Strategic Capital Partners

I N V E S T M E N T   B A N K I N G   &   T A X   M I T I G A T I O N

Eco-conscious Strategies

Conservation Easements & Deed Restricted Donations: A Simple Overview

A conservation easement is a restrictive covenant placed on all or a portion of real property for the purpose of conserving natural resources or restricting the use of such property to passive activities, while a deed restricted fee simple donation similarly preserves the natural resources on the property.  Both transactions involve the use of a qualified organization (i.e. a municipality or a non-for-profit land trust).  The difference between the two is that in a conservation easement the landowner donates the easement to the qualified organization but retains fee simple title, while in a deed restricted donation the landowner donates fee simple title and the easement to the qualified organization.  Conservation easements and deed restricted donations have been widely used for decades and are well recognized by all government authorities.  The use of such a strategy has become common among entities seeking to conserve real property while at the same time achieving favorable tax benefits.

These aforementioned tax benefits are generated by the fact the once eased, the allowable uses on the property are restricted by the easement and, therefore, the value diminishes. When a reduction of a property's value occurs as a result of the placement of a conservation easement and such easement is transferred to a qualified organization, these tax benefits inure to the benefit of the transferor.  

The fair market value of a perpetual easement (the restriction placed on the real property) is equal to the difference between (a) the fair market value of the property it encumbers before the granting of the easement and (b) the fair market value of the encumbered property after the granting of the restriction.  In a deed restricted donation the property is being donated, therefore eliminating residual property value and increasing the tax benefits associated with the transaction.  A taxpayer is entitled to deduct the fair market value of a qualified conservation contribution within the taxable year during which the contribution occurred.

For conserved property held by a partnership, subsequent allocation of the tax benefits is made to the members of the partnership based on the partnership agreement.  Such members may use the allocated tax benefits in the current tax year or subsequent tax periods as appropriate, subject to certain tax limitations.  The allocated benefits may include both a federal and state level deduction, and in some cases, a state level tax credit as well.  Current tax legislation surrounding conservation at the federal level has several attributes that will sunset at the end of 2011, making this year an ideal time to consider conservation strategies.

Applicability of Conservation Easements

We work with a variety of clients that own raw land real estate assets and look to raise equity capital.  These clients include banks, family offices and real estate investors.  When implementing a conservation strategy Strategic Capital seeks to accomplish the following:

  1. Create liquidity in a highly illiquid asset

  2. Secure financial recoveries significantly higher than through current short sales and foreclosures

  3. Assist with recapitalization of the company, therefore, allowing the potential reduction or elimination of debt

  4. Recapitalize banks by clearing underperforming assets and notes off their balance sheets

  5. Preserve land and natural resources for the enjoyment of future generations, while reducing property taxes

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