Goldstein Rikon Rikon & Levi, P.C.

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Valuing Contaminated Property

The valuation of real property that might require remediation for contamination presents numerous valuation problems. The problem becomes acute when the property is taken for a public purpose. Most owners do not want to have their property taken from them in an eminent domain proceeding. Imagine an owner’s chagrin to find out that it will receive less than the fair market value for the property. A condemnation of property is a forced sale involving the inherent power of the sovereign to acquire property it needs for a public purpose. Traditionally, the property taken is to be valued as of the date that title vested in the condemnor. While there is often little that can be done to stop a condemnation, both the United States and New York State Constitutions require that the condemnor pay the former owner, now a claimant. “just compensation.” The exact determination of “just compensation” constitutes the key issue in a condemnation trial.

A new tactic now used by condemnors is the attempt to deduct the full cosl for the remediation of a site from the value it offers the former owner. indeed, we are aware of some situations where the alleged costs to remediate exceed the fair market value of the property. As will be discussed below, the failure to offer full compensation is unconstitutional and violates statutory and case law. Often, too, it cannot be supported factually.

The law requires that a parcel of land that is condemned be valued at its “highest and best use.” This is an absolute requirement and the appraised must set forth the appraiser’s opinion as to the “highest and best use,” regardless of actual use when it was condemned.

If the highest and best use of a parcel that was used as a truck depot is for a shopping center and such use is otherwise legal and appropriate, that is the use to be considered for valuation purposes. If, for example, the shopping center would be constructed on a concrete slab, why should that owner be responsible for the total cost for remediating oil-contaminated soil, especially when it was caused by migrating water?

The condemnor’s construction requirements, say for building a new subway tunnel, or a new school with full basement, will far exceed what would be required by the former owner to develop the property in its “highest and best use.” Furthermore, the offsets for remediation by condemnors often represent improper attempts to subsidize the project’s costs.

Excessive Charges and Waste

Experts evaluating the remediation costs paid by condemnors are often aghast at the excessive charges and waste incurred by governmental agencies for remediation. These costs are incurred without any control or input by the former owner.

As if this were not enough, a claim for damages in a condemnation proceeding is a Special Proceeding with limited jurisdiction. There is no right to a jury. A claim ant-condemnee no longer may bring suit to recover the cost of remediation from former owners or adjoining property owners. Thus, it would be fundamentally unconstitutional as a violaton of Due Process to deprive the former owner of its full compensation.

The litigation over the proprietary measure and cost of remediation will be more proflix than the determination of fair market value. This would, in of itself, violate New York’s Eminent Domain Procedure Law, which re quires prompt payment and resolution of claims with reduced litigation.

The premise for the imposition of remedia tion costs is found in the Comprehensive Environmental Response Compensation and Liability Act (CERCLA), also known as Superfund. The New York State Department of Environmental Conservation (NYSDEC) has adopted its own Regulations and Guidance Policy, which sets forth minimum mandatory actions to achieve regulatory compliance for property affected by petroleum hydrocarbons in the State of New York.

While it is clear that assessed values of property shouid be reduced to account for environmental contamination, this is because the cardinal principle of property valuation for tax purposes, as is set forth in the State Constitution, is that property “[a]ssessments shall in no case exceed full value” for the actual use of the property. Compare that standard to the Eminent Domain standard of “Highest and Best Use.”

There are other significant reasons for considering re mediation costs in a tax certiorari proceeding. The peti tioner still owns the property and has the ability to implead third parties and control remediation costs.

‘Unique Fingerprint’

In a technical report on appraising contaminated property, the Appraisal Institute noted that

…each environmental problem is as unique as a fingerprint. Based on our collective experience, the use of comparabies in the analysis of a specific situation is highly limited; each situation must be examined on its own terms. The sales-comparison approach is useful in establishing the unimpaired value provided that certain cautions are observed, but it has very limited applicability in establishing adjustments to arrive at an environmentally impaired value.

At the same time, the Appraisal Institute in its leading treatise [t]he Appraisal of Real Estate (11th ed.) says that the value of an interest in impacted or contaminated real estate may not be measurable by simply deducting the remediation or compliance cost estimate from the estimated value as if unaffected.

How can a claimant in a condemnation proceeding, with a constitutional right to recover just compensation, be required to litigate such diverse issues — especially when the former owner is denied a remedy against others who may be responsible?

Recently, the Second Circuit decided ABB Industrial Systems Inc. v. Prime Technology Inc. In a non-condemnation setting, the court held that unless it could be shown that a party “spilled hazardous chemicals or otherwise contaminated the site,” those parties, former owners or operators, could not be held liable for the existence of hazardous substances premised merely on the “passive migration” of hazardous substances.

While the ABB Industrial Systems Inc. case provides welcome news, and a safe haven, to property owners and operators when faced with the existence of “passive migratian” of a hazardous substance, it also shows the total injustice and impropriety of at tempting to charge a condemnee for cleaning up a site or a public project.

Even if the contamination is not “passive,” the attempted deduction of remediation costs should not be al lowed. In private enterprise, the trend is to transform underutilized and con taminated sites into usable revenue properties, i.e, Brownfield Redevelopment. Indeed, the Taxpayer Relief Act of 1997 added new