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The cost of open space

Efforts to conserve land raise property rights, affordability, and tax concerns.

A 450-acre property that stretches a mile and a half along the shores of Lake Champlain would ordinarily be snatched up within months. But Wade Weathers Jr., who listed the $10 million Vermont property in June, knows selling it will be a challenge; the seller years ago ceded development rights to a nonprofit conservation group, narrowing the possible buyer pool to those comfortable with the development restrictions.

The restriction of development rights through what's known as a conservation easement isn't uncommon in this scenic Vermont area, with its dairy farms and expanses of undeveloped land, says Weathers, regional manager for the Vermont and Adirondacks office of LandVest Inc. in Burlington, Vt. In fact, thanks to his work on other such properties, Weathers knows how to find and market to conservation-minded buyers.

But conservation easements present a bigger headache in fast-growing parts of the country. Not only do they make properties more challenging to sell but they can hem in cities' ability to grow.

The easements are also controversial: The Internal Revenue Service has raised concerns over questionable tax structures, and real estate groups in some states have battled efforts to allocate transfer tax money to fund easements. Among property rights advocates, the concept of putting restrictions on owners' development rights raises a red flag.

Into the future with hands tied
Conservation easements are one of the environmental industry's main tools for preserving open space by taking developable land off the market. More than nine million acres of U.S. land are now under conservation easements, according to statistics from American Farmland Trust, Land Trust Alliance, The Nature Conservancy, and The Trust for Public Land.

A conservation easement is a deed restriction under which a property owner agrees to extinguish some or all development rights. The easement is sold or donated to a government agency or tax-exempt land trust, which then has the right to manage and enforce the restrictions that the easement document spells out.

In return for giving up development rights, owners who donate easements can receive a federal—and possibly a state—tax deduction for their charitable contribution. Whether the easement is donated or sold, the value of developable land goes down. As a result, owners may also enjoy a reduction in their federal estate tax and possibly in their property taxes.

For fervent property rights advocates, conservation easements harken back to the medieval feudal system, under which peasants paid property taxes but could use their land only for specific uses dictated by the lord of the manor. "Unless you have complete control over your property, you're basically a tenant," says Patricia Callahan, president of the American Association of Small Property Owners.

Not all private property rights proponents share that view. Some see conservation easements as akin to other activities that affect the value of property, negatively or positively, such as subdividing.

But even those who don't feel strongly one way or the other about conservation easements say development restrictions raise housing availability concerns.

In areas with scarce developable land, such as in the West, where the federal government owns much of the land, conservation easements take yet more land out of the development mix, exacerbating housing shortages.

"How will we provide housing if all the land is either government owned or locked up in conservation easements, especially since conservationists target the more scenic areas of the state?" says Laurie Urbigkit, who owns ACMS Realty in Riverton, Wyo., and does contract lobbying for the Wyoming Association of REALTORS®.

"There are better ways to preserve what's worth preserving," says Callahan. "The use of property will change over time. That's how communities grow and adapt to new economic conditions."

Indeed, housing shortfalls have led the Wyoming Association to come out against conservation easements, says Urbigkit. But opinion among the association's members is mixed.

Many practitioners in Jackson Hole, the high-end enclave in the Teton Mountains, favor the easements because they help ensure the area remains pristine. The issue of housing availability is being addressed in other ways, says Clayton Andrews, managing broker of Sotheby's International Realty in Jackson, Wyo., and member of the Jackson Hole Land Trust's Open Space Advisory Council. Affordable housing is being developed in the area through a local private affordable housing trust, and developers must meet a requirement to include a percentage of affordable housing in their projects, says Andrews. What's more, people who work in Jackson Hole but can't afford to live there commute from nearby communities.

Under new scrutiny
But their potential to reduce housing choice is only one of the reasons conservation easements face a harsh spotlight today. With the growth in the number and complexity of easement structures, these deals are posing tax challenges to governments and property owners.

Stories are mounting about the unintended consequences of easements. Take the case of a thousand-acre Wyoming site with a decade-old conservation easement. The owner is facing an unclear tax picture after coalbed methane gas was discovered on a neighboring property. To open the door for drilling, the owner bought the easement back from the local government. Questions have now been raised about whether the owner's tax basis should change. There are also stories of owners taking suspect deductions and of some nonprofit conservation groups structuring questionable deals. Following a series of articles by The Washington Post exposing questionable practices regarding conservation easement donations, the U.S. Senate Finance Committee has begun looking into the efficacy of some deals made by conservation organizations. Committee Chairman Charles E. Grassley, R-Iowa, hopes to introduce legislative reforms this fall.

Meanwhile, on June 30, the IRS announced it is cracking down on land owners who claim deductions for amounts that exceed the fair market value of a donated easement or who claim charitable contribution deductions for easements that have questionable public benefit.

The IRS says it may impose penalties on promoters, appraisers, "and other persons" involved in improper transactions concerning conservation easements.

"Practitioners have to be on guard for deals in which a landowner has been advised to accept an inflated appraisal for a conservation easement in order to reduce the selling price," says Carol W. LaGrasse, president of the Property Rights Foundation of America Inc., adding that practitioners might be "unwitting accomplices."

And while the federal government is putting heat on conservation groups, state governments are taking heat from property rights groups and state and local REALTOR® associations over the growing practice of earmarking transfer tax revenues to fund easements. In the typical case, the revenues from the transfer taxes are given to private land trusts, which then purchase and manage the easements. The NATIONAL ASSOCIATION OF REALTORS® opposes transfer taxes but doesn't take a position on conservation easements.

In New York, the state's Environmental Protection Fund is supported by $125 million in real estate transfer taxes each year. This summer, the New York State Association of REALTORS® helped defeat a bill that would have allowed towns under a voter referendum to impose, without state legislative approval, a local real estate transfer tax of up to 2 percent to create their own community preservation fund.

The New Hampshire Association of REALTORS® supported lawmakers in defeat of a bill that would have earmarked some of the state's real estate transfer tax revenue to help fund the state's Land and Community Heritage Investment Program. The issue has since been placed under "interim study" in the state legislature, so it could resurface in 2005.

The trend toward using real estate taxes to take developable land off the market is unlikely to abate soon. Voters tend to approve tax measures to fund open-space initiatives; some 80 percent of such measures pass, say NAR analysts. These open-space programs have traditionally been used by government to buy land outright, but with the trend toward conservation easements, it's likely that more of the funds will be used to buy development rights, NAR analysts say. That could change, though, depending on the impact of actions by the IRS and Congress.

Know conservation easement rules

The volatile environment surrounding conservation easements makes it important to tread carefully when working on a deal involving one. Sellers who've previously ceded development rights may have focused on the tax breaks but not on how the restrictions would impact a future sale. If you represent the seller or buyer of a property already encumbered with an easement:

Be sure you and your client have a thorough understanding of the terms of the conservation easement, how it's managed, and by whom.
Encourage both the buyer and seller to hire an attorney. If the easement is complicated, the seller's attorney should prepare a sheet of bulleted items, spelling out what the conservation easement does and does not allow.

What if property owners want advice about putting a conservation easement on their property in order to reduce the selling price? Wade Weathers Jr., of LandVest Inc. in Burlington, Vt., suggests proceeding with caution. His company has a separate division that consults with property owners on a fee basis, bringing together a team that includes not only appraisers and attorneys but also marketing specialists, who can advise the owner about issues like retaining the right to build a house on a certain portion of the property. "The wording of a conservation easement is very delicate," cautions Weathers. "Remember, you're affecting value of land long-term. With the additional IRS scrutiny, you need to be even more careful."

Because valuation is at the core of many IRS concerns, getting a good appraiser is key to ensuring that the appraisal is neither inflated nor undervalued, says Clayton Andrews, managing broker of Sotheby's International Realty in Jackson, Wyo., and a member of the Jackson Hole Land Trust's Open Space Advisory Council.

But another fine point is the deductibility of easements that aren't in perpetuity. Only perpetual easements (meaning they remain with the property forever, even if it's sold or passed on to heirs) qualify for IRS tax deductions. That can run into conflict with some state laws. In Wyoming, for example, conservation easements can't be perpetual because of the legal premise that "the dead hand cannot reach beyond the grave to control the living," says Laurie Urbigkit, contract lobbyist for the Wyoming Association of REALTORS® and owner of ACMS Realty in Riverton, Wyo. What to do?
· Defer to the experts. At the same time, learn all you can about conservation easement laws in your state. Check whether your state association offers classes. Many do. In fact, the Virginia Association of REALTORS® says "Appraising Rural Land/Environmental Law/Conservation Easements" is one of its most popular classes.
· Make your voice heard. Get involved with your state association, Urbigkit says, to help formulate policies that ensure balance between development and preservation.