Asking-price discount for conservation easements
June 29, 2008 by Curtis Seltzer
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 a for-sale property 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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Curtis Seltzer is a land consultant who works with buyers and investors. He is author of How To Be a DIRT-SMART Buyer of Country Property at www.curtis-seltzer.com where his columns are posted. He is also a contributor at www.landthink.com.
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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