"While the case law and appraisal science continue to evolve, the framework for valuing properties subject to environmental contamination remains relatively unchanged..."
The legal and appraisal communities have embraced the notion that environmental contamination can impair real estate value. After all, a property's potential uses or limitations on those uses have a direct bearing on the asset's marketability and profit potential.
An investor seeking to rein-in the tax burden on a contaminated property must navigate a legislative and regulatory framework that imposes liability on the property owner for environmental cleanup costs and remediation. In addition to the value lost when a property is directly contaminated, properties in proximity to the contaminated site can also lose value because they are subject to contamination.The devil is in the details, however, and uantifying the direct or proximate impact on value can prove problematic.
The State of New Jersey is a leader in attempting to define the impact of contamination on property value, and its highest court discussed this perplexing problem in the 1980s case of Inmar Associates Inc. vs. Carlstadt.
The New Jersey Supreme Court recognized that the costs associated with cleaning up environmentally contaminated properties would have a depreciating effect upon the properties' true value. The court also noted that deducting those costs dollar-for-dollar from the true value of the property is an unacceptable methodology, and deferred to the appraisal community to arrive at an appropriate valuation method.
Years later, in the case of Metuchen vs. Borough of Metuchen, the court identified a procedure it found acceptable. Without question, uncontaminated land is worth more than contaminated land, the court reasoned. Therefore, as contaminated land is cleaned up, its value increases. The legal question is, how should this capitalization of the cleanup costs affect the market value of the subject property?
In Metuchen, the tax court used the principles established in Inmar to form a foundation or core principles for assessing the value of unused, contaminated property that is subject to mandatory cleanup at the owner's expense, at an estimated but undetermined cost. Those are: cleanup cost, the effect on market value, calculating the impact and treating the cost of cleanup as a depreciable capital improvement.
Taking the lead from the New Jersey Supreme Court's ruling in Inmar, the tax court in Metuchen deferred to the appraisers to determine the costs of cleanup and appropriate capitalization time period. The parties essentially agreed upon the unimpaired value of the property and the court easily reconciled the difference in opinion on cleanup costs.
While the case law and appraisal science continue to evolve, the framework for valuing properties subject to environmental contamination remains relatively unchanged since Metuchen. That formula entails discounting the present value of cleanup costs and subtracting that from the property's clean value.
Most recently, the tax court used the Metuchen formula to find value in an unreported decision.
While courts, property owners and assessors use the Metuchen formula to determine the value of contaminated land, this method fails to deal with other factors associated with contaminated sites. One of those factors is environmental stigma, a term the appraisal community uses in attempting to quantify the adverse effect on property value produced by the market's perception of increased risk. Even after environmental cleanup and remediation, environmental stigma may still lower the otherwise unimpaired property's value.