Unclean Hands and Unclean Lands:  Recent Opinion Sheds Light
on the Effect of Environmental Contamination on Real Estate Tax Valuation

According to a recent Appellate Division decision, for owners of contaminated industrial sites looking to lower their property tax assessments based on the lower value attributed to environmental contamination, in New Jersey the choice is clear: shut down or pay up.   In the published opinion of Pan Chemical Corp. v. Hawthorne Borough, __ N.J. Super. __ (App. Div. 2009), the Borough of Hawthorne appealed from a decision of the Tax Court concerning the tax assessment for a tract of contaminated industrial property.  For the tax years in question, the site had been kept minimally operational by the owner to avoid triggering the property owner’s obligation to clean up the property, which would have begun once industrial operations ceased.  The company kept only 15% of its operations running on the site, while the rest of the concern moved to another location simply “to comply with [the Industrial Site Recovery Act]” (which requires that when an industrial operation ceases operations, or reduces its operations by 90%, the responsible party immediately clean up the contamination).  The taxpayer sought a reduction in its property tax assessment based on the contamination, which is permitted for properties which have no ongoing operations.  The Tax Court considered the property “closed” because the majority of the operation had moved, and deducted the cost of the environmental cleanup costs from the real estate tax assessment, lowering the company’s property tax burden. 

In an opinion written by Judge Coleman, a three judge appellate panel disagreed, holding that for tax purposes, the facility remained in use during that period by virtue of the 15% of its operations remaining at the site.  The court laid out the basic rule in New Jersey:

that an occupied property, with some level of ongoing operations at the time of valuation, will not merit a reduction in assessed property value.  On the other hand, an unoccupied property which has ceased operations, thereby triggering the statutorily mandated remediation obligation, will merit a reduction in value for tax assessment purposes.  (Slip Op. at 14).

Where the line is drawn to determine when a property is “not in use” was not quite as clear under prior case law. 

However, in Pan Chemical, the court clarified this issue, holding that where the property was still considered “in use” under the environmental laws, the taxing municipality could continue to assess as if it were operational, finding that “it is not unfair that it be treated as a continuing operation” otherwise there would be a “windfall tax benefit to the very persons responsible for toxic conditions, even though no actual clean-up costs are incurred.”  Id. (Slip Op. at 15).  If the property owner was to be considered operational for the purposes of not yet having to clean up the environmental problems, it would be considered operational for property tax purposes.  In short, the industrial company could not claim that it was operating under the environmental laws, but shut down under the property tax laws in order to receive a tax reduction for the contamination that it was responsible for, but not addressing.  Such an owner, according to the Pan Chemical court, was entitled to no tax reduction in that situation.