It’s no secret that Donald Trump owns several golf course properties. One garnering particular attention of late is the Trump National Golf Club in Rancho Palos Verdes, California. Trump purchased the property in 2002 and planned luxury housing adjacent to the course. A major obstacle to Trump’s plans occurred when city geologists denied clearance for development of 16 homes because of unstable soil underlying the course. After 8 years of litigation, the development plan was scrapped and Trump sought – and secured – an open space conservation easement on the site (11.5 acres), which would allow him to continue using it as a practice area for the club. The resulting income tax deduction was reportedly $25 million.
All that seems legit, right? There’s one catch. In order to benefit from donating a conservation easement there has to be value before the donation that isn’t there after the donation. This method of valuation is known as the “Before and After” method of valuing an easement. The “highest and best” use of property must be a use that is reasonably probable in the reasonably near future, though it need not be the current use or an intended use of the property. Highest and best use is that use which meets the following four tests:
- Physically possible;
- Legally permissible;
- Financially feasible;
- Maximally productive.
Which ever use meets each and all of those four tests is the property’s highest and best use. When the highest and best use changes, so does the value.
While Mr. Trump, his lawyers and appraisers apparently claim that the highest and best use went from being developed with 16 luxury homes to remaining as a golf practice facility, the question is whether those homes could ever really be developed. Without approvals, and with a questionable likelihood of getting those approvals, the highest and best use of the property is uncertain. Now, since I haven’t seen the appraisals and don’t know if the property’s highest and best use would’ve been for development were it not for the instability, or if the instability could have been corrected for a cost and time period making the development feasible, I can’t be sure this is the case. I’m not opining on whether it was or wasn’t. The New York Attorney General’s office is investigating whether Trump improperly manipulated real-estate values for tax and other economic benefits, court records filed by her office show. They are reportedly also investigating a $21.1 million tax deduction claimed on Trump’s Seven Springs estate in New York through another conservation easement.
What this brings to light, is the issue of highest and best use in conservation easements. You have to give something up to get the deduction. If the property could not have been approved for the “before” use, the highest and best use would’ve been the “after” use to begin with. Thus, there’d be nothing to “donate” and no right to a deduction. Qualified appraisers should be very well trained in the analysis of highest and best use. It’s defined as that use which nets the property the highest present value. The four tests are quite logical and the process pretty straightforward. Unfortunately, there are investors – and appraisers willing to please them – who seek a “free lunch”. As a supporter in theory of conservation easements, and big fan of their use on golf course properties I think it’s great that some golf courses can remain as golf courses in perpetuity even as real estate values evolve. However, as an appraiser dedicated to objective valuations with high levels of integrity I support doing them the right way.
Golf course properties are often a target for conservation easements, in many cases legitimately. However, when the highest and best use, often a subjective analysis, is fabricated as in some cases a donation can be made to seem more than it really is. Both property owners and appraisers had better follow the rules. The IRS can make your life miserable, even if you don’t try to fabricate a deduction. I speak from experience.