Valuation Of Contaminated Property
By M. Robert Goldstein & Michael J. Goldstein
Two relatively recent cases, one in New Jersey and the other in New York, value real estate in tax reduction proceedings that to varying degrees had been affected by either toxic contamination or the presence of asbestos. They have been read in vain for valuation principles to apply, not only in tax reduction cases but in condemnation cases as well.
The first of the cases was Inmar Associates inc. V. Borough of Carlstadt and its companion case was GAF Corp. V. Borough of South Bound Brook, 112 N.J. 593 (1988) decided by New Jersey's highest court.
The Inmar property was subject to toxic contamination and was on the Federal Superfund list under Comprehensive Environmental Response Compensation and Liability Act (CERCLA). 42 USC 889601-9675; operation on the property had been halted by New Jersey; an action had been started against the owner to compel a cleanup, and the petitioners' argument was that therefore it was completely unmarketable and thus should not be assessed or that the estimated cleanup cost of more than $2.5 million should be deducted from its value as a cost to cure.
The court in Inmar acknowledged the rule of law, which is the same as in New York (most usually applied in the probability of rezoning cases), that governmental regulations affecting the property may be used in determining "true value" and that no special rule of law would apply in the valuation of toxically contaminated property even though many local municipalities appeared as amicus on the basis that reducing the assessment for contamination would be rewarding the polluter.
The Cost to Cure
Here again the court rejected the notion that it was simply a matter of deducting the cost to cure from the market value. It pointed out that under CERCLA, the Resources Conservation and Recovery Act (RCRA), 42 USC 886921-6331, the New Jersey Spill Conservation and Control Act (the Spill Act), NJSA 58:10-236 2324 and the Environmental Cleanup Responsibility Act, NJSA 13:1K-6 to L14, there is imposed on current and past owners and users of the land the cost of restoring the land and that they may have shifted costs but not values. It suggested instead that it was up to the appraisers to fashion a valuation theory of how the value was in fact affected by the situation. That is, what did actual transactions show the selling prices to be in similarly situated properties between willing buyers and sellers? Was it that in fact the property might sell at its full market value and that prior owners might br responsible for its cleanup? That the responsibility may be personally that of the owner (or prior owners) but without affecting the value of the property similar to the obligation to pay off a mortgage, which although an obligation to be enforced against the property and affecting the cash received -- does not affect the property's value?
In the GAF case, the property was an operating asphalt plant where, because the asphalt had leaked into the land, it would require under New Jersey law an expensive cleanup equivalent to about 25 percent of its value before it could be sold.
The court in GAF affirmed the lower court in refusing to reduce the assessment because there was no proof of what impact the cost of the cleanup would have on market value, impliedly rejecting proof of the cost of cleanup itself as the basis for a valuation finding, particularly since the plant could continue to be used as an asphalt plant, as in fact it was.
Effect of Asbestos
The other case we read was Bass v. Tax Commission of the City of New York, which appeared in the New York Law Journal on Jan. 24. Judge Parness there tussled with the valuation effect of asbestos, which, he said, "permeates the structure" of One New York Plaza and the other physical defects of the building.
He found that the total reasonable cost to cure in removing
the asbestos and curing the other defects amounted to about
$122 million and that the cash flow from the building was
and continues to be insufficient "to fund a repair and
abatement program." He also found that, while the City
in its appraisal acknowledged the asbestos problem, it failed
to take into account its effect upon market value, the impact
of the other physical defects or that the comparable sales
it submitted were not comparable as they did not have asbestos
problems.
Having found all of this, he found that a "knowledgeable
buyer would demand some abatement in the purchase price to
compensate for the sums that will have to be expended to correct
the building's physical and asbestos problems," citing
Northville Industries Corp. V. Board of Assessors, 143 AD2d
135, 138 and the cases cited therein.
Having said that, we find no further hint of how it is actually to be applied. The $122 million was not applied as a cost to cure deduction from what would otherwise be its market value. Instead, the implication was that it was applied by using the rents and capitalization rates as affected by the asbestos and physical deficiencies to come to a market value determination. It was applied by finding that the values had not increased since the 1983-84 tax year when there was an agreement as to values.
Thus, on both sides of the Hudson, we have cases dealing with the problem but giving no hard and fast guidelines as a black-letter valuation rule, and that is really as it should be.
Valuation is not a mechanical function. One cannot, say mechanically apply a cost to cure, even as to the removal or abatement of asbestos. It is further complicated when as in toxic contamination, the property merely stands a surety for the polluters' and those in the chain of title cleanup obligation.
Surely, one can purchase a contaminated property and pay full market value where a deep pocket is a prior owner who stands responsible for the cleanup, knowing the cost will never come out of the property's value. That is really what the New Jersey case is all about. If we can value property based on the rent obligations of a triple A tenant for the term of the lease, and, in effect, disregard a lower rental value (the theory of excess rent) (see Matter of the City of New York (E.N.Y.I. Comm. Dev. Plan) (Willonea Amusement Co.), 45 AD2d 1007, 358 NYS2d 52 (2d Dept., 1974), we can rely upon the same theory where there is a responsible prior property owner liable for the cost of a cleanup.
The fact that a property needs a cure for a physical defect does not necessarily mean that the market will deduct its cost in fixing a price for the property. For example, a well-known Manhattan developer interested in purchasing a development sit on which to build a half block, 42 story building. The sit needed piling. He was asked how the piling would affect the price he would pay for the land. Imbued with the valuation theories inherent in these proceedings and assuming we were surprised that he said it would not affect the price of the site. He said that although the number was significant, it would only add 50 cents per square foot to the rental he would have to get -- insignificant when added to $35 per square foot rental.
Thus logic and theory is fine, but the New Jersey court was correct. In the final analysis these deficiencies do not affect the price of similarly situated properties in the market place.
Reprinted with permission from the March 20, 1991 edition of the New York Law Journal © 2010 Incisive Media Properties, Inc. All rights reserved. Further duplication without permission is prohibited.