BEYOND BASICS: EASEMENTS PART II

The previous LandSavers webcast explained why conservation easements are an invaluable land protection tool. This webcast delves into the subject more deeply, providing information on:

• Municipal land protection programs
• Financial benefits to landowners
• Steps in acquiring easements
• Easement stewardship

Excerpted and adapted with permission from Using Conservation Easements to Preserve Open Space: A Guide for Pennsylvania's Municipalities. Copyright © 2002 PA DCNR.






Municipalities that want to preserve open space can react to development by trying to reshape subdivision plans after submission or be proactive and approach significant landowners before developers.

An important and necessary first step in the conservation process is to create a municipality-wide open space plan that identifies priority lands for protection. ( See "Creating Open Space Plans" webcast for information on creating a community-wide open space plan. )

Using the open space plan as a guide, a municipality could forge a partnership with a cooperating land trust to encourage private land stewardship. An informational program could be developed to ensure that targeted landowners in the municipality were made aware of opportunities for land preservation. Meetings could be held where land trust staff discuss the financial incentives and costs associated with land preservation. It can be powerful to include past easement donors speaking as to why they donated and how it made them feel. Handouts about the municipal open space program and conservation easements should be distributed. These informational meetings could occur in groups or one-on-one with key landowners.

If a landowner seems interested in conserving his or her land, an informal tour of the property should be scheduled to help answer two important questions:

1) Does the property meet the municipality's or land trust's criteria for accepting easements?; and

2) Will it be possible to develop easement terms that are acceptable to all parties?

If the answer to these questions is "yes," the parties need to decide if the easement will be held by the municipality, by a land trust, or by both entities, in which case the local government and the land trust are called "co-holders." Landowners may request that the easement be held by a municipality to enable the property's tax millage to be frozen under Act 153. Or they may want the easement to be co-held by a land trust because they believe the non-profit will provide more stringent monitoring and enforcement protection.

As part of its land protection program, a municipality may want to establish a reimbursement program to assist landowners with hard costs associated with easement donation, such as appraisal and survey. A landowner may be willing to donate an easement but be unwilling or unable to spend the necessary (albeit tax-deductible) up-front costs. If a land trust will be holding the easement, and a stewardship donation is required, the municipality may choose to subsidize a contribution to the fund.

( Click here to see policies and standards for setting up a municipal program.)

Example: West Pikeland (Chester County) Township formed a §501(c)(3) land trust to focus on land protection in the municipality. The township will provide start-up funding for the first several years and appoint a majority of its directors.

( Click here to learn about a related grant program. To see other tools in the municipal open space toolbox click here. )

Back to the top.






Municipalities will never have enough funds to purchase easements on all the land they would like to protect. Some local governments will be able to accept only donated easements. Fortunately, the federal government has created strong incentives for easement donation. Valuable income, estate, and, in some cases, property tax savings await many landowners who place easements on their properties. Municipal officials and open space committees should be aware of these financial incentives so they can talk with landowners generally about the benefits of donating easements. ( Be sure to advise landowners to consult with their own legal or tax advisors to be certain of the applicable laws and regulations in effect at the time of the transaction. Be sure also to discuss the possible costs involved with donating or selling an easement. )

The overview below outlines the financial implications of granting a conservation easement. Please refer to the Preserving Family Lands series, listed in "Links & Resources," for more detailed explanations.

  • Income Tax Benefits
  • Estate Tax Benefits
  • Property Tax Benefits
  • Other Tax Savings

    Income Tax Benefits
    A landowner who donates an easement or sells it for less than fair market value may be entitled to a federal income tax deduction under §170(h) of the Internal Revenue Code ( the "Code" ). First, the IRS specifies that to qualify for the deduction, the perpetual easement must be conveyed to a governmental unit or a "qualified organization" that is a §501(c)(3) charitable organization with the commitment and resources to enforce the easement's restrictions. ( To qualify as an easement holder under Pennsylvania's Conservation and Preservation Easements Act, the qualified organization also must be registered with the Pennsylvania Department of State, Bureau of Charitable Organizations, and have a conservation-oriented mission. ) The second IRS requirement is that the conveyance be "exclusively for conservation purposes," which are defined as:

    1) Preservation of land for outdoor recreation by the general public or for education of the general public;
    2) Protection of relatively natural fish, wildlife, or plant habitats;
    3) Preservation of open space (including farmland and forest land) which yields a significant public benefit AND is either 1) for the general public's scenic enjoyment, or 2) pursuant to a clearly delineated federal, state, or local conservation policy (e.g., an open space plan); or
    4) Preservation of historically important land areas or certified historic structures.

    ( Click here to view the text of IRS regulations on easements.)

    To increase the chances of qualifying for a deduction, the easement document and the baseline documentation for a property generally will be written with an eye towards fitting the property into as many "conservation purpose" categories as possible.

    ( Click here to learn more about conservation purposes. )

    The mechanics of the charitable income tax deduction are as follows:

    The value of the tax deduction is determined by the difference between the "highest and best use" of the property before donation of the easement and the value of the property after it is restricted by the easement. In an urbanizing area, a property's highest and best use probably is its value if it were fully subdivided and developed under current zoning regulations. In a more remote area, a property's highest and best use might be as a hunting reserve. While all conservation easements reduce a property's market values, the amount of the diminution depends on how restrictive the easement is, the property's location, and its unrestricted development value. Typically, an easement will reduce a property's value by 30% to 70%. Where the value of the deduction to be claimed is more than $5,000, the IRS requires that the donor obtain a qualified appraisal to justify the value of the gift at the time the easement is conveyed.

    If the easement satisfies IRS regulations, it will be treated as a tax-deductible charitable donation. The maximum annual charitable deduction a taxpayer can take for gifts of appreciated property, such as most land and easement donations, is 30% of adjusted gross income ("AGI"; i.e., income minus standard deductions). ( In certain circumstances, taxpayers may elect the less-common 50% alternative deduction. ) This deduction may be spread out for up to six years. Any remaining donation value cannot be used after the sixth year.

    ( Click here to learn more about the tax aspects of donating an easement, PDF file )

    Note that proposals currently are being considered in Congress that would reduce the capital gains tax on sales of property to land trusts or municipalities and expand the deductibility of conservation easement donations.

    Estate Tax Benefits
    Estate taxes are determined by valuing the land's highest potential value (e.g., for subdivision) at the time the landowner dies, and not by its actual use (e.g., farmland) at the time of death. Heirs thus are required to pay a tax - currently as high as 55% in some cases - on the land's development potential. Unfortunately, because of high estate taxes, many Pennsylvanians are unable to keep their land in the family.

    Placing a conservation easement on all or part of the property reduces its development potential and thus lowers the estate tax the IRS will impose. Under the American Farm and Ranch Protection Act of 1997, a landowner's estate also now may totally exclude from federal estate taxation up to 40% of the value of the eased land, with a cap of $500,000. A landowner can donate an easement prior to death, or the heirs may choose to donate the easement within a limited time after the landowner's death.

    An easement may be donated by will if a landowner is conservation-minded but does not want to constrain use of the property during his or her lifetime. This alternative does not provide income tax benefits to the landowner but does reduce estate taxes.

    ( Click here to learn more. )

    With careful tax planning, the estate tax may be reduced sufficiently to allow the heirs to pay the tax without selling the land, allowing the property to remain in the family for additional generations. Of course, potential easement donors should be advised to retain legal counsel to guide them through the tax planning process.

    Property Tax Benefits
    In Pennsylvania, it is the landowner's responsibility to go before the Board of Assessment Appeal to argue for the lower property tax rate that should result from permanent easement restrictions. This argument should be assisted by Section 5009 of Act 153, which specifically states that property assessments must reflect any changes in market value resulting from the local government's acquisition of an easement on property.

    Agricultural conservation easements that are donated or sold, even to non-municipal holders such as land trusts, are also required to be assessed at the land's restricted farmland value. ( See Preserved Farmland Tax Stabilization Act of 1994, P.L. 605, No. 91 (the "Act") - not available online .) Easements do not have to be part of the state or county agricultural preservation program to constitute an "agricultural conservation easement" under the Act, but they do need to contain a third-party right of enforcement.

    Note that in many cases an easement will not lower the property tax assessment because land which comes under easement often is already under one of the state's preferential tax assessment laws, such as Act 319 ("Clean and Green") or Act 515 ("County Open Space Covenants"- not available online) .

    Other Tax Savings
    Other possible tax savings may result from sale or donation of an easement:

    • As detailed in an earlier LandSavers webcast, school districts have the authority to exempt municipally-eased properties from real estate millage increases.
    • Placing easement restrictions on property before conveying the property as a gift may substantially reduce the federal gift taxes owed.


    Back to the top.






    After discussions with the landowner have led to an agreement in principle regarding sale or donation of a conservation easement, the municipality — or a cooperating land trust — is ready to "do the deal." Following is a brief overview of the steps involved in acquiring an easement. Municipalities will need to tailor, re-order, or delete certain steps to deal with each unique property and transaction.

  • Qualified Appraisal
  • Sales Agreement
  • Baseline Documentation
  • Title Search
  • Mortgage Subordination
  • Environmental Assessment
  • Drafting the Easement Document
  • Survey
  • Stewardship Fund
  • Settlement

    Qualified Appraisal
    Whether the easement acquisition is a purchase or a donation, obtaining an accurate appraisal is essential. The landowner and the municipality purchasing the easement need to know what the property interests are worth. Often, both the landowner and the entity acquiring the easement will obtain their own appraisals. Only if the parties can reach an agreement on price does the transaction go forward.

    If the landowner wants to claim a charitable tax deduction for donating an easement, the IRS requires the landowner to obtain a "qualified appraisal" to justify the value of a donation over $5,000. A "qualified appraisal" includes: a description of the property, information on the appraiser's qualifications, the valuation method used to determine fair market value, and a description of the fee arrangement between the appraiser and the donor. (Treasury Regulation §1.170A-13T(c)(1).) The appraisal must be performed by an appraiser who is "qualified to make appraisals of the type of property being valued" and who is "independent" of the donor and the easement holder. Appraisals performed for projects using DCNR funds require that a state-certified general (not residential) real estate appraiser be hired.

    ( Click here to learn more about appraising easements. )

    Treasury regulations require that the appraisal be made not earlier than 60 days before the date of the gift. A summary of the appraisal must be submitted on IRS Form 8283 with the donor's income tax return for the year of the gift.

    Together with other reasonable expenses related to the donation (including legal and accounting assistance, survey costs, and recording fees), appraisal costs are tax deductible to the extent they exceed 2% of the donor's adjusted gross income. ( See Appraising Easements, listed in "Links & Resources," for more information. )

    Sales Agreement
    Between the time the parties come to an agreement and the time they are ready to acquire the easement, a title search must be completed, an environmental assessment may be ordered, and the grantee may need time to raise the purchase price. To document the parties' commitment during this period, which often can take several months, it is wise to have a written agreement prepared and signed by the parties. This agreement can take the form of a standard real estate sales contract, in which the easement buyer makes a deposit towards the purchase price. In other instances, the preferred agreement would be a letter contract requiring the landowner to reimburse the municipality for title and other costs should the landowner subsequently withdraw from the transaction.

    Baseline Documentation
    An analysis of the property's conservation values needs to be performed. This is an IRS requirement for landowners who intend to take a charitable tax deduction and a way for easement holders to conduct meaningful inspections in the future. The report — called "baseline documentation" — describes the condition of the property at the time the easement is placed on it and identifies the property's important resources and any threats to those resources. This analysis typically is conducted at the same time the easement document is being drafted, so that the restrictions and reserved rights can be tailored to protect the property's most important natural features.

    The baseline documentation may include...

    Back to the top.

    		•

    CLICK HERE TO VIEW THE WEBCAST

    Learn why landowners Marty Kyde and her husband
    decided to put an easement on their land.

    You need Flash to view this webcast.
    Free Download here.




      The baseline documentation may include:
    • a list of flora and fauna of interest;
    • signed and numbered photographs of the property with photo points keyed to a map;
    • topographic and soil maps; aerial photographs;
    • a survey;
    • a conservation plan illustrating agreed-upon building envelopes; and
    • a management plan for the property's natural resources.

    Land trusts typically have a conservation biologist on staff who prepares the baseline documentation, or an environmental consultant can be hired to perform this work. The cost of the report varies depending on the size of the property and the complexity of the reserved rights retained by the landowner.

    Title Search
    An entity acquiring a conservation easement should always do a title search to check for liens, encumbrances, or other problems with the property's title. Title information furnishes the legal property description that must be included in any land transfer document.

    A title insurance policy is recommended for every purchased easement. Title insurance protects an easement holder from financial loss resulting from defects in the property's title, other than defects that are listed and excluded from the title insurance policy. Some easement holders obtain title insurance for donated easements as well. The cost of title insurance usually is borne by the entity acquiring the easement.

    Mortgage Subordination
    If the property to be eased is subject to a pre-existing mortgage, and the lender ever forecloses and takes title to the premises, the conservation easement could be extinguished. The solution is either to have the landowner satisfy the mortgage at settlement or to ask the lender to record an agreement that subordinates its rights in the property to the rights of the easement holder. Subordination is required for the easement to be tax-deductible. Although it may take time to obtain the necessary approvals, most sophisticated lenders will agree to a subordination request, particularly if it gives the lender's right to collect on indebtedness under the mortgage priority over the easement holder's right to collect any monetary damages or costs.

    Environmental Assessment

    Environmental laws impose liability regardless of fault ( i.e., "strict liability" ) on current owners of contaminated land, or on previous owners if the pollution happened during their ownership. The law is unclear regarding whether an easement holder ( even one with no property management responsibilities ) will be held liable for environmental clean-up costs, but it is certainly prudent to assume that this risk exists.

    Environmental laws do provide "innocent" purchasers of polluted property with some protection from liability. In order to establish "innocence," the purchaser must show that it was diligent in assessing the land for contamination before acquisition. For every easement the municipality acquires, it first should thoroughly inspect the property ( and view neighboring properties to the extent possible ), review the property's ( and neighboring properties' ) past uses, research public records and permits for indications of past problems, and document all steps taken in the investigation. These steps are considered a "Phase I" environmental assessment.

    If the property inspection or the document review raises the slightest concern, or if the municipality does not want to undertake the necessary investigation itself, it is recommended that the Phase I be ordered from a qualified consulting firm. The Phase I report may recommend analysis of soil and water samples from the property. ( This sampling would be called a "Phase II" assessment. )

    The easement holder should have the right to walk away from the transaction if the environmental assessment uncovers problems that are unacceptable. The agreement of sale may include a due diligence clause granting the easement holder a set period of time to conduct investigations, as well as a provision delineating who will pay for any professional environmental assessments. Additionally, the easement document should include a provision indemnifying the easement holder if it incurs expenses due to contamination, as well as representations and warranties by the landowner relating to the lack of contamination.

    Drafting the Easement Document
    After the terms have been negotiated, the easement document will list mutually agreed-upon use and development restrictions and will specify which parcels (or portions of parcels) are covered by those restrictions.

    The challenge of drafting an easement document is to anticipate potential future uses and points of conflict and address them clearly. The easement document should be as specific as possible without alienating the landowner or creating a maze of restrictions that is impossible to enforce.

    If state or county grant funding is being used in the transaction, the agencies may require the easement document to include particular provisions or restrictions. The Pennsylvania Conservation and Preservation Easements Act also requires certain provisions for the agreement to be enforceable as a conservation easement under the statute. ( Click here to link to the state's Conservation and Preservation Easements Act 32 P.S. section 5051 - 5059. ) Lawyers for both parties should review and approve the document. Land trust staff may be used to write the initial draft of the easement, but legal assistance at this point is essential. Laws and regulations are always changing, and only an attorney with experience in conservation easements can keep the parties up-to-date.

    Survey

    If the boundaries of the property are unclear or in dispute, or if grant funds are being used in the transaction, a survey may be required. A survey with permanent monuments also is highly desirable where building rights on portions of the property are retained by the donor. The Pennsylvania Conservation and Preservation Easements Act requires easement documents to contain a metes and bounds description of the eased area, unless the easement boundary can be referenced to an existing deed boundary or a natural or artificial feature such as a stream or railroad right-of-way.

    The cost of a survey is dependent upon such factors as acreage, survey method, and property terrain.

    Stewardship Fund

    By accepting a conservation easement, a municipality assumes the legal obligation of carrying out the donor's desires by upholding the terms of the easement. The easement donor, of course, is not likely to violate his or her own easement, but eventually others will own the property. The easement holder must be prepared to monitor and defend all of its easements against future violations. If the landowner claims a tax deduction for the easement, the IRS requires the grantee to "...have the resources to enforce the restrictions of the easement."

    To fulfill monitoring and enforcement responsibilities, most land trusts require a stewardship contribution with every conservation easement. A stewardship gift is a one-time, tax-deductible fee that generally reflects a small contribution in relation to the donor's tax savings. This contribution may come from sources other than the landowner. Because of the greater funding resources available to local governments than land trusts, municipalities that accept easement donations may not need to require contributions to a stewardship fund. However, where a land trust is the entity accepting the easement, the municipality should know how the land trust handles this matter.

    ( Click here to learn about calculating stewardship fund donations. )

    Settlement
    A real estate closing will be scheduled once all the conditions of the sales agreement have been satisfied. The title company or buyer's attorney generally handles the closing, ensuring that the landowner receives the agreed-upon compensation and the municipality or land trust receives the easement. If the easement is being donated, a formal closing is unnecessary.

    After the landowner and the easement holder have signed the easement, the document must be recorded at the office of the local recorder of deeds. This provides notice to future owners about the easement's restrictions at the time they obtain title reports. To coordinate local land protection efforts, municipalities may want to ask land trusts to notify them when the land trust accepts an easement within the municipality.

    Back to the top.






  • Monitoring the Easement
  • Enforcing the Easement Restrictions
  • Outline of a Sample Conservation Easement

    Monitoring the Easement
    As easement holder, the municipality or land trust takes on the perpetual burden of monitoring the easement to ensure that its terms are followed. The holder needs to visit the property on a regular basis, maintain adequate records, respond to landowners' questions and requests for approvals, document any changes in the condition of the property, and issue written interpretations of easement restrictions when necessary. The holder also should have a policy in place to respond to any requests for amendment of the easement document.

    Should inappropriate changes to the property be made, the easement holder will try to correct these conditions through voluntary compliance, but it needs to be prepared to use the legal process to defend the easement. The Conservation Easement Handbook, listed in "Links & Resources," notes three key ways to avoid costly enforcement battles:

    1) Institute a program of regular and well-documented monitoring;
    2) Prepare an easement agreement with clear and enforceable restrictions; and
    3) Maintain a good relationship with the landowner.

    The purpose of the inspection is not to find violations and penalize the landowner; most violations are done innocently. The real purpose is to clear up any misunderstandings early, before landowners make major changes in land uses or conditions, and before they incur large costs in making these changes. Just as importantly, these inspection sessions give the easement holder a chance to air any concerns it may have. Again, the more time taken to clearly spell out details prior to putting the easement in force, the fewer the number of problems that will arise later.

    It is good practice to send the landowner a thank-you letter, together with a copy of the monitoring report, after the visit. In addition to contact with the landowner at the time of the annual inspection, it is smart to keep contact throughout the rest of the year by adding owners of eased property to the mailing list for newsletters the EAC or open space committee might generate. The municipality also might want to run occasional workshops on topics such as native plant species or pest management, in order to cultivate good relationships with landowners.

    Enforcing the Easement Restrictions
    If the monitoring visit uncovers possible easement violations, these should be discussed with the appropriate staff person at the municipality or land trust. The easement holder's attorney may need to help interpret the easement restrictions in question.

    A face-to-face meeting with the landowner is important so that the alleged violation can be discussed and a possible remedy proposed. The easement agreement should provide the landowner with a set time period (e.g., 30 days) for curing violations.

    If violations occur which cannot be amicably resolved, the easement holder must be prepared to enforce the integrity of the easement through appropriate legal means. The easement agreement should specify that payment of money damages by the landowner is not an adequate remedy for violations of the easement's restrictions and that "equitable" remedies that require the landowner to fix or reverse violations are more appropriate.

    Outline of a Sample Conservation Easement

    Following is the broad outline of a conservation easement often used by Heritage Conservancy. This is just one approach; acceptable variations in format (and in transactions) are endless. Municipalities also are advised to refer to the Land Trust Alliance's model easement contained in The Conservation Easement Handbook, listed in "Links & Resources," for a widely-followed (non-Pennsylvania) sample easement and detailed explanation of provisions. As noted in the last webcast, easements purchased under the state's Agricultural Security Area Law need to follow that program's standard easement. Likewise, projects using state or county funding need to incorporate clauses required by those funders. ( See the sample provisions outline now, 39K PDF File )

    Back to the top.




    Find out more about this topic by going to our Links and Resources section.