Mola Dev. V. Orange Cty. Assess.
| Decision Date | 27 April 2000 |
| Docket Number | No. G022200.,G022200. |
| Citation | 80 Cal.App.4th 309,95 Cal.Rptr.2d 546 |
| Court | California Court of Appeals Court of Appeals |
| Parties | MOLA DEVELOPMENT CORPORATION, Plaintiff and Respondent, v. ORANGE COUNTY ASSESSMENT APPEALS BOARD No. 2, Defendant and Appellant. |
Laurence M. Watson, County Counsel, and Jim Persinger, Deputy County Counsel, for Defendant and Appellant.
Smith, Silbar, Parker & Woffinden and Keith M. Parker, Irvine, for Plaintiff and Respondent.
The question before us is whether the assessment appeals board erred in its methodology in valuing certain contaminated commercial real property in Irvine in the early 1990's. The board took what it determined to be the fair market value of the property if unpolluted, then deducted the cost of cleanup, but next added back in expected contributions toward the cleanup from two former owners. The taxpayer then successfully petitioned the trial court for an order mandating the board to subtract the amount that it had added back in, and the board has now appealed to this court.
As we explain below, it is not accurate to say that the assessed value of contaminated property is ipso facto the fair market value of the property uncontaminated, minus the cost of cleanup (or, as the board approached the problem, minus the net cost of cleanup to the seller). To be totally accurate, the assessed valuation is the price at which a willing buyer and a willing seller would consummate an open market sale of the property considering the polluted condition of the property. (See De Luz Homes, Inc. v. County of San Diego (1955) 45 Cal.2d 546, 561-562, 290 P.2d 544 De Luz Holmes [].)
In the real world, as the high court of New York has noted, deducting cleanup costs is an "acceptable, if imperfect surrogate" to gauge the true open market value of property. (Commerce Holding v. Assessors of Babylon (1996) 88 N.Y.2d 724, 649 N.Y.S.2d 932, 673 N.E.2d 127, 131.) It is most certainly an acceptable surrogate where the property, as here, is vacant and not generating any income stream.1 Comparables for polluted property are, after all, hard to come by.2 That is because, given the potentially astronomical liability for cleanup costs under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) (42 U.S.C.§ 9601 et seq.) no rational buyer is going to want to touch commercial property unless effectively immune from CERLA liability, and therefore will require from the seller either a discount on the nominal price or a promise to pay all cleanup costs (and then the buyer will require the seller to have pockets deep enough to cover any such promise).
The applicable statute, section 110 of the Revenue and Taxation Code, contemplates a hypothetical open market transaction, where no side is under any "exigencies" and both have "knowledge of all the uses and purposes to which the property is adapted." (Rev. & Tax Code, § 110; see also De Luz Homes, supra, 45 Cal.2d at p. 562, 290 P.2d 544 [].) In such a hypothetical transaction, there is no reason for any buyer to pay more. (Cf. De Luz Homes, supra, 45 Cal.2d at p. 567, 290 P.2d 544 [].) And basically the board agreed with that fundamental idea here, by utilizing in its computation of value the fair market value of the property minus the cleanup costs.
The real question, then, in this appeal, is whether the open market transaction envisioned by the statute is better approximated by deducting the net cleanup costs to the seller, or the gross cleanup costs applicable to the property that must be paid by somebody under applicable environmental law. It is on that question that the taxpayer and the board disagreed, with the trial court siding with the taxpayer. We think the taxpayer has the better part of the argument. Buyers don't care who pays the cost of cleanup as between the seller and third parties (or "potentially responsible parties" in CERCLAspeak). From the point of view of what buyers will pay, net cleanup costs (or net fix-up costs) to the seller are irrelevant. Buyers only care that they don't pay them. The trial court was therefore correct in making its order requiring the board to subtract the promised contributions from third parties that it had added back in to the assessed valuation.
In December 1987, Mola Development Corporation bought more than 20 acres of prime, but at the time vacant, real estate in the City of Irvine, located at the corner of Jamboree Road and Campus Drive. The transaction was part of the purchase of a larger property from Prudential. Mola envisioned a high-quality mixed-use development ("Mola Centre"), consisting of a 450-room hotel, 483,000 square feet of office space in a 20-story office tower and adjoining structures, over 1,000 apartment and condominium units, festival retail, and a 2,100 seat multiplex cinema.
Mola knew the vacant property was riddled with toxic waste from a former Beckman Instruments facility, but agreed to pay $46 million with the understanding that Prudential and Beckman would take remedial action and cure it. Beckman and Prudential did undertake remediation efforts, and Mola sold a portion of the property to another developer.
Mola retested the soil and discovered that the original cleanup efforts had been unsatisfactory. A new remediation plan, prepared by Harding Lawson Associates, estimated additional expenditures of $16.7 million over a 10-year period to treat the contaminated ground water. Beckman agreed to pay approximately $10 million; and Prudential agreed to pay $2.5 million, leaving Mola on the hook for the remainder.
The Orange County Assessor assessed the property at $39.4 million for the 1990 tax year and $41 million for 1991. Mola, as the property owner of record, paid the taxes and appealed to the Assessment Appeals Board No. 2 for the County of Orange.
There were two hearings of the assessment appeals board in October 1992 regarding Mola's application for change of assessment, based on then "current economic conditions" (a nasty recession was then overtaking the county) and "the presence of toxic materials underground."
Mola was represented at the hearing by a CPA firm, Kenneth Leventhal and Company, and primarily by its expert witness, Walter Hahn, a Ph.D. and real estate economist with the firm. The first hearing took place on October 23, 1992. The board was fully aware that the problem of valuing the property in light of contamination loomed before it, and specifically sent for the county counsel because of the problem.
Mola's presentation began with its overall position: The property was worth $26 million if not contaminated, and from that $26 million, $16.7 million in cleanup costs should be deducted, leaving a value for property tax purposes of roughly $10 million. Dr. Hahn then gave an extensive presentation involving the value of the property based on projected costs and revenues from the various uses to which it would be put after it was developed.
Dr. Hahn also testified as to the cost of cleanup. He referred to a "really severe summary of the toxic issues," which "[he] let [the board] read what it [said]." More particularly, he said: Dr. Hahn elaborated that much of the cost was because "contamination has gotten into the groundwater" and a ten-year pump-out and return treatment plan was required, as well as "digging out the soil and replacing it with clean fill."
Dr. Hahn then opined that the fair market value of the site was its value as if uncontaminated, minus the cost of cleanup. He stated, He also said that while a willing buyer "perhaps" would consider the fact that Prudential and Beckman would pay for most of the cleanup costs, he viewed such a potential contribution as "irrelevant" to the valuation issue because "it's got to be paid by somebody." Dr. Hahn based his opinion on his experience with evaluating two other contaminated parcels, where "[u]niformly I found ... that the property was valued by taking the market value of the property as if uncontaminated and deducting from it the cost to clean up."
There was no dispute at the hearing that the cleanup costs were $16.7 million. The figure was never questioned by the assessor when he presented the case for the county. Instead of focusing on the cleanup amount, the assessor focused on (1) who had liability for the cleanup costs, (2) whether any adjustment at all should be made for the fact that the property was contaminated and had to be cleaned up, and, if so, (3) whether the adjustment should be amortized over some period of time.3 And while Mola did not introduce into the record the full "thick report" from Harding Lawson,4 it did provide the summary giving a breakdown of the constituent parts to the cleanup.
The board clearly saw the toxic problem before it as a methodological (i.e., legal) one, not a question of substantial...
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