|
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.
|
