ICYMI: With Proper Knowledge and Experience, Conservation Easements Can Be Viewed With Confidence

Note: This piece originally appeared in the Appraisal Institute’s Atlanta Area Chapter Q4 2018 Newsletter.

The well-being of our country, our communities and our children depends on a healthy environment. That’s why protecting our nation’s treasured natural resources is so important. Land conservation has successfully protected millions of acres of farmland, viewsheds, wildlife habitat and open spaces across the United States, and continuing these efforts benefit both current and future generations.

The population in the United States has exploded to over 328 million people. In an ever-growing world with more and more land being lost to development, conservation easements are more important now than ever before. Between 1982 and 2001, approximately 34 million acres of open space, roughly the size of the state of Illinois, were lost to development, and an additional 26 million acres are expected to be developed by 2030. Fortunately, conservation easements, voluntary and legally-binding agreements that limit the future development of lands for perpetuity, offer a viable solution to overdevelopment.

A central but often misunderstood component of conservation easements is the appraisal process, which revolves around a concept known as highest and best use. This is established by a qualified appraiser both before and after a conservation easement is placed on a property. Prior to an easement being granted, an appraiser must conduct an in-depth analysis of the macro market, the micro market and the most legally permissible, physically possible, financially feasible and maximally productive uses of that property.

While a donor and any new owners retain the right to use a conserved property in accordance with the terms of the easement, any now-prohibited uses of the land ultimately affect the property’s post- easement value, thus necessitating a reevaluation of the property’s highest and best use. An appraiser must then look for comparable sales with similar highest and best uses. This endeavor can be very difficult since easements are tailored to meet an individual landowner’s needs. This means comparable sales with similar easement terms are virtually non-existent. Nevertheless, once these steps on determining the “before” and “after” easement value are completed, an appraiser can determine the value of the conservation easement.

Past federal tax cases illustrate that placing an easement on a given property can have a significant impact on the fair market value of that land. For example, in a piece published in 1990 by the Boston College Environmental Affairs Law Review regarding the 1986 Stanley Works v. Commissioner case, the United States Tax Court found that a conservation easement decreased the property’s fair market value by around 75 percent. Similarly, in the Stotler v. Commissioner case, the Tax Court found that a conservation easement decreased that property’s market value by more than 91 percent.

It is difficult to appraise conservation easements, making specialized experience and education a requirement. However, there is limited education on the subject of conservation easements, which often results in the analysis of the highest and best use concept being misunderstood and not applied correctly for easement appraisals.

The IRS has established guidelines for the appraisal process, which have been modified over time in order to best protect the public’s interest. However, additional common-sense improvements to these regulations are necessary to help address rare instances of abuse and also to ensure that the significant expansion of private conservation can continue to grow.

Unfortunately, while rare, there have been instances of over-valuation, which stem from a lack of conservation easement appraisal experience and a lack of uniform regulations that can effectively safeguard the integrity of the conservation easement appraisal process. Fortunately, current regulations published in July 2018 require an appraiser to have a high level of expertise and understanding of profession standards. Yet, while the new IRS regulations are a positive step in the right direction, they are neither extensive or defined enough to protect the conservation easement process from isolated instances of overvaluation.

Fortunately, the solution lies in implementing additional and more clearly delineated requirements that protect the donor, the donee, and the appraiser. One potential solution would be for the appraisal to be peer-reviewed by an independent appraiser with verifiable conservation easement experience, thus ensuring that both the appraiser and the appraisal are qualified. This added requirement would further curb instances of overvaluation since it is highly unlikely that an independent appraiser would legitimize an appraiser engaging in fraudulent behavior. Also, it would lead to self-regulation of the appraisal process, with professional appraisers being able to report those who violate ethical standards to regulatory bodies, such as the Appraisal Institute and applicable state real estate commissions.

Experience, such as the peer-review appraisal process outlined above, is the only way to truly safeguard the conservation easement appraisal process from incorrect appraisals and overvaluation. While requiring increased education would be valuable, it is insufficient. Without additional experience requirements, appraisers with no or limited experience would receive the necessary education and falsely believe they are qualified to perform conservation easement appraisals.

Conservation easements protect valuable lands from development, and appraisals play a vital yet commonly misunderstood role in the process. Additional guidance, such as implementing a peer- review appraisal component, would help maintain consistency and confidence in the appraiser. Steps such as these would help improve the application of conservation easement appraisals and ensure that private landowners can continue to thoughtfully contribute to land conservation, benefitting all citizens and the environment.

Rick Kenny, MAI, SRA is a conservation easement appraiser who serves on the Georgia State Board of the Appraisal Institute.

Doug Kenny, MAI is a conservation easement appraiser who is a member of the Appraisal Institute.

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