Conservation Easement Appraisals 2011 Wyoming Conservation Easement Conference June 2, 2011 Laramie, Wyoming Hunsperger & Weston, Ltd. Mark Weston 5889 Greenwood Plaza Boulevard Suite 404 Greenwood Village, CO 80111 303-741-5918 303-741-2111 fax www.hwltd.net Based generally on the Tax Benefits and Appraisals of Conservation Projects by Larry Kueter & Mark Weston, published by LTA in 2007, and webinars developed and presented by Mary Burke of LTA and Mr. Weston in 2010 & 2001 Applicability Requirements for appraisal of any charitable gift of appreciated property exceeding $5,000 apply equally to donation of a fee interest and conservation easement Treasury Regulations have additional, specific requirements for valuing conservation easements Part I: Appraisal Concepts and Methods of Valuation
Uniform Standards of Professional Appraisal Practice (USPAP) Key Definitions Appraisal The act or process of developing an opinion of value; an opinion of value Appraisal report Any communication, written or oral, of an appraisal, appraisal review or appraisal consulting service that is transmitted to the client upon completion of an assignment USPAP Competency Rule Prior to accepting an assignment, an appraiser must either: 1. Identify the appraisal assignment, and have the knowledge and experience needed to complete it competently; OR 2. Disclose lack of knowledge to client in advance, take steps to complete the appraisal competently, and describe that lack of knowledge and steps taken in the appraisal report
Highest and Best Use A property s highest and best use is the highest and most profitable use for which it is adaptable and needed or likely to be needed in the reasonably near future. Olson v. United States, 292 U.S. 246, 255 (1934) Highest and Best Use Criteria 1. Legally permissible 2. Physically possible 3. Financially feasible 4. Maximally productive
Market Value A type of value, stated as an opinion, that presumes the transfer of a property (i.e., a right of ownership or a bundle of such rights), as of a certain date, under specific conditions set forth in the definition of the term identified by the appraiser as applicable in an appraisal. USPAP, 2010-2011 edition Approaches to Value Cost Approach Sales Comparison Approach Income Approach Part II: IRC and Treasury Regulations Appraisal Requirements
Fair Market Value Defined The price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of the relevant facts. Treasury Regulation Section 1.170A-1(c). Internal Revenue Code & Treasury Regulations Regarding Appraisals Substantiation of value for donation of any gift of property exceeding $5,000 No deduction permitted without a qualified appraisal prepared by a qualified appraiser Treasury regs perhaps being updated and new clean version incorporating all of the above should be along any day now Until then Qualified Appraisal Made not earlier than 60 days prior to date of contribution Must include certain information on the property, easement donation, appraiser s qualifications and methods of determining value Prepared, signed and dated by a qualified appraiser Not involve a prohibited appraisal fee
IRS Notice 2006-96: Transitional Guidance Qualified appraisal An appraisal that complies with the requirements of Treasury Regulation Section 1.170A-13(c), and is conducted by a qualified appraiser in accordance with generally accepted appraisal standards Generally accepted appraisal standards Are consistent with the substance and principals of the Uniform Standards of Professional Appraisal Practice (USPAP) Qualified Appraiser Has earned an appraisal designation from a recognized professional appraisal organization or has otherwise met minimum education and experience requirements Regularly performs appraisals and receives compensation Meets other requirements as may be prescribed by the Secretary of the Treasury Qualified Appraiser Demonstrates verifiable education and experience in valuing the type of property subject to the appraisal Not prohibited from practicing before the IRS during the prior 3 years
Qualified Appraiser IRS Treasury Regulations [Section 1.170A- 13(c)(3)] definition: Holds himself/herself out to be an appraiser or performs appraisals on a regular basis Is qualified to make appraisals of the type of property being valued Is not an excluded individual Understands that intentionally false overstatement of property value may result in penalty Qualified Appraiser IRS Notice 2006-96: Transitional Guidance Appraisal designation from a recognized appraisal organization An appraisal designation awarded on the basis of an appraiser s demonstrated competence in valuing the type of property for which the appraisal is performed Professional appraiser organizations Appraisal Institute (AI) American Society of Farm Managers and Rural Appraisers (ASFMRA) National Association of Independent Fee Appraisers Royal Institute of Chartered Surveyors (RICS) American Society of Appraisers (ASA) Valuing Conservation Easements Comparable sales 1 st line of inquiry - In markets where there is a substantial record of sales of easements comparable to the donated easement, the value of the donated easement must be based on these sales. Normally, before and after method used
Valuing Conservation Easements Using Before and After Method 1. Determine market value of property without easement restrictions ( before ) Use as many of the three approaches as called for 2. Determine market value of property with easement restrictions ( after ) Use as many of the three approaches as called for treat as a new appraisal Will require different sales than what was used in Step 1 3. Subtract the after value from the before value to arrive at value of easement: Sample Before and After Analysis Value before easement $8,525,000 Value after easement $5,450,000 Value of easement Percent loss in value (this should be a result, not a technique) $3,075,000-36% Appraiser Must Determine Land & Water What division rights remain, if any Restrictions on use Improvements Existing & Future The number that can be built Any limitations on their size, height and occupancy Other Stuff such as Right of first refusal acquired by grantee Impact of management plan Amendment Issues
Subdivision Development Valid only when: Development is highest and best use of property Development is fairly imminent Costs of development can be identified accurately Potential sale prices of parcels can be estimated Realistic absorption rates can be supported by market evidence Percentage Loss in Value Applied to before-easement value of property Useful for local markets that do not have sales of restricted properties Must be supported with analysis of sales Special Rules ALWAYS Value entire contiguous property owned by donor & members of donor s family, before and after the easement Even if part of the property is already encumbered If the donor or a related person (members of donor s family or a donor-controlled company) owns any other property, enhancement of the other property must be addressed May call for additional before-and-after appraisals
Road A B C Mr. Jones owns parcel A, B and C. Parcel B and C have an integrated highest and best use. Mr. Jones conveys a conservation easement on Pcl B. What must be appraised for Treasury Regulations? What must be appraised for UASFLA ( Yellow Book )? Road A B C D D Ms. Phillips owns parcels B and C. Parcels B and C have an integrated highest and best use. Mr. Phillips (husband of Ms. Phillips) owns parcel A. Mr. Phillips Jr. (son of Mr. and Ms. Phillips) owns parcel D. Ms. Phillips conveys a conservation easement on parcel B. What must be appraised for Treasury Regulations? What must be appraised for UASFLA ( Yellow Book )? Part III: The Land Trust s Role in Reviewing Appraisals
S&P Practice 10B: Appraisals The land trust informs potential land or easement donors (preferably in writing) of the following: IRC appraisal requirements for a qualified appraisal prepared by a qualified appraiser for gifts of property valued at more than $5,000, including information on the timing of the appraisal; that the donor is responsible for any determination of the value of the donation; that the donor should use a qualified appraiser who follows Uniform Standards of Professional Appraisal Practice; that the land trust will request a copy of the completed appraisal; and that the land trust will not knowingly participate in projects where it has significant concerns about the tax deduction. S&P Practice 10D: Donee Responsibilities - The land trust understands and complies with its responsibilities to sign the donor s Appraisal Summary Form 8283 and to file Form 8282 regarding resale of donated property when applicable. - The land trust signs Form 8283 only if the information in Section B, Part 1, Information on Donated Property, and Part 3, Declaration of Appraiser, is complete. - If the land trust believes no gift has been made or the property has not been accurately described, it refuses to the sign the form. If the land trust has significant reservations about the value of the gift, particularly as it may impact the credibility of the land trust, it may seek additional substantiation of value or may disclose its reservations to the donor. (See Practice 5B for other gift substantiation requirements.) IRS Form 8283 Required for any charitable donation of a non-cash gift of more than $500 Land trusts should only sign when: Sections specifying value of donation complete A gift has been made (i.e., no quid pro quo exists) Property accurately described The land trust should disclose to donor in writing any significant reservations about value of the gift
Key Aspects of Form 8283 The instructions require that the conservation easement donor attach to Form 8283 a statement that: Identifies the conservation purposes of the donation Shows, if before and after valuation is used, the fair market value of the property before and after the gift States whether the donor made the donation in order to obtain a permit or other approval from a local or other governing authority and whether the donation was required by a contract If the donor or any related person has any interest in other property nearby, describes that interest Finding an Appraiser Other appraisers Other professionals experienced with easements Other easement donors Other land trusts, but Be careful about recommending appraisers to potential easement grantors Reviewing Appraisals 1. Institute an early warning system for landowners 2. Be prepared to enter into confidentiality agreements 3. Institute a three-tier system of appraisal review 4. Avoid being an editor
Identifying Deficiencies in Appraisal Reports Client and any intended users Intended use of the appraisal Identity and characteristics of real estate being appraised Real property interest appraised Definition of market value and its source Effective date of appraisal and the date of appraisal report Identifying Deficiencies in Appraisal Reports Scope of work used to develop the appraisal Information analyzed, appraisal methods and techniques employed and supportive reasoning Highest and best use of real estate being appraised Outlandish extraordinary assumptions and hypothetical conditions Signed certification Suggested Three- Tier System of Appraisal Review
The Good Appraisal seems generally in line with expected value of conservation easement donation and is not missing any essential elements required by IRS The (slightly) Bad Appraisal seems aggressive in its conclusion of value and/or appraisal does not adequately address key elements The Ugly Appraisal is indefensible as to its conclusion of value in light of local land values OR Land trust believes no gift has been made OR Gift described in the appraisal is not the gift received
Extreme Valuation Problems Value of easement looks to be greater than double the value that would have been expected Percentage reduction removes 80-90 percent of the value of the property in an area where there is no significant development pressure Appraisal is based upon a subdivision development analysis that has indefensible assumptions Serious Technical Issues 1. Appraising the wrong property 2. Not valuing all interests 3. Exclusive use of the subdivision development valuation technique, when: Inadequate land use plan Poorly supported forecasts of lot sale prices Poorly supported lot absorption forecasts Poorly supported discount rates Inadequate profit allocation Serious Technical Issues (cont.) 4. Improperly appraising phased conservation easements 5. Ignoring other existing restrictions 6. Lack of familiarity with Treasury Regulations Using the wrong definition of market value Failure to state that the appraisal was prepared for the income tax purposes of the donor Easements recorded more than 60 days subsequent to the appraisal s effective date of value
Boltar v. Commissioner 136 T.C. No. 14 (2011) Entire deduction disallowed due to: Multiple failures and abuses in appraisal methodology Significant factual errors affecting value Accepting a grossly overvalued donation, no matter how important its conservation values, undermines land trusts reputation for honesty. Land trusts and their advisors must take care to not participate in any abusive transaction. New Resource! Appraising Conservation and Historic Preservation Easements Learn the intricacies of the appraisal process as applied to conservation and historic preservation easements. This is a must for every land trust, appraiser & lawyer To purchase: www.lta.org/publications Part IV Questions & The End