Owners of properties with environmental contamination already carry the financial burden of removal or remediation costs, whether they cure the problem themselves or sell to a buyer who is sure to deduct anticipated remediation expenses from the sale price.
Fortunately, New York law allows those property owners to reduce their property tax burden to reflect their asset’s compromised value.
Most local governments in the United States impose a property tax on real estate as a primary source of revenue, levied and calculated by either ad valorem or specific means. Latin for “according to value,” ad valorem taxes are imposed proportionately based upon thecurrent market value of the property. Thus, the higher the market value, the higher the real estate tax.
Specific taxes, on the other hand, are fixed sums without regard to underlying real estate value. School, county and town governments nearly always compute real property taxes using the ad valorem method, whereas lighting, garbage or sewer districts typically apply specific taxes.
Because school and county/town taxes account for the overwhelming majority of a property tax bill, property owners frequently use assessment litigation concerning the market value of the subject property to reduce assessments and, as a result, lower the real property tax burden.
The cardinal principle of property valuation for tax purposes is that assessments cannot exceed full market value. Many states including New York codify this in their constitutions. The concept of full value is regularly equated with market value, which is the highest price a willing buyer would pay and a willing seller would accept, assuming both being fully informed.
Disagreements often arise if the subject property is afflicted with environmental contamination. The treatment of environmental contamination and remediation costs is of particular concern to both owners and municipalities.
Owners seeking to depress taxable values and thereby reduce their tax burden claim these expenses dollar-for-dollar off the market value under the principle of substitution. In other words, a proposed buyer would not pay more than $8,000 for a parcel worth $10,000 which needs $2,000 of remediation.
On the other hand, municipalities would prefer the adoption of a rule (either via legislation or court decision) barring any assessment reduction for environmental contamination.
Otherwise, they claim, polluters would succeed in shifting the cost of environmental cleanup to the innocent taxpaying public, in contravention of the public policy of imposing remediation costs on polluting property owners and their successors in title.
Fortunately for property owners, a seminal 1996 court decision guides the treatment of environmental costs to cure taxable value in New York. In Commerce Holding Corp. vs. Town of Babylon, the petitioner purchased 2.7 acres of land in the Town of Babylon, Suffolk County.
A former tenant of the property had performed metal plating on the premises and discharged wastewater containing multiple heavy metals into onsite leaching pools, ultimately resulting in the severe contamination of the parcel. The owner subsequently filed tax appeals and argued the value of the property should be reduced by the considerable costs needed to clean up the parcel.
As expected, the town’s position relied on a public policy approach and urged the court to reject any argument for a reduced assessment. Ultimately, the case traveled to New York’s highest court, which summarily rejected the public policy arguments that polluters should not be rewarded with lower assessments.
Instead, the court applied the constitutional and statutory requirements of full market value assessments, holding that the full value requirement is a “constitutional” mandate which cannot be swept aside in favor of public policy.
Thus, property must be valued as clean, with the value reduced by the costs to cure the remediation per year. Challenges seeking the limitation or outright reversal of the Commerce Holding case have been continually rejected.
A Recent Clarification
The New York State Court of Appeals did not address remediation again in a property tax litigation context for almost 20 years after Commerce Holding. In a 2013 case, Roth vs. City of Syracuse, a property owner sought to have the assessment on certain rented properties reduced because of the presence of lead-based paint.
The court declined to expand the application of Commerce Holding in this case for two significant reasons. First, the owner continued to rent the buildings and to collect income. Second, the owner had not taken any steps to remove or remediate the lead paint and restore the properties.
Thus, to successfully claim an assessment reduction, property owners should not stand idle, but should instead take definitive actions to remediate the property.
— By Jason M. Penighetti, attorney at the Mineola, N.Y., law firm of Koeppel Martone & Leistman LLC, the New York State member of American Property Tax Counsel, the national affiliation of property tax attorneys. This article first appeared in the August-September issue of Northeast Real Estate Business magazine.