On Tuesday, the Pennsylvania Supreme Court in Harley-Davison Motor Co. v. Springettsbury Twp., Dkt. No J-102-2014 (Sept. 29, 2015), ruled that the presence of contamination, and the stigma that surrounds such contamination, are relevant to determining the property’s fair market value for tax assessment purposes.  

Harley-Davison owns a 229-acre parcel of industrial property in York County, where it operates a motorcycle manufacturing plant.  Historically, the property was owned by the U.S. Navy, which operated a weapons manufacturing plant at the site from 1941-1964, which Harley-Davidson’s affiliate then operated from the late 1960s through the 1980s.  The military use of the property caused widespread environmental contamination on 110 acres of the property, including the burial of unexploded artillery on site.  The remaining 119 acres of the property that were not impacted by historic operations were considered “excess” land.  Under a settlement agreement with the United States, Harley-Davidson has been remediating the property under Pennsylvania’s Act 2 program, funded, in part, by the U.S. government, which paid $2.3 million for past remediation costs.  Both parties also agreed to establish a remediation trust fund to split future remediation costs at the site.

In 2003, the York County Assessment Office notified Harley-Davidson that the property’s tax assessment would be increasing for 2004-2010.  Harley-Davison appealed the assessment, which lead to a bench-trial in the York County Court of Common Pleas.  At the trial court, Harley-Davidson, and the two taxing bodies, York County and the Central York School District,   presented expert testimony to establish the value of the property, focusing on the impact of the contamination on the property’s value.  Each expert determined what the “highest and best use” of the property was – the taxing authorities’ expert arguing for warehousing and office use, with the non-contaminated “excess” land used for development, while Harley-Davidson’s expert argued the entire parcel should be valued as industrial use.  The experts also diverged on whether the property should be evaluated as a whole or subdivided into contaminated and non-contaminated portions, and also disagreed on how to evaluate the impact of contamination on the property’s value.  Harley-Davidson’s expert used a “cost-to-cure” approach, which determines fair market value by subtracting remediation costs from the value of the property as if it were completely clean.  The taxing authorities’ expert argued that the “cost-to-cure” approach was not appropriate in this case, because the property was already being remediated under Act 2, would be subject to use restrictions and institutional/engineering controls, and a standard Act 2 buyer-seller agreement would insulate a prospective purchaser from being responsible for the costs of the remediation. 

In previous cases, the Commonwealth Court had suggested that a cost-to-cure approach would be appropriate for determining fair market value of a contaminated property; however, the Pennsylvania Supreme Court declined to determine whether Pennsylvania would adopt a cost-to-cure approach for determining the fair market value of contaminated property as the facts of the case, particularly the existence of the settlement agreement and the existence of a remediation fund, made it unique.  Rather, the Pennsylvania Supreme Court held that “[a]ll relevant factors having a bearing on the value of a property, including environmental contamination, must be considered in a fair market value determination, [and that] the potential impact of a settlement agreement regarding environmental remediation and ongoing limitations and maintenance as a by-product thereof, through a buyer-seller agreement, are relevant factors that must be taken into account.”   The Pennsylvania Supreme Court also held that “environmental stigma, although an inherently imprecise concept, may be relevant to determining fair market value of real estate for tax purposes.”   Interestingly, the court ruled that the 5% stigma reduction in property value that the taxing authorities expert presented was appropriate in this case, despite the fact the expert did not provide any concrete support for the 5% figure, but rather stated that it was based on his overall professional experience in real estate appraisals.