On
January 17, 2017, the IRS issued a Guidance Notice classifying syndicated
conservation easement transactions as “Listed Transactions,” or presumed tax
shelters.
A conservation easement is an
agreement between a landowner or investor, and a land trust or government
agency that permanently limits development of the land with the aim of
conservation. The restrictions are perpetual and thus reduce the resale value
of the property.
In recent years, promoters have
marketed conservation easements as investment vehicles providing tax benefits well
in excess of the amount invested. This is referred to as the syndication of
conservation easements. With syndicated conservation easements, a promoter
forms a pass-through entity like an LLC or limited partnership, and markets the
concept to other investors who become members. The investors put money into the
pass-through entity, and the promoter uses those funds to purchase the land.
The promoter coordinates the creation of a conservation easement. Then, that
conservation easement is donated to a qualified land protection organization,
like a land trust. The investors become eligible for a federal income tax
deduction equal to the “value of their donation,” and also become eligible for
federal estate tax relief. Most states also provide some form of tax incentive
for conservation easements.
The “value of the donation,” as
determined by a qualified appraiser, equals the difference between the fair
market value of the property before and after the easement takes effect. To
make this calculation, the promoter typically retains a design firm to prepare
a plan to develop the property into something substantially more valuable than
the land in its unimproved state: for example, like a golf course, housing
development, or retail complex. The qualified appraiser then utilizes the
development plan to calculate a “before” value based on the highest and best
use of the property. The appraiser calculates an “after” value based upon
comparable undeveloped properties.
Appraisers
and other professionals providing services in connection with syndicated
conservation easements should take heed of the IRS Guidance Notice. The
professionals should consider taking steps to minimize exposure to investors
who are audited and penalized by the IRS, including, without limitation, ensuring
their engagement contracts contain adequate legal disclaimers, limited and
damage-limiting clauses, and hold harmless provisions. The professionals also
should consider limiting such work to cases in which a legal opinion regarding
the viability of the tax credit is obtained prior to effectuation of the
easement.
