Conservation Easements: Windfall or Straitjacket?

Real Estate Issues, Fall 2007 by Timmons, James D, Daniel, Lara

A CONSERVATION EASEMENT CREATES A NON-POSSESSORY interest in land. In granting or donating a conservation easement, a landowner normally transfers certain property rights to a nonprofit conservation organization or government agency. People who create conservation easements on their land often do so because they wish to ensure long-term conservation of land, which they value and which contains important natural features. This type of easement is a tool for preventing intensification of land use on property having important natural, agricultural, scenic or historic value. The landowner retains legal title to the property but agrees to forgo certain uses, such as residential or commercial development.

There are several good financial reasons for entering into conservation easements. Landowners are often paid substantial amounts of money for the conservation easement. Additionally, if a conservation easement is granted in perpetuity, the landowner is entitled to claim a deduction on his or her federal income taxes. Furthermore, since the conservation easement lowers the value of the property, it also lowers the value of the landowner's estate and, ultimately, the estate tax burden as well as the property tax burden.

In reality, conservation easements are more like restrictive covenants than easements. A grantor who enters into a conservation easement agrees to dedicate the portion of his or her property encumbered by the easement to a specified use (or non-use, as the case may be) or agrees to adhere to specified practices thereon . . . in perpetuity. Perpetuity is a long time, so a landowner who enters into such an agreement not only signs away his right to change the use of the land, but also gives away the rights of any future owner to change the use of the land.

This paper will define conservation easements and comment on the rationale for their use.We will also provide a summary of the various types of conservation easements and survey how widely they are being used. Additionally, and most importantly, the legal aspects and tax implications of their use will be analyzed. Our intent is to provide landowners a framework for evaluating the prudence of encumbering their land with conservation easements.

INTRODUCTION

Urban sprawl is consuming millions of acres of open space, farms and forest land to development each year in the United States. There is, however, a growing effort to combat the loss of so much green space. Rather than see local rural space, rugged outdoor areas or wetlands or other environmentally sensitive areas gobbled up by strip malls or subdivisions, many private land owners are increasingly preserving their land. One of the tools being used extensively to save the land is the conservation easement. Conservation easements are a legal tool designed to extinguish most or all of the development potential of land in the interest of conservation.

For a landowner, the decision to sell or donate a conservation easement is a momentous action that should not be made lightly or quickly. Placing restrictive covenants on a property will not only have consequences for the current landowner, but will also have long-lasting effects on all future owners of the property. Negotiated voluntarily with a nonprofit or public land-trust agency or government entity, conservation easements restrict the use of a particular parcel; the landowner can continue using the land after the easement is purchased, but the land will be restricted as to subdivision or development. Land in easements can be bought or sold, but the restrictions remain in perpetuity.

The decision to sell or donate conservation easements, then, depends on many factors, including the landowner's willingness to forego the profitable option of selling the land for urban development in return for more modest economic gains and other benefits. The idea is often appealing to farm families who want to continue a farming operation over future generations, but need cash that would otherwise only be available by selling the land. There are also those who wish to protect the natural character of land from any future development. In either case, while current cash or tax advantages provide immediate benefits to the present landowner, future generations and owners carry the costs in terms of restrictions and limited land development opportunities.

This paper will provide additional information about the growing number of conservation easements being used to save green space from urban sprawl.We will document not only the number of easements, but also the regions of the country where they are most widely used. It will be seen that a major incentive for allowing one's land to be "preserved" relates to new tax law that provides several possible tax breaks. There will also be a discussion of land appraisal issues, which have complicated the conservation easement process. Finally, there are many legal issues that must be, or should be, considered when one is contemplating the use of conservation easements.