By Joe Stephens and David B. Ottaway
Washington Post Staff Writers
Sunday, December 21, 2003
Mike Kahn, a Florida business consultant and former golf pro, advises celebrities and sports stars how they can save millions in taxes: Buy a golf course and prohibit building on the fairways.
"You make virtually risk-free easy money," Kahn's Web site says. He explained in one Internet posting how an investor paid $2.4 million for a golf course and reaped $4.8 million "in pure tax savings." Kahn will not identify the buyer but describes him as one of many who made big money -- and got to keep the golf course as well.
"People who do it generally keep it quiet," he explained in an interview. "It sounds like a money grab."
It is all possible, Kahn explains, through a common environmentalist's tool called a "conservation easement."
Easements are permanent deed restrictions that limit some types of intrusive development -- such as dense subdivisions or strip mines -- while often permitting limited construction. Landowners "donate" the easements to a nonprofit land trust or a government agency that, in effect, certifies that the restrictions are meaningful and provide some public benefit, such as preserving open space or protecting wildlife. That allows the donor to seek federal income tax deductions for the reduction in the land's market value.
By taking such steps to limit construction, the owners of vacation resorts, country manors and dude ranches can seek big write-offs, too. Pennsylvania developer Kenneth C. Hellings says he restricted building on "unusable" portions of his new subdivision and took "a shocker" of a tax deduction. Luxury-home builders in North Carolina paid $10 million for a tract in the mountains, developed a third of the land, then claimed a $20 million deduction. Such tax bonanzas have become a little-noticed byproduct of the maturing environmental movement, which increasingly entwines preservation of land with preservation of wealth.
Without question, conservation easements have done much good. Conservationists credit them with making preservation the fastest-growing arm of the environmental movement, fueling a boom in land conservation and helping to protect more than 6 million acres nationwide. Easements have helped safeguard fragile ecosystems, critical watersheds, land bordering national parks and some of the nation's most stunning vistas.
"There is an enormous amount of good that has been done," said Rand Wentworth, president of the Washington-based Land Trust Alliance. "Ninety-nine percent of these transactions are good, solid conservation."
But as easements have proliferated, so have problems and abuses.
The Senate Finance Committee earlier this year opened a wide-ranging inquiry into easement practices at the Nature Conservancy, the world's largest environmental group. The committee's investigation followed a Washington Post series that revealed the Conservancy had repeatedly bought scenic properties, added development restrictions, then resold the land at reduced prices to Conservancy trustees and supporters. The buyers, some of whom retained the right to build houses on the land, in turn gave the Conservancy cash donations that supplied them with hefty tax write-offs. After the series, the Conservancy board banned such sales.
Now conservationists are wrestling with other ethical concerns about easements.
Stephen J. Small, a leading easement consultant and former IRS attorney, warned that "some things are starting to get out of hand" in an address delivered at a conservationists' gathering earlier this year in Sacramento.
"We are getting calls from people who are totally misinformed about conservation easements and the potential tax benefits," Small said. "Lawyers and accountants and promoters and investors are giving them bad information, telling them they can do this or that and claim a big deduction, and there aren't enough people out there telling them they can't."
Conservation easements have been around for decades but only gained prominence after 1976, when Congress made them tax-deductible. Today, easements are held by a host of government agencies, national environmental groups such as the Conservancy and about 1,260 local land trusts -- nonprofit corporations devoted to conservation.
Those trusts often operate behind closed doors as they decide which tracts to protect -- and therefore which landowners get the tax breaks. The trusts also decide how much building can be done. The benefits often go to the wealthy, and routinely to board members and staff at the land trusts. And although the development restrictions are publicly described as lasting "in perpetuity," conservationists privately fret over whether this is true, partly because easements continue to face court challenges.
Enforcement is also a problem. Surveys of land trusts around the nation, often conducted by the land trusts themselves, show that hundreds -- perhaps thousands -- of easements have been violated or altered at the request of landowners. Many of the owners have already pocketed the tax savings generated by the easement. Many easements explicitly allow additional development if the land trust approves.
Meanwhile, companies and individuals claiming huge write-offs face little risk of audit. In the past two fiscal years, an IRS program aimed at identifying inflated deductions taken for easements and other non-cash gifts to charities produced thousands of leads but, because of competing priorities at the agency, did not produce a single audit, according to the General Accounting Office.
"It's complete smoke and mirrors," said John Echeverria, a former general counsel of the National Audubon Society. "Donations of conservation easements generally do not really give any value away."
Echeverria, who now directs the Georgetown Environmental Law and Policy Institute, instead favors preserving land through more time-tested processes, such as restrictive zoning and the issuance of building permits. Easements, he says, have "the potential to undermine the cause of environmental protection itself."
Fearful of damaging the land-trust movement, many conservationists are reluctant to broadcast the flaws in easements. They ruminate instead on easement shortcomings in the dry text of academic studies and legal journals.
An April 2000 survey of 18 New England land trusts and easement-holding public agencies, for example, found that 14 acknowledged that they had discovered one or more easement violations. Most said they had agreed to alter restrictions in one or more existing easements. Another study, in 1999, discovered that almost half of the protected tracts examined in the San Francisco area were not regularly monitored to make sure the restrictions were being followed.
"Failure to adequately monitor easements results in the public paying for nonexistent benefits," stated the report, by the Bay Area Open Space Council. A third study concluded bluntly: "There are serious threats to the use of easements."
Some tax specialists say deductions generated by easement donations increasingly are attracting the attention of affluent families seeking tax shelters.
Small, the conservation lawyer, estimated in a recent land-trust newsletter that a third of his potential clients "think they can get away with something by donating a conservation easement." Some developers argue that land separating homes in subdivisions qualifies for tax breaks; others produce land appraisals that appear wildly exaggerated. Although Small turns such clients away, he believes that an increasing number of abusive deals are quietly being made, sometimes facilitated by nonprofits with questionable credentials -- what are known as "rogue land trusts."
Small reserves particular scorn for developers who donate easements on golf courses, then seek tax breaks for preserving open space. All but a few such easements, he said, are on their face "ridiculous."
He wrote in a recent e-mail to other conservationists, "This is a very, very bad direction the land trust business is going in and we need to stop it."
How It Works
Conservation easements generally work this way:
Landowners amend their deeds to permanently restrict some types of intrusive development -- such as shopping malls or hotels -- while often continuing to allow construction of homes or other limited improvements. The owner then finds a nonprofit land trust or a government agency willing to take the easement as a gift.
By accepting the gift, the land trust in effect certifies that the restrictions are meaningful and benefit the public. That allows the donor to seek federal income tax deductions and, in some cases, reductions in federal estate taxes and local property taxes. In many communities, the land trust becomes the sole entity responsible for monitoring the site and suing if violations are uncovered.
Easement donors can seek tax deductions for any loss of property value caused by the restrictions. That value is generally established by appraisers hired by the donor. Propelled by such savings, conservation easements held by the local land trusts have grown more than fivefold nationwide since 1990, to an estimated 12,000 today. Local land trusts hold easements totaling 2.6 million acres, more than double the land they own outright.
There are no reliable figures on the total value of the conservation tax breaks. But legislation to expand allowable deductions that passed the Senate this year would sacrifice more than $1 billion in additional tax revenue over the next decade, according to the Senate Finance Committee.
Unlike restrictive zoning, which is customarily established by public bodies working with land-use experts, easement restrictions often are initiated by individual landowners. The deals are made with private nonprofit corporations that may be simply a handful of local residents. Filed at the courthouse as deed amendments, the easements usually go unnoticed.
A recent survey by the Land Trust Alliance, a national trade association for conservation organizations, found that half of all trusts are run entirely by volunteers. Half have annual budgets of less than $27,000.
Such organizations decide which tracts to preserve and who will pocket the tax savings "with no public input whatsoever," Echeverria wrote in a recent analysis. He describes the process as "a gross fraud on the U.S. taxpayer."
Land trusts say easement donations have helped many cash-poor families retain farms and ranches they otherwise might have sold to developers. But some of the biggest and best-known easements have been linked to major corporations and some of the nation's richest individuals, from Ted Turner and David Letterman to the Rockefellers and DuPonts.
University of Utah law professor Nancy A. McLaughlin, writing in a recent issue of the Idaho Law Review, described the use of tax incentives as "upside-down."
"It provides upper-income donors with disproportionately greater tax savings than middle and lower-income donors," she wrote.
To be sure, McLaughlin and many other environmentalists -- including those pushing for reform -- support easements and say they have done much good. While acknowledging a small but significant number of abuses and legal uncertainties, the proponents say most easements have never been violated. They add that although easements occasionally are amended, the environment rarely has been harmed and that amendments often increase conservation values. Most donors give out of a desire to protect land they cherish, and most ultimately lose money on the transactions, proponents say.
"Most in the land-trust community meet their ethical responsibilities, and well," Vermont Land Trust president Darby Bradley said in an October address to other preservationists meeting in California. Bradley nonetheless called for improvements, saying, "We must do better."
There are mounting concerns about the size of the tax deductions that donors claim, based on the assumption that easements lower property values. Some academic researchers believe easements can increase property values by making neighborhoods more exclusive and scenic, with less density. Real estate ads sometimes tout easements as a selling point.
"Landowners may well be receiving double compensation," according to a recent analysis by Purdue University professor Leigh Raymond and University of California at Berkeley professor Sally K. Fairfax, writing in Natural Resources Journal.
Donors can pocket the tax breaks, then profit as well from the appreciation of their new, trophy-home sites. The authors described that possibility as "troubling, to say the least, given the involvement of public funds in financing their original transactions."
In the Great Smoky Mountains near Asheville, N.C., investors two years ago bought 4,400 acres, placed an easement on 3,000 acres and then began developing 350 home sites and an 18-hole golf course on the remaining property. A master plan for the development, called the Balsam Mountain Preserve, shows that the easement area is broken up by the fairways and home sites, which spot the land like mushrooms on a pizza.
Investors paid about $10 million for the land and shared in a tax write-off "in the $20 million range," said James A. Anthony, a partner in the South Carolina development firm of Chaffin/Light Associates. The 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, Anthony said.
Far from a liability, the easement has become a marketing tool. Sales literature describes the subdivision as "a community within a park" and the undeveloped portions as maintained "for the quiet enjoyment of members."
Anthony said: "It does add value to the remaining land. Kind of like a limited-edition print -- the fewer you have, the more the value."
Appraisers factored any appreciation into their calculations of the tax benefit due the investors, Anthony said. The firm is considering placing an easement directly on the golf course once it is completed, he added.
Broad data about the reliability of claimed deductions are scarce. But a 1984 IRS study examined 42 deductions for easement donations and determined that all but one appeared inflated, resulting in overvaluations totaling nearly $32 million.
According to a GAO report on the study, "The taxpayers generally overvalued their conservation easement deductions by an average of about 220 percent."
Setting values continues to prove nettlesome. In the case of Brandon Park, the personal retreat of chemical heiress Wilhelmina duPont Ross, New York state officials and federal officials came to different conclusions.
Visitors to the family estate in the Adirondack Mountains pull up at a gated and guarded entrance. The road then winds through a 27,000-acre private forest dotted with nine ponds and traversed by 10 miles of the St. Regis River. The grounds feature at least 16 homes, cabins and other buildings, linked by more than 60 miles of roads and trails, court records show.
In 1978, Ross gave the Nature Conservancy an easement restricting commercial development on the remote site and requiring that it remain forever a "natural and scenic area." Backed by an appraisal, she claimed that the restrictions slashed the property's market value by 44 percent. That qualified her for a federal income tax break of more than $1 million -- $2.5 million in today's dollars.
Two decades later, during a local property tax dispute, a panel of state judges pointed out that Ross had retained the right to build 10 additional homes, mine gravel pits, drill for oil, cut trees, subdivide the land and expel the public. They pointed out that local governments already heavily regulated development of the estate, meaning that Ross actually had "parted with very little" when she donated her easement.
"Any further development of the land was unlikely, even if the land was not subject to the conservation easement," the court ruled in 1999, rejecting requests to slash her property taxes.
Ross died in 2000. Her lawyer, H. Dean Heberlig Jr., explained that, unlike New York officials, federal authorities factor in a property's potential future value when establishing tax breaks. The IRS initially challenged the deduction, he said, but ultimately agreed that $1 million "was an appropriate deduction."
The IRS said it could not comment publicly on an individual tax case. A Conservancy spokesman said his group strongly believes easement donors give up "real value."
Preservationists laud the grass-roots nature of the easements: Decision-making devolves into the hands of private groups that know their community best. But that approach also makes the easements difficult to track and police.
Raymond and Fairfax describe conservation easements in general as protecting a patchwork of partially developed tracts, using restrictions largely designed by the landowners to meet their own needs.
"Conserved land thus comes under protection because it is available to a land trust, not necessarily because it is an appropriate parcel to conserve," they wrote in their analysis. "The land owner, rather than the trust, drives the process. Moreover, during negotiations private landowners . . . generally define the nature of the protection on the land to suit their own priorities."
Small, who wrote the federal income tax regulations on conservation-easement donations while working for the IRS in the 1980s, says that at the time he and his colleagues expected land trusts to reject abusive transactions and police the process. Regulators thought that charities would turn away easements that allowed too much building or were designed solely to benefit the wealthy, he said.
Today, however, organizations often are responsible for policing restrictions on property owned by their own officers, directors and donors. On an Internet discussion list, land-trust officials from across the country recently spoke out fervently in defense of employees and board members who donate easements to their own nonprofits.
Tom Bailey, executive director of Michigan's Little Traverse Conservancy, wrote on Oct. 9 that land trusts should "make every effort" to persuade insiders to donate.
"I certainly hope that a board member's having an easement on their land would not be considered a conflict!" Bailey wrote. "Or a staff member either. . . .
"Certainly when enforcement issues are involved, the board member would be required to abstain from discussion or decisions on the case. But let's not get carried away with this conflict stuff."
The Medina Summit Land Conservancy of Ohio holds easements on four properties owned by its trustees and two more deals with trustees are in the works, said its executive director, Chris Bunch. The North Branch Land Trust of Trucksville, Pa., is in charge of enforcing easements on farms owned by its president and its board secretary, who say they received tax deductions exceeding $300,000.
The secretary, Ed Zygmunt, said, "I personally don't see any conflict of interest."
Increase in Problems
Studies funded by land trusts show monitoring and enforcement problems are widespread and growing worse.
The 1999 survey of San Francisco-area easement holders, for example, found that only half of the preserved tracts in the region were regularly monitored by the nonprofit or government agency holding the easement. Many of the existing monitoring programs were inadequate, the survey said. And even that monitoring discovered violations at 14 percent of the sites.
"Problems are more likely to occur with second-generation landowners," added the report, by the Bay Area Open Space Council, a regional group of land trusts and conservation agencies. "Further changes of ownership in the future should be expected to increase the number of violations."
Nearly a third of the organizations surveyed had no list of the easements they held, and some failed to record the original condition of the restricted properties.
"Years may go by without any documentation on the easement," the study said. "Without proper, timely, and consistent monitoring, easements are difficult to defend legally, and violations become practically impossible to remedy."
Many of the nonprofits also could not afford to defend an easement in court if necessary, the report concluded.
One California environmental group, Defense of Place, used data from the study to estimate that easement violations nationwide exceed 2,700. The group's director, Jason Kibbey, warned: "If you just let conservation easements unravel over the next 20 years, the movement is over."
Government agencies, which also hold thousands of easements, have their own problems. Conservationist Edmund Stiles found that his home of Hopewell Township, N.J., holds more than 400 easements, 103 of them stuffed into a box in the township hall basement. He visited a few dozen and found that 80 percent of the easements had been violated. Most were minor, he said, but in one case, a bridge had been built on the protected land.
"Governments don't like enforcing easements," Stiles said. "It's a difficult thing politically."
Hopewell zoning officer Robert Miller said the township has no one to monitor easements, so it depends on residents to report suspected violations. That happens about once a week, he said.
A voluntary survey of New England conservation groups and public agencies by the Land Trust Alliance in 2000 found that a third kept no records on inspections of land protected by easements.
Of 18 organizations participating, 11 admitted to having amended one or more easements already on file at the courthouse. Many of the easements reviewed during the survey were poorly written, making them difficult or impossible to defend in court, the report said.
An Alliance study in 1999 identified 498 easement violations nationwide, but its report struck a positive stance. It called 383 of the violations "minor." The 115 "major" violations included 32 cases of surface alteration, 28 of vegetation cutting and 18 of logging. In 25 cases, "prohibited/unauthorized" structures were built.
The report stressed that 93 percent of easements in the study appeared to have avoided violations.
Statistics show that more than half of all new nonprofits fail in their first decade. Over time, there may be no one to enforce many easements. And even when a land trust survives and has ample financing, it faces murky laws, according to a 1998 survey commissioned by the INNW Fund, a California preservation foundation. Some survey participants noted that easements are still relatively untested, and "not enough time has passed to determine whether they will hold up legally in perpetuity, as intended."
In a broader sense, some lawyers and environmentalists question whether it is wise for today's conservationists to impose their will on the future. Ecologists may one day determine that farmers do more damage than housing developments, they argue, or decide that conservation efforts would be more effective elsewhere.
University of Virginia professor Julia D. Mahoney, writing last year in the school's law review, described the easements as foolhardy. "We lack the technical competence to make land-use decisions for future generations," Mahoney wrote.
Hellings, the Philadelphia developer, said he has not spent much time weighing the philosophical implications. He has been busy building.
A few years ago, Hellings rolled bulldozers onto a historic 450-acre Chester County, Pa., farm and transformed it into an upscale commuters' subdivision, featuring 163 home sites on 100 acres surrounding an 18-hole golf course. Only after the plan was complete, Hellings said, did his lawyers hit on a way to capitalize on a leftover flood plain and some steep hillsides, a scattered jumble of land that Hellings describes as 131 "unusable acres."
Using guidance from a local land trust, Hellings's lawyers wrote an easement covering a dozen islands of protected land, one as small as six-tenths of an acre. Then they placed a second easement directly on 220 acres of the golf course, including the fairways, bunkers and putting greens.
The easements were accepted by the Brandywine Conservancy, a well-established Pennsylvania land trust. A Brandywine spokesman said the easements helped to protect sensitive natural resources, including water quality, and ensured that the golf course would remain "permanent open space, forever."
The easements mandate that the preserved areas "shall not unreasonably interfere with the business operations" and they authorize mowing part of the 131 acres for "temporary overflow parking." The open space boosts land prices, Hellings said, and has become a valuable sales tool.
Hellings would not say how much his tax break, calculated with the help of an appraiser, totaled. He described the final figure as "a shocker."
"It is nice to have when tax time comes," he said with a smile. "It was a bonus."
That bonus came as a surprise to West Bradford Township Manager Jack Hines Jr., who pointed out that under township ordinances Hellings would have had to dedicate at least 60 percent of his development to open space, anyway.
"I don't know how you could take a tax write-off for that," Hines said. "He shouldn't have gotten anything."
Researcher Alice Crites contributed to this report.