The Role of Valuations in Conservation Easements

The creation of conservation easements, which are land preservation agreements between landowners and qualified environmental organizations or governmental bodies,  is currently on the rise across the country. In fact, many environmental and tax lawyers are creating niche practices devoted entirely to structuring conservation easements for individuals and corporations alike. While the overarching purpose of this manifestation of restrictive covenant is an environmental one – specifically, to protect land from real estate development and industrial use - landowners electing to create conservation easements are often incentivized primarily by  significant state and federal tax advantages that accompany suc arrangements.  In addition, conservation easements allow landowners to reap these tax benefits while simultaneously retaining ownership of the property. Appraisers play a significant role in creating conservation easements, as the encumbrances and the tax breaks that often accompany them must be justified by detailed market valuations.

Tax Benefits Accompanying Conservation Easements

As mentioned above, landowners are often motivated to create conservation easements by the encumbrances’ attractive tax breaks.   Not only may landowners qualify for a federal income tax deduction equal to the value of the easement donation, as determined by a qualified appraiser – in addition, a number of states offer income tax credits for conservation easements.

Finally, and perhaps most significantly, conservation easements can create a significant reduction in estate taxes for inheriting parties.  Not only can a conservation easement reduce the value of an estate, and thereby reduce the associated inheritance tax; in addition, federal tax code allows for a further reduction (up to 40%) in “death taxes” for estates with qualified conservation easements. Because the tax breaks are significant, it is becoming a common trend for estate lawyers to present the option of creating conservation easements to property holding clients with tracts of qualifying land.

Where do Appraisals Fit In?

Two methods exist for appraising a conservation easement: The “before and after method” (which subtracts the value of the land post-easement from the value of the pre-encumbered land, and then divides that amount by the value of easement interests) and the direct comparison method, which takes into consideration the actual sales of easements, which are then directly compared to the easement being appraised. Both are discussed briefly below.

The Before and After Method

An appraiser using the before and after method values the property prior to the conservation easement and then again after the encumbrance of the property. The value difference represents the value of the rights within the conservation easement. In some cases, the resulting value may end up close to the full fee value of the property .

The after value may be estimated in one of two ways–either by considering sales that are encumbered by similar easements, or by considering sales that are encumbered in the same way, but under different theories – for example, zoning or access encumbrances. While the before and after method has historically been the accepted approach to easement valuation, many appraisers are now employing the direct comparison method.

The Direct Comparison Method

In the direct comparison method, appraisers compare existing market easement sales with the easement requiring appraisal. Appraisers employing the direct comparison method must consider a number of factors, including:

- The physical comparability of the real estate;
- Any motivating forces behind the easement sales;
- Interests transferred in the easement sale;
- Offsetting benefits and severance damages unique to the sales;
- Market opportunities for realizing economic potential;
- Availability of capital for easement purchases; and
- Public attitude toward the resource being protected.

If you or a client is interested in finding out more about the benefits of conservation easements, or would like to discuss in detail our easement-related valuation services, please give me a call at (888) 580-USAG (8724) Extension 705, or email me at jedgerton@usappraisalgroup.com.

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Jessica A. Edgerton, Esq.
After graduating cum laude from Indiana University Maurer School of Law in 2004, Jessica practiced as a litigation attorney in Boston and Chicago. She is now the Business Development Manager for US Appraisal Group’s Attorney Services Division, and lives in downtown Chicago.
Email: jedgerton@usappraisalgroup.com
Mobile: 312-342-0880