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by Jeff Kauttu
Every corner of the United States is home to important and diverse habitats that deserve to be protected; many hold awe-inspiring natural beauty. What is equally important and just as rare is environmentally important land that also has significant development potential. It is this type of high-value development land that is ideally suited for the consideration of a conservation easement, an important tool used to protect valuable ecological resources for future generations.
The old axiom about land is that there is no more where that came from, which is acutely true when discussing sensitive habitat and wetlands. Once eliminated, it is prohibitively difficult and expensive to return land to its natural state.
It is often the case that sensitive habitats such as wetlands have little value in terms of potential development. They may be too remote or the costs associated with developing them are significantly higher than land a short distance away. For instance, a plot of land that is miles from the nearest town and is home to an endangered salamander has obvious ecological importance but little development potential.
Likewise, land that holds significant development value often has little if any ecological value. This could include a cleared city block in downtown Washington, D.C. that was previously home to a gas station. The potential value in building a mixed-use development is high, and there is little new environmental impact.
Conservation easements are a tool that is most effective when land is identified that has both ecological and development potential. Without the easement, the land would almost certainly be developed, and the environment would almost certainly suffer as a result. This type of land is rare.
When a person, family or partnership of individuals place a conservation easement on a tract of land, they give up the development rights forever. In return, Congress has created incentives in the tax code to encourage more conservation. Without these incentives, land conservation would be restricted to a select few, as the financial repercussions of giving away their development rights forever would prevent most from doing so.
Since conservation easements are forever, appraisers examine what is termed “highest and best use” (HBU) when conducting appraisals on these lands. During a regular real estate transaction, the value of the land is solely the most that one party is willing to pay another party for it. When conserving land forever, the value of the land reflects the fact that development rights are forfeited in perpetuity. And through the incentives created by Congress, the difference between the initial price and the Fair Market Value HBU appraisal is the value of the charitable donation that is tax deductible.
Unfortunately, some at the Internal Revenue Service (IRS) do not seem willing to fairly apply this standard and are forcing taxpayers into costly litigation. A recent donation I was involved in provides a perfect example. This property had entitlements for 2,200 high-end residences in a booming market. The owner abandoned the development project and instead placed a conservation easement on the bulk of the property, restricting development to only 15 tracts. The value of the donation was large based on the fundamentals of the project. The IRS vigorously contested the appraisal, a contest which it ultimately lost.
This isn’t the fault of the IRS entirely. In some instances it seems the IRS does not have appraisers on hand with the experience necessary to evaluate the nexus between HBU and environmental value. Too often it appears the default position of the IRS is that large donations are inherently bad and they are willing to put taxpayers through costly litigation to prove they are right.
This line of thought is particularly obvious in coverage of conservation easements that compare a valuation on one tract of land with a seemingly similar tract of land nearby. First, many real estate transactions are not made at fair-market value because the buyer and/or seller did not do all due diligence to establish HBU before and after, and thus can not be considered “knowledgeable” buyers/sellers as the IRS (and others) define fair-market value.
Second, short distances can mean a significant difference in land value. If a piece of land is being considered for development of a mine, for instance, the depth of the mineral, the level of the water table and the haul distance by truck or distance to a rail line could make one tract of land ideally suited for development and another tract of land only a short distance away comparatively worthless.
Conservation easement appraisals involve some of the most sensitive, unique and scarce resources in the nation. The opportunities for large conservation easement donations are equally sensitive, unique and scarce.
The perception that “land is land” and that land well-suited for conservation easements is plentiful leads some to the mis-perception that large donations are a result of over-valuation. My experience is not that that the IRS lacks expertise, it is that their expertise is colored by a bias toward low donation value. It is incumbent on conservation easement donors to explain and demonstrate how each project meets the very specific requirements that set the project apart. It would be helpful if the IRS and Congress would approach these situations with the understanding that that what is being conserved is a precious resource that is being preserved in perpetuity and not a gimmick being used to defraud the government.
About the Author
Jeff Kauttu is an authority in environmental appraisals with more than 25 years of experience.
Richard Hagar, SRA, is an educator, author and owner of a busy appraisal office in the state of Washington. Hagar now offers his legendary adjustments course for CE credit in over
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