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Where government limits, court may help.

Paying municipal real estate taxes property where development has either been impaired or prohibited by government environmental constraints is a financial nightmare for property owners and developers. But help may be on the way, albeit late and as yet uncertain.

The New Jersey Constitution mandates that all land dedicated to municipal tax purposes must be "assessed according to the same standard of value." The legislature has established that the standard is "true value." And "true value" has come to mean "fair market value," i.e. what a reasonable buyer would pay and a reasonable seller would accept for the land.

Over the years, state courts have recognized certain established appraisal techniques that are employed to reach fair market value, (comparable sales, cost and income approaches) depending upon whether the land is improved or not. When owners of property are dissatisfied with their assessments, they may appeal, either to the County Tax Board or, in appropriate cases, directly to the New Jersey Tax Court. They contend either that there has been discrimination because their assessments exceed the common level in the municipality by more than 15 percent or that the property is worth less than the amount for which the municipality has assessed it.

Many factors affect the value of property. Among them are size, location, zoning and topography. In recent years, the term "environment" has become a staple in the property owner's lexicon. Environmental restrictions are limits placed upon the use of land by governmental regulation dealing with the physical aspects of the,land and their affect upon life and surrounding property. At first, there were limitations on stream encroachments and pollution of waterways. Now we have a whole panoply of state and federal statutes and regulations running from contamination and clean up of one's own property before it can be transferred to outright prohibition of the filling and use of wetlands, both coastal and freshwater.

The courts have always considered impediments to the use of one's land as justification for the downward adjustment of tax assessments, a position somewhat tempered by the constitutional limitation that laws favoring municipalities are to be liberally construed. Among these were such constraints as zoning and topography. Until recently, there were few challenges based on environmental restrictions. The scarcity of buildable land and the ever tightening of the economic noose has made this challenge timely. While the emphasis seems to have been placed upon contamination, the courts are now considering cases involving wetlands.

The Appellate Division of the Superior Court recently handed down opinions in two cases involving the Hackensack Meadowlands. The court has held that wetlands may be "undevelopable" as a result of strict federal preservation standards. The court ruled that the Borough of East Rutherford may not assess these wetlands based upon the Borough's view of the properties' potential for development. The court reduced the assessments because the federal government's refusal to issue required permits rendered the property undevelopable. The history seems to be that the Army Corps of Engineers has not granted a development permit in the Meadowlands since federal regulations took effect in 1985.

Unrestrained celebration is not yet in order for property owners, unless perhaps the land is located in the Meadowlands and development permits have been denied as in these two cases. Because these cases were decided on their own peculiar facts, the Appellate Division in the future (and probably the Supreme Court) may expand or contract that position in different circumstances. It is certain that the historical actions of the Army Corps played a very significant role in the Appellate Division's decisions, a factor which renders those decisions more limited. It remains to be seen whether our courts will come down as strongly in favor of property owners in cases where the Army Corps is not involved, or permit requirements are those under state rather than federal regulation; moreover, the owner must still prove to the court that the property is "undevelopable". This will probably include the need to process an application to the State Department of Environmental Protection and Energy and upon its rejection, the invocation of its appellate procedure to meet the criterion of "exhaustion of administrative remedies" before legal action can be taken.

This is not to say that in some instances, the undevelopability of a track may not be self evident. The extent of freshwater wetlands can be delineated, and applying the 75-to-150-foot buffer requirements may be sufficient to establish that portion of land which is truly undevelopable and for which no permit could legally be obtained or granted. The computation of the reduction in value may almost become routine. Yet the delineation itself can be a costly exercise, depending upon the size of the tract and the extent of the wetlands. The extent of municipal resistance may be another factor, translating delay into economic expense.

Nonetheless, every New Jersey owner or developer should immediately examine his property with a view toward instituting a tax appeal where wetlands and other natural impediments subject to regulation exist. It is likely that tax relief will ultimately be granted although how much is still uncertain, especially in light of the potential disastrous affect of wholesale reduction of assessments in communities where extensive wetlands abound. One might even imagine future legislative action which would further complicate this issue.
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Title Annotation:Development Arena; evaluation of tax issues related to prohibition of development due to environmental constraints
Publication:Real Estate Weekly
Article Type:Column
Date:Aug 4, 1993
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