Conservation easements vary a lot, although all are supposed to serve some public interest.
Some are sold, but most are donated. They are usually sold or donated in perpetuity, though some have limited terms. Most easements are set up to preserve open space, restrict/eliminate development or keep farmland in agricultural use.
At the time of the donation, its value is calculated. The donor uses the value to receive, federal, state, local (property tax) and estate tax benefits. These are substantial.
The question I have is how should a buyer calculate the discounted value of land for sale burdened with a conservation easement?
Many sellers seem to think that a CE is a selling point and don’t like to discount their asking prices.
It’s often hard to find comps to use in a conventional appraisal.
I’ve been involved in several situations of this sort. It’s hard to agree on a valuation methodology.
What are your thoughts?
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Buyers should always consider the influence, both positive or negative, of an existing CE easement on their purchases. The new owner’s bundle of rights in every case has been reduced by the easement as the new partner , in the form of the land trust , has perpetual monitoring rights and obligations. The new owner buys the property ,subject to the existing easement and must adhere to the management plan agreed to by the prior owner as well as dealing with the land trust . There is no question that reduced rights impact the value of the property but the answer to how much? is difficult to get a grip on.
In some cases there is little activity or responsibility required of the new owner but in most working forest CE easements,which I am most familiar with, considerable perpetual responsibility is assumed by the buyer. This responsibility ,developed by the original owner and designed to fit the mission statement of a land trust which agreed to hold the easemet may be significantly different from the new buyer’s ideas of management , if the easement did not encumber the land. The easement can reduce income and constrain use benefits. The new buyer must perpetually follow and adhere to a plan that someone else developed and there is a cost of such compliance. Loss of freedom to manage and direct the land you have just purchased is a burden,especially in the market value concept. The buyer would be foolish to not account for the added financial cost and management burden that is assumed when owning property , subject to a CE easement. The astute buyer should be informed about the benefits as well as the costs and lost opportunities that the property presents, subject to the easement.
The appraiser is confronted with significant difficulty in evaluating comparables as many easements, while appearing to be somewhat generic, can be very different and obviously can have different conservation benefits and obligations.
The IRS regulations allow reasonable creativity in developing a CE plan that will achieve true perpetual conservation benefits that will qualify the CE under section 170.
Properties can be very different and comparable sales of easement encumbered properties are few and far between in many markets.
The smart buyer, during the period of excitement before the sale, should be informed of the influence of the easement. Expertise should be obtained to analyze the situation posed by the CE before the sale is made.
Expertise is limited as many local appraisers have not dealt with CE’s which in many instances encumber complex, diverse properties.
Mr. Travis has raised several excellent points.
As he mentions, buyers who acquire property with a working-forest conservation easement need to understand–before making an offer to purchase–exactly what the easement requires of the new buyer in terms of managing the timberland.
Critical point of information. Might be a deal-breaker in some cases.
Thanks.
Curtis Seltzer
Thank you so much. We have been looking for land for several years, and several times have considered land with a conservation easement on it already. The landowners received money from the state (or a trust) for the easement, but none of these owners have reduced the sale price of the land as a result, so we have not purchased the land. Yes, we believe that an CE can be a good idea, but it would burden the future landowners with restrictions and with costs. It all needs to be balanced out better. Perhaps the fact that local appraisers are unaccustomed to CE’s explains some of the problem.
Thank you for the comments. Mr Travis offered excellent insights. Let me add one more thought to this topic.
Let’s say a seller has 500 acres of undeveloped land, 400 of which is in woods. The other 100 is field, pasture and house. He’s pricing it at $2,000/A, or $1 million. He donated a conservation easement on the woods a year before he sells the property. A consulting forester estimates the value of the timber (both merchantable and pre merchantable) at $1,500/A, or a total of $600,000. So the easement is valued for tax purposes at $600,000. The CE prohibits all timbering on the 400 acres in perpetuity. The forester estimates the value of the merchantable timber at $400,000 and the pre-merchantable timber at $200,000.
The seller has taken $600,000 out of the property’s assets and stuck it in his pocket, plus he’s encumbered the next owner with having to comply with inspection and enforcement activities by the holder of the easement. Plus the new owner is paying property taxes on the 400 acres that he can’t use.
So the buyer should calculate the value of the property without the easement, then deduct $600,000. Right? Sort of.
The $600,000 represents the present value of the timber, both merchantable and pre-merchantable. Both types of timber will gain in monetary value as they grow. Thirty years from now, the timber will be worth far more than $600,000 in current dollars. For that reason, I would discount any offer by more than $600,000.
Sellers, of course, want it both ways. They want the tax benefits from the CE and they want to be paid as if their property is being sold with all rights and assets in tact. Have your CPA and lawyer write a letter to the seller explaining your discounted offer. Include an appraisal.
Don’t pay for what you’re not getting.
Yrs. Curtis
Curtis, You misunderstand the valuation of premerchantable timber. A common thread running through your articles is to accuse sellers of misrepresenting timber offerings. This helps you find clients. Yet in this case you are advising prospective buyers to undervalue timber. When premerch value is estimated by a qualified professional, its fair market value includes, by definition, the present value of the future worth of the timber, typically estimated on the basis of both comparable data and discounted cash flow analysis. What you are advising is for a prospective buyer to discount it a second time. Any timber savvy seller would never sell his premerchantable timber at such an over discounted price. If you are advising buyers that this is the correct way to make offers, you are taking their money for bad advice. You ought to study up a bit on these issues.
Curtis,
I have encouraged my friend , Harold King who bought a 100 acre farm in Warm Springs,VA to contact you.
He has been considering a conservation easement so his land can never be developed but I have told him that down the road he may change his thoughts about rural living or could have to for health reasons.
Have you ever done an article about building an estate in land so you can leave to your heirs ?
The old school was to leave JR. a tax free estate .Then upon his death , Jr. had the land sold before they got the dirt on him -then came the hummers etc. until all the money is gone.
I’ve always heard an old saying about farmers” they farm until all the money is gone ” and today is a prime example.
The beauty of real estate using 1031’s , trusts ,LLC’S etc. allows the old boy to live well , leave Jr. a pile but after paying taxes -not a free ride.
Generally , I only see 2 types of land owners-those that have the family farm and investor-developers and in the future in the usa it will likely be foreigners unfortunately.
40-60% is a basic rule of thumb, but is unique in each instance because of the location, physical features of the land, and the level of restrictions. The truth is that some land may not have it’s value changed at all because of an easement.
For example, take 100 acres of wetland. What is the Highest & Best Use of that land without the easement? Say it’s “recreational” and wetland zoning and flood zones don’t allow for building. Then, say a CE is placed on the property that restricts development and building. What rights were removed? In that case, none. In fact, a 40% reduction in estate taxes for the future heirs might be considered to some as an enhancement.
On the other hand, if a CE is placed on 100 acres of buildable land close to the path of development, the Highest & Best Use is significantly changed. The unencumbered development land might be worth $20,000/acre without the easement, and only worth $2,500/acre with the CE. In that case, the value loss is 87.5%.
Those are two extreme examples, and in most cases the influence on value is in the range of 40-60%.
Gatlin Fenwick, CGA
Conservation Easement Appraiser
how do i go about leasing my private road and easement to the city how much can i charge and how do obtain an agreement document what value should i estimate my private road and easement at?