Articles: Urban Land Magazine

This article, written by our executive(s), originally appeared in the Urban Land Magazine, June 1994.) Contact us for Reprint Permission.

Fair Assessment for Contaminated Properties

Real estate taxes constitute one of the largest fixed expenses confronting property owners. Theoretically, each property is taxed according to its fair market value. Yet many property tax assessors fail to evaluate the impact of new laws and new sensibilities on the fair market value of properties with environmental problems. The failure to account for the material reduction in market value of certain environmentally problematic properties results in these properties paying more than their fair share of real estate taxes.

Recently, owners of environmentally problematic properties have begun to recognize that current assessments of their properties cannot be reconciled with economic reality. A few owners have instituted formal or informal proceedings, in hopes that the assessments will be adjusted to reflect the property’s fair market value accurately. All too often, assessors and assessment boards have refused to make adjustments because of the meager funding available to them. This lack of funding regularly stymies good-faith efforts by assessment boards to evaluate the financial impact that environmental factors have on afflicted properties.

Even fewer owners have challenged their assessments in court. (See, for example, MICO v. County of Nicollet, Minn. Tax Court File Nos. C6-89-284 and C8-89-285 (September 28, 1990, amended December 11, 1990) and Firestone Tire and Rubber Company v. County of Monterey, 223 Cal. App. 3d 382, 272 Cal. Rptr. 745 (1990).) Although these types of cases are relatively new, courts are beginning to decide that a property’s fair market value cannot be ascertained without an evaluation of the impact of environmental factors. (See, for example, Monroe County Board of Assessment Appeals v. Miller, 570 A. 29 1386 (PA., 1990).)   Both institutional and large private investors can save millions in real estate taxes by ensuring that environmental factors are fully acounted for in the assessment. One recent case, Bass v. Tax Commission of the City of New York, 179 App. Div. 2d 387, 578 N.Y.S. 2d 158 (1st Dept., 1992), for example, yielded a savings of more than $20 million for a prudent taxpayer.

Unfortunately, most assessors still ignore the impact that environmental factors have on fair market value, despite the International Association of Assessment Officers’ (IAAOs’) published Standard on the Valuation of Property Affected by Environmental Contamination (IAAO, Chicago, August 1992). This publication lists a number of environmental laws and conditions that may affect a property’s market value.

A wide variety of environmentally friendly land use regulations also may affect property values. A growing body of case law supports the proposition that property tax assessments must include any impact that these regulations have on fair market value.

Society’s increased concern about human health and the environment has resulted in a steady increase in the number of environmental factors that adversely affect property values. Some recent medical studies, for example, have indicated that electromagnetic fields (EMFs) emitted by electrical utilities may cause cancer. Although these studies are inconclusive, a great deal of evidence supports the proposition that the fair market value of properties located near EMFs are lower because of the market’s hesitation. In fact, some property owners have successfully petitioned the courts to obtain compensation for the diminution in market value their properties experienced because of their proximity to EMFs. (Westlake v. Transmission Agency of Northern California, No. 98803, Cal. Super. Ct., Shasta County, 1993.)   These property owners are entitled to tax assessments that reflect the diminished market value of their properties.

Environmental factors affect the market value of real property to varying degrees. Owners and their representatives must be vigilant in their efforts to ensure that the properties under their charge are fairly assessed. The financial benefits accruing from such efforts can help generate the funds needed to clean up the offending contamination. This cleanup, in turn, will go a long way toward protecting the health and safety of the property’s occupants, as well as making the property more attractive to tenants, prospective purchasers, and lenders. Owners who put saved tax money to work making environmental improvements can do well by doing good.

(This article, written by an ALR executive, originally appeared in the Urban Land Magazine, June 1994.)