February 9, 2008
Colorado
Colorado
Conservation easements approved for pricey subdivisions, fairways, small parcels
An innovative state law designed to preserve Colorado’s scenic open spaces and working ranches has, in dozens of cases, been used to protect everything from multimillion- dollar home sites in gated communities to tiny pieces of land slated for oil and gas development.
The law allots generous state income tax credits to property owners who agree to protect their lands from development. But in some cases, a Rocky Mountain News investigation has found, the law has been used to generate tax credits on lands with questionable public value.
In addition, the investigation found, appraisals on some properties granted protection have been grossly inflated. The higher the appraisal, the greater the tax credit.
The tax credits, which have cost the state at least $274 million since the program’s inception, are potentially lucrative, because they can be sold by the property owner for cash.
The Rocky’s review of transactions found conservation easement deals all over the state map, and far beyond the law’s intentions, according to its authors. The deals have been approved:
* In pricey subdivisions in the Denver area, where home prices range from $800,000 to $2 million, and where the land being preserved is located between exclusive homes or bordering the subdivision.
* On land along fairways at a PGA golf course.
* On parcels in southeastern Colorado that also allow oil and gas development and wind farms.
* On small pieces of land. In Larimer County, for example, one-third of an acre was given an easement, generating a $100,000 tax credit for its owner.
* For dozens of small ranchettes, even as the owners were allowed to build multiple homes on their properties.
* On land subdivided to generate multiple easements and tax credits, for what had been a single land parcel. In several instances new companies were formed to hold the parcels, apparently to avoid a state rule that allows for just one tax credit per easement.
“These shenanigans need to be stopped,” said former Sen. Dave Owen, R-Greeley, a co-author of the law. “We were trying to preserve farmlands and open space. These people are taking advantage of the statute.”
A source of profit
To date, no state agency has oversight of the tax credit program, despite the large sums of money awarded. This is money that otherwise would have been collected by the cash-short state treasury.
This year, however, land trusts and local governments holding easements must file some information with the Department of Revenue.
Critics of the law say it has worked well in some instances, but also has become a source of profit for those who’ve learned how to manipulate it.
The legislature embraced the concept in 1999 as an additional way to save the state’s stunning landscapes from rapid growth and development. Lawmakers agreed to give private landowners tax credits if they agreed not to develop their land or sell it for development.
Colorado had previously relied on Great Outdoors Colorado and county open space programs to buy land outright. But growth and development pressures were outpacing the state’s ability to keep up.
Here’s how it works: The easement and subsequent tax credit are assigned a dollar value based on the difference in price between the land’s developed worth and its undeveloped worth.
To sweeten the pot for cash- poor landowners, working ranchers and farmers, for example, the state also agreed to make the credits transferable, meaning that landowners could sell them to businesses or wealthy individuals who would then use the credits to reduce their tax bills.
Only lands that comprise scenic open spaces, that provide for public recreation, wildlife habitat or working ranches, were intended to qualify for the program.
Under the law, conservation easements must be evaluated and held by nonprofit land trusts or local governments. These entities are charged with defending the easements and ensuring they are properly maintained “in perpetuity.”
But keeping track of the trusts and the transactions has proven nearly impossible, even as the state authorized millions of dollars in tax breaks. Several hundred easements are now under investigation by the Department of Revenue and the state’s real estate division.
Appraisal problems
Huge discrepancies in the appraised value of land have cropped up under the program.
In southeast Colorado, the Lower Arkansas Water Conservancy District, an entity allowed to hold easements, has rejected at least 19 proposed deals because the appraised values were too high.
“I saw one 160-acre farm whose appraised value came in at $2.54 million. I knew two years earlier that it had sold for $106,000. That’s just crazy,” said Jay Winner, executive director of the district. Winner declined to identify the people proposing the easement.
“Land trusts absolutely have to look at these deals with a critical eye,” he said. “They have an ethical and moral obligation to do so.”
One land trust official, whose deals have been scrutinized by the IRS, said the law is so vague that it’s unclear what is OK and what isn’t.
Howard Hallman is executive director of Colorado Springs-based Greenlands Reserve, a land trust that has accepted dozens of small parcel easements, as well as easements that allow oil and gas development.
Hallman said neither the trusts nor the property owners have been given much guidance by the state or the Internal Revenue Service.
“I’d like to see everyone look forward and not look back, and say we have to scrutinize every easement in the state,” he said. “The rules are so wide open that it is difficult for people to really understand what is appropriate.”
The Colorado Department of Revenue, which is reviewing dozens of transactions, said many easement deals may be legal under the law.
“But that doesn’t mean they honor the intent of the law,” said John Vecchiarelli, senior director of taxation for the state.
Certainly, they are costing the state an enormous amount of money. In the seven years since the law took effect, at least $274 million in state tax credits have been claimed for saving land. Lawmakers originally thought it would cost less than one-third that amount to provide the tax breaks. That’s money that isn’t available to spend on schools or health care.
Though thousands of acres of lands have been properly protected for the public’s benefit, hundreds of easements have been done on lands with questionable conservation value. Consider:
* In Delta and Montrose counties at least 70 ranchettes, most 35 to 40 acres in size, have been protected even as the property owners were granted the right to build one, two or three homes on the land.
The easements were accepted by the nonprofit Black Canyon Regional Land Trust in Montrose. Tax credits on some of the parcels have ranged from $100,000 to almost $200,000. Overall, Black Canyon trust has overseen easement deals that have generated $13.7 million in tax credits, according to revenue department records.
Barbara Hawke, executive director of the trust, said in a written statement, “The size and allowed homesites for the individual properties were considered consistent with the conservation goals of preserving agricultural land for scenic open space with significant public benefit.”
She said in one case 17 small lots each with the potential for a home were placed in easement to allow only four homes. In other cases, easements on such parcels reduced development densities and preserved views, Hawke said.
* At the Triple B Ranch in Teller County, Ron Bullard opted to place much of his family’s 80-acre dude ranch under easement and to have the land monitored by the small town of Woodland Park.
Town officials went for the deal, saying the Triple B would form a low-density buffer between town boundaries and the nearby Pike National Forest.
But instead of granting one easement for the ranch, which would have qualified Bullard, his associates and family members, for one tax credit worth a maximum of $260,000, the city of Woodland Park accepted 16 separate easements of roughly 5 acres each.
Different companies formed as part of the deal then claimed a $260,000 credit for each easement. The Triple B deal cost the state $3.8 million in tax credits, according to Department of Revenue records and easement information provided by Woodland Park.
Bullard said the transaction made sense.
“In my opinion it is a good deal for taxpayers,” he said. “My option was to develop or donate. I could have made twice as much developing the land.”
State tax director Vecchiarelli, who declined to comment on specific transactions, said creating individual companies to hold easements may be legal under Colorado law as long as the appraised value of each separate parcel can support the tax credit claimed.
* Douglas County developer Lenn Haffeman and three business partners, including Denver Art Museum benefactor Frederic Hamilton, placed conservation easements on four lots next to Haffeman’s high-end development known as Sapphire Point in Castle Rock.
Haffeman’s easement covers 10.1 acres and includes a 1.7-acre homesite. Hamilton and two other business partners placed easements on three other small lots, of five to eight acres each, all next to each other on a ridge bordering the housing development. The easements allow the men to build horse stables and riding facilities on the land, according to county property records.
The easements were accepted by the Douglas County Land Conservancy in Castle Rock. But the deals have come under scrutiny by the state and the IRS, Haffeman said. Whether the tax credits claimed will stand isn’t clear yet. Hamilton did not return a phone call seeking comment.
Patti Hostetler, executive director of the Douglas County Land Conservancy, said the nonprofit accepted the easements because the businessmen agreed not to build multiple homes on the lots, which sit along a bluff above the city.
Conservation experts say such deals raise red flags because it’s not clear whether multiple easements were justified and whether landowners donated anything of value.
Jill Ozarski is executive director of the Colorado Coalition of Land Trusts. Her group has been working with lawmakers in an attempt to reform the program.
She declined to comment on specific transactions, but she said conservation easements used in or around subdivisions can raise serious issues and need to be carefully evaluated and appraised. Sometimes, she said, such deals don’t result in a charitable donation at all because they actually raise the value of the other lots that aren’t conserved.
But Haffeman rejected that criticism.
“All you have to do is look at the site. It’s a beautiful place. And we did a lot of work on our appraisals. They are sound,” he said. “Under the zoning in place at the time, we could have built 90 homes there.”
* Outside Larkspur, three companies placed easements on a series of lots in and around Bear Dance Village, a high-end development near Larkspur that includes a PGA tour public golf course and several gated communities. Three easements were created, each containing numerous small parcels. The parcels, some just one or two acres, lie along the golf course and separate multimillion-dollar home sites, according to county maps.
The open space between homes can also be used for leach fields, the areas that drain septic systems, according to county property records.
The Douglas County Commissioners accepted the Bear Dance easements and signed IRS forms authorizing tax credits, according to Cheryl Matthews, Douglas County’s director of open space.
How large the tax credits are isn’t clear. But such deals raise questions about whether the public benefited, or whether the easements, again, simply increased the value of the multimillion-dollar homes and the golf course, rather than the decrease in value required to generate a donation and tax credit.
Douglas County spokeswoman Wendy Holmes said the county accepted the easements because the land contained important wildlife habitat and because developers agreed to maintain the golf course as open space if it ever stops operating.
“We thought it appropriately limited development,” Holmes said. “We felt that was a legitimate conservation purpose.”
Bear Dance officials did not return phone calls seeking comment.
Explosion in easements
In 2003, the easement law was amended, increasing the maximum tax credit amount from $100,000 to $260,000. (The credit has since been raised to $375,000.) And it allowed Colorado limited liability corporations and partnerships to take the credit even if the principal owners lived out of state. Almost immediately, the number of easements created and credits claimed exploded.
Since then, few land trusts have been as active as the Greenlands Reserve.
Founded in 1999 by Hallman, Greenlands signed off on 201 easements between 2003 and mid-2006, the second-highest number of transactions in the state behind Black Canyon Land Trust.
The Greenlands easements have led to at least $25 million in state tax credits for the property owners, according to the latest list published by the state Department of Revenue. That tops all other land trusts in the state.
Many of the easements are on 25- to 45-acre parcels in Prowers and Bent counties in southeast Colorado. State records show 42 easements on those parcels each earned the maximum $260,000 tax credit.
The Rocky’s review of the Prowers County easements also found that all but a handful of the 90 accepted by Greenlands also allowed oil and gas exploration. The open space agreements called for property owners to submit any extraction plans to Greenlands that show how the impacts of drilling on the property will be minimized.
Hallman said the easements are part of the trust’s plans to preserve a mile-wide corridor along the Arkansas River from Prowers County to Pueblo.
He said they are structured so the trust has tight controls over oil and gas exploration.
“It is our judgment in the Lower Arkansas Valley that it is allowable as long as there is no significant impact to the environment or conservation purpose,” Hallman said.
In addition, 25 of the conservation easements allowed the property owners to charge fees for commercial hunting as long as Greenlands got 25 percent of the purse, the records show.
Hallman said the trust has now changed its policy to focus on parcels of 160 acres or more, because it’s too difficult to manage so many small parcels.
While most of Greenlands’ open space easements are in southeast Colorado, the trust did agree to one for a small parcel in Colorado Springs, and this was land owned by the development company of a Greenlands board member.
In December 2004, Greenlands accepted an easement on 16.5 acres of land owned by Pland LLC and surrounded by the Centennial Glen housing subdivision in northwest Colorado Springs, according to county records. Peter Martz, a Greenlands board member, was manager of Pland.
The hilly plot of land was initially zoned as a no-build area, and the Colorado Springs Parks and Recreation Department rejected Pland’s offer to donate it to the agency in 2002, according to minutes of the Colorado Springs Planning Commission.
It is unclear whether Pland got any tax credits for the easements.
Hallman said the trust was sensitive to the possible conflict in granting an easement to one of its own directors, but decided the parcel was worth conserving because of its views and potential to be part of an urban trail system.
More reforms coming
Sen. Jim Isgar, D-Hesperus, said using tax credits for small parcels is problematic, and that many of the easements studied by the Rocky are beyond the intent of the law.
“All of the situations you describe sound like either abuse or outright fraud,” Isgar said. “This program was not created to help Realtors and developers buy and sell land.”
But finding ways to make it work better have proven difficult. The easement law has been amended at least five times since 2000, and another overhaul is in the works.
One proposal on the table would require that land appraisals be filed with the Colorado Division of Real Estate. Another would allow the Department of Revenue to share confidential tax-return information with other state agencies. Another would require that land trusts be certified.
Former Sen. Owen said he wants the law preserved with appropriate reforms.
“The easements are good. We just need to close the loopholes. When you’re starting from scratch,” he said, “all you can do is what you think is best. Unfortunately you can’t always see these kinds of things happening. We had no idea people would try to make tons of money off it.”
Granting credits
The Internal Revenue Service offers tax breaks to those who place their lands in protective conservation easements. Colorado relies heavily on the IRS rules governing protection of open spaces in granting state tax credits in exchange for conservation easements.
The IRS definition of conservation:
* The preservation of land for outdoor recreation or education purposes by the general public.
* The protection of natural habitat of fish, wildlife or plants.
* The preservation of open space (including farmland and forestland) where such preservation is for the scenic enjoyment of the general public or will yield “a significant public benefit.”
* Access: The preservation of land for recreation or education will not qualify unless the recreation or education is for the substantial and regular use of the general public.
Jerd Smith and Burt Hubbard
9 February 2008
URL to article: https://www.wind-watch.org/news/2008/02/09/abuses-taint-land-deals/