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Valuing Contaminated Property
By Michael Rikon
The valuation of real property that might require remediation
for contamination presents numerous valu ation problems. The
problem becomes acute when the property is taken for a public
purpose. Most owners do not want to have their property taken
from them in an eminent domain proceeding. Imagine an owner's
chagrin to find out that it will receive less than the fair
market value for the property. A condemnation of property
is a forced sale involving the inherent power of the sovereign
to acquire property it needs for a public purpose. Tradi tionally,
the property taken is to be valued as of the date that title
vested in the condemnor. While there is often little that
can be done to stop a condemnation, both the United States
and New York State Constitutions require that the condemnor
pay the former owner, now a claimant. "just compensation."
The exact determination of "just compensation" constitutes
the key issue in a condemnation trial.
A new tactic now used by condemnors is the attempt to deduct
the full cosl for the remediation of a site from the value
it offers the former owner. indeed, we are aware of some situations
where the alleged costs to remediate exceed the fair market
value of the property. As will be discussed below, the failure
to offer full compensation is unconstitutional and violates
statutory and case law. Often, too, it cannot be supported
factually.
The law requires that a parcel of land that is condemned
be valued at its "highest and best use." This is an absolute
requirement and the appraised must set forth the appraiser's
opinion as to the "highest and best use," regardless of actual
use when it was condemned.
If the highest and best use of a parcel that was used as
a truck depot is for a shopping center and such use is otherwise
legal and appropriate, that is the use to be considered for
valuation purposes. If, for example, the shopping center would
be constructed on a concrete slab, why should that owner be
responsible for the total cost for remediating oil-contaminated
soil, especially when it was caused by migrating water?
The condemnor's construction requirements, say for building
a new subway tunnel, or a new school with full basement, will
far exceed what would be required by the former owner to develop
the property in its "highest and best use." Furthermore, the
offsets for remediation by condemnors often represent improper
attempts to subsi dize the project's costs.
Excessive Charges and Waste
Experts evaluating the remediation costs paid by con demnors
are often aghast at the excessive charges and waste incurred
by governmental agencies for remediation. These costs are
incurred without any control or input by the former owner.
As if this were not enough, a claim for damages in a condemnation
proceeding is a Special Proceeding with limited jurisdiction.
There is no right to a jury. A claim ant-condemnee no longer
may bring suit to recover the cost of remediation from former
owners or adjoining property owners. Thus, it would be fundamentally
unconstitutional as a violaton of Due Process to deprive the
former owner of its full compensation.
The litigation over the proprietary measure and cost of
remediation will be more proflix than the determination of
fair market value. This would, in of itself, violate New York's
Eminent Domain Procedure Law, which re quires prompt payment
and resolution of claims with reduced litigation.
The premise for the imposition of remedia tion costs is
found in the Comprehensive Environmental Response Compensation
and Liability Act (CERCLA), also known as Superfund. The New
York State Department of Environmental Conservation (NYSDEC)
has adopted its own Regulations and Guidance Policy, which
sets forth minimum mandatory actions to achieve regulatory
compliance for property affected by petroleum hydrocarbons
in the State of New York.
While it is clear that assessed values of property shouid
be reduced to account for environmental contamination, this
is because the cardinal principle of property valuation for
tax purposes, as is set forth in the State Constitution, is
that property "[a]ssessments shall in no case exceed
full value" for the actual use of the property. Compare that
standard to the Eminent Domain standard of "Highest and Best
Use."
There are other significant reasons for considering re mediation
costs in a tax certiorari proceeding. The peti tioner still
owns the property and has the ability to implead third parties
and control remediation costs.
'Unique Fingerprint'
In a technical report on appraising contaminated property,
the Appraisal Institute noted that
... each environmental problem is as unique as a fingerprint.
Based on our collective experience, the use of comparabies
in the analysis of a specific situa tion is highly limited;
each situation must be examined on its own terms. The sales-comparison
approach is useful in establishing the unimpaired value provided
that certain cautions are observed, but it has very limited
applicability in establishing adjustments to ar rive at an
environmentally impaired value.
At the same time, the Appraisal Institute in its leading
treatise [t]he Appraisal of Real Estate (11th ed.) says that
the value of an interest in impacted or contaminated real
estate may not be measurable by simply deducting the remediation
or compliance cost estimate from the estimated value as if
unaffected.
How can a claimant in a condemnation proceeding, with a
constitutional right to recover just compensation, be required
to litigate such diverse issues -- especially when the former
owner is denied a remedy against others who may be responsible?
Recently, the Second Circuit decided ABB Industrial Systems
Inc. v. Prime Technology Inc. In a non-condemnation setting,
the court held that unless it could be shown that a party
"spilled hazardous chemicals or otherwise contaminated the
site," those parties, former owners or operators, could not
be held liable for the existence of hazardous substances premised
merely on the "passive migration" of hazardous substances.
While the ABB Industrial Systems Inc. case provides
welcome news, and a safe haven, to property owners and operators
when faced with the exis tence of "passive migratian" of a
hazardous substance, it also shows the total injustice and
impropriety of at tempting to charge a condemnee for cleaning
up a site or a public project.
Even if the contamination is not "passive," the attempted
deduction of remediation costs should not be al lowed. In
private enterprise, the trend is to transform underutilized
and con taminated sites into usable revenue properties, i.e,
Brownfield Redevelopment. Indeed, the Taxpayer Relief Act
of 1997 added new 𨴞 of the Internal Revenue Code, which
now al lows tax deductions for qualified envi ronmental remediation
expenditures.
Contaminated properties are sold to users who do not deduct
the estimat ed costs to remediate but carry the expenses as
they do any other cost of doing business.
Another issue deals with property where there has been an
alleged spill. In most instances, there will be a con sent
order that often states that the alleged responsible person
neither admits nor denies the allegation of the agency but
agrees to do certain things. If the property is taken in con
demnation, the prior owner no longer has control over the
property. In fact, the prior owner may not even be able to
enter the property. It would be fun damentally wrong to deduct
the cost of remediation if a consent decree did not require
this expense.
Our review of a typical consent order reveals that the alleged
polluter is excused for noncompliance if it can not comply
because of any event over which it has no control. The compul
sory purchase of the property certain ly serves to relieve
it of any obligation under the consent decree.
Remediation Offset
Although there is no decision from a New York Condemnation
Court, oth er jurisdictions have been adamant in their refusal
to allow condemnors to attempt to offset their remediation
costs from a condemnee's "just compensation." In Department
of Transportation of the State of lllinois v. Parr, the
lllinois Transportation Department sought to value the property
leged environmental hazards and the cost to remove them. The
Parr court ruled that environmental cleanup costs were
not admissible in a con demnation proceeding.
The lllinois Appellate Court relied heavily on the fact
that its Eminent Domain Act, like New York's, did not allow
for third-party actions nor did it address potential liability
for environ mental remediation. "For the reasons given, we
conclude that the admission of remediation costs at an eminent
domain proceeding violates the right of property owners to
have their po tential liability properly adjudicated in a
proceeding under the act with attendant procedural safeauards."
Iowa, a few months ago, held sub stantially the same in
Aladdin Inc. v. Black Hawk County. Here, the condemnor
valued the land it took as if uncontaminated, and then reduced
that value dollar-for-dollar by the cost of remediation, which
the County esti mated at $561,000. Condemnation commissioners
reduced the award by $135,000 as remediation costs. The Iowa
Supreme Court overruled the commissioners and held that "an
eminent domain proceeding is not a prop er forum to assess
liability for environmental contamination." The Appellate
Court agreed.
To hold one liable for contamina tion under lowa law, it
must be proven in a separate proceeding that the lia ble individual
generated the contami nation. Unless this is done, the owner's
just compensation will not be diminished by the cleanup cost,
but he will still remain liable to others, the same as before
the condemnation.
The court also noted that the cost of trying contamination
would boost the cost of eminent domain proceedings and force
the owner to incur addition al expenses. Also, it is difficult
to find comparables that are as contaminated as the subject
property, and that, too. would make condemnation proceedings
more complex and more expensive.
Under the circumstances, we sug gest that it is unconstitutional
to de duct any remediation costs from a condemnation award.
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