LOGISTICAL AND TAX-RELATED OBSTACLES TO COORDINATING CONSERVATION LAND ASSEMBLAGES.

• Author: Pessar, Daniel

1. Introduction 438 II. Logistical Obstacles to Assembling Multiple Blocks of Property for Conservation Purposes 440 A. In General, Conservation Groups Have Limited Resources, Hindering Their Ability to Successfully Assemble Property 441 B. Landowners Are Often Unwilling to Sell or Donate Their Property 443 C. Assembling Land Involves Coordination with Multiple Landowners 446 III. Tax Obstacles to Successful Conservation Assemblage Efforts 449 A. Tax Issues Related to Circumventing the Holdout Problem 452 B. Questions of Appropriate Valuation Raised by an Assemblage Effort 455 C. Problems Arising from Attempts to Streamline Administrability of Multiple Donations 461 IV. Two Case Studies Illustrating Opportunities and Challenges of Conservation Assemblage Projects 465 A. Case Study 1: hey den Working Farms & Forests Project 466 B. Case Study 2: Popes Creek Coastal Wetlands Project 470 V. Conclusion 474 VI. Appendices 475 Appendix 1: Section 170 Tax Law Guidelines for Conservation Assemblages 475 Appendix 2: Leyden Working Farms and Forest Conservation Partnership Map 477 Appendix 3: Leyden Working Farms and Forest Conservation Partnership Aerial View 478 Appendix 4: Leyden Working Farms and Forest Conservation Project News Article 479 Appendix 5: Popes Creek Project Map 480 Appendix 6: Popes Creek Wetlands Project Aerial View 481 Appendix 7: Popes Creek Chesapeake Bay Watershed Regional Map 482 Appendix 8: Recreation Enhancement Plan Map 483 Appendix 9: Popes Creek Area Map 484 I. INTRODUCTION

   A whole is often more valuable than the sum of its parts. This concept holds true in a host of business and organizational contexts, and it is certainly true in the context of environmental conservation. Because ecosystems interact and impact one another, control of a large natural expanse can offer a much higher conservation value than the value offered by each of the parts held separately. (1) As well, the benefits offered by large parks and open spaces for education and recreation far exceed those offered by smaller tracts of land. While the benefits of a long hiking trail, a quiet lake, and a well-preserved ecosystem or natural resource are clear, the creation of these large projects is not inevitable. And to the extent government agencies, conservation groups, and landowners succeed in forming such projects, the aggregation of space tends to be a long-term effort, sometimes taking decades or longer until key lands are designated for conservation. (2)

   In theory, coordinated aggregations of land should happen in conservation contexts just like in the private sector. An individual or group should be able to target a set of properties whose value together can far exceed the current use of the land and use whatever tools and funds available to gain control over the properties within a number of years. But to the extent that assemblages happen in the conservation context, they usually take at least several decades. Limited access to capital plays a central role in making assemblages less common and more logistically difficult in the conservation context. (3) Unlike private sector developers, conservation groups do not have access to profit-oriented capital, a pool of funding which far exceeds the funds available to the conservation community. Even if owners of lands with great conservation value were open to selling or donating their cherished property, they might only consider a disposition if the financial rewards were better than the economics currently offered by conservation groups.

   Moreover, private sector developers often obtain control of multiple properties through the use of coordinated agreements with multiple landowners to ensure that a sufficiently large parcel is controlled before putting large amounts of money at risk. (4) But conservation groups can be limited in their ability to coordinate sale or donation agreements with the necessary landowners. (5) The possibility of funding the non-refundable deposits often used to generate landowner interest may be prohibited by law or policy. (6)

   Finally, coordinating contingent property donations can be complicated from a tax perspective. In several ways, the coordinated conservation effort itself might undermine the financial goals of certain landowners participating in the process by causing a reduction or denial of federal tax deductions. It is only property donors who face these tax law pitfalls. Because private sector firms do not receive property donations in the course of assembling land, they do not face the regulatory burden involved in helping donors qualify for property donation deductions.

   This Article outlines opportunities and challenges presented by conservation assemblages, tax law obstacles to their realization, and solutions to several of these logistics and tax pitfalls. Part II describes the logistical obstacles conservation groups face when aggregating property and some of the ways these groups can overcome the obstacles. Part III describes tax obstacles that could arise in the course of pursuing a conservation assemblage. The Part will focus on obstacles to obtaining charitable donation deductions in coordinated conservation efforts, a concern which could make donating property less attractive to landowners in these contexts. It also includes potential solutions to the deductibility issues that could arise. Finally, Part IV presents two case studies which illustrate the facts that make conservation assemblages so rare. While the facts of the case studies are very different, there are common themes. They both involve multiple landowners, multiple governmental and non-governmental groups, and multiple funding sources. The first case involves donations of land interests and federal and state tax incentives. The second case involves the purchase of fee simple interests in land and no tax incentives. Despite the absence of tax issues in the second case, there was significant complexity involved in the successful realization of the conservation project. To reach its goal, the lead conservation group had to overcome many common obstacles facing conversation assemblage projects.

2. LOGISTICAL OBSTACLES TO ASSEMBLING MULTIPLE BLOCKS OF PROPERTY FOR CONSERVATION PURPOSES

   Creating important conservation projects can take significant resources such as public and private funds, donations of land, and increased government regulation. Conserving natural ecosystems, natural resources, or open space can be complex and expensive because of the challenges of coordination and enforcement. Conservation efforts occurring on one piece of land can be offset or even undone by a long list of activities on contiguous--or even non-contiguous--properties. Pesticide use in one area, for example, can harm ecosystems a distance away if substances applied in one location travel to another location via air, water, or living organisms. One of the ways to achieve conservation goals, then, is to coordinate efforts among multiple landowners, government entities, and private organizations such that use restrictions can be enforced over sufficient amounts of property.

   Conservation assemblage efforts often face a host of challenges relating to a lack of resources to pay for property, a lack of landowner willingness to dispose of property, and coordination issues. A fourth category, tax considerations, will be discussed in depth in Part III. These factors explain why coordinated conservation assemblages are rarely achieved over short time horizons, if ever, despite the promise of a large environmental benefit.

   1. In General, Conservation Groups Have Limited Resources, Hindering Their Ability to Successfully Assemble Property

      Conservation groups rarely have access to large and recurring sources of financial support. (7) As a result, they rely on donations of property and property interests, cash donations, and grants from public and private organizations. (8) Fortunately, conservation groups do not need to purchase every piece of land they want to influence. Donations of property, whether fee simple interests or otherwise, allow conservation groups to leverage their cash for bigger impact. Donors can enjoy tax deductions and, depending on the state, tax credits might also be available. (9) Bargain sales, transactions which function as a partial sale or exchange and partial charitable contribution, also allow groups to leverage their limited resources while providing more financial benefit to landowners than a simple donation. (10)

      A numerical example can help illustrate the differences among these options. Smith is open to the possibility of selling or donating Greenacre, a working farm owned by his family for sixty years. Greenacre produces income for Smith and his children who work with him on the farm so he will only part with the property if the transaction comes with a large economic benefit. Greenacre's fair market value is $80 and Smith's basis in the property is $60. A conservation group interested in restricting development at the property or building a network of hiking trails inside of it will have several options. First, Smith can donate Greenacre and receive $80 in deductions. If his marginal tax rate is 25%, he will benefit from $20 in value for the donation. (11) The conservation group's only costs will be future operating expenses and any transaction fees that it pays to facilitate the transaction. (12) Alternatively, the conservation group can purchase Greenacre, but Smith may think $80 is too low a price to justify parting with such an important property. However, the conservation group might be restricted by policy or by the terms of grant funding to paying fair market value as determined by an appraisal. If the purchase for fair market value were agreeable, Smith would receive $75 in post-tax benefit (13) and the conservation group would have to pay $80. If a bargain sale were to be negotiated at a $50 price--implying a $30 deduction--Smith's total...