Economically Depressed Contaminated Properties Are Prime Candidates for Significant Real Property Tax Relief

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While New Jersey is known as the Garden State, it is also regrettably fertile ground for contaminated properties as a result of its long history of industrial development. With over 20,000 contaminated sites, New Jersey is infamously ranked number one with the most Superfund sites in the nation. In many instances, but typically as a result of the sale of the property, owners are faced with the obligation to cleanup property contamination. The cleanup of a contaminated property involves significant costs and regulatory delays that can be financially crippling. These considerations are therefore material in any negotiations for the sale or other disposition of the property and undoubtedly negatively impact value.

At the same time, there is frequently a disconnect when considering the property tax obligations for such properties. Although New Jersey’s Constitution requires that all properties are to be assessed at their fair market or true value, tax assessments relating to contaminated properties are often grossly overstated. Assessments on these contaminated properties typically ignore the impact contamination has on the property value, and therefore are frequently out of touch with the economic realities of the situation. Consequently, contaminated property owners, already burdened with significant cleanup responsibilities, are frequently further handicapped by excessive tax bills that adversely impact their ability to simultaneously carry and cleanup these impaired properties.

Although our courts have historically sent mixed messages to contaminated property owners when it comes to pursuing property tax relief, a recent New Jersey Tax Court decision provides real guidance and hope for these property owners. In Orient Way Realty v. Township of Lyndhurst, the Tax Court concluded that, although no formal cleanup plan had been approved by the New Jersey Department of Environmental Protection (“NJDEP”), and the cost of the cleanup was not yet definitively determined, a negative adjustment to the value of the property, to account for the cost of the cleanup, should be applied.1 Because the purchaser of the property was taking the property subject to the expenses of the environmental cleanup the court held that the negotiated, arms’ length, sale of the property represented the best indication of the property’s true value. Through this negotiated sale price, the sophisticated parties involved in the transaction fairly recognized the diminished value of the property attributable to the contamination present and cleanup obligations encumbering the property.

With the addition of Orient Way to New Jersey’s body of existing contaminated property case law, property owners in this state can now more confidently pursue real property tax relief using a variety of recognized valuation methodologies. New Jersey courts have for years been wrestling with the appropriate approaches to account for contamination when assessing value for tax purposes. The Tax Court’s decision in Orient Way has finally closed the loop by adding the arms’ length sale price, where available, to the mix of approaches deemed valid in the pursuit of fixing value in this unique context.

Before Orient Way, while court precedents did consistently sound the bell for the need to account for the discounting affect contamination had on value, there was nonetheless only piecemeal guidance provided on how to calculate such influences. As early as 1988, the New Jersey Supreme Court, in Inmar Associates, Inc. v. Borough of Carlstadt, recognized that cleanup costs associated with contaminated properties no longer in operation should be considered in determining value.2 In this regard, however, the Court concluded that simply deducting the cleanup costs from the value of the property, as if clean, on a dollar for dollar basis, would be inappropriate. Although the Supreme Court did not ultimately decide the proper measure of deduction warranted or provide a particular method for making such calculations, it did suggest that such costs could be treated as a capital expense, capitalized over the term of the expected cleanup period.

More recently, in Metuchen I v. Borough of Metuchen, the Tax Court followed the teachings of Inmar and actually calculated the reduced value of the property due to contamination by subtracting from the unimpaired value of the property, a) the present value of the five (5) year anticipated cleanup costs (discounted by 9%), and b) an entrepreneurial incentive fee determined by taking 10% of the total property acquisition costs.3 Importantly, the court there also recognized that a further “stigma reduction” might also be appropriate where adequate proofs of such a contamination stigma were submitted, but found the proofs lacking in that instance.

Our courts also made clear that a reduction in value due to contamination would only be appropriate where there was a cessation of use of the contaminated property. In Pan Chemical Corp v. Hawthorne Bor., the Appellate Division held that the cessation of use of the contaminated property must occur before any value deductions for contamination cleanup can be applied.4 See also Badishe Corp. (BASF) v. Town of Kearny.,5 288 N.J. Super. 171 (App. Div. 1996). In particular, Pan Chemical confirmed that clean up cost deductions could not be applied where, on the one hand for tax appeal purposes, the owner claimed that an obligation to clean the property existed, but on the other hand, for compliance with New Jersey’s Industrial Site Recovery Act, N.J.S.A. 13:1K-6 et seq. (“ISRA”), maintained that cleanup obligations were not yet triggered because “operations” as defined by ISRA had not ceased.

With this historical backdrop, the Orient Way Court, applying the teachings of all such authorities, concluded that where there is a cessation of operations at the property, contamination must be considered in fixing value. In such an instance, cleanup costs are to be considered even where no final approved cleanup plan is in place. These costs are then properly capitalized in arriving at the appropriate measure of contamination deduction that is then to be applied to reduce the unimpaired “clean” value of the property to reflect its true value.

Where, however, an arms’ length sale transaction occurs during the valuation period in question, the Tax Court may circumvent this exercise and instead rely upon the final sale price as the best indicator of value. The Court in Orient Way recognized that when sophisticated parties negotiate a sale price, operating with full knowledge of the expected scope of the cleanup and the magnitude of the obligation, as they did there, the parties will, by necessity, have applied the discounting dictated by the contamination, culminating in a final sale price that properly reflects the true value of the property as impaired.

Accordingly, contamination and attending cleanup obligations should be carefully evaluated to ensure that the current assessment levels attached to these properties correctly reflect true value. By pursuing this very analysis, the property owner in Orient Way was able to realize a reduction in annual assessment of over $4 million dollars and an annual reduction in taxes of over $67,000. While the magnitude of tax relief will vary on a case-by-case basis, Orient Way provides owners of contaminated properties with a working roadmap as to how to utilize their cleanup obligations to realize meaningful tax relief. Only by consulting with a team of real property tax and environmental professionals can a proper case-by-case evaluation be conducted to determine if tax relief is indicated.

[1] Orient Way, Tax Court of New Jersey Docket Nos 003895-2006; 00434-2007, and 003219-2008 (N.J. Tax July 22, 2013).

[2] Inmar Associates, 112 N.J. 593 (1988) 

[3] Metuchen, 21, N.J. Tax 283 (Tax Ct. 2004)

[4] Pan Chemical, 404 N.J. Super 401 (App. Div. 2009)

[5] Badishe Corp., 288 N.J. Super. 171 (App. Div. 1996)

As the law continues to evolve on these matters, please note that this article is current as of date and time of publication and may not reflect subsequent developments. The content and interpretation of the issues addressed herein is subject to change. Cole Schotz P.C. disclaims any and all liability with respect to actions taken or not taken based on any or all of the contents of this publication to the fullest extent permitted by law. This is for general informational purposes and does not constitute legal advice or create an attorney-client relationship. Do not act or refrain from acting upon the information contained in this publication without obtaining legal, financial and tax advice. For further information, please do not hesitate to reach out to your firm contact or to any of the attorneys listed in this publication.

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