Condemning Conservation Easements Protecting the Public Interest & Investment in Conservation Nancy A. McLaughlin Robert W. Swenson Professor of Law University.
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Condemning Conservation Easements Protecting the Public Interest & Investment in Conservation
Nancy A. McLaughlin Robert W. Swenson Professor of Law
Who should get what when land encumbered by a conservation easement
is condemned in whole or in part?
Conservation Easement-Encumbered Land
U.S. Constitution
Takings Clause of 5th Amendment
“…nor shall private property be taken for public use without just compensation”
When land encumbered by a conservation easement is taken…
1) Does the conservation easement constitute compensable “property”?
2) How should the conservation easement be valued for purposes of compensating its holder?
Does a Conservation Easement Constitute Compensable Property?
U.S. v. General Motors 323 U.S. 373 (1945)
“The constitutional provision [the Takings Clause] is addressed to every sort of interest the citizen may possess”
- leasehold interests, interests of mortgagees, life estates, remainders, and reversions,
- affirmative and negative easements, whether held appurtenant or in gross,
- in a majority of states and at federal level, restrictive covenants (negative restrictions on the development and use of land)
(i) a few easement-enabling statutes,Caveats: (ii) minority rule
How should a conservation easement be valued for purposes of
compensating its holder?
First Eminent Domain Valuation PrincipleThe Meaning of “Just Compensation”
Normal Standard: “Fair Market Value”
FMV is not an absolute standard
U.S. v. Commodities Trading 339 U.S. 121 (1950)
Willing Buyer/Willing SellerOpen and Competitive Market
No Open and Competitive MarketOther Valuation Methods are Employed
“Just compensation” must be fair and equitable to all parties involved
Valuation of Non-Possessory Partial Interests in Land
(traditional easements and restrictive covenants)
“Before & After Method” is used
No open and competitive marketso
FMV is generally not the appropriate standard
Second Eminent Domain Valuation Principle Majority Rule -- Just Compensation for the Taking of Property Held Subject to a Restriction on its Use
is the Property’s Unrestricted Value
Fairfax County Park Auth. v. Virginia Dep’t of Transp. 247 Va. 259 (1994)
FMV as park: $ 2,000/acre
FMV at HBU: $125,000/acre(residential development)
Board of County Commissioners v. Thormyer 169 Ohio St. 291 (1959)
Second Principle Holder should be entitled to
unrestricted value of CE
First Principle No open and competitive market
FMV is not the appropriate standard
“Before & After Method”
Condemnation of Conservation Easement
Total Taking
Total Taking At the Time of the CondemnationFMV of land if not encumbered by the easement: $5 millionFMV of land encumbered by the easement: $3 million
Unit Rule (aka the Undivided Fee Rule)
Step 1: Total Compensation Award = $5 million
Owner of encumbered land $3 million (FMV of the encumbered land)
Holder of easement $2 million
(value of CE/B&A method)
1) Property valued as unencumbered whole = Total Comp. Award 2) Total Comp. Award apportioned among owners of interests in the land in accordance with value of their respective rights
Treasury Regulations § 1.170A-14(g)(6)(ii)
“when a change in conditions give rise to the extinguishment of a [conservation easement]…, the donee organization…must be entitled to a portion of the proceeds at least equal to the [Donation %] of the [conservation easement]”
The greater of:1) the Donation % or2) The Extinguishment %
Partial Taking At the Time of the CondemnationFMV of land if not encumbered by the easement: $5 million FMV of land encumbered by the easement: $3 millionValue of the easement: $2 million 40%
60%
Partial Taking At the Time of the CondemnationFMV of land if not encumbered by the easement: $5 million FMV of land encumbered by the easement: $3 million
Step 1: Total Compensation Award = $2.5 million
60% ($1.5 million) Owner of encumbered land
40% ($1 million)Holder of easement
Value of the easement: $2 million
Unit Rule (aka the Undivided Fee Rule)
40%60%
1) Total Comp. Award: Before & After/Severance Damage Method
2) Total Comp. Award apportioned btwn owners of interests in the land in accordance with value of their respective rights
**Value Property as Unencumbered Whole**
Partial Taking
Partial Taking Conservation Purpose Destroyed
Valuation on Front End
Value of deduction = fair market value (FMV)
of conservation easement at time of donation
Prescribed Valuation Methods
Sales Prices of Comparable Easements
But see Browning v. Comm’r, 109 T.C at 312 (1997)
Prescribed Valuation Methods
Before & After Method
Value of Easement = Difference Between:
• FMV of the land immediately before the donation, and
• FMV of the land immediately after the donation
FMV: “the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having a reasonable knowledge of relevant facts.”
Enhancement Rules
Rule #1: Entire Contiguous Parcel Rule
If land contiguous to the land encumbered by the easement is owned by the donor [or] a member of the donor’s family, the value of the easement is equal to the difference between the before-easement and after-easement values of the entire contiguous parcel.
Enhancement Rules
Rule # 2
If the granting of the easement increases the value of any other property owned by the donor or a “related person,” the amount of the deduction must be reduced by the amount of such enhancement, whether or not the property is contiguous.
Incidental Benefit Rule
The donor’s charitable income tax deduction must be reduced by an amount equal to the value of any financial or economic benefit that the donor or a related person receives, or can reasonably expect to receive.
Valuation Abuse
Exaggerating Before-Easement Value
Using
Subdivision Development Analysis
Before & After Method
Value of Easement = difference between:
• FMV of the land immediately before the donation, and
• FMV of the land immediately after the donation
FMV: “the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having a reasonable knowledge of relevant facts.”
Subdivision Development Analysis
• Mimics valuation process employed by prospective purchaser (developer)
• Appraiser determines gross proceeds realizable from imagined development
• Gross proceeds discounted to reflect:- Risks/delays
- Time
- Costs
- Expected profit
Subdivision Development Analysis
• The “highest and best use” of the land is for
subdivision purposes
• The sales comparison approach is not
available
Subdivision Development Analysis
USPAP 2008-2009
“Because [the SDA] is profit oriented and dependent on the analysis of uncertain future events, it is vulnerable to misuse.”
“Because of the compounding effects in the projection of income and expenses, even slight input errors can be magnified and can produce unreasonable results.”
“[The SDA] is best applied in developing value opinions in the context of one or more other approaches.”
Subdivision Development Analysis
U.S. Dept. of Justice, Uniform Appraisal Standards
(“Yellow Book”)
“When comparable sales are available with which to
accurately estimate the property’s market value, the
[SDA] should not be relied upon as the primary
indicator of value, as it is considerably more prone to
error.”
Subdivision Development Analysis
Joe Stephens and David B. Ottaway,Developers Find Payoff In Preservation,
Wash. Post, Dec. 5, 2003 A1
“…investors paid about $10 million for the land and shared in a tax write-off ‘in the $20 million range’. . .[t]he deduction was based, in part, on an appraiser’s assessment of how much the land would have been worth had they filled the acreage with
1,400 homes”
J. D. Eaton, Real Estate Valuation in Litigation (2nd ed.1995)
“If all of the land that has been appraised by the [SDA] were actually subdivided, there would be enough subdivision lots on the market to last hundreds of years and little, if any, farmland left in the United States.”
Subdivision Development Analysis
Whitehouse Hotel v. Comm’r131 T.C. No. 10 (2008)
P/S’s Deduction: $ 7.4m IRS’s Value: $1.15m
Tax Court’s Value: $1.7 million
P/S’s Expert: $10m IRS’s Expert : $ 0
Before Easement Value
P/S’s Expert: $43m
IRS Expert: $10.3m
Easement Value
Tax Court: $12m
Bruzewicz v. United States 604 F.Supp.2d 1197 (2009)
Orlando Blackmer House
Hughes v. CommissionerT.C. Memo 2009-94
TP’s claimed deduction: $ 3.1mIRS’s value: $ 1.9m
Bull Mountain Parcel
TP purchased for $1.5m in 1999
TP’s expert claims BEV was $3.5m in 2000 (128% appreciation in 14 months)