What does the Sewall Bridge Dock in southern Maine have in common with the Crown S Ranch in Washington State’s Methow Valley and the Van Eck Forest in California’s redwood country?
Each property is subject to a conservation easement.
An easement is the legal removal of a right of use. Conservation easements generally protect wildlife habitat and recreational land by eliminating development rights. They are also a valuable estate-planning tool and landowners who donate these rights get substantial income-tax breaks.
“You can’t give three days a week to view Picasso and get a tax deduction,” says Laurie Wayburn, co-founder and co-CEO of the Pacific Forest Trust in San Francisco. “Conservation easements are an extraordinarily effective way to protect the public trust interests and to reward private stewardship.”
Historically, most conservation easements were “forever wild,” meaning all economic use was prohibited. In the case of the Sewall Bridge Dock in York, Maine, however, the conservation easement actually protects the economic use of the land by preserving the “working” nature of the waterfront, on just one-sixth of an acre, thereby providing a place to land lobster. After sale of the development rights, the lobstermen still own the property, but there is a covenant in the deed restricting its use to commercial fishing even if they sell it.
The same is true of the conservation easement on the Crown S Ranch in Winthrop, Wash., where the farmer was able to plow the proceeds from the sale of the development rights into new capital equipment for the farm. And in the case of the Van Eck Forest near Arcata, Calif., the conservation easement—a so-called “working forest conservation easement”—provides the basis for a sustainably harvested forest that includes ecosystem services such as clean water, fish and wildlife habitat, and carbon storage. In contrast, timberland is managed solely for the wood in the trees.
Preserving Family Land
The challenge with passing family wealth in the form of land when there is little or no cash flow is that it’s an illiquid asset. According to Stephen J. Small, a Newton, Mass.-based attorney specializing in conservation and preserving family land, one of the first tools in the toolbox for passing family farms, ranches and forests is the conservation easement—something he wrote the income tax regulations for at the IRS more than 30 years ago. In effect, this limits the ability to develop the land in perpetuity. But it can also reserve the right to engage in farming, ranching or forestry—as long as the approach to managing this “working land” is based on allowing it to serve seven generations. And it can allow the landowner to monetize the asset while hanging onto it so land does not have to be sold to pay estate taxes.
Here’s how it works: The landowner maintains ownership of the land, but either donates or sells the easement to a “qualified conservation owner”—usually a land trust, though it can be a government agency. In general, the value of the easement is the difference between the present value of the property versus its value if it were fully developed. This reduces the value of the land by at least 30%—up to 90% in some cases, depending on where it is. That 30% to 90% represents the value of the easement or development rights.
The development rights are not really given or sold, but rather extinguished, and the landowner gives the donee organization the right to monitor and enforce the recorded restrictions on the property forever. To pay for the cost of their responsibility, which can be particularly burdensome for large-scale conservation easements, land trusts generally request a donation to an endowment or stewardship fund, which is permanently restricted for this purpose.
In addition to estate tax savings due to the reduced value of the land, there is usually a reduction in property taxes. If the landowner donates the easement, she also receives a charitable deduction on her income tax for an amount equal to the value of the easement. That tax credit has been enhanced for this year only—a nonfarm donor may deduct up to 50% of adjusted gross income for a period of up to 15 years. For farmers and ranchers, it’s even a better deal: They can deduct up to 100% of adjusted gross income for the same time period.
But not every family has the capacity to donate easements—nor is it always feasible from a fiduciary perspective. That was the case when the Pingree family sold the development rights on 762,192 acres in the North Woods of Maine (an area larger than Rhode Island and still the largest conservation easement ever) to the New England Forest Foundation (NEFF) in 2001. Keith Ross, now a senior advisor in the real estate consulting group at Landvest, a luxury real estate firm based in Boston, organized and led the initiative when he was at NEFF.
“All those groups in Maine had assumed the family could afford to give away the easement,” he says. “But [the Pingree family] had a lot of these ownerships tied up in family trusts, and trustees cannot sell assets below market value or they risk being sued by the beneficiaries.”
In fact, the Pingrees did not include all of their property in the conservation easement. They left about 250,000 acres unrestricted, meaning that about one-quarter of their property can be developed and monetized at full, appraised value if they choose. “That’s the great thing about conservation easements,” says David Rosen, managing director at Landvest. “They allow real flexibility in terms of achieving goals. It’s not all or nothing. You can craft a restriction in such a way that if the conservation groups cannot raise enough money [for the development rights], you just don’t restrict as much land.”
That said, the sale of development rights for a conservation easement can be a complex affair—and not just on large deals like the Pingree easement. In order to purchase the development rights, a land trust has to raise funds.
“Conservation finance, including the financing of conservation easements, is like large layer cakes,” says David Levitt, director of the conservation finance program at the Harvard Forest in Belmont, Mass. “You have to get revenue from source A, B, C and D to put together a package that pays for the whole project.”
Depending on the project, that can include grants from government programs such as the U.S. Department of Agriculture’s Forest Legacy or Wetlands Reserve Program (WRP) grants from foundations or individuals or even from impact investors. According to William T. Hutton, a partner at Coblentz Patch Duffy & Bass in San Francisco, the tax benefits of a conservation easement pass through to the partners of an LLC. “They are monetizing that benefit for the investors right here and now,” he says. “So it just adds to the total return.”
Like the Pingrees, many families exclude a few acres from an easement. But it’s also possible to break the land up and put one type of conservation easement on one portion and put another type of conservation easement with a different set of rights and restrictions on another. Ross, who engages in mostly conservation transactions at Landvest, is currently working on a conservation plan with the owners of the High Valley Farm in the core forest of the Berkshire Taconic landscape in Copake Falls, N.Y.
The property, which has been in the Masters family since 1899, consists of a 120-acre farm surrounded by 680 acres of forest that together form a high valley. The plan includes a wilderness conservation easement for the forestland with the Northeast Wilderness Trust, an agricultural conservation easement (called an “agricultural preservation restriction,” or APR) with the Columbia Land Conservancy and a potential sale of the restricted forestland with an option to purchase the restricted farmland to The Nature Conservancy. Four exclusions are planned, including an 11-acre envelope around the barns and three houses on the property. The forest easement will also reserve the right to sell carbon.
“I will help the conservation groups to figure out how to raise the money to buy the rights,” Ross says, pointing out that it’s not easy for conservation groups to work together on a fund-raising project. “They are generally very independent and don’t want to share donor lists for fear that a donor might want to support another group more than them. That’s money they need to keep their salaries and lights on.”
Changing The Game
Why do conservation easements serve as the foundation for a sustainably harvested bio-economy? Many of the country’s economic subsidies have driven the development of resources—many of them to nearly the brink of extinction. As a result, Wayburn points out, our economic system actually rewards resource degradation, particularly in forests, where the only way a landowner can get paid is through deforestation. The faster the land is logged, she adds, the higher the value.
This comes at the same time, she says, that it is becoming increasingly clear that forests are important because of their climate and water benefits. There are substitutes for timber and timber products, but there are none for balancing the climate or for water.
“You can manage forests for climate and water with these timber and timber products as complementary goods if you shift the economic drivers,” she says. “Conservation easements realign those economic forces for landowners, and the more you protect the public trust, the more money you as a landowner get paid. That is one of the superbly elegant features of conservation easements, which are a very flexible tool to maximize both private return and public return.
“It is very rare that you can do that,” she notes.
Conservation easements shift the economic drivers from resource extraction and degradation to restoration and regeneration in two ways. The first is by breaking down the rights of property ownership and retaining some for private interests and assigning others to the public interest. The second is to explicitly prohibit excessive extractive behavior and in some cases actually mandate restorative behavior. This, combined with the financial incentives in the tax code, changes the economics of the game.
All forests are “working,” even those subject to a “forever wild” easement, which some derogatorily dismiss as luxurious Disneyland deals, according to experts. “There is no such thing as a lazy forest,” says Ross of Landvest. “They are all providing clean air and clean water.”
In fact, there has been a sea change in the use of conservation easements during the last 15 years. The new landscape-scale “working forest conservation easements” (WFCEs) allow landowners to continue harvesting timber—but in a sustainable manner, usually certified by a third party like the Forest Stewardship Council (FSC). These plans usually include stewardship requirements and forest management plans. “Conservation easements have gotten more complicated,” Small says. “Most good land trusts have moved away from standard boilerplate documents because they have come to understand that every piece of land is different and so every conservation easement needs to be different.”
In general, the value of an easement is the value of the property’s development rights. But in practice, these financial values are far more nuanced and flexible. Property rights include a bundle of rights, including rights to development, public access, minerals, wind power development, water and crop or timber harvesting. Thus, it is possible to alter the value of the easement depending on which rights are included. The Pingree easement, for example, only includes a limited set of development rights, according to a report by Levitt. Since the family did not assign any legal obligations with respect to public access or preapproval of forestry management plans, and had a low ratio of shorefront, the per acre value was less than 20% of several other landscape deals negotiated at the same time.
According to Dick Luddington, associate at Legacy Landbank, a legacy and conservation land advisory and brokerage firm in Greensboro, N.C., 90% of most easements consist of “thou shalt nots”—for example, restrictions against putting up a cell tower or a shopping mall, sub-dividing the property or planting loblolly pine. Subsurface mining is always forbidden.
“We craft these so we have very tight specific provisions for when, where and how subsurface minerals—oil and gas—may be extracted,” he says. “And we include cleanup [provisions] and a bond for cleanup.”
The other 10% of the easement, he says, consists of stipulations regarding restorative activities. “There are conservation easements where we say we are trying to restore a piece of forest, and you have to plant 300 pine trees per acre within one year, and if survival is not 50%, you have to come back and replant,” he says. In fact, restoration clauses are present in all of the USDA’s WRP program easements, which is the biggest conservation easement program in the country.
Although the law stipulates that there should be public access on properties subject to conservation easements, Luddington says there are more easements these days with exceptions than actually have public access. Those easements must include an explicit exception that still benefits the public, such as a landscape viewshed or watershed management.
The methods for monitoring easements are also changing. If a deal is small, it’s still feasible for a conservation officer at a land trust to “come over and have coffee and fresh muffins and drive around the property and write a report,” as Small puts it.
But that won’t work for large areas. Fortunately, though, the photo technology has advanced dramatically, making it not just possible but efficient. “With satellite photography, you can sit in your office and monitor 100,000 acres in an hour,” Luddington says. “Whereas it would have taken you a week to do a really minimal job, now you can peer down from the sky and see if somebody has clear-cut their forest, damned up a river, or put in a cell phone tower.”
The New Restorative Economics
The Pingree family has managed its forests for seven generations, but few investors are thinking in a 60- to 80-year time frame—the amount of time between planting and harvest for, say, many trees in the Pacific Northwest. Nor is the economy built on that type of biological time. Enter the conservation easement, which is the only instrument designed for perpetuity.
“When you have an easement, it’s a way to take that otherwise illiquid value that’s waiting there for decades and make it liquid for investors,” Laurie Wayburn says. “And it’s paying you for what you don’t take in the marketplace in the near term, but you can still take it in 80 years.”
A former investment banker, Ellie Winninghoff is a writer and consultant specializing in impact investing. Her blog is at www.DoGoodCapitalist.com, and she can be contacted at firstname.lastname@example.org.
|Conserving More Than Land|
How much open space do we actually need to supply our clean air and clean water—the two most important products we get out of our forests? In New England, the country’s most densely populated region, the answer is a whopping 70% of the landscape, according to scientists at the Harvard Forest, the university’s rural laboratory and classroom for ecological research and education, in Petersham, Mass.
“Protecting these natural benefits comes at a fraction of the cost of manufactured infrastructure that seeks to replace them, such as water treatment plants,” they note in “Wildlands and Woodlands: A Vision for the New England Landscape” (www.wildlandsandwoodlands.org), which recommends tripling the amount of land free from development and allowing 90% of that to be sustainably harvestable “woodlands” and conserving 10% as “wild” lands.
The report echoes the experience of New York City, according to former Goldman Sachs managing director and Nature Conservancy President Mark Tercek in his book, Nature’s Fortune. Rather than spending $8 billion on a new water filtration plant, the city instead spent $1.5 billion protecting the watershed. Among other things, it purchased conservation easements from farmers, which also helped some of them stay in business.
But while the W&W report emphasizes multiple economic benefits as a result of conserving a forested landscape—including natural resource production, tourism, outdoor recreation and local and sustainably produced food and forest products—the effort is no ivory tower project. There are nearly 100 resource conservation partnerships (RCPs) made up of mostly land trusts and watershed associations that are implementing the report’s recommendations by focusing on watershed boundaries rather than political boundaries.
Case in point: In May, 23 landowners earned healthy returns by collaborating to conserve key linkages among 50,000 acres in the watersheds of the Quabbin and Wachusett reservoirs, which provide some of the cleanest drinking water in the country to 2.5 million people in the Boston metropolitan area—40% of Massachusetts’ population.
Totaling 3,275 acres, the plots of land are not contiguous to each other but to already protected land, according to Leigh Youngblood, executive director of the Mount Grace Conservation Land Trust, which organized the so-called Quabbin to Wachusett Mountain Forest Legacy Project. Partners included seven towns, four land trusts, one watershed group and one state agency. “It fills in gaps,” she says, “and expands corridors.”
The project is an example of how landowners can have an extraordinary long-term environmental and social impact while earning market rate returns—even though the USDA’s $5.1 million Forest Legacy grant only paid for 75% of the development rights on each landowner’s property.
Most of the landowners ended up doing what is called a “bargain sale”—part sale of the development rights and part donation. The ratio in this case was 75% to 25%.
Advisors need to note that in 2013, donations of development rights through conservation easements are tax deductible, but only in an amount up to 50% of a donor’s gross adjusted income in any one year. It is possible, however, to deduct the full amount over a maximum of 15 years.
The development rights on such properties average 55% of total appraised value, according to Pacific Forest Trust co-CEO Laurie Wayburn. Under that average, a landowner who sells development rights on a $1 million parcel of land in a 75/25 sale could monetize $400,000 worth of the land’s value—and still keep the property. He or she still would be able to deduct the donated portion, saving about $150,000 in taxes.
Moreover, the value of the property is reduced by $550,000 for estate tax purposes, meaning estate taxes are also reduced. In some cases, that may mean that it’s easier for families to pass property to their heirs.
If future generations might prefer to retain the right to develop the land, benefactors should note that the present value of the tax benefits is a lot higher than the value of possible development rights in 20 or 30 years, according to William T. Hutton, a partner at Coblentz Patch Duffy & Bass, in San Francisco.