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Feb 17, 2021

Narwhal 101: Conservation Easements

Narwhal 101: Conservation Easements
  1. What is a conservation easement?

    According to the National Conservation Easement Database, a conservation easement is "a voluntary, legal agreement that permanently limits uses of the land in order to protect its conservation values." Officially recorded as deed restrictions, these agreements allow the land to transfer ownership through sale or inheritance, but they come with development restrictions that guarantee perpetual conservation. Typically, these agreements are made between owners and land trusts or government agencies. The owner often donates certain rights to classify the transaction as a tax-deductible charitable donation. Easements "run with the land," meaning that all subsequent owners of that land must abide by the initial agreement. Often easements dictate that the land cannot be developed or altered in any significant way, reducing the value of the land as potential development opportunities are permanently removed. However, the tax benefits from donating this land and accepting the restriction of development rights can be significant in their own capacity.

  2. Why were they created?

    The concept of easements was first seen in the late 1800s, but not until the 1990's did popularity increase. Much of this is due to states beginning to promote income tax credits for owners who donated conservation easements. When certain states began to allow transferability of these tax credits, the market truly started to boom, and today there is a healthy market for these transferable credits. As a result of these incentives, there are now an estimated 56 million acres of land designated as conservation easements in the United States. This impressive number is double the amount of national park land in the continental United States.

  3. What qualifies a piece of land to be set up as a conservation easement?

    The easement must have a legitimate conservation purpose, and qualifications differ depending on the entity forming the easement. Some common themes include the protection of wildlife habitats, scenic areas, or historical lands and structures. Some states also have allowances for public use of lands designated as conservation easements, so if a property can be used for outdoor recreation, it could be qualified as well.

  4. What purpose do they serve for investors?

    In 2015 Congress increased the tax deduction amount for land donors to 50% from 30% of annual income. Not only that, but Congress made the tax deduction permanent (initially enacted as temporary in 2006) and extended the carry-forward period on the deduction to 15 years from 5 years. Additionally, certain farmers and ranchers can deduct up to 100% of their income for donating an easement. The break itself is defined by the difference between the value of the land if "unencumbered" by the restrictions, and its value with the restrictions in place. When easements were first becoming popular, they were only really accessible to those who already owned large properties (farmers and ranchers) or those who had the capital to purchase it outright (large businesses and the ultra-rich). Now, the prominence of syndicated partnership groups allows accredited investors to pool money and purchase large tracts of land purely to receive the tax benefit (on a pro rata basis). Those investors are eligible to receive a tax break up to 50% of their annual income each year until the credit's total value is paid off or until 16 years have passed.

  5. What causes these to go wrong?

    Like with most things, people will make an effort to take advantage of any system in place in order to increase profits, and conservation easements are no exception. As you might imagine, the estimated value of large land tracts developed to their highest and best use can be quite significant, especially when there are opportunities for mining, oil drilling, and residential/retail development. These estimates can be easily misrepresented to maximize profit, and it is critical that the uses are valid and indisputable. Additionally, easements that are claiming conservation due to historical reasons or wildlife preservation must show significant evidence of their claims. Unfortunately, in easement deals that go poorly, it is often the investor, not the organizer, that gets punished the most.

  6. What are the implications of an investment in a bad conservation easement?

    While a "bad" investment in private real estate might result in you losing your investment, a "bad" investment in a conservation easement will likely result in an IRS audit and significant penalties along with back-taxes. While conservation easements exist as a true tax loophole created by the government, there is little forgiveness for investors who are associated with fraudulent syndicators.

  7. Are conservation easements for me?

    If you are a high earner with a significant risk appetite, then you are the only type of individual we would recommend considering one of these opportunities. With that being said, it's wholly dependent on the quality of the syndication entity that is putting the transaction together. An ideal conservation easement deal would involve property owned by someone that is trustworthy and has a proven track record of clean, above-water deals. As in every private opportunity, there are inherent risks due to the transactions' highly relational nature. If you are offered the chance to participate in an easement deal, the Narwhal team is more than happy to review it and perform due diligence on the promoting organization or individual.

Luke Burton

Director of 401(k) Services

Luke joined Narwhal’s client services team in the spring of 2019 after working as a wrangler on a West Colorado guest ranch. He holds a B.S. in psychology from Davidson College and competed for four years on the Davidson men’s swim team. His role at Narwhal focuses on serving 401(k) clients and their employees. In his own time, Luke enjoys all things related to fitness and the great outdoors.

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