Conservation easement conundrums
Colorado and other Western states crack down on abusers
Perched at the podium during a Colorado Coalition of Land Trusts gathering, Erin Toll wears a poker face, a smart black pencil skirt and sassy Jimmy Choos. Among the jeans-and-hiking-boot-clad crowd attending, this wry New York transplant seems an unlikely hero. As recently as last fall, Toll, director of the Colorado Division of Real Estate, had no idea what a conservation easement was. But now, she says, protecting the integrity of land conservation is her number-one priority - and she's cracking down on crooked deals with a vengeance.
Toll's new enthusiasm for conservation easements, which offer landowners tax breaks in exchange for accepting limits on their right to develop, couldn't come at a better time for Colorado's land trusts. The state has seen some of the fastest-paced land conservation in the country, driven by a boom in both land trusts - the nonprofit organizations that hold easements - and in government open-space programs. Coloradans have protected nearly 1.8 million acres with conservation easements, much of it fueled by innovative tools, including a lottery-funded land protection program and a transferable state income tax credit.
Unfortunately, though, tax benefits sometimes breed abuses. And questionable conservation deals are drawing intense scrutiny - including Toll's investigation into inflated real estate appraisals in Colorado and an ongoing Internal Revenue Service audit of hundreds of tax returns nationwide claiming federal tax breaks for donated easements. While state investigation and reform is moving swiftly, the federal audits have dragged on, frustrating landowners and creating confusion about easement appraisals.
The legal and financial complexities of conservation easements have reached a crossroads in Colorado. "What happens in Colorado could bleed out to the rest of the country," says Lynne Sherrod, Western policy manager for the national Land Trust Alliance.
To help ferret out abusers, Toll has issued 30 subpoenas since November. So far, she's suspended two appraisers who inflated appraisal values on more than 35 conservation easements. (She's still wading through 44 boxes of evidence and says, "Every day we find more.") The jacked-up appraisal values exploit a state program that offers landowners up to $375,000 in transferable tax credits for conservation easement donations. Land-conservation professionals say the program has been critical in protecting more than a million acres (at a cost of about $274 million) across the state since it took effect in 2000.
Although the majority of the state's conservation easements are rock-solid, Toll rolls her eyes as she reveals some of the more outrageous exceptions. In a sampling of conservation easements from one group, Noah Land Conservation (also known as Colorado Natural Land Conservation), Toll found gross overvaluations of 111 easements on the eastern plains. The scheme involved 6,100 acres valued at $76.5 million (hence eligible for $37 million in state tax credits) by a mere three appraisers, on parcels that were meticulously subdivided so they could slip past county and state laws regarding acreage or subdivision development. In one particularly egregious example, the appraised value of a single 640-acre ranch leaped more than $14 million in a matter of days. Toll's investigation is ongoing, but she's narrowed the state's spoilers down to about eight appraisers (including the two she's already sanctioned), a couple of attorneys and a promoter or two - and their offenses, including possible securities fraud, could spread into the realm of other government agencies.
"A few scoundrels are ruining it for everyone," says Toll, who discovered the abuses largely by accident. When she came on the job in 2006, her top priority was to slow down Colorado's rampant home foreclosure rate. She was convinced that overly inflated residential appraisals were a major culprit. One offender repeatedly surfaced, but the pieces finally fell into place when someone slipped her a sealed envelope signed "From a little birdie" during a Denver conference. The anonymous tip pointed to an overvalued conservation easement appraisal by Loveland, Colo., appraiser Julie O'Gorman. Last June, the Division of Real Estate took the uncharacteristically harsh step of suspending O'Gorman's license.
Immediately after the suspension was announced, Toll's phone started ringing. Land trusts, local governments, Great Outdoors Colorado (the state's lottery-funded land conservation program), "people and groups I'd never associated with," were calling to thank her, she says. At first she had no idea why. She soon learned that land-conservation insiders had been trying for a long time to get government to tighten the reins, without success. "We had heard rumors of things happening for years, but how do you find out?" says Jill Ozarski, executive director of the Colorado Coalition of Land Trusts, an umbrella group. "The root of that abuse is bad appraisals, but they're confidential. We were really unclear what (the abusers) were doing, and there is no way to access confidential tax records."
Counties record conservation easements as property deeds, but those documents don't reveal the details of appraisals or tax returns. Only the state revenue department has access to that information, and it lacks conservation easement experts and staff to do reviews. In 2004, the agency actually turned down an offer of extra funding earmarked to help enforce conservation easement tax credits. Bad appraisals slipped through the cracks.
New legislation championed by Colorado Rep. Alice Madden, D-Boulder, and Sen. Jim Isgar, D-Hesperus, is designed to fix all that. If the bill passes as written, appraisers will lose their veil of secrecy. All conservation easement appraisals will be submitted to the Colorado Division of Real Estate for review, and easement holders, including local governments and land trusts, will have to be certified by a state oversight commission. Only landowners who work with certified organizations will be able to qualify for the tax credit.
Other Western states are keeping close tabs on Colorado as they work to create their own conservation tax credits, widely considered the most effective tools for conserving vast landscapes owned by cash-poor farmers and ranchers. "Anybody who's interested in these incentives at all is watching Colorado very carefully," says Sherrod.
New Mexico has a $250,000 transferable tax credit for up to half of an easement's value. Unlike the Colorado credit, the New Mexico credit, which took effect Jan. 1, can be claimed by multiple co-owners of property. In other words, if a husband and wife donate a million-dollar conservation easement on their ranch, each of them could claim a $250,000 credit. This could become a sticky point for the state: "I'm sure people will find all kinds of creative ways to come up with multiple names for ownership on their warranty deeds," says New Mexico Land Conservancy director Scott Wilber. "That's the problem with flexibility. It opens the door for people to take advantage."
To avoid this, the New Mexico Legislature is hammering out new regulations. Proposals include rules mirroring Colorado's proposed one-year holding requirement (so the names on a deed can't be changed the day before recording a conservation easement), and requiring easements to be pre-certified by a state oversight committee before they become eligible for a credit.
In Idaho, a broad coalition, including agricultural and timber interests, land trusts, sportsmen and the Farm Bureau, recently proposed legislation for a state tax credit. It took into consideration many of Colorado's recent concerns, emphasizing oversight, limiting total annual credits to promote competition for the best conservation projects, and offering a refundable tax credit instead of a transferable one. The coalition withdrew the legislation on March 5, however, because the Idaho House Revenue and Taxation Committee slashed requirements for eligible conservation agreements, allowing credits for lands set aside for as little as five years. Idaho's proposal now goes back to the drawing board.
Unfortunately for many landowners caught in the middle, on-the-ground changes at the state level are not being paralleled at the federal level. IRS audits of about 290 Colorado conservation easements (out of more than 500 nationwide), are plodding along at a snail's pace; many audits begun three years ago have seen little progress, landowners say. Colorado has borne the brunt of the federal investigation simply because the state handed over its list of easements after the Senate directed the IRS to follow up on potential abuses nationwide. (Other states have averaged about a half-dozen audits apiece.)
Initially, land trusts were "perfectly comfortable" with IRS audits, hoping they would help put some teeth into standards for good land conservation projects, says Rob Bleiberg, Mesa County Land Trust Executive Director. But the federal agency is casting a broad net that snares many well-meaning landowners. At least 100 of the Colorado easements being audited are with Colorado Coalition of Land Trust members, who follow rigorous standards and practices established nationally by the Land Trust Alliance - practices that received praise from legislators in Washington, D.C., when they voted in 2006 to continue federal tax benefits for easement donations.
These unnecessary audits not only frustrate existing easement donors but may discourage wary landowners from donating new easements. In a letter to Sen. Ken Salazar, D-Colo., last August, IRS agent Steven Miller acknowledged the need to avoid "a prolonged compliance initiative that has the potential to chill legitimate donations of conservation easements in Colorado and elsewhere."
The audits have also caused confusion over appraisal standards and values. The IRS does not have to use the same federally required appraisal methods that qualified appraisers and landowners follow - and the agency isn't sharing the techniques it does use. Nor does it employ qualified appraisers to perform appraisal audits; instead, it uses employees called "engineers." "It's very confusing because we don't understand the information the IRS is using, where they're getting their information from," says Chris West, the director of the Colorado Cattlemen's Agricultural Land Trust, which has eight easements undergoing audits. "It truly doesn't make any sense."
Last November, the IRS started sending out audit settlement offers that accepted, rejected or offered a reduced value on donated easements. Many landowners who received reduced valuations say they have yet to see concrete justifications, such as comparable sales, and they're turning down the settlements. Some of these cases could wind up being appealed in court, where, ironically, the IRS would likely bring in qualified appraisers to defend its engineer evaluations.
So far, the IRS has largely ignored Colorado's investigations into the most brazen offenders, says Toll. But she's hoping that the federal agency will finally avail itself of the state's expertise and resolve the lingering audits. In April, an IRS agent from Arkansas is coming to meet with her, Toll says, to learn about her state investigation as well as the legislative strides being made to tighten up Colorado's tax credit system: "If we can work out something where we can help them, 90 percent of the problem can go away."
In the meantime, Toll's office is working with legislators, land trusts and landowners to hold the line on Colorado's successful conservation programs. "No one said, "You'll become the queen of conservation easements,' when I took this job," Toll says. "Whenever this legislation becomes effective, I don't foresee ever having to subpoena a land trust again."
Jennie Lay is a freelance journalist based in Steamboat Springs, Colorado.