The bundle of rights of an owner/grantor is diminished by a conservation easement. A deed of conservation easement is a perpetual and legal fragmentation of the physical use and legal title of the property, restricting future generations of owners from many productive uses while increasing the management and ownership costs of the property. The property rights are diminished the unit is no longer owned in fee simple.
Conservation easements have been defined in these ways:
- Conservation easement means a non-possessory interest of a holder in real property imposing limitations or affirmative obligations, the purposes of which include retaining or protecting natural, scenic, or open-space values of real property, assuring its availability for agricultural, forest, recreational, or open space use, protecting natural resources, maintaining or enhancing air or water quality, or preserving the historical, architectural, archeological, or cultural aspects of real property. Uniform Conservation Easement Act, 12 U.L.A. 60. (1988)
- The interest conveyed by an easement is primarily negative, preventing the landowner from impairing the conservation value of the property. Title to the land parcel remains in the easement grantor’s name. This title remains freely transferable, although it is permanently burdened with the conservation easement. 8:2 Stanford Environmental Law Journal 7. (1989)
- A restriction that limits the future use of a property to preservation, conservation, or wildlife habitat. The Dictionary of Real Estate Appraisal, 4th ed. Chicago: Appraisal Institute. (2000)
- A legal agreement between a landowner and a qualified organization that restricts future activities on the land to protect its conservation values. The Conservation Easement Hand book, 2nd ed. Washington, DC: Land Trust Alliance. (2005)
Grantees obtain a vested ownership interest and are entitled to proceeds from any sale, exchange or taking of the property in the event of a condemnation. Some uses may require a Grantee’s approval.
Pursuant to the Code, Grantors of easements may deduct the value of their conservation easement, as a charitable contribution. The easement lists the type and number of restrictions placed on the property over and above any land use plans, zoning or standard governmental regulations. These restrictions limit use and impact the owner’s ability to sell, mortgage, lease, and occupy the property. The land becomes primarily restricted – a nonconforming land parcel within the current market.
In the before appraisal, the fee simple estate is valued. “Fee simple” means all legal control of the parcel of land, including tangible and intangible use, is vested in the owner. Every parcel of property has tangible rights to: occupy and use, develop in the future, subdivide, harvest crops, hunt, peaceably enjoy, etc. Intangible rights include personal satisfaction and anticipation of change and value growth. The combination of tangible and intangible rights constitutes the “bundle of rights” of ownership:
The most complete form of ownership is title in fee. Such ownership establishes an interest in real property known as fee simple interest—i.e., absolute ownership unencumbered by any other interest or estate, subject only to the limitations imposed by the governmental powers of taxation, eminent domain, police power, and escheat. Although fee simple interest represents the most complete form of ownership, often an appraiser will be asked to appraise the value of something less than the fee simple interest—i.e., a partial interest or fractional interest.
The bundle of rights concept compares real property ownership to a bundle of sticks. Each stick in the bundle represents a separate right or interest inherent in the ownership. These individual rights can be separated from the bundle by sale, lease, mortgage, donation, or another means of transfer. The complete bundle of rights includes the follows:
» The right to sell an interest
» The right to lease an interest and to occupy the property
» The right to mortgage an interest
» The right to give an interest away
» The right to do none or all of these things
The Appraisal of Real Estate, 12th ed., Chicago: Appraisal Institute, 2001
Landowners relinquish certain sticks (property rights) from the bundle of rights to the Grantee organization or entity. The portions of the bundle that are donated are specific ownership rights that are transferred into perpetuity. Most often these rights are numerous and specific. They might include items like the right to subdivide the property, restrictions on the number of homes that may be built and occupied on a year-around basis, the restriction of dumping, paving, harvesting of timber, commercial wind generation, water maintenance requirements, signage, mineral estate restrictions, and roads and fences.
The conservation purposes for which easements may be donated are defined in four categories:
The preservation of land areas for outdoor recreation by, or the education of, the general public,
- The protection of a relatively natural habitat of fish, wildlife, or plants, or similar ecosystem,
- The preservation of open space (including farmland and forest land) where such preservation is for the scenic enjoyment of the general public or pursuant to a clearly delineated Federal, state or local governmental conservation policy and will yield a significant public benefit, or
- The preservation of a historically important land area or a certified historic structure.
Kim C. Bennett, Ph.D., ARA has been appraising conservation easements for over 25 years in both Montana and Wyoming. During this time frame she has prepared several hundred conservation easements on thousands of acres of land that is now conserved into perpetuity. Kim has the education and background and is an IRS Qualified Appraiser for Conservation Easements.
The landowner normally hires the appraiser for conservation easements. In some cases the organization receiving the conservation easement donation will hire the appraiser. These cases typically include a purchased easement.
Conservation easement appraisals are complicated in that they are two appraisals in one. Conservation easements appraisals are typically performed in the “before” and “after” method whereby the property is appraised unencumbered by the easement and then appraised again in its encumbered state. The difference in the two appraisals is the amount of the decrease in value due to the effects of the conservation easement and this number is often referred to as the charitable donation in a straight donation situation. However, in a purchased easement scenario the difference could include a portion of the property rights that will be purchased plus a bargain sale component. The bargain sale component becomes the charitable donation to the land trust or government entity. Proper documentation of the loss in value is key. Terra Western Associates maintains a database of sales of properties which have sold after they have been encumbered by a conservation easement. Having the proper sales data and the skills to implement their use is critical in the conservation easement process.
The appraisal of conservation easements runs more like a project of sorts. There are many phases of the easement process which involve the appraiser and many that are specifically between the entity taking the donation and the landowner. A summary of the steps are as follows;
1) The landowner contacts the charitable organization which is normally a land trust such as The Montana Land Reliance, The Nature Conservancy, The Wyoming Stock Growers Agricultural Land Trust, Gallatin Valley Land Trust, Five Valleys Land Trust, Little Prickly Pear Land Trust, or sometimes a state or federal agency such as Montana Fish, Wildlife, and Parks, the Wyoming Game and Fish Department, or the Natural Resources and Conservation Service. There are many organizations willing to receive donations. Working with a Land Trust Alliance Certifed Trust is a good idea. Many trusts are still in the certification stages so ask them about their process
2) The landowner contacts the appraiser. The easement request is reviewed through an interview with the landowner and then if we choose to work together an engagement letter is sent out explaining the process. We require a 50% retainer to work on conservation easements as they can take from three to nine months to complete. An appraisal acknowledgment form is also sent with the letter which is returned with the retainer and then the landowner is placed on our conservation easement appraisal list for the year.
3) The landowner and the land trust work together to formulate a “draft” conservation easement deed document specific to their property. This document is often reviewed by an attorney before the appraiser receives a copy.
4) In the early stages the appraiser will visit the site with the landowner, review the “draft” conservation easement document, gather sales data and develop preliminary planning information to be discussed with the landowner. The shaping of the final document can often be determined by how much diminution in value will be created by what is being relinquished in the conservation easement deed. The appraiser works with the landowner and their professionals to solidify a final document.
5) The land trust performs a “minerals remoteness” test if all of the minerals are not owned, and they will also do a “baseline study” on the property to have a reference point, or beginning point, to refer to when they do their annual inspections.
6) The final conservation easement deed must be approved by each county commission in Montana. This can often take 30 to 60 days. Once it is approved by the county in its final form it can be filed at the courthouse.
7) IRS regulations do not allow the appraisal to be performed more than 60 days prior to the filing of the document. In our office the effective date is the date the easement was field at the courthouse. The literal appraisal document may be completed any time after that date but before the client files their taxes. At Terra Western Associates we prefer to have a copy of the filed document in the appraisal so the IRS knows what is being appraised is actually what was donated.
8) A final IRS Qualified Appraisal is performed for the landowner and delivered before the tax filing deadline. If the donation is over $500,000 a full copy of the appraisal must be submitted with the tax return. The appraiser also signs an IRS Form 8283 for the charitable donation which is also filed with the tax return. The Grantee, usually a land trust, must also sign this form.
9) The landowner receives three copies of the appraisal and a signed IRS Form 8283 from our office.
Appraisers of conservation easements that involve a tax deductible charitable donation must meet the requirements established by IRS Code Section 170. IRS Code Section 170 explains in detail the details of a charitable contribution consisting of a conservation easement.
The Internal Revenue Code and Treasury Regulations provide specific requirements for a “qualified appraisal” and a “qualified appraiser”. The donor of a conservation easement should be aware of the detailed requirements related to a qualified appraisal and qualified appraiser as set forth in Section 170(f)(11) of the Internal Revenue Code and Section 1.170A-13(c)(3) & (5) of the Treasury Regulations.
A qualified appraisal must comply with all the requirements of Treasury Regulation Section 1.170A-13(c)(3) and must be conducted by a qualified appraiser in accordance with generally accepted appraisal standards. It will be treated as meeting generally accepted appraisal standards if, for example, it is consistent with the substance and principles of the Uniform Standards of Professional Appraisal Practice. A qualified appraisal must be made no earlier than 60 days prior to the date of contribution of the appraised property and received by the donor before the due date (including extensions) of the return on which a deduction is first claimed.
Under Internal Revenue Code Section 170(f)(11)(E)(ii), a qualified appraiser is an individual who regularly performs appraisals for compensation and who has earned an appraisal designation from a professional appraiser organization or has met minimum education and experience requirements as set forth in regulations. Notice 2006-96 provides that, until regulations are promulgated, an individual will be treated as meeting the appraisal designation requirement if the individual’s appraisal designation is awarded on the basis of demonstrated competency in valuing the type of property for which the appraisal is performed. For an appraisal of real property, the appraiser will be treated as having met minimum education and experience requirements if the appraiser is licensed or certified for the type of property being appraised in the state in which the appraised property is located.
Under Internal Revenue Code Section 170(f)(11)(iii), for each specific appraisal, an individual will not be treated as a qualified appraiser unless the individual demonstrates verifiable education and experience in valuing the type of property subject to the appraisal and has not been prohibited from practicing before the IRS at any time during the 3-year period ending on the date of the appraisal. Notice 2006-96 provides that an individual will be treated as meeting the verifiable education and experience requirement if the appraiser makes a declaration in the appraisal that because of the appraiser’s background, experience, education and membership in professional associations, the appraiser is qualified to appraise the type of property being appraised.
Land trusts will normally have a list of IRS Qualified Appraisers. Ask them for the list and interview the appraiser to find the one that is right for your project.