On August 25, 2020, the Senate Finance Committee (“SFC”) staff issued a bipartisan report on “Syndicated Conservation Easement Transactions” following a sixteen-month fact-finding inquiry into conservation easements donated by partnerships, which originated after lobbyists representing interests on both sides advocated for policies related to these transactions.
At the beginning of the inquiry, SFC staff made clear that it was going to find abuses. Accordingly, although the SFC’s conclusion that syndicated conservation easement transactions “cannot reasonably be characterized as anything other than abusive tax shelters” did not come as a surprise, it was nevertheless disappointing. Equally disappointing was the wholesale refusal to acknowledge or even inquire into the benefits provided by the preservation of thousands upon thousands of acres of important real estate across the country.
Bryan Kelley, CEO of Webb Creek Management Group, was among the fourteen individuals who received a letter from the SFC requesting information and documents relating to “syndicated conservation easement transactions.” Webb Creek voluntarily complied with the SFC’s request by providing over one hundred thousand pages of documents. Webb Creek fully supports Congressional efforts to better understand the crucial role partnerships play in preserving valuable land through the conservation easement incentives provided in Section 170(h) of the Internal Revenue Code.
The SFC’s report included a case study of a 2013 Webb Creek project in Clay County, Georgia involving Adam Smith Ventures, LLC. The underlying property, which is adjacent to the Meadows Link Golf Course, a golf course rated in 1998 by Golf Digest as the 6th best new public course in the U.S., and across the highway from George T. Bagby State Park (a park that is on the banks of Lake Eufaula on the Alabama side and Walter F. George Lake on the Georgia side), was purchased by two local developers for development as a “mature market” housing development in 2006. The original property owners developed a land-use plan for the project, initially to be called “The Villages at the Lake,” as a 50+/ retiree community targeted toward those who would value the bucolic rural environment, golf, water sports, hunting, fishing, and other outdoor recreation options available in the area. The original owners conducted their own due diligence and market research and, prior to learning about conservation easements, received an appraisal supporting a much higher value than the amount claimed for the 2013 donation. Contrary to the SFC’s self-serving conclusion, at the time the development was originally contemplated in 2006, the lack of comparable property development in Clay County was a significant factor in the residential appraiser’s conclusion that “The Villages on the Lake” had good development potential.
After the market crash of 2008, the original owners of Adam Smith Ventures were facing financial stress and had no ability to pursue their development plans. Webb Creek became involved in the project in 2013, seven years after the original property owners contemplated the development. As with all of Webb Creek’s projects, Webb Creek was retained by the property owners to assist in liquidating the owners’ interest, as opposed to purchasing the property and flipping it. Webb Creek structured an offering that not only provided the infusion of capital needed to avoid a complete financial loss by the original owners but resulted in the conservation of 227 acres of pristine land adjacent to Lake Eufaula/Walter F. George Lake and across the street from a state park.
The SFC’s report focuses on selective facts that support its negative view of the use of conservation easements and fails to objectively analyze the facts and legitimate underlying appraisal principles for why comparables of similar projects were used (despite their lack of close proximity to Clay County). At the heart of its report, the SFC questions “the accuracy of these appraisals that consistently value property many times higher than was established in prior arm’s length transaction”, but then concedes that the fair market value of land involves consideration of the land’s “highest and best use”. It is because conservation easements last forever, that appraisers are required to examine the property’s highest and best use when conducting this type of specialized appraisal. This differs from a typical real estate transaction where the value of the land is solely the most that one party is willing to pay another party for it. When conserving land forever, the value of a donation reflects the fact that development rights are forfeited in perpetuity. The authors of the SFC report fail or refuse to acknowledge this critical difference, which forms the basis of the tax incentive created by Congress.
Webb Creek believes that the Adam Smith Ventures project is a prime, early example of how partnerships can utilize a conservation easement to accomplish the objectives of its members. Recognizing the increased scrutiny within its industry, and well before the issuance of IRS Notice 2017-10, Webb Creek voluntarily chose to go above and beyond the legal requirements established by the Internal Revenue Code to determine the value of a donation. Beginning in 2015, Webb Creek revised its internal policy to engage at least two independent qualified appraisers to provide qualified appraisals for any potential donation. Moreover, each appraisal is reviewed by a third, independent and qualified appraiser to verify compliance with appraisal standards and the reasonableness of each report. These appraisals are also reviewed by internal and external legal counsel and a third-party due diligence firm. Importantly, appraisals are further supported by independent industry professionals who prepare and provide reports substantiating the highest and best use of the property by analyzing a project’s feasibility and local market conditions. These voluminous reports are also subject to a professional third-party review to verify the reasonableness of the analysis and conclusion. Should the members of a partnership elect to forgo the development rights and donate a conservation easement, the lowest valued qualified appraisal is used for any donation. Conspicuously absent from the SFC report is any discussion of the rigorous standards that Webb Creek follows to evaluate a property’s highest and best use. Nor does it appear that the SFC staff relied on qualified valuation experts to reach their own conclusions.
Privately initiated conservation efforts are needed now more than ever. The U.S. Forest Service estimated that 6,000 acres of open space are converted to other uses each day. Individuals, partnerships and corporations have helped to protect millions of acres over the last few decades using conservation easements, and report after report confirms the value of conserving land from unchecked development. If partnerships of unrelated individuals are arbitrarily prohibited from utilizing conservation easements, and only the ultra-wealthy are able to take advantage of the benefits under Internal Revenue Code section 170(h), then the result will be a drastic decrease in the amount of green space that is perpetually conserved in our country.
Webb Creek calls on Congress to enact targeted legislation that provides better clarity to donors of conservation easements and codifies procedures that ensure donations are supported by independent and accurate valuations. In an environment where the Internal Revenue Service is running roughshod over taxpayer rights, detailed guidance is crucial to giving well-intentioned taxpayers an opportunity to understand the rules in which they are being asked to follow. Webb Creek is confident that the projects in which it has been involved will withstand close, unbiased scrutiny and demonstrate clearly that Webb Creek is an exemplary industry participant. Along with Partnership for Conservation, Webb Creek has long advocated for a “safe harbor” and guidance of specific rules regarding valuation. Clear guidance is needed from Congress, and Webb Creek stands ready to work with all stakeholders to find solutions that will continue to encourage and incentivize much needed private conservation of land for generations to come. This is not the time to abandon efforts to protect our environment and our future, it is time to enhance those efforts.