CHAPTER 10 NEW WEST CONSERVATION AGREEMENTS AND OIL AND GAS DEVELOPMENT
| Jurisdiction | United States |
(Feb 2008)
NEW WEST CONSERVATION AGREEMENTS AND OIL AND GAS DEVELOPMENT
Faegre & Benson LLP
Denver, Colorado
Introduction
Land is a scarce resource in the Rocky Mountains. Developers want land for the development of residential communities, shopping centers and other industrial and commercial projects. Ranchers and farmers want land to provide food and other agricultural products for Americans. Oil and gas companies want land for the extraction of valuable oil and gas resources. And the land conservation community wants to preserve the land for the benefit of wildlife, plant communities and the general public's visual or physical accessibility. Many of these interests are competing and conflicts can arise when two or more interests have to co-exist.
Fortunately for land preservationists, the United States Congress and some state legislators have chosen to adopt legislation that provides tax benefits for the donation or bargain sale of a conservation easement. When the donation of a conservation easement meets all the requirements of Section 170 of the Internal Revenue Code (the "Code") and Treasury Regulations Section 1.170A-14 established to support and implement the Code ("Regulations"), the conservation easement qualifies for a federal charitable income tax deduction1 and other federal tax benefits.2 Many states have also adopted state tax credits discussed below.
In today's market, domestic oil and gas development is booming. New technology and the increase in the price of oil and natural gas have caused an enormous increase in mineral development in the Rocky Mountains. At the same time, the tax incentives created for the donation of conservation easements have caused a boom in the rate of land protection. This paper will discuss impediments to the peaceful co-existence of these two land uses but also opportunities for collaboration and agreement among mineral developers and the land preservation community.
Legal Structure of a Conservation Easement
A conservation easement is a legal document that contains permanent restrictions on the use or development of land. In essence, it is a voluntary contract entered into between a landowner (the grantor), and a qualified organization (the grantee), for the purpose of preserving certain conservation values of the land. A conservation easement has the same qualities as any business contract because it sets out the agreement between the parties - in this case, an agreement regarding restrictions on the use and development of the land. But a conservation easement is different from a typical contract because it is a real property interest. The
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conservation easement is recorded in the real property records just like a deed transferring a house or other real property.
The legal structure of a conservation easement is unique. In other typical easements (e.g. an access easement), the easement burdens one parcel of land (the land crossed by the access easement) for the benefit of an adjacent parcel of land (the destination of the easement). A conservation easement does not provide a benefit to an adjacent parcel of land, but instead confers a responsibility upon an entity or an individual to enforce use restrictions on the land. This structure is legally referred to as a negative easement in gross and is disfavored by the common law.
Without common law support, conservation easements are creatures of statute. All fifty states have adopted conservation easement enabling acts which recognize a conservation easement as a real property interest, with the full weight of statutory authority. In Colorado, conservation easements are created according to title 38, article 30.5.3 Each conservation easement must comply with this statute to be valid and legally enforceable in Colorado.
The term of a conservation easement can be either a definitive term of years (a term easement) or an unlimited number of years (a perpetual easement).4 Whether the conservation easement is a term easement or a perpetual easement, the conservation easement runs with the land and binds future owners of the land. Because a conservation easement runs with the land, the landowner who places a conservation easement on the land can sell the land and the conservation easement will stay in effect against the new landowners. No matter how many times the land is sold, the new landowner must abide by the terms of the conservation easement during the term of the easement, or forever if the easement is perpetual.
Qualified Organizations
To obtain tax benefits permitted by the donation or bargain sale of a conservation easement, the landowner must grant the conservation easement to a "qualified organization."5 An organization is qualified if it is (i) a non-profit organization that is tax-exempt (otherwise known as a § 501(c)(3) organization) that meets certain requirements; or (ii) a government entity, such as a county, city, state or federal agency, or other quasi-governmental entity.6 The Regulations require a
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qualified organization to "have a commitment to protect the conservation purposes of the donation, and have the resources to enforce the restrictions."7
The non-profit organizations that accept the donation of conservation easements are called land trusts. Land trusts often have different missions and priorities, although all are related to the preservation of land. There are a variety of land trusts, including national organizations, that focus their preservation efforts generally on the protection of flora and fauna, such as The Nature Conservancy, Rocky Mountain Elk Foundation, and Ducks Unlimited. Some land trusts dedicate their efforts to preservation within a certain geographic area or community, while others might narrow their mission to the preservation of a particular use of the land, such as ranching or agriculture.
Conservation Purposes
To qualify for tax benefits, a landowner must donate a conservation easement exclusively for conservation purposes.8 The land that is the subject of the conservation easement must meet at least one of the following conservation purposes:
1. Recreation and education of the general public;
2. Protection of the natural habitat of wildlife, fish or plants;
3. Preservation of open space, including farmland and forestland, for the scenic enjoyment of the general public or pursuant to a clearly delineated governmental conservation policy; or
4. Preservation of historically important land or a certified historic structure.9
The Regulations explain what types of land meet each of the four conservation purposes and provide examples of qualifying land. Although a parcel of land must only contain one of the four conservation purposes to be eligible for tax benefits, many parcels can qualify under more than one purpose. The conservation easement specifically identifies the conservation purpose or purposes of the land preserved and requires the grantee to protect those conservation purposes identified. Conservation easements commonly refer to the conservation purposes as the "conservation values" of the land.
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Typical Restrictions
The conservation values of each parcel of land are unique. Each conservation easement is individually drafted to reflect both the specific conservation values and the goals and desires of the landowner for future use of the land. There are certain activities that most conservation easements uniformly prohibit in order to adequately preserve and protect the conservation values in keeping with the Code and the Regulations. These activities include restrictions on:
1. Mining (discussed below);
2. Industrial uses;
3. Non-agricultural commercial uses;
4. Construction of buildings and homes (unless otherwise reserved in one or more homesites); and
5. Other similar uses which by their nature would not protect the conservation values.10
A conservation easement typically restricts both development and subdivision of the land. To prevent fragmentation of land by keeping large parcels in a single ownership, the subdivision of land is prohibited or severely limited. Sometimes a landowner will prohibit development completely. More often the landowner will reserve one or more homesites on the land for residential use by relatives or even for sale to third parties if a subdivision is not prohibited.
Other typical restrictions are generally included to protect the conservation values of the land and to prevent the degradation of those conservation values. These restrictions include a limit on commercial uses other than ranching, farming, lodging or some types of home occupations. Depending upon the status and use of water rights associated with the land, a conservation easement might also require that all water rights associated with the land remain tied to the land. This issue is extremely controversial in different parts of the state depending upon the value of water in the area and its perceived marketability.
Despite the fact that a conservation easement restricts the use and development of land, it does not grant ownership rights to the land trust. Generally the land trust will visit the land only once a year to monitor and to ensure that the landowner has not violated the conservation easement. The conservation easement does not restrict a landowner's right to sell his or her land or take out a loan on the land.
Finally, a conservation easement does not generally require a landowner to permit public access to the land. This is an important issue for many landowners
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who wish to see the land preserved but are not interested in creating a public park or recreation area on their land.
Federal Income Tax Benefits
A landowner can qualify for federal...
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