State conservation easements under fire

DENVER Nearly 90 percent of conservation easements that have been reviewed by Colorado and federal tax officials had problems that could mean landowners owe back taxes, according to the Internal Revenue Service.

IRS Acting Commissioner Kevin Brown wrote a letter to Sen. Wayne Allard, R-Colo., in August indicating that 96 out of 108 cases reviewed showed problems, The Denver Post reported Thursday.

An additional 182 cases were still under review when Brown sent the letter to Allard. It wasn't
immediately clear if any of those cases have since been closed.

The inquiry is expected to be finished by early next year.

Tax officials began investigating the easements after conservation groups raised questions about easement values that appeared inflated, Allard spokeswoman Tara Hendershott said.

Conservation easements allows farmers, ranchers and other landowners to reap tax benefits in exchange for promising to not develop a portion of their land. That helps maintain habitat for deer, elk and other wildlife along with scenic vistas across the state.

Last week, state officials issued about 30 subpoenas to people involved in easement deals. The Post reported they involved five ranches, all through an Arvada-based land trust.

Use of the program has jumped from $2.3 million in state tax credits in 2001 to $85.1 million last year, fueled in part by a change in 2003 that allowed the credits to be transferred and sold.

Under state law, property owners who don't have enough income to benefit from the $100,000 to $375,000 conservation easement tax benefit can sell that credit to a land trust or other charitable group in what is an unregulated security under Colorado law, state Securities Commissioner Fred Joseph said.

Statewide, about 1,500 conservation easements protect some 1.2 million acres.

Are You Asking the Right Questions about Conservation Easements or Purchased Development rights?
By Ric Frost - Policy Analyst New Mexico State University
October 2, 2003

In recent decades, Conservation Easements (CEs) and Purchased Development Rights (PDRs)
have become a trendy way to acquire tax write-offs on private lands. Reasons as to why varies
with each owner, but the common thread has been tax relief and to retain the land in agricultural
production. Many of these landowners have placed portions, or all, of their private land holdings
into a split estate situation without fully understanding the impacts to themselves, or their
community. This is largely due to not asking enough questions, or the right questions.
To truly understand the problem: land trusts come on to landowners and communities with the
claim that they are working to protect rural agriculture from development pressures. Development
is not the problem, as rural economic pressures come from:

Government Restrictions and Regulations,
Tax Exempt Non Government Organization Environmental Lawsuits,
Weather Fluctuations,
Market Fluctuations,
Operators Being Price Takers Without Control of the Market Pricing
Structure (or the ability to pass on increased business costs, such as fuel
expenses),
Subsidized Foreign Market Dumping Without Protection,
Influx of Wealthy Urbanites Competing for Control,
Estate Taxes and Compliance Costs.

These cumulative pressures force the economic demise of rural economies, and create
compromised-sellers ready for a quick economic fix, not willing sellers desiring to leave their
cultural practices or heritage. So the question simply put is, do CEs protect agriculturalists from
these real pressures as is claimed? Simply put, NO THEY DO NOT! The secondary question to
this is, if land trusts are concerned with protecting agriculture, then what have they done to
alleviate these real pressures?

Splitting the title of private land has other consequences as well. Some comments on CE and
PDR impacts by financial officers:

"Owners give up management and control of the land" : Jimmy Hall, PCA, NM
"Severely diminished loan value of land" : John Johnson, First Western Bank, SD
"CEs eliminate property loan value" : Dee Gidney, Texas Bank Ag Loans, TX
"Fragmentation of land title to deny future generations a full range of productive land use
options" : David Guernsey, Alliance for America
Loan Value for Operational and Other Loans is Reduced up to 90 percent with an
Easement
Interviews of land owners with CEs and PDRs have revealed some common misunderstandings
held when they got involved. Some misconceptions are:
"Perpetual means 99 years." False: perpetual is forever.
"I retain full title to the land." False: title becomes split with easement holder.
"A CE (PDR) is the only way the land is managed to my intent." False: the easement
holder and future easement holder can change management practices at any time,
including development! Easement management loopholes also allow easement holders
to sue the landowner and impose habitat restrictions.
"A CE (PDR) allows me to use the property as I always have." False: you give up
management control of all easement property, forever!
"Property with a CE (PDR) will sell easy." False: a CE (PDR) may reduce the property
value, and affect the willingness of financial institutions to loan money on a split title.
Economic impacts may also be encountered as the result of CEs and PDRs.
Some of the impacts already experienced by landowners and communities have been:
Reduced management options on taxed lands of landowner and heirs
Restrictions on farm and ranch management practices
Restrictions on chemicals used
Restrictions on seed and plant types
Restrictions on farm and ranch management practices
Reduction of income due to restrictions
Reduction in management options with land and business value decline, forcing owner
into a "willing seller" status (actually a compromised seller)
Imposition of Environmental Assessment (EA) and Environmental Impact Study (EIS)
expenses on land owner for restriction and management changes, especially if a Federal
Nexus exists
Legal and penalty expenses for CE and PDR violations (It's built into the fine print)
Vulnerability from non-trust third party lawsuit - Litigation Exposure is in the Easement
Act
Decreased, or eliminated, production, translating into negative economic impacts to
agriculture and related industries within community, county, and state
Recent reports indicate a majority of lands with CEs (PDRs) have not remained in
agriculture, and are rendered to untaxed "open space" in the hands of the government, or
owned by wealthy non-agriculturalists comfortable with "open space" restricted lands
without production
Reduced Management Options on Taxed Lands of Landowner and Heirs
Reduction of Income due to Restrictions Reduction of Direct, Induced, and
Indirect Economic Benefits to all Related Industries within Community, County and State
Reduction of County Tax Base Forcing Tax Increases and Reduction of County Services
on Other Property Owners in County to Make Up Loss (a disproportionate burden)
Impacts resulting from violations were studied by the Land Trust Alliance and published in the
Winter 2000, Vol. 19 #1 issue of Exchange. It revealed that the landowner always pays legal and
penalty expenses for violations, as this condition is built into CE and PDR language. Average cost
per case is $35,000 with range of $5,000 to $100,000. Of 498 violations reported, 22 were
litigated, only one landowner won in court, but was still made to pay land trust expenses (the
$100,000 case).
Another ill-understood impact of CEs and PDRs is that if there are any federal permits or
expenditures involved, this creates a Federal Nexus. The landowner must now undergo a Section
7 consultation process for existing and new species, restriction and proposed management
changes. The owner with a CE or PDR must also pay for all related expenses for studies.
One question that is typically missed is who is behind the push to get private property into a CE
or PDR. One effort where CEs and PDRs are the centerpiece, is known as the Wildlands Project,
a plan developed by Michael Soule, Dave Foreman (founder of the Earth First! movement), and
Dr. Reed Noss of Idaho. The base concept is that wilderness areas need connecting corridors
(without human activity) for the creatures to roam freely and keep the gene pool healthy. The key
to establishing these corridors is CEs and PDRs.
Dave Foreman, as quoted in Listening to the Land by Derrick Jensen (Sierra Club Books),
considers conservation easements as the keys to the corridors. He had this to say about
conservation easements:
If we identify a ranch ... that's between two wilderness reserves, and we feel it will be
necessary as a corridor, we can say to the rancher, "We don't want you to give up your
ranch now, but let us put a conservation easement on it. Let's work out the tax details so
you can donate it in your will to this reserve system."
It is highly recommended you research the design and implications of the Wildlands Project. It is
a plan to render 50 percent of the United States land area as unoccupied, or affected by human
activity. Several trusts such as the Nature Conservancy, involved with developing CEs and PDRs
support and promote the Wildlands Project. A description of this plan and partial list of supporting
organizations can be accessed at http://www.wildlandsprojectrevealed.org and
http://www.epi.freedom.org.

Questions landowners approached for CEs or PDRs should be asking themselves are:

What are CE (PDR) impacts to private landowners and communities?
Do the "benefits" offset the impacts? (Lost tax revenue and future earnings opportunities)
What are the other impacts and implications from imposing a CE (PDR) on private land?
(Federal Nexus and Section 7)
What is the long-range outcome from imposing a CE (PDR) on private landowners?
According to whom? (A tax-exempt organization?)
Would a limited liability company or incorporation better serve the landowner's
tax needs, instead of a CE (PDR) that brings in tax-exempt third party and
potential federal management?
Would it not be better to protect agriculture by:
Supporting reduced environmental restrictions on agricultural producers?
Stopping the dumping of foreign commodities on our markets by foreign
subsidized products, at prices lower than what our producers' cost of operation?
Making agriculture attractive as a viable business career and encouraging our
youth to remain in agriculture as a productive and fulfilling life?

Questions State and County officials should be considering for CE regulation are:

License and Regulate Land Trust Agents
Regulation by State Real Estate Commission (they are acting as land brokers)
Bonding Requirement on Each CE Transaction Equivalent to Value of
Encumbered Property Before Transaction
Renegotiation Language Built into CE Contract that Allows Grantee to
Renegotiate Every 5 Years (North Dakota has 10 year limits - no perpetuity allowed!)
If Renegotiations Cannot be Accomplished to Satisfaction of Landowner, the CE Contract
Becomes Null and Void
Land Trust pays back-taxes on land if this occurs, not landowner (don't forget that if a CE
is ended, under current law the landowner pays the IRS the back-taxes back to the time
of the origin of the CE, not the trust)
Land Trust Pays Taxable Value of Severed Development Right to County to Prevent
Erosion of Tax Base as Community Infrastructure Demands Increase (check with county
appraiser for development right tax values)
No CE Shall be Valid and Enforceable Unless the Limitations or Obligations Created by
the Easement are Clearly Presented in Writing on the Face of Any Document Creating
the CE Including Information From the UCEA 1981 (Uniform Conservation Easement Act)
Water, Grazing, Farming and Mineral Rights Shall Not be Encumbered by Conditions or
Restrictions Imposed or Agreed to in the CE Contract. Grantee (landowner) Retains
Rights of Transfer on All Rights Not Expressly Identified in CE.
Local and State Legislation Expressly Prohibiting Transfer of CE to Other Parties Without
Formal Written Consent of Landowner (a common practice of land trusts is to trade CEs
without knowledge or consent of landowner)
Elimination of Third-party Enforcement Clause Language From CE Contracts - Must be
State law! (Colorado apparently already has this law, and it has been upheld in one case)
Remember, restricting land through Conservation Easements in the name of "protecting
agriculture" simply put, does not protect agriculture!

Author Ric Frost, a policy analyst with the Range Improvement Task Force since 1998, took a
permanent position as policy analyst in 2001 at New Mexico State University.
Frost has worked on infrared remote sensing and vegetation and habitat analysis maps for the
task force. He has conducted training seminars on the National Environmental Policy Act for
Bureau of Land Management grazing permit renewals. He served as technical investigator
and steering committee member for a natural beef marketing project.
Frost is a registered adjudication mediator for New Mexico water rights issues. He is bilingual in
English and Spanish.

He earned a master's degree in agricultural economics, a bachelor's degree in agricultural and
extension education, and an associate's degree in agricultural mechanics, all from NMSU.

Good Neighbor Committee
P.O. Box 155 - La Salle, CO  80645
info@goodneighborlaw.com

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