The bottom line on conservation easements is that they may indeed be a socially acceptable tool for environmental conservation and smart growth in rural areas; and landowners can obtain significant financial benefits by entering into them.

By: Robert J. Fledderman

Conservation easements may soon become an important financial consideration for many farmers and forest landowners. This is due to several factors: passage of the Farm and Forest Conservation Act last year, the anticipated use of Purchased Development Rights (PDRs) by local governments to implement “Smart Growth” programs, and increased funding for federal initiatives providing funds for outright purchase of conservation easements (the Forest Legacy Program and the Conservation and Reinvestment Act (CARA)).

Conservation easements (voluntary restrictions on land use for conservation purposes) have been around for a number of years. Until recently they were rare, landowners generally entered into them (often to their financial detriment) out of a sense of stewardship. However, with the new government programs mentioned above, along with federal tax law allowing landowners to claim an income tax benefit, conservation easements are becoming increasingly attractive to landowners.

Landowners can now realize significant tax benefits (income tax, property tax, inheritance tax) as well as outright cash payments for entering into conservation easements. Conservation easements are a legitimate option for landowners to monetize their development rights while continuing to use their land for commercial activities like farming and forestry. But like all land transactions, landowners should be aware of potential pitfalls.

Acceptable (for tax benefits) conservation easements are incredibly flexible, allowing considerable leeway for each agreement to be tailored to the objectives of the partners (the landowner and the conservation easement holder – usually a non-profit land trust or conservation organization). While this flexibility is a tremendous asset for customizing the easement to individual situations, it can also result in landowners giving up more rights than necessary or lead to future disputes between partners if not carefully developed.

Perhaps the most important consideration for landowners is the fact that all acceptable (for tax benefits) conservation easements are permanent. While it may be possible to undo a conservation easement, it hasn’t been done yet and with government interests involved, dissolution would likely be very complicated. 

Given all this, it is very important to select a compatible and stable partner. Landowners would do well to carefully evaluate the conservation objectives and the long-term prospects of any land trust or other easement holder they are considering.

The permanent nature of conservation easements also means the easement document itself must be strong enough to stand the test of time and the different personalities that will implement it.

A key provision in every conservation easement is the conservation purpose, which is used to determine if the easement meets the federal guidelines as a tax benefit. More importantly, the conservation purpose is the dominant factor in allowing or disallowing land uses and settling disputes between partners. Therefore, it needs to be clear and subject to as little interpretation as possible. Vague conservation purposes like “preserving wildlife habitat” are sure to create conflicts.

Each conservation easement details specific land uses or management activities that are incompatible with the conservation purpose and restricts them. The difference between the market value of the land before and after these restrictions is what determines the amount of the tax benefits or payment. Generally, simply restricting commercial or residential development obtains most of the differential. However, many conservation easements to date have restricted much more than development to meet the conservation objectives of the easement holder. Active forest management has been especially restricted, often to the detriment of the landowner and health of the forest. 

Most conservation easement experts now maintain that allowing active forest management and commercial timber harvests, even well-planned clearcuts and plantation forestry, do not preclude tax advantaged conservation easements.

Conservation easements should also include provisions for dispute resolution. Easement holders are legally obligated to enforce the land use restrictions of the easement (many easement holders require their partners to pay a fee to help cover expenses). Dispute resolution provisions need to be efficient and equitable. Many easement agreement models contain conflict resolution provisions that are terribly slanted towards the easement holder.

The bottom line on conservation easements is that they may indeed be a socially acceptable tool for environmental conservation and smart growth in rural areas; and landowners can obtain significant financial benefits by entering into them. On the other hand, conservation easements are not to be entered lightly. They are permanent and must be enforced, creating the potential for conflicts between partners. To enhance the likelihood of successful conservation easements, landowners need to carefully choose a partner with compatible conservation objectives and should seek expert legal counsel to represent their interests.