Conservation easement considerations

by Cat Urbigkit

As Sublette County considers the idea of developing a program to use county tax revenue to purchase development rights from ranchers, the Examiner continues to provide its readers with information on the issue.

The following is an excerpt from "What land owners should know when considering conservation easements," an extension bulletin out of Routt County, Colo., that details items landowners should keep in mind when considering protecting agricultural land with a conservation easement.

• Consider landscape impact: A conservation easement (CE) affects your land and neighboring landscapes. Protecting your agricultural land may influence surrounding development and land values, which in turn may affect your agricultural values, particularly if your agricultural neighbors do not also enter into easements or your community does not establish agricultural districts. Producers have experienced mixed results. Most find that their land does not depreciate as much as the easement value would suggest. Still other producers have been very frustrated because they could only use the land for farming or ranching, but cities grew around them, making it difficult to conduct agricultural activities or to sell their land and move somewhere else.

• Dependence on agricultural infrastructure: CE agreements put the landowner in a place of greater dependence on the surrounding farming/ranching infrastructure. This can act as an economic reinforcement but also long-term limitation if the surrounding unprotected agricultural land eventually develops, leaving an isolated non-viable agricultural operation.

• Take into account your credit needs: Immediate credit needs may be improved from the cash infusion from CE compensation, but future (long-term) credit needs will be determined by market value accounting for the fact that the land is now encumbered with a CE. Typically, agricultural lenders will be lending on the agricultural operation's ability to repay any loan. The CE takes into consideration the developable value of the land. Thus, you may reduce the future borrowing power (on development values of the land), as you have taken some of the asset value that you would have borrowed against up from in the CE payment.

• Future land-use implications: The primary concern for future landowners may stem from their ability or inability to transfer remaining affirmed land uses. The specificity and durability of the restrictions the CE imposes are among its greatest virtues, but from future landowner's perspective, they may also provide a persuasive argument for invalidating it. Of course, if your alternative is to sell the farm to development, you have also made a choice (the sale of the farm) with permanent implications for future generations, both yours and your community's.

The bulletin was the result of a survey involving landowners with experience with conservation easements in Colorado. The bulletin's authors advised landowners to be sure to integrate their property goals with the CE goals and to make sure there is no confusion as to easement terms.

"Even an apparently obvious term like 'agricultural use' can be interpreted differently between two parties," the bulletin stated, advising landowners to consider how much ranching and farming has changed in their lifetimes. "One party may think agricultural use allows a confined hog operation or a vegetable-processing shed, while the other disagrees."

Financial benefits of conservation easements should be considered as well, the bulletin stated, noting that benefits come in three forms: income tax savings for donations, estate tax savings and direct payments for the CE (which may be exposed to capital gains taxation).

As for estate taxes, the bulletin stated: "Many landowners are interested in reducing the value of their farm or ranch to a point where estate taxes will not be so high that their heirs cannot afford to take over the farming or ranching operations. Any reduction in the property's value, whether donated or compensated, will reduce estate tax liability."

The bulletin noted that there have been instances in Colorado where the easement did not reduce the value of the property commensurate to the agricultural value: "That is, taking away the potential to develop made the property more attractive to people that wanted the land for something other than farming or ranching. Therefore, the heirs' tax burden was still too high to continue farming."

In addition, if your property has any financial encumbrances such as a mortgage, "the mortgage holder must also be in agreement with and recognize a subservient position to the easement holder."

Realize that surface water, mineral and oil/gas rights will also be affected, the bulletin advises.

"Surveyed landowners told us that the initial financial benefits of easements, such as tax savings and direct payments from private or public land trusts, were not as high as they expected," the bulletin stated. "They also told us that the financial benefits were initially important when they started the easement, but that in the end, non-financial goals, such as preserving agricultural production, were more likely to be realized."