Paper 2

Generating Property Tax Benefits from Contaminated Land – A Private and Public Perspective
Author: Yvonne J. Hamlin, LLB

This paper focuses on the means by which both the private and public sectors can achieve their goals relating to the property tax burden and the property tax revenue base, in the context of contaminated properties.

Contaminated Sites Impacts

There are many contaminated properties across Canada. The threat these properties pose, not only from a health point of view but also an economic perspective, can be significant for the property owner directly impacted by the contamination, and by the surrounding community.
The direct effects can include devaluation of the land and liability for clean up and other environmental and safety issues. Indirect effects include the systematic devaluation of surrounding land and areas, a lower tax base for the government, urban blight and decay, and the gradual move towards non-contaminated areas, which contributes to urban sprawl.
One of the economic impacts that can be measured, both to the affected land owners and to the community, is the impact on property taxes. Detecting the impact requires a review of both the private and the public spheres. To the private landowner, property taxes are a liability, and hence the need to ensure the amount paid reflects a value which takes into account the negative influence of the contamination. To the public, property taxes are an asset and hence the need to encourage and facilitate the clean up of contaminated properties in their community so as to ensure, among other things, the generations of additional property value which can then be taxed.

The Property Tax Regime in Canada

Property tax authority in Canada includes both provincial and municipal governments. These entities control the burden by ensuring the valuation and classification of properties for purposes of creating an assessment roll, and by the setting of tax rates in order to raise required revenues. The traditional approaches of valuation – income, replacement cost, and market comparison – are usually employed.
Clearly, the presence of contamination can negatively affect the assessed value of a property and even create a negative value. The value of an interest in impacted or contaminated real state may not be measurable simply by deducting the remediation or compliance cost estimate from the opinion of value determined on the basis that no environmental liability existed. Other factors may complicate the impairment and influence value, such as contamination´s impact upon marketability, stigma, and a possible change in the highest and best use as well as restrictions on use. Furthermore, governments at all levels have issued numerous environmental laws and regulations. The environmental legislative schemes in Canada define both natural and man-made conditions that constitute environmental liabilities, which in turn have a negative effect on property values by creating potential liability.
The good news is that the benefits of a proper site clean up and redevelopment include an increase in the property tax revenues for a municipality. For example, it was estimated in 1995 that the City of Toronto´s industrial-zoned properties comprised more than 1000 hectares. This represented 150 million of the city´s 1996 local tax revenue. However, because many of these sites were underutilized or needed to be redeveloped, it was estimated that the foregone taxes on these lands amounted to more than 22 million – half of which is estimated to be foregone on contaminated sites alone. It quickly becomes clear that the impact of redeveloping these sites is considerable.

Tax Savings for Contaminated Sites

Evidence of contamination can result in lower assessed values and consequently, reduce property taxes. These tax savings may assist owners of these sites to afford the costs of rehabilitation.
In the first instance, is the role of the assessing authority to recognize and quantify the value of a property impacted by contamination. There must be established evaluation techniques when dealing with contaminated property. The results of a survey questionnaire to 50 state and provincial assessing authorities in the United States and Canada, as well as, 200 metropolitan assessing authorities in both countries, indicate a range of contaminated site assessment standards and a range of approaches to reflecting the impact on value (Hirota 2004 ). Some 23 methods of determining the impact are noted plus another dozen dealing with the impact of stigma. Methodology is tailored to the valuation technique applied to the property – whether it be cost, sales comparisons, direct capitalization, or discounted cash flow.
An administrative appeal scheme exists in each province which allows an owner to challenge the assessed value returned against a property.

Creating Tax Benefits from Contaminated Property

This portion of the paper examines the concept of a government authority encouraging the clean up and development of contaminated lands and the economic benefits that can be achieved in the context of Brownfields.
Brownfields are the abandoned, idle or under-used commercial and industrial properties where past activities have caused known or suspected environmental contamination, but where there is potential for redevelopment. Brownfields differ from other contaminated sites in one important way: they hold excellent potential for being cleaned up and redeveloped for productive uses.
As a result of contamination, or perceived contamination, the reduced valuation of brownfield properties results in a lower tax base for municipalities. Widespread contamination in an area will lead to a gradual devaluation of that area. The NRTEE estimates public benefits of redeveloping within cities, instead of developing greenfield land on the city periphery, at between $4.6 billion and $7.0 billion a year. This estimate excludes the direct commercial benefits realized by redevelopers and users of the remediated land. Many of the benefits would be created in areas adjacent to the brownfield sites, where property values would rise with the remediation of the derelict neighbouring land parcel.
Brownfield redevelopment increases the tax base for all three levels of government through the creation of new wconomic bases to sustain property, income, sales, and capital taxes. The NRTEE points out that the experience in the United States has demostrated that, as brownfields are redeveloped, the surrounding properties within a radius of up to 2,5 kilometers may rise by an average of 10 percent, with associated increases in property tax revenues (Hara Associates 2003).

Impediments to Redeveloping Brownfields

Despite the fact that many of these sites are in prime locations, they sit unused because of economic and regulatory impediments. Such obstacles include the risk of civil and regulatory liability, lack of access to capital, stigma, and risk perception. The concern over liability for environmental issues in particular has been recognized as a major Barrier to brownfield redevelopment.

Conclusions

Contaminated sites undoubtedly pose an economic liability to both the affected landowners and the communities in which they are located. Prudent landowners will seek reduction in assessed values and property taxes to generate benefits to them during the holding and rehabilitation stages. Working with local assessors, and challenging decisions of those local assessors, where appropriated, may be required. Prudent governments will seek to implement strategies to encourage rehabilitation and redevelopment to generate long - term, future property tax benefits. These governments must work with landowners and other effected stakeholders to obtain the highest returns possible, achieving success for both the private sector and the public sector.