PA Tax Law News: December 2013 -- Assessment Of Environmentally Contaminated Real Estate

by McNees Wallace & Nurick LLC

The Pennsylvania Commonwealth Court’s recent decision in Harley-Davidson Motor Company v. York County Board of Assessment Appeals (Pa. Cmwlth. Ct. decided on October 30, 2013), demonstrates the importance of establishing a proper basis for the valuation of property which has suffered environmental contamination.


The taxpayer owned a property in York County, consisting of 229 acres of land and buildings containing approximately 1,400,000 square feet. The United States Government used the Property as the York Naval Ordinance Plant until 1964 when American Machinery and Foundry Company (“AMFC”) purchased the property. The Navy had used the location to make bomb casings. AMFC subsequently merged with Harley-Davidson and in 1973 motorcycle production commenced on the property.


As a result of the prior owners’ use, the property had significant environmental impacts consisting of soil and groundwater contamination as well as hazardous materials buried on the property. Pursuant to a 1995 Settlement Agreement between the taxpayer and the United States Government, environmental cleanup costs were allocated 47% to taxpayer and 53% to the United States.


Harley-Davidson appealed to the York County Board of Assessment Appeals in 2004 and subsequently appealed to the York County Court of Common Pleas where a trial on the issue of valuation was held. At the trial the taxpayer presented evidence on the environmental issues. The taxing authorities presented rebuttal witnesses on the issues. Both parties presented expert appraisal witnesses who testified to the impact of the contamination issues on the valuation of the property.


The taxpayer’s appraiser testified as to the cost to cure the environmental problems on the property under the assumption that a potential buyer of the property would deduct that amount from any offer to purchase the property. The trial court disagreed with this approach and accepted the approach of the taxing authorities’ expert who adopted a 5% “stigma” devaluation factor. The taxpayer appealed this issue to the Pennsylvania Commonwealth Court.


The Commonwealth Court reversed the decision of the trial court in regard to its determination of the credibility of the taxing authorities’ expert - specifically the expert’s stigma reduction in valuation due to environmental degradation of the property. Following the case of Herzog v. McKean County, 14 A.3d 193 (Pa.Cmwlth. 2011) the Commonwealth Court held that the trial judge improperly failed to enumerate his reasons for finding one expert credible over another. In this case the trial court did not specifically enumerate its reasons for accepting the 5% stigma devaluation factor rather than using a cost-to-cure methodology.


In B.P. Oil Co. Inc. v. Board of Assessment Appeals of Jefferson County, 633 A.2d 1241 (Pa.Cmwlth. 1993) the Court held that environmental contamination is relevant to determining the fair market value of real estate. It is up to the fact finder to determine the correct methodology in calculating the reduction in value caused by the extent of the environmental problems. The trial court must find this number from the testimony of the experts and can make this determination in a vacuum of evidence.


In order for the trial court to accept an expert’s testimony it must have some basis of credibility. In the case at bar the Pennsylvania Commonwealth Court stated the following:


“Rather than apply a cost-to-cure method the trial court accepted Camins’ (taxing authority expert) application of the 5% stigma devaluation which was based upon the presumption that due to the Settlement Agreement, a purchaser would have no liability for remediation. Although there is reference in the trial court’s opinion to Camins’ reliance on his expert testimony regarding remediation costs, there is nothing the trial court’s opinion how Camins came to the 5% devaluation figure and why the Court adopted it. In fact, as demonstrated below, it is clear from Camins’ testimony that there was simply no supportable basis for the 5% figure….”

The Commonwealth Court in its analysis of the lower court record found that there was no credible testimony as to the 5% stigma factor but it was rather “in essence a guess.” Therefore the stigma figure did not constitute the substantial evidence needed to support the lower court’s finding of value. The Court reversed and remanded the case back to the lower court to determine from the record the impact of the environmental conditions upon the property’s fair market value.

This case stands for the proposition that an appraiser must clearly articulate his reasons for his valuation of environmentally impacted property rather than merely picking a number out of the air and calling it a stigma factor. Much more must go into that determination, such as the underlying environmental problems and a study of how the real estate market would treat such a condition when these type of properties are exposed for sale.

Environmental problems do impact property valuation. It is incumbent upon a party to present adequate expert testimony to support its position; the conjecture or guess of an expert is insufficient to meet this burden.

Written by:

McNees Wallace & Nurick LLC

McNees Wallace & Nurick LLC on:

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