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How to Navigate the Tax Appeals Process for Contaminated Properties

Below is a property owner's guide to reducing the taxable value of contaminated real estate.

Valuing contaminated properties presents numerous challenges due to the complexity and uncertainty that contamination entails. The presence of hazardous substances or pollutants can affect both a property's value and potential uses. As an assessment must reflect market value, contamination can significantly impact taxable valuation.

Determining the extent of that impact requires careful consideration of legal, technical, and economic factors as the valuation of contaminated properties is governed by a combination of statutory law, regulatory guidance, and case law. Yet these are the fields a taxpayer with contaminated real estate must tread to evaluate assessments for fairness and, if necessary, to appeal an unfair assessment.

Tax assessment review proceedings are crucial mechanisms for all property owners to ensure fair and accurate assessments. These proceedings provide avenues to challenge property assessments they believe are incorrect or unfair. Understanding the process, timelines, and legal considerations involved is essential for property owners, assessors, and legal professionals alike.

Most real estate taxes in the United States are ad valorum or "according to value." Thus, the owner of a high-value property would expect to pay more real estate taxes than the owner of a lower-value parcel. While the exact procedures to file a tax appeal can vary by state, all give property owners the right to challenge property assessments through various means, including administrative review, grievance procedures, and judicial review.

Four Preparatory Keys

To prepare for a tax appeal, the following important considerations should be addressed:

1. Assess contamination levels: Determining the extent and severity of contamination on a property requires expertise in environmental engineering, so expert assistance is a must. Documentary evidence can significantly strengthen a property owner's case during the appeal process. Procure this with expert testimony from environmental consultants, appraisers, and other qualified professionals to establish the impact of contamination on the property's value. Assessors may need to rely on those reports to understand and truly appreciate the contamination's nature and scope.

2. Estimate remediation costs: The price tag to remove or contain pollutants can vary widely depending on the type, quantity and spread of the materials involved, as well as the chosen remediation method. While there are state statutes concerning remediation and liability, those matters are also codified at federal levels within the Comprehensive Environmental Response, Compensation & Liability Act (CERCLA) of 1980, commonly referred to as the Superfund Law. If a site is designated a "superfund site," it will typically have a remediation plan with anticipated cleanup costs, which assessment professionals can rely upon in determining market value.

3. Gauge market perception: Market perception can play a significant part in valuation since contamination can have a negative impact on the property's appeal to potential users or buyers. Known as "environmental stigma," this can severely depress market values. Prospective buyers are typically hesitant to purchase contaminated properties, often leading to decreased demand and lower market prices.

4. Don't sweat legal liability: Property owners may face legal liabilities for environmental contamination, which can also affect the property's value. This, however, should have no effect on valuation in a tax appeal proceeding, because the statutory mandate to value property in a tax appeal according to its market value cannot be subordinated to environmental property concerns. Most significantly, any liabilities for contamination or remediation must be addressed in a separate proceeding outside the tax appeal.

More to Consider

The three accepted approaches to valuation in the context of a tax appeal are income capitalization, sales comparison, and replacement cost less depreciation. Unfortunately, none of these truly account for the presence of contamination and its negative influence on value. The effects of environmental contamination, and even stigma from nearby contamination, must be part of the valuation equation.

Local case law also plays a significant role in shaping the legal landscape surrounding contamination in tax assessment review proceedings. Many courts have recognized the impact of contamination on property values and have upheld adjustments to tax assessments to account for this factor. Additionally, these same courts have established principles regarding the burden of proof and evidentiary standards in contamination-related tax appeals.

For example, the seminal case in New York is Commerce Holding vs. Board of Assessors of the Town of Babylon. In this 1996 case, a property owner filed a tax appeal contending the assessed values should be reduced to account for contamination by a former on-site tenant. While New York's highest court held that "any fair and non-discriminating method that will achieve [fair market value] is acceptable," they concluded that contaminated property in a tax assessment review proceeding shall be valued as if clean, then reduced by the total remaining costs to cure the contamination.

Clearly, valuing contaminated properties in tax assessment review proceedings requires a nuanced understanding of environmental regulations, property valuation principles, and market dynamics. Assessors and property owners must navigate complex legal and technical challenges to arrive at a fair and accurate valuation that reflects the unique circumstances of each contaminated property. By employing appropriate valuation strategies and seeking expert guidance, stakeholders can ensure that contaminated properties are assessed fairly and in accordance with applicable law. 

Jason M. Penighetti is a partner at the Uniondale, N.Y. office of law firm Forchelli Deegan Terrana, the New York State member of American Property Tax Counsel, the national affiliation of property tax attorneys.
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