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In the case Orient Way and Red Roc Realty v. Township of Lyndhurst, a New Jersey appellate court held that a single sale price of a contaminated property was the best evidence of a true market value for tax assessment purposes.

 

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Background


In November of 2005, plaintiff Red Roc Realty, LLC (Red Roc) agreed to purchase an 8.8 acre property, improved with a 100,230 sq. ft. building, for $2.5 million. Red Roc knew the property had been used for industrial activity and had become contaminated, so the purchase was subject to the New Jersey Department of Environmental Protection’s approval of its remediation plans. The plan fell through, but Red Roc was able to take title in May of 2006.


Over the next two years, Red Roc attempted to remediate but failed, so it sold the property in 2008 for $2.4 million. Defendant Lyndhurst Township (Township) assessed the value of the property for the three years Red Roc owned it (2006, 2007, and 2008), at $6,837,900. The parties agreed that the value of the property in its uncontaminated state—the clean values—for those years would be $5.1 million, $5.2 million, and $5.4 million, respectively.


Red Roc challenged the assessment of $6.8 million in tax court, which agreed with Red Roc that the assessed value should be the agreed upon purchase price of $2.5 million. The Township appealed.


The appellate court’s conclusion


The appellate court upheld the tax court’s ruling that the use of a single sale to determine the fair market value was appropriate in this situation. Recognizing that, generally, a single sale is not evidence of market value, the rationale of both courts centered largely on the following:

  • The single sale was in proximity (time-wise) to the first valuation date; and
  • The court did not think it was in a position to ascertain the values of similarly contaminated properties as evidence of value because of the likelihood that the contamination of the property at issue, as well as the necessary remedial measures, were unique in scope, type, and dimension.


To the Township’s argument that the tax court made an error in ignoring the agreed upon clean values, the appellate court countered that “stipulated clean values cannot be reflective of true market value absent some kind of reduction to account for the contamination.” Ultimately, the court relied on expert testimony that the parties had specifically factored the estimated remediation costs into the sale price.


In addition, the evidence showed that the extended negotiations resulted in an arm’s length transaction, which reflected the property’s true value.


Implications


In the end, the appellate court took a flexible and pragmatic approach when evaluating and weighing the parties’ evidence. Red Roc had the strongest case, and what’s more, the court did not think it was acting in bad faith by seeking a windfall through a reduction in the assessed value.

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