Contamination Can Cut Assessments

By John Garippa, As published by Real Estate New Jersey, April 2003

Environmental Contamination of a property rarely, if ever, signals good news for a property owner.  But as the old joke starts...I have some good news and some bad news.  If the bad news is that your property is contaminated, at least the good news is that your real property tax assessments should be lowered.

The New Jersey Tax Court has recognized that environmental clean-up costs ought to be deducted from real property tax assessments.  In the case of Witco v. Perth Amboy, the chief judge of the court agreed with the plaintiff that it was reasonable to assume that a prudent owner of contaminated property would take 10 years to clean it up under an approved plan.  Instead of taking a dollar-for-dollar deduction in one tax year, the court stabilized the costs over a 10-year period and then discounted the stream of deductions to a net present value, which was deducted from the market value of the property over the next three years, until the property was clean.

This decision follows previous determinations on other types of contamination affecting real property.  Previously, the court ruled on asbestos contamination and determined that those clean-up costs should also be deducted from market value.

These are important decisions for property owners because it is not unusual for the costs of remediating contamination to run into the millions of dollars.  In addition to the real dollars spent, the owner is tied up for years, expending time and energy managing the clean-up effort.

Now, with this decision in hand, an owner can prepare a remediation plan, a budget for implementing it and apply for approval.  As the plan is put into action, the owner must file an assessment appeal, as any money spent in remediation before the assessment is contested cannot be used to reduce that assessment.

Thus, property tax assessments can be reduced to reflect the clean-up costs because the court has recognized that no buyer would pay the same price for a contaminated property as for a clean property.  Now, the remaining issue to be contested is keeping the assessment reduction in place until the clean-up is completed.

Public policy considerations are also sound.  The public benefits because contaminated property is being cleaned.  And while tax revenues temporarily suffer, the reality is that in the long term, quality property will be put back on-stream and tax revenues should be higher. 

In making these decisions, the public is protected, since the only way for a tax reduction to take place is for an approved clean-up plan to be in place.  Mere speculation on potential remediation actions is insufficient for tax assessment reductions to be made.

The next frontier will most probably be black mold and mildew.  While mold has been around forever, only recently has it begun to support a cottage industry, as evidenced by the multi-million-dollar lawsuits for property damage and personal injury.  Clearly, mold will become the next asbestos in property tax assessment issues because of its relationship to construction.  Building codes that create airtight buildings have the potential to create mold and mildew that will now impact property tax assessments.  The discovery of toxic mold growth in New Jersey and the Northeast is on the rise and toxic mold litigation will likely continue to rise as well.  Improper construction techniques and the use of water damaged materials will likely give rise to increasing recognition of this issue.  When damaged and wet materials are incorporated into a building structure, toxic mold can develop.

At the present time, statutory and regulatory guidance is limited.  However, as these standards become codified, sick building syndrome will become an important issue on the property tax assessment front.  It is undeniable that from a market point of view, no knowledgeable buyer of property would pay the same price for a "sick" building as they would for a "healthy" building.  Therefore, it is not unreasonable to conclude that the same doctrine that allowed for a deduction for asbestos contamination should now also cover toxic mold.

It will take a few years to determine how this new area of contamination is treated by the marketplace and the assessment community.  Most likely, the bad news will be accompanied by some good news.

John Garippa is the senior partner of the law firm of Garippa, Lotz & Giannuario with offices in Montclair, NJ and Philadelphia.  He is also the president of American Property Tax Counsel, the national affiliation of property tax attorneys.  He can be reached at john@taxappeal.com