Addressing enhancement in conservation easement appraisals.

abstract

This article attempts to bring some clarity to one of the most commonly misunderstood aspects of conservation easement appraisal practice, the enhancement rules. Enhancement rules apply when encumbering land with a conservation easement may enhance the value of neighboring properties owned by the easement donor or related persons. This article focuses on the mechanics of the enhancement rules applicable to easement appraisals for federal income tax purposes; includes an overview of the applicable Treasury Regulations relevant to valuing enhanced properties; identifies a step-by-step method for recognizing which properties are affected by easement; and discusses various methods of analyzing and estimating enhancement.

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During the past few decades, the conservation easement has blossomed from a relative oddity into one of the most prevalent and high-profile land conservation tools in the United States. (1) According to the Land Trust Alliance's 2003 National Land Trust Census, the acreage protected by conservation easements increased 266% between 1998 and 2003, from 1,385,000 acres to 5,067,929 acres. The number of conservation easements increased from 7,392 in 1998 to 17,847 in 2003. (2) Despite reported abuses of the tax incentives for easement donations, (3) voluntary private land conservation through purchased and donated conservation easements is expected to be a growing component of the environmental movement in the United States and elsewhere.

Participants in conservation easement transactions--whether the easements are donated, exacted, purchased, or partially donated in bargain sale transactions--almost always need to know what the easements are worth. (4) Such easements must be appraised. Demand for conservation easement appraisals has been growing and should continue to grow in the foreseeable future. Easement appraisers, however, should be aware that there are controversies over abuse of the easement tax incentives and other compensation programs. There have been reports of easement appraisals that assert easement valuations far in excess of reasonable market value of the unencumbered land. There are perceptions that inflated appraisals are to blame for overspending by government on easement acquisitions, particularly in the context of state and federal tax incentives for easement donations. Consequently, easement appraisers should expect increased scrutiny of their work by government, tax authorities, (5) easement donees and purchasers, and other interested parties.

Given the increased scrutiny, the authors recommend that the appraisal community foster standardization and consistency in the practices employed by appraisers working with easements across the country. This article will take one relatively small but significant step toward the goal of standardizing easement appraisal practice by clarifying one of the most commonly misunderstood aspects of easement appraisal practice, the enhancement concept as set forth in the federal Treasury Regulations promulgated under [section] 170(h) of the Internal Revenue Code.

Relevant primarily in appraisals prepared for income tax purposes, "enhancement" refers to the idea that encumbering land with a restrictive conservation easement may enhance the value of neighboring properties. For example, buyers may be willing to pay more for a property because it overlooks land that is permanently protected from development. If the benefit of enhanced neighboring property values accrues to the donor of the easement, that benefit should be considered when estimating the value of the easement. Thus, if the donor of the easement (or a person or entity related to the donor) owns other property that is enhanced by the easement he or she donates, applicable enhancement rules require that such direct or indirect benefit to the donor be estimated and subtracted from the value of the easement before the donor's compensation and tax incentives are calculated.

The enhancement rules undeniably increase the complexity and cost of conservation easement appraisals and can present challenges for conservation easement appraisers. The goal of this article is to help untangle the complexity of the enhancement rules and promote some standardization among appraisers' approach to those rules thereby reducing unnecessary costs and problems.

This article focuses on the enhancement rules under the federal Treasury Regulations applicable to easement donations for which a charitable income tax deduction is claimed. For donors to claim federal (or, in many instances, state) tax incentives for easement donations, the valuation of the easement must comply with enhancement rules under Treasury Regulation [section] 1.170A-14(h)(3)(i). Historically, many easements have been donated, at least in part, so the federal rules apply to a large number of easement appraisal assignments. (6)

Overview of Enhancement Rules

The rules under Treasury Regulation [section] 1.170A-14 (h)(3)(i) with regard to enhancement and incidental financial or economic benefits seek to ensure the easement donor only receives a charitable income tax deduction for the donor's net economic sacrifice resulting from the donation of the easement. (The rules consider donors and their family members as an economic unit.) The Treasury Regulations do this by providing three rules that require any benefits inuring directly or indirectly to the donor as a consequence of the donation to be taken into account in determining the donor's charitable deduction.

Rule 1: The Donor/Family Contiguous Parcel Rule The fourth sentence of Treasury Regulation [section] 1.170A-14(h)(3)(i) states:

   The amount of the deduction in the case of a charitable
   contribution of a perpetual conservation restriction covering
   a portion of the contiguous property owned by a
   donor and the donor's family (as defined in section
   267(c)(4)) is the difference between the fair market
   value of the entire contiguous parcel of property before
   and after the granting of the restriction.

Example 10 of Treasury Regulation [section] 1.170A-14(h)(4) illustrates how Rule 1 is applied.

   E owns 10 one-acre lots that are currently woods and
   parkland. The fair market value of each of E's lots is
   $15,000 and the basis of each lot is $3,000. E grants to
   the county a perpetual easement for conservation purposes
   to use and maintain eight of the acres as a public
   park and to restrict any future development on those
   eight acres. As a result of the restrictions, the value of
   the eight acres is reduced to $1,000 an acre. However,
   by perpetually restricting development on this portion
   of the land, E has ensured that the two remaining acres
   will always be bordered by parkland, thus increasing
   their fair market value to $22,500 each. If the eight
   acres represented all of E's land, the fair market value
   of the easement would be $112,000, an amount equal
   to the fair market value of the land before the granting
   of the easement (8 x $15,000 = $120,000) minus the
   fair market value of the encumbered land after the
   granting of the easement (8 x $1,000 = $8,000). However,
   because the easement only covered a portion of
   the taxpayer's contiguous land, the amount of the deduction
   under section 170 is reduced to $97,000
   ($150,000-$53,000), that is, the difference between
   the fair market value of the entire tract of land before
   ($150,000) and after ((8 x $1,000) + (2 x $22,500)) the
   granting of the easement.

Despite the somewhat unclear wording of the sentence setting forth Rule 1, (7) Example 10 implies that the rule is intended to sweep into the before and after appraisal all parcels of property that are contiguous to the encumbered property and owned by the donor and the donor's family. Thus, if land contiguous to the land encumbered by the subject easement is owned by the donor or a member of the donor's family, (8) such contiguous land must be valued together with the encumbered land in the before and after easement appraisal.

Rule 2: The Other Property/Related Person Rule

The fifth sentence of Treasury Regulation [section] 1.170A-14(h)(3)(i) states:

   If the granting of a perpetual conservation restriction
   after January 14, 1986, has the effect of increasing the
   value of any other property owned by the donor or a
   related person, the amount of the deduction for the conservation
   contribution shall be reduced by the amount
   of the increase in the value of the other property,
   whether or not such property is contiguous.

Under Rule 2, if the subject easement enhances the value of noncontiguous land that is owned by the donor or a member of the donor's family; or, if the subject easement enhances the value of contiguous or noncontiguous land that is owned by a related person as defined in the Internal Revenue Code, (9) the value of the donor's contribution must be reduced by an amount equal to the value of any such enhancement.

Note that Rules 1 and 2 are quite different from each other; Rule I tells the appraiser which properties are to be valued in the before and after appraisal, while Rule 2 asks the appraiser to consider the easement's effect upon a potentially large class of properties but does not provide any guidance as to how to go about doing so. The rules address two different sets of properties. The first step with respect to each rule is to identify the properties that must be addressed under that rule. Though the valuation of property will constitute the essence of an appraiser's assignment, the step of identifying related properties can be difficult for appraisers. The second part of this article suggests a procedure by which an appraiser can identify the set of properties to be addressed under each rule.

Rule 3: The Incidental Benefit Rule

The sixth and seventh sentences of Treasury Regulation [section] 1.170A-14(h)(3)(i) state:

   If, as a result of the donation of a perpetual conservation
   restriction, the donor or a related person receives,
   or can reasonably expect to receive, financial
   or economic benefits that are greater than those that
   will inure to the general public from the transfer, no
   deduction is allowable under this section. However,
   if the donor or a related person receives, or can reasonably
   expect to receive, a financial or economic
   benefit that is substantial, but it is clearly shown that
   the benefit is less than the amount of the transfer,
   then a deduction under this section is allowable for
   the excess of the amount transferred over the amount
   of the financial or economic benefit received or reasonably
   expected to be received by the donor or the
   related person.

Rule 3 has to do with incidental benefits accruing to the donor such as increased density or other quid pro quo entitlements provided by local government in exchange for the easement donation. Appraisers rarely need to address this rule in easement appraisals, and it is not discussed in depth here. (10)

The next section suggests a structured, step-by-step approach to complying with the enhancement rules, particularly with respect to identifying the set of properties to be considered under Rule I and Rule 2. Substantive valuation issues the appraiser may face when analyzing enhancement are discussed in the Analyzing and Estimating Enhancement section of this article.

Step-By-Step Method for Compliance with Enhancement Rules

The Treasury Regulations require the appraiser to consider the easement's impact on the value of a potentially large class of properties. How does the appraiser obtain the information he or she needs in order to address the enhancement rules and what should the appraiser do when several parcels are involved, some of which may not be enhanced by the easement donation? Described in this section is a systematic approach to complying with the Treasury Regulations' complex enhancement rules. (11) Figure 1 presents a flowchart showing the steps in the analysis.

[FIGURE 1 OMITTED]

Identify the Potential Reach

Appraisers should first identify the potential reach of the appraisal related to the conservation easement (i.e., what property might have to be appraised to achieve the purpose of the appraisal assignment?). (12) Appraisers need to obtain certain information from a prospective client before accepting any easement appraisal assignment (See Appendix for Conservation Easement Pre-Bid Checklist). When the assignment involves a donated conservation easement, it is absolutely crucial that the appraiser find out early whether the easement donor, any family member, or any entity or trust associated with the donor owns property in the vicinity of the subject parcel. The reach of the assignment can increase significantly if such properties are involved, which will in turn increase the cost of the appraisal and the time required to finish the assignment. If the donor can state categorically that no such related properties exist, the appraiser should provide a statement in writing to that effect for the donor to sign and retain that statement in the appraiser's work file. Moreover, even if the enhancement rules are not applicable, that fact should be discussed briefly in the appraisal report. (13)

The determination of exactly who or what is a person related to the easement donor for purposes of the Treasury Regulations' enhancement rules may be highly technical. It is fortunate that most assignments with enhancement issues involve parcels owned by family members of the donor--the enhancement rules' applicability to such parcels is relatively easy to analyze--rather than parcels owned by entities or persons with trust relationships to the donor. The appraiser should make the prospective client aware that if entity or trust relationships appear, the client will be responsible for obtaining any legal analysis necessary to guide the appraiser's identification of the properties he or she must address in the appraisal.

Once the appraiser has a list of potentially related parcels in hand, some judgment is required in the course of proposing the fee. Sometimes the reach of the appraisal is obvious; for example, if the prospective client states that no other related parcels exist, or if the only other parcel listed is a farm owned by the easement donor that is contiguous to the subject property (and thus clearly must be appraised with the subject). However, if multiple parcels are involved and more research would be required to determine whether some or all of those parcels must be appraised, the appraiser may propose a fee schedule that will adjust according to the ultimate reach of the appraisal rather than conduct the potentially extensive research necessary to determine the appraisal's reach before accepting the engagement. It is crucial for the appraiser to identify the reach of the appraisal early in the assignment.

Sort the Client's List of Properties

The second step is to sort the client's list of properties into two categories: "Rule 1 Property" and "Potential Rule 2 Property" If the donor lists any parcels under related ownership in the vicinity of the subject, the appraiser should identify those parcels and make an initial judgment as to whether they should be analyzed under Rule I (donor/family contiguous property) or Rule 2 (other property/related person). This and subsequent steps will be much easier if the appraiser initially identifies all of the listed properties by assessor's parcel number and owner's name and then plots the properties in relationship to the subject parcel on a county tax map.

Rule 1 Property (Contiguous Property Owned by the Donor or a Family Member). Real estate falling under the purview of the donor/family contiguous parcel rule is relatively easy to identify--all property contiguous to the subject and owned by the donor and his or her brothers and sisters by whole or half blood, spouse, ancestors, and lineal descendants. (14) All such property must be valued with the subject property in the before and after appraisal as explained later. (15)

Potential Rule 2 Property (Other Property Owned by the Donor or Related Person). All other property on the donor's list would fall into this category to be further winnowed in the next step.

Sort Rule 2 Properties into Subcategories

The third step is to sort the potential Rule 2 property into three subcategories: common sense eliminations; property that may be enhanced and is owned by the donor or a person clearly related to the donor; and property that may be enhanced and the owner's relationship with the donor requires legal analysis.

Common Sense Eliminations. The appraiser may be comfortable eliminating without discussion in the report, some of the properties on the client's list. This includes properties that no reasonable person would suspect could be enhanced by the easement. It also includes properties where the client's relationship with the properties' owners is so minor or attenuated that it clearly is outside the related-person prong of the Treasury Regulations' enhancement rule. The appraiser should not eliminate in this step properties that--even though their nonenhancement seems obvious to the appraiser--are proximate enough to the subject that they deserve some mention in the appraisal report. This helps avoid the appearance of having committed an oversight (a subsequent reviewer might identify the ignored properties and ask why they were not considered in the appraisal). In addition, because any doubts about the definition of "related person" should be resolved by legal counsel, properties about which the appraiser has such doubts should be placed in the Requires Legal Analysis section of the report.

Examples of common sense elimination properties include:

* Property owned by the donor and located at the other end of the county, fifteen miles away and not visible from the subject

* Nearby property owned by the donor's second cousin 

* Nearby property owned by IBM Corporation, of which the donor owns one hundred shares of common stock

Property That May Be Enhanced and Is Owned by the Donor or a Person Clearly Related to the Donor. Properties that may be enhanced and are owned by the donor or a person clearly related to the donor must be analyzed in the Estimate Enhancement section of the report. These properties include any nearby but noncontiguous properties owned by the donor or the donor's family members (remember, contiguous properties owned by the donor or family members are covered by Rule 1) along with nearby and contiguous parcels owned by individuals or entities that are clearly related persons. By placing a property in this subcategory, the appraiser is deciding only that the property should be discussed in the enhancement section of the appraisal report, not that such property is necessarily enhanced as a result of the donation.

Examples of properties that may be enhanced and are owned by the donor or a person clearly related to the donor include the following:

* Nearby but noncontiguous property owned by the donor that overlooks the subject property

* Contiguous property owned by a limited liability company wholly owned and controlled by the donor

* Nearby property owned by the donor but obscured from the easement's view by intervening foothills (16)

Property That May Be Enhanced and the Owner's Relationship With the Donor Requires Legal Analysis. The donor's legal counsel should be consulted to resolve any questions as to whether the donor's relationship with the owners of any of the potential Rule 2 property (i.e., property not already eliminated by common sense based on location) falls within the purview of the related-person prong of the Treasury Regulations' enhancement rule. Parcels eliminated by the legal analysis may not need to be discussed in the appraisal report itself, though the attorney's written legal analysis of the donor's relationship with the owners of such properties should be retained in the appraiser's records. Properties determined by legal counsel to be owned by related persons should be analyzed in the Estimate Enhancement section of the report.

Examples of properties that may be enhanced and the owner's relationship with the donor requires legal analysis include the following:

* Nearby property owned by a trust benefiting the donor and the donor's brother, where the terms of the trust are unclear.

* Contiguous and nearby properties owned by various entities with complex ownership relationships, both parent and subsidiary, with a donor corporation

In these situations, the appraiser should insist on a legal opinion stating whether the owners of the contiguous and nearby properties are related persons for purposes of the enhancement rules.

Appraise the Subject Property

The fourth step is to appraise the subject property--together with any Rule 1 property (donor/family contiguous property)--before and after the easement donation. This is the central component of the easement valuation assignment and should be completed before estimating the enhancement of any Rule 2 property in the Estimate Enhancement section of the report. The value estimated in the before and after appraisal should be considered the preliminary value of the easement.

Estimate Enhancement

The fifth step is to estimate enhancement of any Rule 2 property (that is, all properties where the relationship is within Rule 2's purview). The appraiser must conduct an analysis of each such property sufficient to form a judgment as to whether the value of the property is enhanced by the easement donation and, if so, by how much (discussed in the following section).

Subtract the Total Enhancement

The sixth step is to calculate the final net value of the easement by subtracting the total enhancement of Rule 2 property (i.e., the result of the Estimate Enhancement section) from the preliminary value of the easement (i.e., the result of the Appraise the Subject Property section).

Analyzing and Estimating Enhancement

Appraisers may face a number of substantive issues when analyzing enhancement.

Context of Enhancement Analysis

It is important for the easement appraiser to remember that enhancement analysis can be necessary in two separate and slightly different contexts within the same conservation easement appraisal, as follows:

Rule 1 Property (Donor/Family Contiguous Property). In the context of Rule 1 Property, the value of the easement is equal to the difference between the before-easement and after-easement values of the entire contiguous parcel, that is, all parcels of property that are contiguous to the encumbered property and owned by the donor or the donor's family. Whether the appraiser should value the parcels constituting the entire contiguous parcel together as a single unit or, alternatively, value the parcels separately and add their values together depends upon standard appraisal practice, especially a careful analysis of highest and best use. (17)

The idea behind Rule 1 is that a before and after appraisal encompassing contiguous unencumbered parcels along with the subject parcel will account for any enhancement (and, presumably, any shadow effect of the easement causing diminution) to the contiguous parcels because any changes in the value of such parcels will affect the net value of the easement. The technical issue of enhancement itself will arise in the after-easement analysis when the appraiser must decide whether the value of the contiguous property in question is increased, decreased, or unaffected by the donation of the easement. This element of the analysis will be similar under both Rule 1 and Rule 2.

Rule 2 Property (Other Property/Related Person). Property enhancement under Rule 2 must be considered separately from the primary before and after appraisal. In the appraisal report, the appraiser should include a separate section (perhaps entitled "Enhancement of Other Property") identifying each Rule 2 property and describing its relevant characteristics and relationship with the subject property.

Characteristics of the Properties

Regardless of the context, the appraiser should list and discuss various characteristics of each property before analyzing whether the property in question is enhanced by the easement. In the following discussion, the property that may be enhanced (whether it is a Rule 1 or Rule 2 property) will be referred to as the "property in question," and the property to be encumbered by the easement will be referred to as the "subject easement property"

Physical Relationship of the Properties. The appraiser should describe and analyze the physical proximity of the property in question to the subject easement property; the presence of any intervening hills, structures, or forests that block the view of the subject easement property from the property in question; and any other relevant aspects of the physical relationship between the two properties. An important physical relationship to consider occurs when the property in question is located downstream from the subject easement property. If the protection of the subject easement property essentially guarantees the future water quality on the property in question, and water quality is important to the highest and best use of the property in question (e.g., estate lots with frontage on a blue-ribbon trout stream), the easement donation could conceivably enhance the value of the property in question even if the subject easement property is not within the view of the property in question. (18)

Highest and Best Use of the Property in Question. An essential step is identifying the highest and best use of the property in question. For example, if the highest and best use of the property in question before and after the encumbrance of the subject easement property is for certain types of industrial or commercial development, it is not likely to be enhanced. Usually there is no particular reason to expect that adjacency to protected farmland will increase the attractiveness of an industrial or retail site. If the highest and best use of the property in question is for high-end residential development, on the other hand, permanent protection of the view may well enhance the property's value. The appraiser should consider such factors as the property in question's accessibility, soil conditions related to the cost of road and dwelling construction, and individual septic tank installation. Similarly, it is appropriate to consider the development potential of the property in question from a demand perspective and how this potential affects whether it would be enhanced by the view protection created when the subject easement property is encumbered.

The highest and best use issue is also important when the property in question already is encumbered by a prior conservation easement. If the property in question is subject to a forever wild easement prohibiting all development and residential use, its market value is not likely to be materially enhanced by the protection of adjacent land. However, if the property in question is already under an easement and has an estate-type dwelling (or an as-yet unexercised right to build such a dwelling or dwellings) overlooking the subject easement property, the property in question is likely to be materially enhanced when the subject property's easement protects the views enjoyed from the property in question.

Restrictiveness of the Easement. The nature and extent of rights retained by easement donors can vary widely. A forever wild easement will prohibit any significant conversion of the encumbered land, but it is more common for easement donors to retain various rights under their easements. An evaluation of the restrictiveness of the subject property's easement is important to any inquiry into enhancement of adjacent parcels. The easement's restrictiveness may reduce or improve the enhancement benefits provided to nearby parcels depending upon the situation. For example, if market data shows that buyers value property adjacent to a nature preserve more highly than property adjacent to a large-lot subdivision (as is sometimes permitted under conservation easements), a restrictive easement on the subject parcel may be more likely to enhance the value of adjacent parcels than one permitting a large-lot subdivision. On the other hand, if the subject property is a large parcel of land located between the property in question and approaching development, a restrictive easement on the subject easement property that prevents the extension of public water and sewer lines could reduce the value of the property in question by cutting it off from public utilities or redirecting the path of development and price appreciation.

Findings of "No Enhancement"

If the appraiser believes the property in question is not enhanced by the easement, the appraiser should fully explain his or her reasoning in the appraisal report. (19) It is inconsistent to provide an analysis of one value aspect of an appraised property (easement) but not another (enhancement). For example, the appraiser may include observations about the irregularity of the shape of the property in question; its extreme steepness, inaccessibility, or remoteness from the subject easement property; or an interruption of an otherwise favorable view by intervening electric transmission towers, energy-generating windmills, buildings, or hills, in addition, subsoil conditions may adversely affect the potential for development of the property in question beyond its present agricultural or forestry uses and there may be a lack of demonstrated demand for residential or more intensive land development activities. ff data is available to support the appraiser's no enhancement decision it should be included and properly analyzed in the appraisal report.

Findings of "Some Enhancement"

The proper method of estimating enhancement is a before and after appraisal of the property in question. All Rule 1 property (donor/family contiguous property) is already subject to a before and after appraisal along with the subject easement property. To estimate the enhancement of Rule 2 property (other property/related person), the appraiser must conduct a separate before and after appraisal of each property in question.

Market Analysis

The goal of market analysis in the enhancement context is to ascertain whether and to what extent a premium is gained for land adjacent to protected areas in the relevant market. (20) In selecting comparable sales, the appraiser should consider such possibilities as sales of properties with similar proximity, views of state and federal parks and forests, and previously gifted conservation easements. Another possibility to consider is land sales with and without protected views. A variation of this approach is to consider sales of larger parcels (but not residential lots where prices are influenced by community amenities) with and without scenic views, such as those proximate to golf courses, lakes, valleys, and mountain ranges.

Dearth of Local Data

If enhancement cannot be measured from land sale transactions, the extent of the enhancement should not be estimated by applying an arbitrary unsubstantiated percentage to the value of the easement. This approach fails to address the question of enhancement to the value of the property in question.

The amount of enhancement to the property in question should be supported by logic and market evidence. In order to judge the extent of enhancement of properties owned by the donor or related persons, the appraiser should describe the physical features and proximity of the property in question and state whether the property in question is within the viewshed of the subject easement property. The amount of enhancement applies to the value of the property in question, and that amount is deducted from the value of the donated easement

Summary and Conclusion

Properly addressing enhancement in conservation easement appraisals is a matter of working sequentially through the proper steps. The appraiser must gather information about relevant properties. Then, the appraiser must sort those properties as required under the applicable Treasury Regulations and analyze them under the appropriate rule. Legal help should be sought out when necessary. Most importantly, the appraiser should carefully explain his or her reasoning with respect to future development limitations imposed by the conservation easement and its effect on any nearby properties owned by the donor or a related person. All estimates of enhancement should be market supported and the appraiser's reasoning should be clearly set forth. The appraiser should provide a full description of the physical relationship between the relevant nearby parcels and the subject easement property. The appraiser must remember that any estimates of enhancement should be market supported.

Unquestionably, it is necessary for the appraiser to make an ample effort establishing the property's highest and best use before and after the easement, finding appropriate comparable sales in the after-easement situation, and making reasonable adjustments to those comparables. Also important to a high-quality conservation easement appraisal report is a careful analysis of the relationship between the subject easement property and any nearby properties owned by the donor or related person. The process of determining if the value of such nearby properties is affected by the donation of the easement (and, if so, estimating the amount of that value change) must not be an afterthought to the conservation easement appraisal. Enhancement analysis demands the appraiser's full attention and should be considered an important aspect of conservation easement appraising.

Appendix Conservation Easement Pre-Bid Checklist

Conservation easement appraisers may wish to provide the following checklist to prospective clients and evaluate the listed materials before bidding on the appraisal assignment. The scope of the assignment will depend upon what the appraiser finds in the materials listed below, most particularly the first and last items. Treasury Regulation [section] 1.170A-14(h)(5)(i) requires that an appraiser consider the effect of the subject conservation easement on various contiguous and noncontiguous properties owned by the easement donor and the donor's family. Note that contiguous property owned by the donor or a member of the donor's family must be valued together with the subject property in the easement appraisal. The appraiser also may want to ask the client to certify as to the completeness of the information provided.

Conservation Easement Pre-Bid Checklist

The following data is required for this assignment, if applicable. Please indicate if not available.

Date Received   Description of Item

                Survey, legal description, and title reports of the
                subject property as well as any other real estate
                contiguous to the subject property that is owned
                by the easement donor or the donor's immediate family
                (brothers and sisters by whole or half blood, spouse,
                ancestors, and lineal descendants)

                Closing statement(s) and deed(s) on any transfer(s)
                in the last five years

                Contract(s) on any proposed or pending sale(s) in the
                last five years

                Any written offers to list, sell, buy, or lease the
                property in the last five years

                Status of any property tax appeals or reviews

                Zoning and POD approvals, with proffers; status of
                any proposed or pending zoning changes

                Proposed easement agreement(s) and plat showing the
                easement(s) area

                Description of the relevant conservation attributes of
                the property (recreation/education, natural habitat,
                open space, scenic, and/or historic significance). May
                require consultation with the government agency or
                private nonprofit organization that will be accepting
                the easement donation

                Topographical and/or soils map and any available
                aerial photography

                Plat and/or site plan

                Copies of soils, environmental and/or wetland
                assessments

                Inventory of structures noting age and existing
                and proposed use

                All third party rental agreements (w/amendments,
                pending changes)

                Project cost breakdown and timing

                All agreements with adjacent property owners or
                any other agreements related to the use and
                development the subject property

                Any changes in the operation and/or unusual
                conditions that should be considered in our analysis

                Copies of applicable market studies, feasibility
                studies, and appraisals

                Marketing brochure(s) for subject and similar
                properties

                Contact person and phone number

                Any other information that you feel may be
                relevant to the valuation of the subject property

                A list (including a brief description and location)
                of any real estate that is contiguous to or located
                in the vicinity of the subject property that is
                owned by the easement donor or any person or entity
                that is a related person with respect to the donor
                as defined in [section] 267(b) or [section] 707(b)
                of the Internal Revenue Code. Information regarding
                any contiguous real estate owned by you or your
                immediate family should be provided as requested
                above. In addition, please carefully consider
                whether any other real estate located near the
                subject property is owned by you, your immediate
                family, or any trust, estate, corporation,
                partnership, LLC, or other entity you (or a member
                of your immediate family) have a significant interest
                in, and please seek legal counsel if you have any
                question whether there is any such real estate. The
                appraiser may request more information on such real
                estate if necessary.

This exhibit is based on a checklist provided by Robert E. Coles, MAI, of Integra Realty Resources, Richmond, Virginia. Used with permission.

Additional Reading

Keating, David Michael. Appraising Partial Interests. Chicago: Appraisal Institute, 1998.

by James H. Boykin, PhD, MAI, and James A. McLaughlin, JD

James H. Boykin, PhD, MAI, SREA, is a real estate analyst and consultant with Boykin Realty Advisors, LLC in Richmond, Virginia, specializing in resort property advising, conservation easement reviews, and predevelopment consulting. He is a Real Estate Professor Emeritus at Virginia Commonwealth University and has served on many Appraisal Institute committees and offices. Among his seventeen books and monographs are the Appraisal Institute's Land Valuation Adjustment Procedures and Assignments (and two current Appraisal Institute seminars on the same topic). His latest book is investing In A Vacation Home For Pleasure and Profit. Contact: 10931 Lansdowne Terrace, Midlothian, VA, 23113; T 804-320-7643; E-mail: [e-mail]

James A. McLaughlin, JD, has been consulting and practicing law in the private land conservation area for twelve years. He has assisted landowners with the donation, sale, and bargain sale of conservation easements, and currently is a principal of Conservation Partners, LLC, which consults with landowners and their professional advisors regarding land conservation and is developing a market for the transferable Virginia income tax credits available to landowners who donate interests in land for conservation purposes. McLaughlin received his BA from Washington & Lee University and his JD from University of Virginia School of Law. Contact: 5907 Pioneer Fork Road, Salt Lake City, UT, 84108; T 801-583-0285; [e-mail]

(1.) A conservation easement is "a legal agreement between a landowner and an eligible organization that restricts future activities on the land to protect its conservation values." Michelle Byers and Karin Marchetti Ponte, The Conservation Easement Handbook, 2nd ed. (Washington, DC: Land Trust Alliance, 2005), 7. Note that the authors often use the shorthand "easements" to refer to conservation easements in this article.

(2.) See Land Trust Alliance, National Land Trust Census, at http://www.lta.org/aboutlta/census.shtml (last visited July 17, 2005). The Land Trust Alliance's 2003 figures are derived from local, state, and regional nonprofits and do not include the significant amount of land under easements held by national organizations (such as The Nature Conservancy) and government agencies (such as the U.S. Fish and Wildlife Service).

(3.) See for example, Bill Garber, "Regulators, Appraisers Forge Dialogue-Rich Experience at D.C. Appraisal Summit," Valuation Insights & Perspectives (First Quarter 2005): 15; Bill Garber, "The 109th Congress: The Year of the Appraiser," Valuation Insights & Perspectives (First Quarter 2005): 6-7; Joe Stephens and David B. Ottaway, "Developers Find Payoff in Preservation," Washington Post, Dec. 21, 2003, A1; IRS Notice 2004-41 (July 12, 2004), available at http://www.irs.gov/irb/2004-28_lRB/ar09.html and United States Senate Committee on Finance, "Committee Report on The Nature Conservancy," http://www.senate.gov/%7Efinance/sitepages/ TNC%20Report.htm (last visited December 21,2005).

(4.) The worth or value of conservation easements for purposes of their purchase or donation has little directly to do with their intrinsic public interest value, which refers to the benefits that flow to the public from the easement; rather, easement appraisal practice focuses on the economic damage the easements may do to the property they encumber, usually employing some variant of the traditional before and after method to estimate such damage (this article assumes a basic familiarity with the before and after method of valuing conservation easements). There are very good reasons for the conceptual disconnect between the public interest value of an easement and the way in which it is properly valued for purposes of its acquisition. Those reasons are beyond the scope of this article but are briefly discussed in Nancy A. McLaughlin, "Increasing the Tax Incentives for Conservation Easement Donations--A Responsible Approach," Ecology Law Quarterly 31, no.1 (2004): 68-71.

(5.) See for example, IRS Notice 2004-41 and Staff of the Joint Committee on Taxation, Options to Improve Tax Compliance and Reform Tax Expenditures (JCS-02-05, Jan. 27, 2005), 281, available at http://www.house.gov/jct/s-2-05.pdf (last visited December 21, 2005).

(6.) Where the donor will not be claiming tax benefits for a charitable donation (and, thus, the appraiser is not required to comply with the federal Treasury Regulations), other methods of addressing enhancement may be appropriate, such as those required under the "Yellow Book" to estimate damages and benefits to unencumbered remainders consequent to easement acquisitions. See United States Department of Justice, Uniform Appraisal Standards For Federal Land Acquisitions (The interagency Land Acquisition Conference, 2000), Sections B-11, B-12, and B-20, especially note 296, page 63.

(7.) Especially, the phrase "entire contiguous parcel of property."

(8.) Family is defined in [section] 267(c)(4) of the Internal Revenue Code as brothers and sisters by whole or half blood, spouse, ancestors, and lineal descendants.

(9.) Sections 267(b) and 707(b) of the Code refer to various familial, entity, and trust relationships.

(10.) But see note 13. for sample language an appraiser might include in an easement appraisal report to clarify the report's position with respect to Rule 3 (incidental benefit property).

(11.) The authors are describing their own interpretation of what the enhancement rules require. Very little helpful guidance has been issued with respect to these issues.

(12.) See Appraisal Standards Board, Uniform Standards of Professional Appraisal Practice, 2006 ed. (Washington, DC: The Appraisal Foundation, 2006). Standard 1 of USPAP states: "In developing a real property appraisal, an appraiser must identify the problem to be solved and the scope of work necessary to solve the problem, and correctly complete research and analysis necessary to produce a credible appraisal."

(13.) The authors offer the following as a sample of the type of language that may be included in appraisal reports under such circumstances (the language also addresses Rule 3 (incidental benefit property):

"Under Treasury Regulation [section] 1.170A-14(h)(3)(i), the amount of the deduction for a conservation contribution must be reduced in the event certain benefits accrue to the donor as a result of the donation. The donor of the subject easement has represented the following to me (see attached letter from donor): (i) that neither the donor nor any family member (as defined in [section] 267(c)(4) of the Internal Revenue Code; i.e., brothers and sisters by whole or half blood, spouse, ancestors, and lineal descendants) or related person (as defined in [section] 267(b) or [section] 707(b) of the Internal Revenue Code, referring to various familial, entity, and trust relationships) owns any other property in the vicinity of the subject property, and (ii) that other than potential federal, state, and local tax benefits, neither the donor nor any family member or related person has received or reasonably expects to receive any financial or economic benefit as a result of the donation of the subject easement."

The appraiser also may want to attach to the appraisal a copy of the acknowledgement letter from the easement donee, required to be kept in the donor's records under Treasury Regulation [section] 1.170A-13(f), containing a statement of whether or not the donee provided any goods or services in consideration for the easement donation. If the appraiser is aware that the transaction is a bargain sale, that fact should be noted here and perhaps elsewhere in the report, depending upon the nature of the assignment.

(14.) Section 267(e)(4) of the Internal Revenue Code.

(15.) Some appraisals have ignored the specific requirement of Rule 1. (donor/family contiguous property) that donor/family contiguous parcels be appraised together with the encumbered parcel before and after its encumbrance and have simply considered enhancement to all contiguous/family member properties and other related person properties in a separate step in the appraisal. There are reports that some state tax authorities have unofficially approved of this method. The Treasury Regulations, however, are quite clear regarding the necessity of appraising contiguous parcels owned by the donor or a family member together with the encumbered parcel. The authors recommend appraisers heed the separate rules until receiving official guidance to the contrary from the IRS.

(16.) Although such property would not be enhanced despite its physical proximity to the subject, it should be identified in the appraisal and the appraiser should explain the reasoning against its enhancement. Otherwise, an auditor simply using a tax map without contours might expect a property so close to the subject to be enhanced and may call upon the appraiser to explain why the property was not mentioned in the appraisal.

(17.) Note that in Example 10 of Treasury Regulation [section] 1.170A-14(h)(4), the fair market values of ten contiguous but separately platted one-acre lots were simply added together in the before and after components of the easement appraisal. That will not always be appropriate, such as when the highest and best use of the separate lots is assemblage for an integrated use. For an in-depth discussion of this issue in the context of determining the larger parcel for purposes of eminent domain appraisals, see J. D. Eaton, Real Estate Valuation in Litigation, 2nd ed. (Chicago: Appraisal Institute, 1995), 92-101.

(18.) Todd D. Mayo, JD, personal communication, December 23, 2005.

(19.) Arguably, in order to comply with USPAP, the appraiser should conduct a before and after appraisal of each property in question, whether or not the appraiser believes such property is enhanced. The argument is that the appraiser is stating an opinion of value of that property and therefore must appraise it. These expectations are stated in the 2006 edition of USPAP under the SCOPE OF WORK RULE: "An appraiser must not allow assignment conditions to limit the scope of work to such a degree that the assignment results are not credible in the context of the intended use" [Lines 439-440]; and under Standards Rule 1-4(a): "When a sales comparison approach is necessary for credible assignment results, an appraiser must analyze such comparable sales data as are available to indicate a value conclusion" [Lines 607-609]. Therefore, the cautious appraiser may decide to appraise all Rule 2 properties (other property/ related person) even if the appraiser believes some or all such properties are not enhanced by the easement donation.

(20.) See a discussion of different view lots in James H. Boykin, Land Valuation Adjustment Procedures and Assignments (Chicago: Appraisal Institute, 2000), 91-97. Care should be taken to distinguish privately owned open space that affords a protected view but no use rights versus protected land that affords recreational amenities (as well as, in some cases, the potential nuisance caused by a high level of public use).