Cattle Raisers Discuss Policy
On Conservation Easements

By Colleen Schreiber

SAN ANGELO — The use of conservation easements in the U.S. is growing, and though differences of opinion remain over the value of such agreements, experts say the issue is here to stay.

Some members of the Texas and Southwestern Cattle Raisers Association have endorsed conservation easements despite the fact that association policy currently opposes their use. TSCRA's legislative and tax committee took up the issue during the group's recent fall board meeting here, discussing whether or not its policy should be amended.

The existing resolution, on the books since March 22, 1995, reads: WHEREAS, conservation easements placed on agricultural land can greatly restrict agricultural use, devalue property, and threaten the economy of fragile rural communities; and

WHEREAS, many counties already contain large amounts of land that is under government control and further acquisitions will erode an already fragile tax base,

THEREFORE BE IT RESOLVED that Texas and Southwestern Cattle Raisers Association opposes laws and policies which encourage and provide for conservation easements.

To explain the legal jargon of conservation easements, members heard from attorneys Arthur Uhl, with Matthews and Branscomb, P.C., and Ryland Howard, with Oppenheimer, Blend, Harrison & Tate Inc., both of San Antonio.

Uhl defined a conservation easement as "a voluntary agreement between a landowner and a qualified organization which holds permanent restrictions on specified uses of the property exclusively for conservation purposes."

More simply, it's a set of restrictions placed on use of the land and is created either through donation, selling of the land or by granting it through a will.

Conservation easements are voluntary, Uhl noted, in that they are not mandated, but they are legally binding and permanent once executed and recorded in the public record. Most important, the attorney said, such an agreement is binding on future owners of the property, including heirs.

To trigger a tax benefit, the easement must be granted to a qualifying organization. He defined a qualifying organization as "a non-profit organization created for one or more of the conservation purposes authorized by federal statute, with not-for-profit status established under Internal Revenue Code or a land trust or a government agency which can hold real property interests."

The qualifying organization, for example a land trust, has to take certain legal responsibilities, Uhl told the group. These responsibilities include such things as establishing a baseline inventory of the easement area to assess physical condition and continued monitoring and reporting of the condition of the easement.

For federal tax purposes, to receive a tax benefit the easement must be established for one or more of the following reasons: the preservation of land for outdoor recreation or education for use by the public; for the protection of the natural habitat of fish, wildlife or plants; for the preservation of open space, including farmland, ranchland and forest land, and finally for the preservation of historically important land or a certified historic structure.

Under Texas law, for legal and property tax purposes, Uhl said, the restrictions must achieve one or more of the following purposes: to retain open space; to protect natural resources; to maintain or enhance air or water quality; and to preserve the historical, architectural, archaeological or cultural aspects of real property.

Some examples of common restrictions, he noted, are no subdivision or limited subdivision; no building or improvements or limited building or improvements; no surface mineral development; no diversion of water; no land clearing.

Among the benefits of a conservation easement, the attorney told listeners, is the fact that it may be used for a charitable deduction. The landowner, he explained, may deduct the value of his gift, which is the difference in the value of the property before the easement and the value of the property after the easement. Such a deduction is limited to 30 percent of the landowner's adjusted gross income per year, with a five-year carryforward. If the donation is limited to basis in property, the deduction limitation, Uhl said, increases to 50 percent of the AGI per year.

Landowners may also benefit from the use of easements through an estate tax valuation. That simply means that the value of the property is lowered to the value of the property with the easement in place.

Finally, if the easement is a "qualified conservation easement," the landowner can qualify for an estate tax exclusion equal to the lesser of 40 percent of the value of the land subject to the qualified conservation easement or $200,000 in 1999, increasing to $500,000 in 2002. In this case a qualified conservation easement, he explained, is one which is located within 25 miles of a metropolitan area or a national park or wilderness area or within 10 miles of an urban national forest.

The attorney also reiterated some of the burdens placed on landowners who use conservation easements. Some of the more recognized ones are limitations on land use; decreased marketability of property; monitoring and access by the easement holder; and access by the public if permitted.

When considering whether to donate, sell or buy a conservation easement, the attorney recommended a consultation with an estate planner an attorney and even an accountant to determine if such a plan fits in with the overall estate plan. A proper appraisal, he added, is a must.

For those considering a land trust, Uhl encouraged landowners to thoroughly interview the prospective recipients to determine if they meet your requirements. He also recommended that public access be denied. Finally, he said, the easement should be non-assignable.

Attorney Ryland Howard followed and reiterated many of the same points made by the first attorney.

"If a conservation easement fits your needs, then serious consideration should be given to it, but there are lots of things you have to think about," Howard warned.

He noted that in a traditional conservation easement, public access is not required.

"The only person that has access is the holder of the easement, who is supposed to monitor what’s going on," Howard remarked.

Another major consideration, the attorney said, is finding a way for a "friendly" group to hold the easement.

"You want someone who understands farming and ranching and how the land is used as opposed to someone from the city. Though they are good and well-meaning folks, they're not likely going to understand the needs of the people on the land who are using the land for productive use."

Like Uhl, Howard noted that there are some advantages but also some real disadvantages.

"A desire to keep land in the family and burdens of estate taxes, those are real motivations for an easement," he told Cattle Raisers members.

"The disadvantages are obvious," he continued. "Loss of future flexibility is one. These easements are perpetual, meaning you can’t turn around and subdivide it; you can’t turn the ranch into ranchettes. You can do a 1031 exchange, but once you put it into an easement, most of the value of your land is gone."

Other disadvantages, Howard said, are that no surface mining is allowed, and land with a conservation easement is often difficult to mortgage. Also, there are some up-front costs associated with easements, such as attorney fees, appraisals, surveys, title and ecological assessment. Sometimes, too, Howard said, a trust wants money set aside for enforcing the legality of an easement if heirs should contest it.

The attorney gave an example of dollars saved through the incorporation of such an easement. Using a "2032 special use valuation," a ranch worth $2.8 million in total assets gets a $770,000 deduction. Thus, he said, estate taxes that must be paid total $584,200. With a 40 percent easement assessment, that same estate pays only $146,800 in estate taxes, a savings of $437,400, he explained.

"Some might look at this as federal coercion: 'We’re going to take part of your land rights away and put it in the government’s pocket and you get a break in estate taxes that you didn’t want to pay in the first place,'" he remarked. "Make sure you understand this."

Howard further expounded on the logistics of land trusts, what they are and how they're used. In general, a land trust, he said, is a non-profit organization that protects land for its natural recreational, scenic, or productive value. A trust may be local, regional or national and it may own property outright or hold conservation easements in property owned by others, he said.

He related some experiences of trusts set up in other states. The Colorado Cattlemen's Agricultural Land Trust, initiated in 1995, was founded through and affiliated with the Colorado Cattlemen's Association, the nation's oldest state cattlemen's organization. A group of ranchers near Steamboat Springs initiated the idea to help preserve farms and ranches throughout the state.

The trust's mission is stated as: "To help Colorado's ranchers and farmers protect their agricultural lands and encourage continuing agricultural production for the benefit of themselves, their families and all of Colorado's citizens."

The board is made up of five Colorado Cattlemen's Assn. members. Those five board members in turn appoint the other three members.

It was decided from the beginning that the land trust had to raise its own money if it was going to acquire property. Thus far the trust has purchased 7850 acres; another 19,050 acres have been donated from 24 different ranches.

Another Colorado organization, Gunnison Ranchland Conservation Legacy, has preserved 3500 acres of ranchland in Gunnison County near Crested Butte.

California, Howard said, has also recently formed a similar kind of trust. California Rangeland Trust, established in 1988, was initiated by the California Cattlemen's Assn. All board members must be members of the cattlemen's association. Currently there are six conservation easements in progress. Landowners are proposing 140,000 acres for purchase of easement rights.

The Marin Agricultural Land Trust was founded in response to rapid development and resulting loss of farmlands in the area north of San Francisco. Founded in 1980, the trust has 26,600 acres protected through 40 different conservation easements. The state itself has contributed $17 million toward purchase of land for these easements. The board consists of 19 members, half of whom must be involved in agriculture.

He also mentioned the Michigan Farmland and Community Alliance formed by Michigan Farm Bureau in 1999 and funded by Farm Bureau and other donations, and the Lancaster (Pennsylvania) Farmland Trust formed in 1988 in response to a state farmland preservation program. Thirty percent of the farms in Lancaster County, Howard said, are owned by Amish people who receive no government funds.

This trust has 6500 acres protected through conservation easements. Most of the easements are small farms and generally 100 percent of the land on these farms is put into the easement. Thus far, 70 percent of the land has been purchased outright and another 30 percent donated.

Following comments by the two attorneys, the meeting was opened to discussion and several members spoke up.

Marathon rancher Ben Love made known his opinion of such conservation easements by paraphrasing a comment made by a speaker at another meeting with whom he shared the podium.

"I can use them (conservation easements) to greatly diminish or destroy the value of my land. That’s what you get the tax break for," Love told listeners. "You’re not getting the tax break because you’re doing something good and benevolent. You get it because you're diminishing the value of that land, not just for today, but forever. Your heirs will never have the opportunity to realize the full value of that land. That's the bottom line, and that's what we need to keep in mind when considering such an easement."

Clark Willingham, past president of the National Cattlemen's Beef Association, agreed with Love in part.

"It does diminish value, but the value that it's diminishing is the value of the condo or the shopping center," Willingham said. It doesn’t diminish the ag value. It protects the ag value. It can never be developed for anything other than ag use.

"There are already several small trusts in place in Texas," he continued. "I would rather have people I trust operating these easements, and for me the group that is most trustworthy in Texas is TSCRA. If it’s going to happen, shouldn’t we be the ones to control it?"

Ed Small, attorney with Jackson Walker LLP, Austin, and longtime legal counsel for TSCRA, told members that his concern regarding the resolution currently on the books leaves the organization little bargaining room legislatively.

"If TSCRA has a real strict policy on the books against conservation easements, then that eliminates people like me from being in the room during discussions and when policy is being formed," he explained.

"The bottom line is you don’t have to use a conservation easement if you don’t want to, but I think it’s to our advantage to have a little latitude in our policy," he concluded.

Small cited the example of Ira Yates, a Travis County rancher who has held his property together as a working ranch despite increasing pressure from developers. Yates recently signed a conservation easement.

"He got paid the full market value for his land," Small said. "He got to sell it and yet it's still a ranch, and he gets to pass the money on to his kids."

After a lengthy discussion, a straw vote was taken to determine if members wished to amend the current policy. The vote was 23 to 16 in favor of considering such an amendment. The matter will be addressed again at the group's annual convention in March.