The New Jersey Superior Court recently ruled against a township seeking to appeal the real property value of a tract of land which could not be developed during the tax years at issue due to its designation as a Superfund site, affirming an earlier decision.1 Specifically, the Court found it inappropriate to value the land based on speculative future development.
The taxpayer began conducting chemical manufacturing operations on a large property located in Dover Township, New Jersey (Township) in 1952 and scaled back its activity in the early 1980s. In 1989, the Environmental Protection Agency (EPA) required the taxpayer to seal contaminated wells, install a groundwater extraction and treatment system, and discharge the treated groundwater at one of the operable units on the property. During 1996, manufacturing operations ceased completely, and the groundwater extraction and treatment system project commenced. During 2000, the EPA required remediation of source areas of contamination at a second operable unit on the property. The operations contaminating the soil and groundwater led to the EPA designating the 1350-acre property as a Superfund site. While the EPA had primary oversight and responsibility for approving the necessary environmental remediation work, the New Jersey Department of Environmental Protection (DEP) retained jurisdiction to enforce applicable state requirements. During 2009, the taxpayer was acquired, and ownership of the subject property changed hands.2
Beginning in the 2004 tax year, the Township began assessing the property according to residential usage, not yet authorized by the zoning ordinance, but based on its belief that the realty market would anticipate this change. The taxpayer challenged the assessment through appeals for the 2004-2018 tax years, and the New Jersey Tax Court used a four-phase analysis to address: (i) the propriety of assessing the property based on prospective uses not yet permitted; (ii) usable acreage and the development potential of the subject property; (iii) valuation of the property for the 2004-2011 tax years; and (iv) valuation of the property for the 2012-2018 tax years. The Tax Court concluded that there was no prospect of a zoning change for residential use of the property for the years in question, and development on the property was prohibited due to the Superfund designation. However, the taxpayer had the burden of proving the amount of potentially developable acreage. The Township appealed the Tax Court’s decision that development of the property was prohibited, and the taxpayer cross-appealed the Tax Court’s decision not to determine the number of developable acres on the property, resulting in this controversy.
At issue on appeal was whether the Township properly assessed the subject property for the 2004-2018 tax years based on the value of residential usage. Specifically, the Township contended that the Tax Court erred by: (i) finding that the property could not be developed for procedural reasons; (ii) excluding certain documents from its analysis as privileged mediation communications; (iii) addressing the likelihood of a zoning change in isolation from the other elements of valuation; and (iv) failing to determine the number of developable acres on the property. The Superior Court upheld the decision.
Over the course of several years, many different governmental agencies and consultants weighed in on potential development and use of the property. During 2008, the EPA issued a report indicating that the site’s remediation activities were proceeding as anticipated and classifying its status as “final.” Further, a 2009 report detailed the presence of threatened and endangered species on the property. The Township’s planner reported in 2011 that the environmental remediation activities had been proceeding for more than 20 years and contended that some of the property could be redeveloped as the soil cleanup was at or near completion. In 2012, the taxpayer proposed to the EPA that certain parts of the property be delisted and labeled as having “unrestricted” potential future use. Finally, in 2017, the taxpayer solicited a report assessing the reasonable probability of a potential zoning change. The report concluded that there was insufficient evidence to convince a buyer to reasonably conclude that the Township intended to permit residential use of the property. Further, an environmental consulting firm determined that it was not feasible to develop the property for high-density residential use.
First, the Township objected to the Tax Court’s determination that the property was undevelopable largely based upon a belief that expert testimony and other evidence was inadequate. In reaching its conclusion, the Tax Court had examined and relied upon several detailed reports and expert testimony. Based on an independent review, the Superior Court found sufficient evidence to support the original finding that the Township failed to show development activity would have been allowed on any portion of the property during the tax years at issue.
Next, the Township asserted that the Tax Court erred in declining to consider as evidence prospective plans for developing the property which had been solicited by the Township. The document was prepared by private developers and found to be confidential, based on a determination that it constituted statutory privileged mediation communications. The Superior Court rejected the Township’s argument that the potential developers had no expectation of confidentiality. Since the privilege was not expressly waived, the Superior Court found no abuse of discretion in the Tax Court’s earlier decision.
The Superior Court then considered the Township’s contention that the Tax Court erred by addressing the likelihood of a zoning change to allow residential use of the property as an isolated question. Specifically, the Township argued that the expectation of a zoning change can be appropriately included in property valuation, regardless of whether such a change is reasonable. In valuing the property, the Tax Court had explained that the property was to be assessed according to its “highest and best use” that was “legally permissible.”3
To reach a conclusion, it relied upon several factors supported by case law to evaluate whether a zoning change had a reasonable probability of enactment, including: (i) the nature of market interest in the property; (ii) the complexity and likelihood of success in securing approval from the municipality for a zoning change; and (iii) the complexity and likelihood of securing approval from the regulatory agencies with authority over the property, without which any zoning change would be moot. In the Tax Court’s view, the listing of the property as a Superfund site might have induced the Township to accept some residential development as an incentive for a developer to assume some of the clean-up costs, but securing regulatory approval would have been unlikely. Thus, there was no demonstrated “reasonably probable” prospect on the valuation dates that the DEP and EPA would allow such development. In evaluating the conclusion that the Township failed to show that the highest and best use of the property was within reasonable probability of being permitted, the Court determined that the Tax Court had performed the threshold determination required. Specifically, the Tax Court had adequately explored whether a zoning change to permit residential uses on the property was sufficiently capable of affecting market conceptions of value and its decision to address the likelihood of a zoning change as a separate question that preceded other valuation issues was sound.
Finally, the Court addressed and rejected both parties’ arguments that the Tax Court erred by failing to properly determine the number of developable acres. After the Tax Court noted that all development activity would necessary be precluded until allowed by the DEP, it was unnecessary to address or refute the number of acres that the DEP might approve.
Property tax valuation of environmentally contaminated property is an issue that is infrequently addressed at an appellate court. This decision highlighted the Township’s tenacious pursuit of increased property values over a fifteen-year period based solely on speculating what the value of the property could be if it could be developed. Real property is typically valued based on the highest and best use of the land. Since the property in question was contaminated, without permission from the EPA and DEP, no development was possible until the remediation process was complete. With no possibility of development, it is reasonable to conclude that contaminated land which cannot be used safely for a lengthy period of should not carry with it anything more than a marginal value until deemed “clean.”
Although not a central focus in this decision, the estimated costs of remediation, as determined by an environmental study, are also sometimes considered to value contaminated property. In particular, environmental studies are typically used in valuing older facilities that have discharged a form of chemical waste that was not regulated or disposed of properly (i.e., gasoline stations, which could not be sold until remediation was complete). Further, financial institutions often require environmental studies to determine whether a site is contaminated and, if so, whether remediation is necessary, prior to lending money with respect to a property. Taxpayers owning property that is significantly impaired due to environmental concerns should consider whether a “highest and best use” argument is appropriate in an effort to dispute the assessed value of the property.
1 CIBA Specialty Chemical, Corp. et. al. v. Township of Dover, et. al. Docket No. A-3963-18 (Superior Court of New Jersey, Feb. 24, 2021).
2 For purposes of this Alert, the owning entities are collectively referenced as the “taxpayer.”
3 Pursuant to tests that the Tax Court originally outlined in Ford Motor Co. v. Twp. of Edison, 10 N.J. Tax 153 (Sept. 22, 1988). The concept of “highest and best use” relates to the use that the market would make of the property, requiring market analysis to determine what alternative uses might be feasible, based on known and anticipated uses at the time of assessment. The Tax Court noted in Ford that the “use” must be legally permitted, physically possible, economically feasible and the most profitable.
Donald L. Lippert Jr.
Don Lippert is a principal with Grant Thornton LLP specializing in property tax services. He has over 25 years of professional experience.
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Jamie C. Yesnowitz
Jamie Yesnowitz, principal serving as the State and Local Tax (SALT) leader within Grant Thornton's Washington National Tax Office, is a national technical resource for Grant Thornton's SALT practice. He has 22 years of broad-based SALT consulting experience at the national and practice office levels in large public accounting firms.
Washington DC, Washington DC
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