Challenging tax assessments on contaminated property in Florida.

• Author: Morley, Samuel J.

Environmental contamination present in the soil or groundwater may significantly reduce the market value of contaminated property or adjacent properties. Although this should be considered by the property appraiser in assessing the property for purposes of imposing property taxes, the impact of contamination often is overlooked or underestimated. In Florida, this devaluation issue is especially significant in light of the thousands of petroleum- and drycleaning-solvent-contaminated sites that have been identified in the state pursuant to various cleanup reimbursement programs. Although many of these sites are eligible for state-funded cleanup, the programs remain underfunded, and cleanup has been progressing at a snail's pace. As a result, taxpayers who own such sites--even those who are eligible for cleanup funding--should be aware that Florida provides mechanisms to challenge assessments which fail to take into consideration the contaminated nature of the property.[1]

A central problem a taxpayer will face in challenging the assessment is determining the appropriate method to measure the impact on market value caused by the contamination.[2] Unfortunately, this is a relatively new issue for tax appraisers, courts, and administrative tax boards, and a consistent approach has not been developed. The problem is compounded by the fact that real estate valuation is "an art, not science" and relies on the approximation and judgment of the experts who review the data and apply the various methodologies.[3]

Florida law in particular remains relatively undeveloped in the area of contaminated property valuation. As a result, this article discusses various approaches used by other states' courts and tax boards to measure the effect of contamination on property value, and discusses those Florida cases that bear on the issue. Before this is addressed, however, it is necessary to review the statutory background for tax assessments in Florida.

Florida Law on Valuation

The guiding principle in Florida for attaching value to property for tax purposes is set forth in the state constitution: "No assessments shall exceed just value."[4] The concept of "just value" is legally synonymous with fair market value.[5] Under the Florida Constitution and case law, fair market value is the gauge by which all methods of valuation, statutory or otherwise, must be measured.[6] Where an appraiser fails to consult reliable sources of information in the valuation process and makes no attempt to reach the fair market value of the assessed property, the assessment is illegal.[7]

Fair market value is what "a purchaser willing but not obliged to buy would pay to a seller willing but not obliged to sell."[8] In arriving at just value, Florida law requires that property appraisers consider certain listed factors.[9] Although these factors include the condition and highest and best use of the property and there is no specific language relating to environmental contamination, both factors are broad enough to include contamination.

Approaches to Valuation

* Background

There are three basic approaches an appraiser employs to arrive at a valuation: the cost, market (direct sales comparison), and income, or economic, approach.[10] In conducting a thorough appraisal of a property, an appraiser generally will consider all three methods. In reaching a conclusion as to the value of the property, however, the appraiser does not average the three estimates, but rather relies primarily on the approach that seems most reliable in the particular case. This process is called "reconciliation."[11] In the reconciliation process, an appraiser compares the quality and quantity of the data used in each of the three appraisal approaches.

With respect to contaminated property, an appraiser may have a difficult time using the three traditional methods because all rely on market data to some degree and often there is little or no market data available concerning contaminated land. Furthermore, the cost approach may not be relevant to valuing contaminated land, since it focuses on the buildings and structures on the property and not the soil and water. Similarly, the income approach may not be useful in situations where the contamination has not interfered with the use or utility of building improvements.[12]

In light of the unique situation presented by each property, courts, tax boards, and property assessors have taken widely varying approaches toward the issues of costs to cure and stigma associated with the property's contamination. These are discussed below, along with Florida cases that bear on the issue.

* Costs to Cure

When can a deduction for costs to cure be taken? Assuming that contamination is a relevant factor to consider in appraising the property, the existence of the contamination, by itself, nonetheless may be insufficient to support a cleanup cost deduction for purposes of estimating the market value of property. Some courts have held that in order to deduct the cost of cleanup, two additional factors must be shown in addition to the existence of contamination: 1) there is a legal requirement for cleanup; and 2) the costs of cleanup, including a formal plan and timetable, are established with a reasonable degree of certainty.[13] Thus, if the property is not on the Superfund list or other federal or state contaminated property list and no other evidence is offered that the property is being cleaned up or will ever need to be cleaned up, then the court might uphold the property appraiser's refusal to deduct the cost of cleanup.[14]

Methodologies for valuation of costs to cure. Once it is determined that a taxpayer is entitled to a deduction for the contamination, a more complicated and controversial question is the proper valuation methodology to employ in that devaluation. Each case of environmental contamination is unique, and the traditional techniques used by appraisers--comparable sales, income, and cost--may be deficient in this respect. However, traditional valuation techniques must be adapted sufficiently to account for environmental contamination.

A few courts have concluded that environmental contamination automatically renders the real property unmarketable, and the property should be appraised at a nominal value for purposes of tax assessment.[15] However, this conclusion is ordinarily rejected unless the property is highly contaminated and unmarketable.[16] Simply alleging that no buyer can be found for the property usually will not be sufficient for a finding that the property has no value for tax purposes.[17]

More commonly, property value is arrived at by subtracting the cost to remediate or "cure"[18] the property from the value of the property in an uncontaminated state. This general approach was recommended by the court in Roden v. Estech, Inc., 508 So. 2d 728, 730-31 (Fla. 2d DCA 1987). Specifically, the appraiser uses the three methods of appraisal to determine the value of the property in an uncontaminated state and then adjusts that figure downward dollar-for-dollar by...