CONSERVATION EASEMENTS

I.	Definition of Conservation Easement  

A.	A negative easement in gross with affirmative obligations enables the owner of the easement to prohibit or require a limitation upon or an obligation to perform acts on or with respect to the land owned by the grantor appropriate to the retaining or maintaining of such land;

B.	A legally binding agreement that permanently restricts the development and future uses of the subject property in order to protect certain conservation values;

C.	A property right that is less than fee generated by a non-possessory interest with affirmative obligations and negative easement implications surrounding a parcel of land and created by a deed conveyance that is executed with the same formalities associated with other forms of real estate conveyances.

II.	Characteristics of Conservation Easements

A.	Voluntary
B.	Private
C.	Unique
D.	Perpetual

III.	Misconceptions about Conservation Easements

A. 	Ownership of land is given up with conservation easement;	
B. 	Land encumbered by a conservation easement can not be sold, mortgaged, or passed on to future generations; 
C.	Public access generally is required once you grant a conservation easement.

IV.	Qualifying for State and Federal Tax Benefits 

A.	State Qualifications for Conservation Easement Donation:  A fully transferable interest in real property interest that is a conservation easement in gross. (CRS §38-30.5-101 et seq.)

1. 	Purpose: Maintaining the land predominantly in a natural, scenic, or open condition, or for wildlife habitat, or for agricultural, horticultural, wetlands, recreational, forest, or other use or condition consistent with the protection of open land, environmental quality or life-sustaining ecological diversity, or appropriate to the conservation and preservation of buildings, sites, or structures having historical, architectural, or cultural interest or value. (CRS §38-30.5-102)

2.	Holder:  To qualify as a property interest under Colorado law, a conservation easement must be granted to or reserved by either:

a. 	a governmental entity; or
b.	a qualified, tax-exempt 501(c)(3) charitable organization recognized under the Internal Revenue Code, which organization was created at least 2 years prior to the receipt of the easement. (CRS §38-30.5-104(2))

3.	Perpetual:  The easement is deemed perpetual unless otherwise stated. (CRS §38-30.5-103(3)

4.	Water:  An easement that encumbers water or a water right may be created by the owner of the water or water right and may be revoked after sixty days' notice and in accordance with the applicable requirements of the mutual ditch or reservoir company.  (CRS §38-30.5-103(5), 104(1)) 

5.	Validity:  Instruments creating, assigning, or otherwise transferring easements must be recorded upon the public records affecting the ownership of real property in order to be valid and shall be subject in all respects to the laws relating to such recordation. (CRS §38-30.5-106)

6.	Termination:  Easements may, in whole or in part, be released, terminated, extinguished, or abandoned by merger with the underlying fee interest in the servient land or water rights or in any other manner in which easements may be lawfully terminated, released, extinguished, or abandoned. (CRS §38-30.5-107)

7.	Damages:  In addition to the remedy of injunctive relief, the holder of an easement shall be entitled to recover money damages for injury thereto or to the interest to be protected thereby, and in assessing such damages, there may be taken into account, in addition to the cost of restoration and other usual rules of the law of damages, the loss of scenic, aesthetic, and environmental values. (CRS §38-30.5-108)

8.	Property Tax:  Real property subject to one or more easements shall be assessed with due regard to the restricted uses to which the property may be devoted. (CRS §38-30.5-109)

B.	State Qualifications for Conservation Easement Tax Credit:  Credit against income tax for Colorado taxpayers who donate conservation easements. (CRS §39-22-522)

1.	Taxpayers qualified to claim the gross conservation easement credit (including transferees of these credits) include:

a.	Colorado residents,
b.     	C corporations, 
c.   	 trusts, 
d.    	estates, 
e.   	partners, shareholders or members of pass-through entities who receive the credit from such entity, regardless of whether such individuals are Colorado residents: 

          i.	Joint tenancy, tenancy in common, pass through entity such as a partnership or S corporation, or other similar entity or group must allocate the credit to the entity’s owners, partners, shareholders or members in proportion to their distributive shares of income or ownership percentage from such entity or group.
          ii.	A single-member limited liability company will generally be disregarded for federal tax purposes (I.R.S. Regulation 301.7701-3) as well as for state tax purposes and will not qualify as a "member of a pass-through entity" so will not qualify for the credit unless the member is a Colorado resident.
          iii.	Individuals who are not residents of Colorado cannot claim the credit for a donation they make or for a credit they purchase. Part-year residents may claim the credit, but only if they make the donation while they are a Colorado resident. Only a credit apportioned to nonresident partners, shareholders, or members of a pass-through entity can be claimed by nonresidents. Nonresident owners included in a joint tenancy, tenancy in common, and similar groups cannot claim the gross conservation easement credit.

2.	A credit is generated from the donation of a single perpetual conservation easement in gross which must be a qualified conservation contribution per 26 USC §170(h), but NOT if:
	i.	Not made exclusively for  conservation purposes (subjective at best; arguably more strict than the federal test);
	ii.	Land already protected by non-profit 501(c)(3) ownership (presumes non-profits do not have trade lands and always protect the land they own);
	iii.	Donation made to an unqualified organization;
	iv.	Water rights encumbered are revocable.

3.	A taxpayer can claim only one tax credit per income tax year that is generated by the donation of a perpetual conservation easement in gross by the taxpayer, either directly or by a pass-through entity in which the taxpayer is a partner, shareholder or member. A taxpayer cannot earn multiple credits in one year from multiple donations even if the donations are made by different pass-through entities. (C.R.S §39-22-522(6))

4.	A taxpayer cannot claim a tax credit on a donation made during a tax year if:

a.	the taxpayer has a carryover credit from a prior tax year, or
b.	another taxpayer that has purchased a credit from the taxpayer is carrying all or part of the purchased credit to the tax year.

5.	Credit survives death of donor and is transferable or can be claimed by estate (HB 05-1244). 

6.	DR Form 1305 for both transferee and transferor for each credit, federal form 8283, and summary of appraisal filed with tax return.

7.	Federal deduction add-back if charitable deduction claimed at federal level and amount deducted at federal level added back to state taxable income.

8.	Phased easements permissible provided each easement stands alone and prior tax credits are used by transferor or transferee prior to making subsequent donation for new tax credit.

C.	Federal Qualifications for Conservation Easement Donation:  Qualified conservation contribution. (Internal Revenue Code §170(h) (26 USC §170) and Treasury Regulations §1.170A-14 (26 CFR 1.170A-14)) 

	1.	A “qualified conservation contribution” satisfies the Internal Revenue Code 	requirements for a charitable contribution and income tax deduction.  A “qualified 	conservation contribution” is a:

	a. 	“Qualified real property interest”,
	b. 	Donated to a “qualified conservation organization”,
	c. 	For “conservation purposes”.  (26 USC §170(h)(1))
 
	2.	A “qualified real property interest” is an “easement or other interest in real 	property that under state law has attributes similar to an easement”. (26 USC 	§170(h)(2))
		
        3.	A “qualified conservation organization” is either a:

	a. 	A qualified, tax-exempt 501(c)(3) charitable organization, which must generally be in the land conservation field or have a mission of land conservation, or
	b. 	A governmental entity. (26 USC §170(h)(3))
	

        4.	“Conservation purposes” include the following:
        a.	The preservation of land for outdoor recreation or education for substantial and regular use for the public;
	b. 	The protection of the natural habitat of fish, wildlife or plants;
        c. 	The preservation of open space, including farmland and forestland, where such preservation is for the scenic enjoyment of the general public or is pursuant to a clearly delineated governmental conservation policy and will yield a significant public benefit; and
        d. 	The preservation of historically important land or a certified historic structure. (26 USC §170(h)(4))

5.	The Easement’s conservation purpose(s) must be protected in perpetuity. (26 USC §170(h)(5)).  Protected in perpetuity according to the Code and Regulations requires several factors: 

a.	No surface mining on the easement property is permitted. 
 
        i.	The general rule is that no charitable deduction is allowed if the landowner does not own the minerals under the property and if at any time there may be a removal of those minerals by any surface mining method.
        ii.	The exception, however, swallows the general rule, stating that a landowner may obtain a charitable deduction if the probability of “extraction or removal of the minerals by any surface mining method is so remote as to be negligible”. (26 USC §170(h)(5))

b.	Mortgage holders must subordinate to the conservation easement. (26 CFR §1.170A-14(g))

         i. 	Subordination by lender does not mean that they will not be able to foreclose on their security.
         ii. 	It does mean that in the event of a foreclosure, the conservation easement will remain in effect as a restriction on the property.
         iii. 	Whether the lender realizes the amount on its security will depend upon the value of the property with the easement in place.
	
c.	Documentation of the conservation easement sufficient to establish the condition of the property at the time of the gift is required, usually in the form of a baseline inventory. (26 CFR §1.170A-14(g))
 
d.	Extinguishment and proceeds from sale or conversion if the easement is terminated. If subsequent unexpected changes in the conditions surrounding the property subject to easement make impossible or impractical the continued use of the property for conservation purposes, the easement may be extinguished by judicial proceeding.  Holder is entitled to proceeds in proportion to the easement’s value.  (26 CFR §1.170A-14(g))

7.	Valuation of the easement gift requires a “Qualified Appraisal” by a “Qualified Appraiser” to be created  and available to submit or submitted with donor’s tax return (26 CFR §1.170A-14(h)(3)(i), (ii) and 26 CFR §1.170A-13):

a.	Typically appraised using the Before and After Method of Valuation: 
b.	Before Valuation—Determine Highest and Best Use—evaluate potential for continuation of existing uses and alternative uses such as subdivision, redevelopment, expansion, renovation, timbering, etc.; 
c.	After Valuation—Determine Highest and Best Use—by comparing easement restrictions to existing zoning regulations and other controls.

8.	Taxpayer allocates basis to reduce his/her tax basis in the land in proportion to the value of the conservation easement, so that the conservation easement value is proportionate to the value of the land, owner incurs a higher capital gain tax rate when selling the land encumbered by the conservation easement. (26 CFR 1.170A-14(h)(3)(iii)

9.	The conservation easement must be donated, or sold for less than market value (as a bargain sale), to yield a charitable contribution income tax deduction.  

a.	A conservation easement that is granted in return for something, i.e., where there is a “quid pro quo,” will not satisfy the “donative intent” requirement established by case law surrounding the Internal Revenue Code provision for charitable donations and will not qualify for a charitable deduction.  
b.	An example is a conservation easement granted by a landowner to a city in exchange for or as required by annexation or favorable zoning of the property.
 
V.	Typical Restrictions/Requirements in/of Conservation Easements

A.	No or limited subdivision.

B.	Limit on development or additional building.  A landowner may reserve several homesites for present and future use.
	
C.	No commercial or industrial uses other than ranching, farming, lodging, and cottage industry.

D. 	A cash donation to the land trust as an endowment for monitoring and enforcement of the conservation easement is usually part of the transaction.

E.	No clear-cutting of trees.

F.	No separation of water rights from property, or no separation greater than that required to support conservation values.

VI.	Landowner Steps to Creating and Donating/Selling a Conservation Easement

A.	Identify your property’s potential conservation values; 
 
B.	 Consider if/where to reserve rights for development, other uses;

C.	Locate a land trust or government entity whose mission is consistent with your vision of the property’s protection;

D.	Identify your financial goals; consult with your tax advisor/accountant to determine whether you should donate an easement;

E.	Obtain an appraisal of the conservation easement to determine before and after values;

F.	Obtain a title report for your property to review status of ownership, mortgages, covenants, minerals, etc.

G.	Obtain a baseline inventory of the property to establish ecological status of property at time of grant and to describe conservation values; 

H.	Obtain a mineral report/remoteness letter if you do not own minerals associated with property;

I.	Obtain subordination of any mortgages on property;

J.	Prepare the deed of conservation easement—both sides should have legal counsel; and

K.	Sign and record the conservation easement.