In a recent New Jersey Tax Court decision, ACP Partnership v. Garwood Borough, the court ruled that it will permit consideration of a property’s environmental contamination in deciding its true market value even though the property possesses a “value in use” to the tax payer. The case is significant because it rebuts the notion that a commercial property “in use” by the tax payer may only be assessed using “normal assessment techniques,” with no consideration given to environmental contamination in establishing its true market value.

The subject property in ACP Partnership is a multi-tenanted and multi-structured industrial and warehouse complex containing approximately 230,000 square feet of improvements. The tax payer leases the property to tenants for warehouse and industrial uses. The tax payer also occupies a small portion of the property for self-storage.

At the time the property was purchased, the property owner was not required to investigate the property for contaminates, or cleanup the property, since its sale pre-dated the enactment of the Environmental Cleanup Responsibility Act (“ECRA”) and Industrial Site Recovery Act (“ISRA”). Following the acquisition of the property, the tax payer discovered the presence of contaminates and entered into a voluntary Memorandum of Agreement (“MOA”) with the New Jersey Department of Environmental Protection (“NJDEP”) to investigate the source of the contaminates and commence remediation efforts. Remediation efforts by the tax payer are ongoing. Nonetheless, the property is still “in use” since it generates income for the property owner and the owner occupies part of the property.

The tax payer appealed the municipality’s tax assessment for six years beginning in 2010. The cases were thereafter consolidated. The tax payer moved for partial summary judgment on the issue of whether the property’s “in use” status precludes any consideration of environmental contamination in both assessing practices and in establishing true market value. The municipality opposed the motion by arguing that the property’s “in use” status requires the court to only consider “normal assessing techniques,” without consideration of environmental contamination in establishing true market value.

In analyzing the issues, the court focused on the Supreme Court’s decision in Inmar Assocs., Inv. v. Borough of Carlstadt, 112 N.J. 593 (1988) and the body of law that developed thereafter. Inmar laid the foundation for the general principle that environmental contamination must be considered when determining true market value for property tax purposes. In Inmar, the Court opined that environmentally contaminated property for which there is no market may nonetheless have a distinct “value in use” to the owner as long as the owner continues to operate the property. Significantly, inInmar, the New Jersey Supreme Court never expressly provided that environmental contamination could not be factored into the analysis for determining true market value when the property is “in use” by the tax payer.

After Inmar, two lines of cases emerged. The first was based on the scenario where the property owner continued to operate the property in order to avoid statutorily mandated environmental cleanup requirements. See Pan Chemical Corp. v. Borough of Hawthorne, 404 N.J. Super. 401 (App. Div. 2009), certif. denied, 198 N.J. 473 (2009). Under the rationale of Pan Chemical, the court declined to consider the influence of contamination on the property in determining true market value since the property was “in use.” One of the reasons for this is because the tax payer who caused the contamination continued to operate the property in order to avoid statutorily mandated cleanup requirements. Therefore, allowing consideration of environmental contamination in the assessment of true market value would provide a “windfall benefit” to the party responsible for the contamination at issue.

The second line of cases involves property where the operations that caused environmental contamination on the property had ceased and the property owner was engaged in investigation and remediation of the contamination. See Badische Corp. v. Town of Kearny, 288 N.J. Super. 171 (App. Div. 1996); Metuchen I, LLC v. Borough of Metuchen, 21 N.J. Tax 283 (Tax 2004); Orient Way Corp. v. Township of Lyndhurst, 27 N.J. Tax 361 (Tax 2013), aff’d, 28 N.J. Tax 272 (App. Div. 2014), certif. denied, 220 N.J. 574 (2015); and Methode Electronics, Inc. v. Township of Willingboro, 28 N.J. Tax 289 (Tax 2015). In those cases, the courts have considered the impact of environmental contamination on the true value of the property.

After providing a recitation of both lines of cases, the court noted that the facts in ACP Partnershipdiffer from the facts and rationale of Pan Chemical Corp. In ACP Partnership, the tax payer is an innocent party who did not cause the contamination of the property, yet was engaged in investigation and cleanup of the property. The court held that the use of “normal assessment techniques” must be considered in attempting to determine true market value of contaminated property “in use” by the tax payer. However, those techniques “must be tempered by the costs encountered by the tax payer in addressing the environmental condition of the property.” The court did not provide a methodology for the tax payer to employ, but left the issue open to the “competence of the appraisal community.”

The ACP Partnership case demonstrates a few points:

1. Tax payers continue to face uncertainty when appealing environmentally contaminated property despite the progeny of established cases on the subject.

2. The door now appears to be open to for the consideration of environmental contamination in assessing true market value for contaminated property even in scenarios where the property is “in use,” as long as the tax payer is not trying to skirt its obligation to remediate the contamination.

3. Finally, the case highlights the difficulty that the courts have in grappling with the valuation of contaminated property. Instead of providing a rule or framework that tax payers can use to valuate contaminated property, the issue is left to the “competence of the appraisal community.”