value of the property. The Borough, however, argued that the property possessed a distinct ‘in use’ value in light of plaintiff’s continued operations on the property, and thus as held in Inmar, the application of ‘normal assessment techniques’ in valuing the property was appropriate. Given the upcoming trial date in the case, the Tax Court’s ruling on this issue would be critical to the expert appraisers on both sides.
The facts were undisputed. After decades of industrial activity on the subject property, the property had become contaminated. The plaintiff in the present case acquired title to the property in 1991, and had voluntarily taken measures to investigate the environmental conditions of the property. After years of sampling results from the soil and groundwater, it was revealed that the soil on the subject property was contaminated with high levels of volatile chemicals and solvents. As a result, subject property was placed on the NJDEP’s Known Contaminated Sites List. Plaintiff had provided a remedial action work plan to NJDEP and also applied for and received 50% innocent party grant from the Hazardous Discharge Site Remediation Fund since plaintiff was not the party responsible for the discharge of hazardous substances or wastes on the property. In 2013, it was further discovered that potential contamination may extend down to the bedrock beneath the subject property which would dramatically increase the estimated contaminant mass size from earlier studies.
Notwithstanding the contamination, the property continues to be operated as a multi-tenanted, and multi-structure industrial and warehouse complex. The improvements contain approximately 230,000 sq. ft. and the plaintiff leases the property to tenants utilizing it for various warehouse and industrial uses. Plaintiff also occupies a small portion of the building for self-storage.
The Tax Court recognized that the facts in the present case presented an anomaly from those in prior precedents. First, the plaintiff acquired title to the subject property prior to the statutory changes which required the former owner of contaminated property to be obligated to cleanup the property. The contamination of the subject property was a result of the former owner prior to plaintiff’s acquisition, and plaintiff has neither caused nor exacerbated the situation, as evidenced by plaintiff’s successful application in receiving 50% innocent party grant. Second, the plaintiff voluntarily sought to investigate and contribute to implement remediation efforts on the property. Based on these facts, the Tax Court applied the holding in Inmar Assocs., Inc. whereby the court was required to take into consideration the environmental condition of the subject property. Furthermore, the current ‘in use’ status of the subject property cannot be ignored and thus the use of ‘normal assessment techniques’ must be utilized. However the Tax Court noted that “such techniques must be tempered by the costs encountered by the taxpayer in addressing the environmental condition of the property.” Although the court did not offer a methodology to account for the effect contamination has on the value of property, the court left the issue of making any adjustments as to the contamination to the “competence of the appraisal community.”
A copy of the Tax Court’s published opinion of ACP Partnership v. Garwood Borough can be found here.
