Conservation Easements

 Chris Zinkhan

The Forestland Group, LLC

Definition

 
A conservation easement is a recorded legal agreement between a landowner and a land trust or governmental agency that perpetually restricts the landowner’s use and development of the property (Anderson 2005).  In this transaction, the landowner is the grantor of the conservation easement and the land trust or governmental agency is the grantee.  Land trusts, in turn, are not-for-profit organizations which seek to conserve land by acquiring either fee interests or conservation easements and providing stewardship and monitoring functions thereafter.  The grantee is responsible for enforcing the terms of the conservation easement.  Conservation easements can be either sold or donated by the grantor to the grantee.  In some cases, a public agency may acquire the conservation easement from the grantor and then convey it to a land trust, which becomes the grantee.  These legal agreements have been consummated on a diversity of land types, including forestland. 

Terms of the Conservation Easement

 
Each conservation easement is unique and is customized through negotiations to address the objectives of the grantor and the grantee.  However, conservation easements applied to forestland address some or all of the following terms:

• Explicit Rights of the Grantor:  What landowner rights are being explicitly retained by the landowner?

• Explicit Rights of the Grantee: What rights are being granted to the grantee?  Among others, these generally include the right to access the subject property to periodically monitor its condition and activities on it so that the grantee can assure that the grantor is in compliance with the terms of the conservation easement.  The grantee does not actually hold the rights sacrificed by the grantor; rather, the grantee holds the responsibility to monitor and enforce the conservation easement’s terms.  The actual rights, although restricted, remain with the landowner.

• Forest Management Requirements and Restrictions: What forest management activities must be undertaken?  What forest management activities are prohibited or are limited?  Conservation easements oriented toward forestland are often intended to sustain natural forest systems.  Thus, a silvicultural plan proposing practices for maintaining a natural forest with certain attributes is often required.  Often, the grantee has the right to approve or reject the silvicultural plan.  Examples of prohibited silvicultural activities are ones which would be in violation of state best management practices (“BMPs”), clearcuts in excess of some maximum acreage, harvests in riparian management zones (“RMZs”) which would leave a residual basal area of merchantable timber less than some minimum number of square feet, removal of wildlife habitat trees, conversion of a natural forest to a plantation system, and application of certain chemicals.  Some conservation easements provide the grantor with two alternatives with respect to forest management activities: Compliance with some negotiated array of silvicultural prescriptions or maintenance of some specific form of forest certification.

• Development Restrictions: Many conservation easements applied to forestland restrict or prohibit further development activity.  Such development activity can relate to a variety of structures and improvements, including, among others: residential structures, sawmills, storage facilities, windmills, utility lines, cell-phone towers, marine docks, and roads.  Some conservation easements permit seasonal-use cabins but not houses intended for year-round use. 

• Subdivision Restrictions: Conservation easements often prohibit or restrict fragmentation of the property through future conveyances.  In addition to intending for the subject property to be managed in accordance with a uniform plan, this term has implications for the monitoring and enforcement of the conservation easement by the grantee.  Significant fragmentation can greatly increase the monitoring and enforcement burden and thus the associated costs.  Some conservation easements permit the development of a limited number of “kingdom lots.”  That is, for example, a cluster of large lots, each with a large residential structure, a garage, and a dock on a lake may be allowed.  By allowing limited subdivisions, the price of the conservation easement to the land trust or public agency is reduced relative to the price if they were prohibited outright.

• Public Access: Can the public be prohibited from accessing the subject property for certain activities?  Some conservation easements are funded by public agencies for the express purpose of expanding recreational lands for citizens.   These conservation easements will thus require the grantor to allow citizens to access the subject property for such activities as hunting, fishing, and hiking.  Furthermore, in order to prevent any impairment of citizens’ recreational usage, such easements typically prohibit leasing recreational rights to a private club.  Typically, the state public agency generally charged with enforcing hunting and fishing laws will be responsible for such enforcement on the subject property.

• Recreational and Land-Use Activity Restrictions:  Is the grantor permitted to hunt and fish on the subject property?  Is the grantor allowed to use all-terrain vehicles (“ATVs”) and snowmobiles on the subject property?  Are certain locations on the property off limits to ATVs?  Is the grantor permitted to lease acreage to hunting clubs?  Is the grantor allowed to cultivate agricultural crops on parts of the subject property?  These are examples of questions relating to recreation and land use which are addressed in conservation easements involving forestland.

• Monitoring and Enforcement:  How frequently must the grantor submit reports detailing historical activities on the subject property to the grantee?  How frequently can the grantee access the subject property for the purpose of assessing whether or not the property’s condition is consistent with the terms of the conservation easement?  Can the grantee delegate certain monitoring and enforcement activities to an agent?  Is the grantor responsible for underwriting any of the monitoring and enforcement activities?  If there is a dispute about whether or not the grantor is in compliance with the conservation easement, what is the dispute-resolution process?  If there is a violation of the terms of the conservation easement, what remedies can be used by the grantee to restore the subject property to a condition which is consistent with the terms of the conservation easement?  These represent a sample of the questions relating to monitoring and enforcement activities.  Some grantees will complete a baseline report detailing the status of certain conservation-related attributes (e.g., population of a threatened or endangered species; diversity of vegetation) as of the consummation of the conservation easement.  If negotiated within the conservation easement, then the grantee may require certain outcomes associated with these attributes when this report is periodically updated.  When monitoring costs are high, simple behavioral criteria (e.g., miles of newly constructed roads being less than some maximum number) are often preferred to less-easily controlled and quantified outcomes-based criteria (e.g., diversity of the ecosystem).

Purposes of Working-Forest Conservation Easements

 
Many of the larger conservation easements applied to forestland can be categorized as working-forest conservation easements.  That is, the grantor has agreed to perpetually restrict certain activities, but still intends to actively manage the forestlands in order to produce certain timber and non-timber products and services.  If landownership is viewed as control of a bundle of rights—timber production, recreation, right to subdivide, right to develop, and so forth, then the grantor has relinquished a layer or more of rights when selling a conservation easement.  However, residual rights are retained by the grantor.  With a working-forest conservation easement, the grantor may retain the right to grow and harvest timber (perhaps subject to some form of forest certification) and engage in any legal recreational activity, but may sell all development and subdivision rights. 

Landowners enter into working-forest conservation easements to address a variety of objectives, including the following:

• Desire to protect their property from development or parcelization after they no longer control it.

• Sale of a conservation easement enables the monetization of a property’s conservation, development, or recreational attributes, and thus the landowner concentrates their capital and attention on its timber-production value.  Importantly, the landowners can receive what they perceive to be market value for the sacrificed rights while maintaining ownership of the property.

• Donation of a conservation easement generally yields an income-tax deduction based on the value of the easement.  In addition, by lowering the value of the residual property, the donation of a conservation easement can provide estate tax and property tax savings.

Public agencies and land trusts have multiple potential motivations when seeking working forest conservation easements, including the following:

• Protect special ecological and important wildlife-habitat areas.

• Protect a natural area and open space from ownership and management fragmentation.

• Protect water resources by maintaining forested areas and preventing conversion of watersheds to alternative uses which can exacerbate erosion and water quality.

• Encourage active forest management and timber flows which furnish forest products companies with raw materials.  Such companies are often leading employers and contributors to economic activity in rural areas.

• Expand access by citizens to lands for recreational use.

• The purchase of a working-forest conservation easement requires less funding than purchasing a fee interest in the property.

Extent of Conservation Easements

 
As of 2005, local and state land trusts had protected 6.3 million acres in the United States through the use of conservation easements, an increase of 148% relative to just five years earlier (Soto and Garnett 2006).  The Nature Conservancy participated in the acquisition of more than another two million acres of conservation easements in the United States as of 2003.  (The Nature Conservancy 2007).  Over the past decade, conservation easements have started being employed outside of the United States--in Central America, South America, Canada, and Australia.

Valuation of Conservation Easements

 
Since each property and each conservation easement are unique, the valuation of a subject conservation easement needs to reflect its specific facts and circumstances.  The value of a conservation easement is equal to the value of the associated property in an unencumbered state less the value of the same property encumbered with the conservation easement.  Thus, using discounted cash flow methodology, the value of a conservation easement is the net present value of the subject property unencumbered less the net present value of the subject property with the conservation easement in place.  The greater the net cash flow potential of the sacrificed rights, the greater the value of the conservation easement.  Since the sale of a conservation easement involves the loss of landownership rights, it has been suggested that option pricing models developed in financial economics be applied to the problem (Zinkhan et al. 2004).  For example, if a conservation easement prohibits any parcelization, then the value of the property will decline by the value of the landowner’s option to convert one parcel into multiple parcels for sale.  Appraisers generally attempt to utilize comparable sales analysis as part of their approach to estimate the value of a conservation easement.  The relatively small sample of forestland transactions involving conservation easements and the unique nature of each conservation easement make it challenging to value conservation easements using this methodology.  Appraisers strive to estimate the appropriate discount for the subject encumbered property (relative to its unencumbered state) by analyzing the implied discounts on transactions involving comparable, encumbered properties.

References

Anderson, E.R.  2005.  Conservation easements: a tool to preserve land, wealth, and silvicultural practices.  Forest Landowner 64(1): 28-29.

Soto, C. and A.W. Garnett (eds.).  2006.  National Land Trust Census Report.  Washington, D.C.: Land Trust Alliance.  22 p.

The Nature Conservancy.  2007.  website: www.nature.org.

Zinkhan, F.C., H.R. Jenkins, B.H. Stansell, V.P. Haley, S.J. Radcliffe, and J.C. Wikle.  2004.  Insights from financial economics on the valuation and design of conservation easements.  Presentation at the SOFEW Annual Meeting, St. Augustine, FL.

Posted 28 February 2008