It’s important that anyone considering a grant understands what a conservation easement really is. The granting of conservation easements is governed by Section 170 of the Internal Revenue Code (IRC-170). This voluminous statute has been updated and improved, mostly to the benefit of the Grantors (persons donating an easement), by code clarifications over the years and through congressional acts. It is obviously a detailed and complicated piece of law, full of nuances, which will be explained only on a general business basis here. I cannot emphasize strongly enough how important it is to have qualified, experienced advisors, including an attorney and CPA who are familiar with easements, who fully understand these great tools and who can think big-picture and long-term. The advisors and/or the grantor must comprehend the potential material adverse and perpetual effects grants can have on land, land values and exit strategy if used improperly or without proper prior planning.
Few people understand conservation easements. Easements are highly negotiable prior to grant. If carefully formulated, they can simultaneously be very valuable tools in tax savings, accomplish important resource goals, beneficially affect preservation and can increase certain long-term real estate values if properly phased and located. There is a common belief that a grant affords public access, or strips all the rights from a property. These myths could not be further from the truth. Conservation easements are a widely used, greatly expanding form of preservation with financial incentive. They are highly negotiable. If done correctly, they are value-adding instruments over time, and contribute to environmental safeguards, which beneficially affect not only the property on which the easement is placed, but the entirety of the local ecosystem.
In simplest terms, a conservation easement is the grant (donation) by the Grantor (landowner) of certain rights of ecological value to a Qualified Grantee (the organization that accepts the donation). Every property has a bundle of rights. You can build roads on it, subdivide it, sell or transfer it in pieces, mine it, strip it, timber it, farm it, improve it, etc. Just as a donation of an art piece to an art museum carries certain tax benefits, so, too, do property rights have donative value. The appraised value of the bundle of potential rights donated becomes a tax deduction, which can be extremely beneficial to the Grantor. Many Fortune 500–1000 companies, such as Plum Creek, International Paper and Wal-Mart, have become heavily involved in conservation easement grants. Many states give tax credits, in addition to the Federal deductions. Credits directly lower tax owed. If you owe $20,000 in tax, and have a $10,000 credit, your tax liability drops to $10,000. Deductions lessen taxable income. If you have $200,000 in Adjusted Gross Income (AGI) on the bottom line of your tax schedule and you have a $50,000 deduction to apply, your AGI is then $150,000, and your tax liability is computed on the lower amount.
Easements differ from standard real-estate-related write-offs in that the deductions or credits flow to and stay with the Grantor, not the property. One could literally grant an easement on Monday, sell the property on Tuesday and still maintain the tax benefits of the grant.
Many federal agencies, states, counties and now local municipalities are involved in the grant of easements. Many jurisdictions require easements on subdivided property to maintain open space, agriculture, wildlife, fishery and habitat values. When a conservation easement is negotiated, certain of the bundles of rights can be donated, and certain of the bundles of rights can be reserved. These are “Reserved Rights.” Done properly, reserved rights can generate very significant flexibility related to future tax, real estate and conservation value for an owner or subsequent purchaser.
Contrary to popular misconceptions, what conservation easements DO NOT DO, unless the landowner specifically agrees otherwise, are the following:
Easements do not restrict hunting, fishing or recreation.
They do not afford the public any access whatsoever.
Even the Grantee cannot come on the property without the permission of the owner except in extraordinary circumstances.
Properly done, easements do not restrict rights that are properly reserved, including all recreation rights, rights to subdivide (“transfer”) or sell (or donate in the future for additional tax deduction) already existing parcels, build additional homes and structures, continue to farm, extract minerals or timber, build ponds and conduct other resource/agricultural, wildlife improvements, guest ranch, etc.
A conservation easement completed through a private Grantee does not afford any government entity at any level any increased jurisdiction, rights, entry or management oversight on the property. The government is not involved in such cases.
In the go-go days of the early eighties, I had already been heavily involved in resource-oriented urban and exurban development for ten years. A hectic time, I needed twenty-eight hours in every twenty-four-hour day. I never lost sight of my roots though, and my first love remained the small ranches I owned. Even though I was chairman of the billion-dollar development company I had founded at the age of twenty-one, I generally wore a flannel shirt and cowboy hat, and drove a pickup, much to the consternation of my board of directors. Certain times of the year, I would slap the camper on the back of the truck, perhaps hitch up the horse trailer or drift boat and disappear for weeks. I was relegated, though, to hunting and fishing mostly public lands, because my ranches were too small and too close to the anthill of humanity known as the Front Range of Colorado. I hungered for a big place that was my own that I could improve, preserve, enjoy, run some cows on and get lost in.
I was approached by a well-meaning and hard-working rancher, Carl Judson, who was looking for investors in a sixteen-thousand-acre spread known as Phantom Canyon Ranch, located half an hour’s drive north of Fort Collins. It was an incredible property, with varying ecosystems, low mountain foothills punctuated with spires of rock and red granite cliffs pock-marked by the vibrant green of rock lichen. Stands of pines and north slope aspens spread in clusters up the rolling toes of the Rockies. Through it all ran a magical, invisible, deeply-formed canyon. Miles of the North Fork of the Cache La Poudre River coursed through the bowels of the chasm. The North Fork was reputed to be, by those fortunate few who had fished there, a blue-ribbon wild fishery. I toured the ranch, hiked into the secret recesses of the canyon and was delighted by the seclusion. I became one of the largest partners.
A few years later I got a call from Carl. He wanted to know what I thought about donating a conservation easement to the Nature Conservancy on a portion of the ranch in order to protect the secret canyon. Carl suggested that subsequent sales of a few building sites outside the confines of the easement might generate money for the partnership, and could expand the scenarios under which the ranch might ultimately be sold in parcels to its partners.
Carl had researched conservation easements and had had discussions with the Nature Conservancy. In retrospect, he meant well, but it was a novel concept, and none of us could fully understand the consequences of the plan he was setting in motion. Little did I know that his phone call would forever change my perceptions of land use, preservation and land economics. Nor did I realize right then how that watershed moment would stimulate my intrigue with the concept, engender my resulting research and intertwine with a previous epiphany back in 1972 when I was nineteen.
On that June evening in 1972, my buddy Bob was behind the wheel of an F-250, intent on reaching the Madison River in time to fish. I was in the co-pilot’s seat. In front of me, the open glove compartment door formed a tray for the fly-tying equipment, where I was industriously turning out big brown stonefly nymphs. Bob and I were making our annual Colorado-to-Montana pilgrimage to fish Bear Trap Canyon of the Madison River, prior to the salmon fly hatch. Around us, the verdant green of coming summer valleys swept into snow-capped peaks, and the grey-blue of sage covered the flanks of the late spring mountainsides.
The F-250 was screaming through the Ruby Valley on US-287. I gazed out the window and admired the grandeur of the place. It was near dusk and the fading sun h
ad painted shadows, which sharply etched the contours and canyons, draws and washes and the flow of the topography. One huge chunk of land on the flank of the Tobacco Roots called to me, even from miles away. Stunned, I pointed out the window and said matter-of-factly, “One day I’m gonna own that ranch.”
Bob looked at me with one eyebrow raised and a bemused half smile. With a somewhat deprecating tone, he responded, “We need ten more stone flies and we’re only a half an hour from the river. Stop talking. Get tying.”
Twenty-six years after it spoke to me that dusky spring evening in the F-250 headed to the Madison River, several partners and I purchased that large, remarkably beautiful swath of the west face of the Tobacco Roots, with plans to restore the vitality of that sadly degraded working ranch, enhance its resources and preserve the same through conservation easement grants.199
In 1991, one of the ranch outfits with which I was involved listened to my first presentation of the idea of a conservation easement and the win-win benefits for both the land and the landowners. They were swayed by my enthusiasm and gave me the green light to go ahead with the grant. It was my first experience with the proactive design and negotiation of a Conservation Easement Grant.
I have been involved as a consultant with no ownership stake, or as principal (owner) in scores upon scores of completed, or intended easements involving a number of national and local conservation trusts in two foreign countries and a host of western states including Colorado, Wyoming and Montana. These easements have conserved or will conserve tens of thousands of acres of critical fisheries and wildlife habitat, ranch lands and agricultural properties in perpetuity.
Easement donative value can often be maximized if easements are granted on a phased basis. This requires good long-term planning. If granted with carefully thought-out reserved rights in the first round, a conservation easement can leave very significant increments of real estate and tax value realizable through easements on the rest of the property, or second-tier easements, or amendments to the initial easement. These can be enjoyed by a new owner, or the original Grantor.
Whether one is the Grantor of the conservation easement on a twenty- to one-hundred-acre piece of land somewhere back east, where zoning or other government overlayment might allow typical lot or small acreage subdivision (three and one-half houses per acre—aka 3.5/DU), or the Grantor of total or partial easements on a large ranch of many thousands of acres in the western part of the continent, the basic principles related to intelligent, effective granting and reservation of rights remain inviolate.
Reserved rights can afford a purchaser excellent land use and operational latitude. Inclusion of the following reserved rights and protections should be ensconced in some form in the grant of every easement. An actual Grant of Conservation Easement deed negotiated with a major National Land Trust is included in the Green for Green workbook. Reserved rights should include, as a minimum:
1) The right to construct and operate all beneficial agricultural improvements and structures, and implement all beneficial agricultural improvements including pasture, farming, fencing, irrigation and other improvements.
2) The right to operate and enjoy any and all property-related recreational and agricultural activities including guest ranching, lodging or eco-tourism activities, as well as farming or ranching activities such as livestock, crops and pasture.
3) The right to construct and maintain any and all beneficial resource improvements, such as restoration, creation or rehabilitation of ponds, springs, streams and fisheries; upland improvements for birds, wildlife, and livestock; and to conduct and profit from any and all private or reasonable commercial recreation, hunting and fishing rights permitted by the state law.
4) The right to build all roads necessary to reach residences, including driveways; and to construct and maintain improvements, such as drilling wells, installing septic tanks (pursuant to county regulations) and making similar resource-conscious limited-residential development-type improvements.
5) The right to retain small-acreage building envelopes legally described and excluded from the easement, and/or floating building sites, located anywhere on the ranch.
6) The right to construct a home, additional guest cottage or cabin, and non-residential outbuildings, such as a residence garage, shed, barn, etc. in each building envelope.
7) The right to exclude any and all public access, as the owner wishes.
Inherent in reserved rights is the right to donate, in a second-tier or easement amendment or series of amendments, either all or a portion of these many reserved rights. These future donations can be extremely valuable. Remember, however, that reservation of rights within any grant will reduce the donative (tax) value of the specific donation in which the rights were reserved.
This type of phasing strategy can result in a very significant escalation of tax benefits. As resource, agricultural and other improvements are completed on the property, values of future donations are likely to rise. The grant of easements can also increase the value of adjacent lands not subject to easement, and of the rights that have been reserved. Depending upon the individual Grantor’s tax status, this strategy can lower the after-tax cost of acquisition of a property over time by a significant percentage of the purchase price. We term this strategy Enhancement Derivative Planning.
It should be noted, however, that each transaction, every property and the tax status of each taxpayer is unique. Review by knowledgeable persons, attorneys and CPAs is essential. It is critical that your easement team be familiar with easements, land use, tax, law and the real estate market. In addition, it is required that the value of grants be reduced by the amount of value enhancement to reserved rights or adjacent unencumbered land. The concept of value enhancement is simple: Property adjacent to a “park” is more valuable than property adjoining potential development. When one donates an easement on just a part of a rural property, the balance of the land has more value, or is enhanced.
Unsalable Easements
As anecdotal substantiation of the “bad things” that may occur if a Grantor does not reserve rights, consider the case of a several-thousand-acre ranch on the Little Blackfoot River (of A River Runs Through It fame), up near Ovando, Montana. It was secluded, end of the road, surrounded by state and other public lands, with miles of the famous river. At the time, with Montana’s ranch land boom, this property should have been extremely desirable and completely saleable. I stumbled across the property on an internet search. Several partners and I were in the market at that time for another ranch to improve, operate and enjoy. I was immediately drawn to the land, even on paper. The Blackfoot River Ranch seemed to have it all: river, fishery, prime wildlife habitat, room for value-adding resource improvements, good summer livestock capacity, sixty miles from booming Missoula, privacy and proximity to public lands. I was puzzled that it appeared to be underpriced.
I went up to drive by the property that very day. It was stunning. The aquamarine waters of the Little Blackfoot flowed around serpentine bends in the river. Continual changes in stream structure and visual observation indicated an excellent population of trout. Abundant track, scat and other evidence of whitetail, mule deer and elk herds were everywhere. There was a pristine and secluded feel to it all, a palpable pleasant natural energy. Why had it been on the market for more than six months? Excited, I called the broker when I returned home. I asked him for additional materials. I queried him as to why the property had not sold.
He hemmed and hawed and finally stated, “Some people don’t like conservation easements.”
“There is a conservation easement on this property?” I asked. He knew full well that under disclosure laws that should have been mentioned upfront.
“Yes, there is,” he stammered.
I asked, “And what are the terms of the easement? What rights are reserved?”
“Reserved rights?” the broker responded, evidently puzzled. “What are they?”
I sat at my desk drumming my f
ingers, heart sinking, and gazed at the brochure’s mouth-watering photos, beauty that I had now verified in person.
I replied in a steady voice, “Reserved rights are the rights that the owner reserved when they made the grant of the easement. What could I, if I purchased the ranch, do with this property after purchase? Those are the reserved rights.” There was a moment of startled silence.
“I don’t think you can subdivide, and I’m not sure if you can build a house on it,” he replied.
“Do you mean that somebody allowed this Grantor to give an easement that doesn’t allow a single home to be built on a two thousand-plus-acre property? I just spent the day traveling, previewing the property and reviewing basic information. This previously undisclosed conservation easement is a material adverse fact.”
The listing agent sensed the incredulity in my voice. The broker stuttered, “I will find out for you. Come to think of it, I may have a copy of the conservation easement somewhere.”
I knew what the broker was thinking. This was a property he had not been able to secure a contract on for a long period of time, despite its incredible location and attributes. Now he had a buyer who was well-known in the business, qualified to close, had taken the time to view the ranch, liked it and was obviously interested in submitting an offer. Now here comes this damned conservation easement problem again.
I asked him if he could send me the information and a copy of the easement, along with any baseline resource study. Several days later, I received the information. The advisors to the owners had indeed allowed them to grant an easement with no reserved rights. There was timber on the property that needed to be thinned, which could also generate revenue, increase pasture and forage for livestock and wildlife and reduce fire danger. Timbering, however, was forbidden. Permitted enhancements of the fisheries and wildlife habitat were minimal to nonexistent. The construction of agricultural buildings, including those necessary to simply operate the ranch as a ranch, was forbidden. There were no subdivisions or transfers allowed or reserved. Not a single residential structure, even an owner’s house, could be built on the property. A note with the package from the broker indicated one could build a house on an adjoining piece of property that might possibly be purchased from a third party owner. I was extremely disappointed. We did not purchase the ranch. To the best of my knowledge, now, years later, the ranch remains for sale.
Land for Love and Money Page 17