If My Property is Contaminated, Am I Entitled to a Property Tax Reduction?
Environmental contamination is widespread in many parts of the United States, particularly in now or previously industrialized areas of the Northeast and Midwest. This phenomenon is not limited to big cities, however.
In New York State, for example, the largest number of state "superfund" sites can be found in western New York (DEC region 9--Buffalo); the highest number of "brownfield" sites in all of Upstate New York are in the Syracuse/Central New York region (DEC region 7); and the Southern Tier has the second highest concentration of brownfield sites on a per capita basis.
This pattern holds true in "Greater Binghamton" as demonstrated by the following statistics for Broome County:
- 773 reported oil spills in the past 5 years (155 average per year)
- More than 80 recorded "brownfield" sites
- 45 sites on NYSDEC's "environmental site remediation" database
- 717 sites on DEC's "bulk storage" database
- 9 National Priorities List (NPL) federal "superfund" sites
- 15 sites on U.S. EPA's CERCLIS inventory of potential "superfund" sites
- 837 active RCRA (hazardous waste) facilities
This note discusses the question of whether real estate parcels stigmatized by environmental contamination must pay the same real property taxes as uncontaminated properties. For the reasons discussed, the answer is no.
The leading court case on this issue in New York was a court of appeals decision in 1996--the Commerce Holding case. The case involved a 2.7-acre site that was improved with a one-story industrial building divided into 37 rental units. A former tenant was a metal plater who discharged contaminated wastewater into onsite leaching pools, resulting in severe subsurface contamination, which led to the site being designated a federal "superfund" site in 1986.
Under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), the property owner was strictly liable for the cleanup costs. In 1988, the owner entered into a consent order with U.S. EPA to remediate the site. Town tax assessors valued Commerce's property at between $1.5 million and $2.6 million each year. Each year, Commerce filed timely challenges to the assessment, followed by annual tax certiorari proceedings, contending that these valuations were excessive and that the assessors should have reduced the assessed value to account for environmental contamination.
The court of appeals affirmed the decisions of both lower courts, upholding Commerce's valuation of the contaminated property. Specifically, Commerce's expert valued the property by using an income capitalization approach (capitalizing rental income potential), with a comparable sales approach for valuing the land only. The total remaining cost to cure all the contamination was then subtracted from the property's value in each year. The court held that "cleanup costs are an acceptable, if imperfect , surrogate to quantify environmental damage and provide a sound measure of the reduced amount a buyer would be willing to pay for the contaminated property." Noting "[t]he difficulty in assessing a polluted parcel" because of "the uniqueness of environmental contamination," and recognizing "the unsuitability of the strict application of traditional valuation techniques" to such properties, the court endorsed a "flexible approach" wherein "traditional techniques" are "adjusted for environmental contamination."
It cautioned, however, that "a challenge to a property tax assessment must be supported by sound theory and objective data ...." While no one method can be prescribed "to assess the effects of environmental contamination," the court stated that "there are certain factors that should be considered." These include:
- the property's status as a Superfund site
- the extent of the contamination
- the estimated cleanup costs
- the present use of the property
- the ability to obtain financing and indemnification in connection with the purchase of the property
- potential liability to third parties, and
- the "stigma" remaining after cleanup
Among the other guiding principles enunciated by the court were the following:
- "Because environmental contamination can depress a parcel's true value,... it must be considered in assessing real property tax"
- "The cardinal principal of property valuation for tax purposes, set forth in the State Constitution, is that property '[a]ssessments shall in no case exceed full value"
- "[T]he assessment of property value for tax purposes must take into account any factor affecting a property's marketability.... It follows that when environmental contamination is shown to depress a property's value, the contamination must be considered in property tax assessment"
- "[S]tatutory and constitutional full value requirements cannot be subordinated to environmental policy concerns" (i.e., the public policy in favor of requiring landowners to remediate their contaminated property, and requiring the polluter to pay, does not weigh against providing an assessment reduction for environmental contamination)
- The fact that the property owner, by consent order, has agreed to pay the cleanup costs even if it sells the property does not negate the impact of the contamination on the property's market value--because a purchaser of the site is nevertheless jointly and severally liable for the cleanup costs under CERCLA
- Nor does the owner's (or a third party's) agreement to remediate the property "resolve the question of whether, and to what extent, the contamination in fact affects the value of the land." A buyer would have demanded an abatement in the purchase price to account for the contamination notwithstanding the existence of the consent order--or an indemnification agreement. "Whether a property owner's agreement to pay the cleanup costs would affect the property's value in a given case is a factual matter for the assessment board."
- When the property is capable of productive use, but the high cleanup costs yield a negative property value (where outstanding cleanup costs are deducted from the property valuation as determined by the income capitalization approach), "the cleanup costs could be more appropriately accounted for by adjustments to the projected income stream"
- Cited with approval the decision of the supreme court of Minnesota in the Westling case, which affirmed an assessment which reduced the value of a property by subtracting the "remaining cleanup costs and amount attributable to stigma"
The Appraisal Standards Board, as part of its Uniform Standards of Professional Appraisal Practice (2010-2011 Edition), has issued guidance on appraising properties that may be impacted by environmental contamination. See Advisory Opinion 9 (AO-9). In short, there is no reason why environmentally impaired property in Greater Binghamton, or anywhere else in the State of New York, should be paying the same property taxes as similar uncontaminated properties.