Conservation Easements

Just this morning, I read with great disappointment an article in the Wall Street Journal about a conservation easement denied by Federal Tax Court for a golf property in North Carolina.

Having experience with these cases and having seen first hand the havoc the IRS can bring, I question not the science of “native vegetation and wildlife” or the difference between “fairways and bird flyways” but rather the fairness of the IRS denying deductions for clear reductions in property value as a result of sacrificing development rights. While there is no doubt that abuses have ocurred, it is equally clear that preserving open space is a common goal, and that some form of compensation is appropriate.

Many golf courses and clubs sit on sites that could most certainly be put to “higher and better use”. Accordingly, in order to preserve these courses as open space, one option to make it economically feasible to do so is the granting of a conservation easement. I’m not sure the characterization of the benefit as a “tax break” is appropriate given that the owner is sacrificing significant flexibility and both present and future value by giving up his or her development rights.

While there are potential alternatives for clubs to monetize the preservation of open space through local, regional and state programs for preserving same, the conservation easement is perpetual and doesn’t require cash payments. In today’s golf economy, that’s a biggie.

The St. James case deals a blow to the conservation community as well as the golf industry, because it further squeezes the economic profile by taking away an option as golf courses struggle for profitability. As with most issues, this one will probably become politicized. However, I don’t see this as a democratic/liberal or a republican/conservative issue, rather an issue of whether open space is important and how to incentivize potential donors of easements (especially in the golf industry) and make it affordable to do so. From my perspective, the science is less important from an economic perspective. It simply comes down to the difference in market value between a site that can become a 400 unit housing development and one that remains a golf course. With many golf course properties trading for 1+/- times gross revenue, the owner is potentially devaluing the property by a significant amount.

The concept of open space preservation is one that often arises in conversation with my clients. Given the intense scrutiny and substantial risk and cost of conservation easements, I often counsel them to seek alternatives, if available. This may seem like the IRS is taking away rights, but with their unlimited resources and substantial powers, even if the taxpayer wins, he loses, by the time all the costs and time are added up. It’s unfortunate, but it may be the best business decision.