Toxic Real Estate Assessments: A New York State Primer
What is the cardinal principle of property value for tax purposes? Property assessments “shall in no case exceed full value." NY Const., art. XVI, § 2.
What does “full value" mean? It is typically equated with “market value" or what “a seller under no compulsion to sell and a buyer under no compulsion to buy" would agree to as the property’s price. See Office of Real Property Tax Services Valuation Standards, http://www.orps.state.ny.us/ref/pubs/uniformAssmntStd/valuation.htm.
Does property value for tax purposes have to consider environmental contamination? Yes. The assessment “must take into account any factor affecting a property’s marketability." When “environmental contamination is shown to depress a property’s value, the contamination must be considered in property tax assessment." (See, Commerce Holding ). Accord RPTL § 302(1): “The taxable status of real property… shall be determined annually according to its condition." RPTL § 305(2) provides that all parcels within an assessing unit are assessed at a uniform percentage of current value (i.e., Level of Assessment, or LOA). “Recognizing the unsuitability of the strict application of traditional valuation techniques for contaminated properties, the prevailing trend in this field has been one of experimentation and adaptation, marked by the use of traditional techniques adjusted for environmental contamination." However, “a challenge to a property tax assessment must be supported by sound theory and objective data." Commerce Holding. There are certain factors that should be considered:
v the property’s status as a Superfund site
v the extent of contamination
v the estimated cleanup costs
v the present use of the property
v the ability to obtain financing and indemnification in connection with the purchase of the property
v potential liability to third parties
v the stigma remaining after cleanup
Do New York courts differentiate eminent domain taking from value for assessment purposes? Yes. In eminent domain taking, the owner has only one chance to be compensated for present value and potential future uses. In value for assessment purposes, the value is determined annually.
What are the three accepted approaches for determining market value and how do they differ?
Most Common Use
Comparable Sales Approach
Value is developed by comparing similar property sales within the same market area to the subject parcel and adjusting the comparables for dissimilarities.
Residential property and vacant land
Whenever sufficient sales are available
Value is determined by capitalizing rental income potential. The value of the real estate is measured based on the net rental capacity; not the value of the business being conducted.
Sufficient market income information, such as recent income and expense statements or current market lease data, is essential.
Preferred approach for income-producing property
Value estimate is developed by taking the cost of reproducing or replacing the improvements on a parcel, reducing that cost by any depreciation (physical, functional or economic), and adding the land value of the parcel—Reproductiion or Replacement Cost New Less Depreciation plus Land [RCNLD+L].
Particularly appropriate for proposed and new construction, special purpose properties (e.g., religious facilities, museums, schools), and properties with limited sales or income information.
The maximum value that can be placed on an improvement is reconstruction cost less depreciation.
Does the public policy in favor of requiring landowners to remediate their contaminated property (and requiring the polluter to pay) weigh against providing an assessment reduction for environmental contamination? No. Statutory and constitutional “full value" requirements cannot be subordinated to environmental policy concerns. The landowner’s potential liability for failure to take appropriate remedial action—especially where the site is listed under federal or state “Superfund"--operates to ensure compliance.
Does the landowner’s commitment under a consent order (or a previous owner’s contractual indemnification) to pay cleanup costs even if it sells the property, mean that the property’s market value would be unaffected by the presence of contamination? No. Especially under CERCLA, where a purchaser of the site, on notice of the environmental contamination, would still be “jointly and severally" liable for the cleanup costs. The fact that the landowner has agreed to remediate the property “does not resolve the question of whether and to what extent, the contamination in fact affects the value of the land." It may be that, “a buyer of the property would have demanded an abatement in the purchase price notwithstanding the existence of the consent order." Whether an owner’s agreement to pay “would affect the property’s value in a given case is a factual matter for the assessment board."
Is it acceptable to use the income capitalization approach to determine the value of an income-producing industrial property in its uncontaminated state, combined with a downward environmental adjustment in the amount of outstanding cleanup costs (discounted to their present value), to reflect the impact of contamination on value? Yes. “[C]leanup 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." This valuation method has the potential, however, to overstate the effects of environmental contamination. “The use of this method would be disfavored, for example, when the property is capable of productive use, but the high cleanup costs yield a negative property value. In such a case, the cleanup costs could be more appropriately accounted for by adjustments to the projected income stream." Commerce Holding, n. 5.
Has the Appraisal Standards Board, as part of their Uniform Standards of Professional Appraisal Practice (2010-2011 Edition) [USPAP], issued guidance on appraising properties that may be impacted by environmental contamination? Yes. Advisory Opinion 9 (AO-9). Relevant property characteristics may include:
Ø whether the contamination discharge was accidental or permitted
Ø the status of the property with respect to regulatory compliance requirements
Ø the remediation lifecycle stage (before, during or after cleanup) of the property as of the appraisal date
Ø the contamination constituents (petroleum hydrocarbons, chlorinated solvents, etc.)
Ø the contamination conveyance (air, groundwater, soil, etc.)
Ø whether the property is a source, non-source, adjacent or proximate site)
Ø the cost and timing of any site remediation plans
Ø liabilities and potential liabilities for site cleanup
Ø potential limitations on the use of the property due to the contamination and its remediation, and
Ø potential or actual off-site impacts due to contaminant migration (for source sites)
In valuing a property as impaired, the appraiser:
q must consider relevant factors in developing an opinion of the highest and best use of the property in its impaired condition
q must usually perform two highest and best use analyses—one as impaired, one as unimpaired
q must, in considering impaired value, consider “any limitations due to the contamination, its remediation, and any legal use restrictions associated with the cleanup of the contamination source"
q must recognize that “[e]nvironmental contamination and its remediation to appropriate regulatory standards may affect the feasibility of site development or redevelopment, use of the site during remediation, use of the site after remediation, marketability of the site, and other economic and physical characteristics of a contaminated property"
q “should consider the possibility that site remediation and any remaining limitations on the use of the site following remediation may alter or limit its highest and best use in the impaired condition"
q be aware that “excessive environmental risk and stigma may deter site development or redevelopment and thereby limit the highest and best use until the property’s environmental risk is reduced to levels acceptable to the relevant market participants"
When the appraiser addresses the diminution in value of a contaminated property and/or its impaired value, the appraiser must recognize that:
q “the value of an interest in impacted or contaminated real estate may not be measurable simply by deducting the remediation or compliance cost estimate from the opinion of value as if unaffected (unimpaired value)"
q “[r]ather, cost, use and risk effects can potentially impact the value of contaminated property"
§ cost effects: primarily represent deductions for costs to remediate a contaminated property; should include consideration of any increased operating costs due to property remediation
§ use effects: reflect impacts on the utility of the site as a result of the contamination; e.g., if a portion of the site is rendered unusable, or the future highest and best use is limited
§ risk effects: (typically estimated by the appraiser) often represent the most challenging part of the appraisal assignment; these effects are derived from the market’s perception of increased environmental risk and uncertainty—environmental stigma (must be based on market data, rather than unsupported opinion or judgment
- What other authoritative industry guidance is available? Detailed guidance is provided by the International Association of Assessing Officers’ Standard on the Valuation of Properties Affected by Environmental Contamination (approved July 2001). [Note: this standard states: “If any portion of these standards is found to be in conflict with… USPAP or state laws, USPAP and state laws shall govern."]
 In the Matter of Commerce Holding Corp. v. Board of Assessors of the Town of Babylon, 88 N.Y.2d 724, 673 N.E.2d 127, 649 N.Y.S.2d 932 (NY 1996).