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November 09, 2023

Conservation Easements for Biodiversity and Happy Clients

Michael A. Powell

On January 27, 2021, President Joseph Biden issued an executive order to set a goal of conserving 30 percent of U.S. land and waters by the year 2030. Exec. Order No. 14,008, 86 Fed. Reg. 7619 (Jan. 27, 2021). This order, called the 30×30 Initiative, is part of a global effort to ensure adequate climate resiliency, protect biodiversity, and ensure that communities have the resources necessary to adapt to the changing conditions caused by the warming of the Earth’s atmosphere. 30×30 was subsequently adopted as a key plank of the Kunming-Montreal Global Biodiversity Framework by the United Nations’ COP15 Biodiversity conference in 2022. Helen Briggs, COP15: Nations Reach “Historic” Deal to Protect Nature, BBC News (Dec. 19, 2022). Completing 30×30 will require numerous conservation approaches; the Biden administration has already undertaken a number of traditional approaches, such as expanding national monuments and wildlife refuges to protect areas that are both naturally and culturally significant, including Castner Range National Monument in El Paso, Texas, created in 2023.

However, private land conservation will also be necessary to achieve the ambitious 30 percent threshold for land area conserved. At present, only 12 percent of U.S. lands and 26 percent of U.S. waters are conserved, and more than 70 percent of U.S. lands are in private hands. Sarah Gibbens, The U.S. Commits to Tripling Its Protected Lands. Here’s How It Could Be Done, Nat’l Geographic, Jan. 28, 2021. Given their permanence and relatively low cost, conservation easements are likely to be a centerpiece of these efforts. Developing a working understanding of conservation easements as well as new and innovative approaches to drafting and implementation will be a necessity for practitioners in the areas of estate planning, real estate, and environmental law.

Conservation Easement Skepticism

Conservation easements run counter to many of the traditional principles of property law. They are a statutory, policy exception to the Rule Against Perpetuities, but perhaps more significantly, they run against the principle of maintaining value and flexibility in our clients’ real property holdings. Conservation easements reduce the value of the land to which they are applied; this characteristic is the basis of the federal tax incentive for landowners who agree to conservation easements. I.R.C. § 170(f)(11)(C). This devaluation is attributable to the easement’s restrictions on future use of the land. Many attorneys are reluctant to encourage their clients in a course of action that devalues an asset and restricts future flexibility.

However, understanding conservation easements as a devaluation of assets oversimplifies the matter. By tying the value of the tax deduction to the reduction in appraised land value, the conservation tax incentive offers landowners the opportunity to access a portion of the value of their land. That value—otherwise inaccessible without a change in ownership—must be determined by an appraiser trained in conservation easement methods. The appraisal subtracts the restricted fair market value of the property from its unrestricted value, isolating the value of the interest itself. IRS, Conservation Easement Audit Techniques Guide 43–44 (Jan. 24, 2018) [hereinafter IRS, Conservation Easement Guide]. With thoughtful tax planning, the easement tax deduction can allow a landowner to offset the tax burdens of planned windfalls, retirement plan withdrawals, and other tax bombs. Alternatively, it might simply provide a stable, long-term reduction of a landowner’s tax burden. Many landowners consider conservation easements as part of an estate planning process; the value of the land is often a sizable portion of the value of their estate. An easement reduces that value, which can be helpful to reduce estate or capital gains taxes. It is indisputable that the value of a conserved property decreases. However, that value does not evaporate; it is available to landowners.

Many clients also derive distinct nonfinancial benefits from the creation of a conservation easement. Landowners invest considerable time, energy, and resources into their property over years of ownership—in some cases, over generations—and the value of preserving that investment for the future may not be captured by an appraisal. Devaluation of the land can even provide a direct benefit to landowners concerned that their heirs may be forced to sell the land to cope with rising real estate prices or exorbitant tax bills. In short, understanding the prospective value of a conservation easement to a client may require us to look beyond a basic balance sheet.

In addition, while a conservation easement restricts a landowner’s options in managing and enjoying their land, it offers in exchange an otherwise unavailable level of control over the future. Not only can a conservation easement ensure that future landowners are unable to damage a property’s natural resource values, but the presence of an easement can also be a tool for selecting future landowners because the easement may dissuade destructive users from purchasing the property. By contrast, prospective landowners who want natural resource amenities for aesthetics, hunting, farming, fishing, hiking, or forestry may actively seek an easement-protected property for purchase.

Some skepticism regarding conservation easements derives from simple misunderstandings. In my decade of work with land trusts, I have encountered landowners and advisors who incorrectly believed that conservation easements conferred a right of public access to their property. Others were concerned that a conservation easement would preclude hunting, farming, or harvesting timber on the property. The reality is that conservation easements are incredibly versatile tools. Public access is a possible component of an easement, but the Internal Revenue Code requires such access only if the property’s conservation purposes necessitate it. Treas. Reg. § 1.170A-14(d). Active use of the land is not only possible for conserved properties but is often a necessity.

A recent spate of litigation and regulation by the Internal Revenue Service (IRS) also drives some practitioner skepticism. This is understandable—a legal or tax advisor whose client lands in tax court is an advisor whose life becomes considerably more difficult and complicated. This pattern of increasing litigation was largely in response to abuse of the conservation easement deduction through fraudulent syndicated transactions. Peter Elkind, The Tax Scam That Won’t Die, ProPublica, June 17, 2022. These tax shelter schemes use fraudulent appraisals to generate outrageously inflated conservation easement values to pass tax deductions on to investors. Unfortunately, litigating appraisals is time-consuming, expensive, and prone to getting bogged down in dueling expert opinions, and so the IRS sought alternative approaches to curb the abusive practices, even where those approaches led to litigation against good faith landowners—as in the recent case of Hewitt v. Commissioner. 21 F.4th 1336 (11th Cir. 2021). This type of IRS effort—challenging legitimate conservation easements as well as abusive ones—created a powerful reason for practitioners—and, consequently, their clients—to be skeptical of conservation easements.

The costs of this skepticism are considerable. Legal practitioners all over the country caution their clients about the litigation risks associated with the easement deduction, and many of those landowners decide not to proceed with the easement. Some professional firms have even begun categorically prohibiting their associates from working on conservation easement transactions. However, landowners who are committed to conservation easements generally complete them despite advisor skepticism, and are often forced to find new advisors to work with them on the process.

Landowners who are committed to conservation easements generally complete them despite advisor skepticism, and are often forced to find new advisors to work with them on the process.

The good news is that President Biden signed the Charitable Conservation Easement Program Integrity Act into law in December 2022, reducing the opportunities for abuse of conservation easements and simplifying the deduction process. Land Trust All., Important Advisory: Charitable Conservation Easement Program Integrity Act Advisory, 2023. This act disallows inflated, fraudulent appraisals that form the basis of an abusive, syndicated transaction, curbing the use of easements as tax shelters. The act also provides a means for effectively addressing conservation easement abuses without resorting to appraisal litigation. Deductions that exceed 2.5 times all owners’ aggregated basis in the land are categorically excluded unless the property is family-owned or has been under the claimant’s ownership for more than three years. An easement valuation of $3 million on a property purchased two years prior for $1 million would be excluded, unless the property is owned by a family partnership. A $3 million easement valuation is also permissible when the property has been in its current owners’ hands for at least three years; for example, it would not be surprising for a property purchased in 1970 to have increased in value by an order of magnitude in 2023. With these bright-line, easily enforceable rules, the IRS has little incentive to continue hunting new ways to disallow syndicated easement deductions, opening the doors to the increased use of easements that the 30×30 Initiative will require.

Navigating the Easement Process

Conservation easement law is idiosyncratic and complex; many practitioners will have only limited opportunities to work on conservation easement issues. Regardless of the depth of a practitioner’s conservation easement practice, a working understanding of the future of conservation easement law will help all attorneys advise their conservation-minded landowners on this useful and unique tool as an option to achieve their goals. No tool in the real estate toolbox offers the combination of flexibility and perpetual stability as a conservation easement with a highly qualified land trust.

Finding a highly qualified land trust—or another qualified holder—for the conservation easement is perhaps the most important step for protecting clients’ interests during negotiations and the stewardship phases of conservation easement implementation. The definition of conservation easement holder is generally quite broad but varies by jurisdiction. In Missouri, it includes virtually any government agency, nonprofit organizations, and private individuals. Mo. Rev. Stat. § 442.014.2(2). The IRS standards are more stringent, requiring a governmental unit or public charity that meets the public support test of I.R.C. § 170(b)(1)(A)(vi) or section 509(a)(2), and demonstrates the commitment and resources necessary to steward the easement. IRS, Conservation Easement Guide, supra, at 14–15.

No tool in the real estate toolbox offers the combination of flexibility and perpetual stability as a conservation easement with a highly qualified land trust.

An excellent land trust or other well-qualified easement holder can ensure that the transaction meets the obscure and sometimes counterintuitive standards and precedents for the tax deduction, as laid out in the Standards and Practices promulgated by the Land Trust Alliance and the Land Trust Accreditation Commission. A qualified easement holder can also provide knowledgeable guidance on protecting the property’s conservation values and promoting the long-term benefits of the easement. For assistance finding qualified land trust partners, practitioners can refer to the Land Trust Alliance, a national coalition of conservation land trusts that compiles best standards and practices for the sector and maintains a database of member land trusts that is searchable by geography, making it easy to find a local, qualified organization, and the Land Trust Accreditation Commission, which accredits organizations that adhere to the highest standards of conduct in the land trust sector.

The next stage of the process should be relatively familiar to any attorney with real estate experience: due diligence. During typical due diligence, the attorney will spend several months documenting the condition of the property, identifying the natural resources that the easement will protect, and discussing the landowner’s intentions for both the easement and the land itself. A title search will be conducted, and a Baseline Documentation Report will be prepared as a record of the condition of the property at the time the easement was created. Most importantly, this is the stage where the landowner and the easement holder will negotiate the easement instrument.

Historically, conservation easements have focused on negative clauses and broadly restrictive language to protect the natural resource values of conserved properties. The reasons for this approach are both philosophical and practical. The idea of setting aside land, apart from human influence, to preserve its natural state, is how the American environmental movement has largely defined itself, focusing on the ideal of wilderness preservation. Yrjö Haila, “Wilderness” and the Multiple Layers of Environmental Thought, 3 Env’t & Hist. 129 (1997). Conservation easements and land trusts grew from that movement, and often operate along the same lines. Additionally, bright-line prohibitions are simple and inexpensive to enforce; it is much easier for a land trust to assess whether prohibited logging has occurred than it is to ensure that an active logging operation is being conducted in a sustainable fashion. The savings in monitoring and enforcement costs are considerable, and land trusts sensibly tend to err on the side of enforceability in drafting.

However, the constraints that the prohibitive provisions approach imposes can limit the conservation value of an easement and can lead to a contentious holder-landowner relationship where cooperation would be more beneficial. To address these shortfalls, land trusts are exploring affirmative language in conservation easements that requires active effort, rather than simple prohibitions. Perhaps the most broadly understood affirmative conservation easement language is the maintenance of public access, but the possibilities are much broader and offer considerable benefit, particularly in the protection of biodiversity.

This distinctly nonlegal term bears defining. Biodiversity refers to the number and variety of organisms in a given area or ecosystem. The costs of biodiversity loss are considerable; it can undermine the complex systems that comprise ecosystems, leave area populations at heightened risk of disruption, and drive organisms to extinction that may have possessed useful characteristics for both ecology and human use. Consider the Great Famine of Ireland; the few species of potato that were imported to Ireland were all vulnerable to the blight that caused the famine. Greater biodiversity among the potatoes grown for human consumption would have averted incredible human suffering, a lesson that we would be wise to heed in an era of ubiquitous monoculture. Evan D.G. Fraser, Social Vulnerability and Ecological Fragility: Building Bridges Between Social and Natural Sciences Using the Irish Potato Famine as a Case Study, 7 Conserv. Ecol. no. 2, 2003, art. 9.

There are a few downsides to this approach. The first is uncertainty; there has been relatively little litigation on this type of language in conservation easements. There is little precedent on its enforceability, and what precedent does exist focuses primarily on limited areas such as public access and agricultural activities. Agricultural easements use language that requires specific practices—organic agriculture, for example—or that requires active cultivation of the property for agricultural purposes, to discourage landowners from keeping agricultural land out of production. Natural resource–focused easements generally do not include language requiring any kind of activity.

Second, the added complexities of enforcing affirmative language could lead to higher costs for land trusts and other holders. Generally, land trusts cover the cost of stewarding conservation easements through a combination of donated funds, revenue-generating endowments (often funded by landowners), and specialized enforcement insurance. This insurance does not currently cover the enforcement of affirmative easement requirements, and so land trusts will have to fund such enforcement costs through other means. Some or all of these costs could be passed along to landowners.

Ecology and the Practice of Law

Adopting an affirmative approach to nonagricultural easements offers considerable opportunity. For a start, the protection of biodiversity in many habitats is only possible with active management. The proliferation of species outside their historical range presents one problem; an influx of honeysuckle or some other prolific woody bush can overrun slower-growing species that are integral to local ecosystems. Preventing this problem requires that species outside their historical range be managed carefully and actively.

Some ecosystems quite simply require hands-on management to maintain their complexity. Many North American landscapes are dependent on fire or other transient disruptions for a variety of natural processes; in the absence of regular burns, many species are unable to maintain their populations. While fire itself may not be required—the effect can be replicated to some extent with grazing practices—these ecosystems cannot be simply set aside; maintaining them in the modern context requires proactive management.

Additionally, proactive management can convey climate resiliency benefits. Particular ecosystems, especially wetlands, provide stormwater management and, consequently, flood mitigation. Constructing, restoring, and maintaining the function of these wetlands may require active management; for example, traditional prohibitive language is likely to fall short in its ability to improve stormwater management on private properties. Even intensively cultivated farmland can achieve considerable stormwater benefit through easement-mandated management practices—cover cropping and no-till cultivation increase the permeability of soil, allowing farmland to absorb stormwater that would have otherwise run off into waterways. As added bonuses, these cultivation methods also improve soil productivity and reduce farmers’ reliance on costly fertilizers and additives.

Affirmative easement language can also provide an opportunity to address climate change directly. Landscape capture and sequestration of atmospheric carbon are key strategies for ameliorating the effects of anthropogenic carbon emissions on the climate. The cultivation of wooded or grassland ecosystems can sequester enormous volumes of carbon in the soil, but this landscape improvement will often require active management that a conservation easement can require or promote.

The protection of biodiversity in many habitats is only possible with active management.

Ecology is generally not discussed in law school classes or continuing legal education programs, and so legal practitioners may be at a loss negotiating language that requires active management of a property’s natural resources. To address this understandable lack of background, attorneys should consider the wealth of wildlife and other natural resource professionals available to consult on easement language. Land trusts and other holders generally include individuals with environmental expertise. To maximize clients’ interests, attorneys should proactively seek out conservation professionals who can help develop a plan for the management of potentially conserved property. While attorneys may be understandably reluctant to wade into unfamiliar conceptual waters, ecological advisors are as available as tax professionals to practitioners. With such help, conservation easements are an opportunity to accomplish enormous public good while benefiting conservation-minded clients both ethically and financially.

Good Partners, Happy Clients

Landowners also benefit from a proactive approach to conservation easement drafting. Affirmative language necessitates a cooperative relationship with the easement holder. Prohibitive easement language often casts the land trust as a simple enforcer arriving on the scene once a year to ensure that the commandments have not been violated. However, by necessity and nature, these organizations develop extensive networks of individuals with expertise in the management of all sorts of landscapes. Easements with affirmative goals and requirements allow landowners to access land trusts’ considerable resources and expertise to achieve biodiversity and other goals.

Working cooperatively with landowners to manage their properties is not necessarily the traditional approach; however, it is one that many land trusts are beginning to pursue. At least one land trust, focused on grasslands conservation, is developing a cost-share program to offset the costs of effective prairie management for easement landowners. Land trusts also often possess groups of dedicated volunteers, ranging from neighborhood residents to students, academics, and highly qualified ecological experts, ready and willing to get their hands dirty for all manner of management activities; these volunteers may be a valuable source of short-term labor assistance to conservation easement landowners. These resources are a potential windfall for any landowner seeking assistance with land management.

Practitioners who seek advice from qualified tax and ecological professionals, who relax their adversarial instincts and build a cooperative relationship with a holder, and who manage risk while embracing new opportunities, will have very happy clients.

While well-advised landowners can already benefit from the proliferation of conservation easements as an environmental strategy, practitioners should recognize that up-front diligence can lead to long-term benefits. Cost-conscious landowners may be inclined to cut corners in the easement development process, but those cuts can undermine the long-term viability and economic benefits of the easement. A well-crafted easement—even if the up-front cost of crafting it is higher than the landowner might prefer—is a sound investment in a client’s future financial interests.

Similarly, a landowner might be tempted to donate their easement to a less qualified holder—the country church down the road that will simply accept the easement without any interest in appurtenant costs. Unqualified holders are perhaps the most reliable way to attract IRS attention. The cost of working with a highly qualified land trust is discouraging, but far less damaging than litigation because the holder failed to meet regulatory standards. The demand for easements with qualified land trusts and the queue to use them are growing rapidly, but paying more or waiting longer is well worth the effort in terms of long-run risk management.

A sound approach to developing a conservation easement—as well as the Biden administration’s conservation priorities and the recently enacted Charitable Conservation Easement Program Integrity Act—minimizes the risk of regulatory action and is key to the use of conservation easements as a viable real estate and estate planning strategy. Practitioners who seek advice from qualified tax and ecological professionals, who relax their adversarial instincts and build a cooperative relationship with a holder, and who manage risk while embracing new opportunities will have very happy clients. For many landowners, the family farm is not only their single biggest asset, but also a deep-seated part of their identity. The same is true for all of us—we depend profoundly on the land we inhabit. The National Conservation Easement Database reports that more than 800,000 acres of land have been preserved by easement since 2021; while this is admirable, it is a fraction of the 272 million acres needed to achieve the 30×30 Initiative’s goals. We have work to do.

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Michael A. Powell

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Mr. Powell is an attorney and PhD student in political science at the Truman School of Government and Public Affairs, University of Missouri. He is the former executive director of Greenbelt Land Trust of Mid-Missouri and may be reached at [email protected].