Preserving Preservation Easements?: Preservation Easements in an Uncertain Regulatory Future

• Publication year: 2021

91 Nebraska L. Rev. 121. Preserving Preservation Easements?: Preservation Easements in an Uncertain Regulatory Future

Preserving Preservation Easements?: Preservation Easements in an Uncertain Regulatory Future

Jess R. Phelps(fn*)

TABLE OF CONTENTS

I. Introduction..........................................123

II. Background...........................................128
A. What are Preservation Easements?................128
B. Development of Preservation Easements as a Preservation Tool .................................130
1. Pre-Enabling Legislation.......................130
a. Affirmative Easements Versus Negative Easements .................................130
b. Easements Appurtenant Versus Easements in Gross ...................................131
2. The Early Years ...............................132
3. The Easement Boom and Bust .................133
C. How are Preservation Easements Negotiated?......134
1. Donor Motivation..............................134
2. Initial Informational Visit and Background Research......................................135
3. Deciding Whether to Accept the Donation......135
4. Negotiating the Terms, Preparing, and Recording the Easement.......................136
5. Endowment Contributions.....................137
6. Tax Considerations............................137
D. Understanding the Tax Motivations Behind Easement Donations ..............................138
1. Qualified Real Property Interest ...............138
2. Qualified Organization.........................139
3. Exclusively for Conservation Purposes .........139
a. Certified Historic Structures ...............140
b. Historically Important Land Areas .........141

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4. Other General Requirements...................141
a. Perpetual in Duration......................142
b. Restrictions on Transfer....................142
c. Prohibition of Inconsistent Use.............143
d. Requirement of Donative Intent............143
5. Other Specific Historic Preservation Requirements .................................143
6. Explaining the Deduction......................144

III. Recent Legal Decisions: The Current Regulatory Climate ...............................................146
A. Structural Issues ..................................146
B. Procedural Issues.................................148
1. Appraisal Issues...............................148
2. Acknowledgment Letters.......................150
3. Perpetuity Issues..............................150
a. Subordination of Mortgages ................151
b. Condemnation and Extinguishment Proceeds ...................................151
c. Durability of Easement-Holding Organizations ..............................152

IV. What Can Easement-Holding Organizations Do? .......153
A. Moving Beyond Reliance on Federally Subsidized Easement Donations ..............................153
1. Voluntary Donations ...........................153
2. Planned Giving ................................155
3. Exacted Easements ............................156
B. Expanding the Role Easements Play Within the Preservation Movement ...........................158
1. Preservation Easements as Part of a Larger Effort .........................................158
a. Oral Histories .............................158
b. Collection of Material Objects Associated with the Property..........................159
c. Public Awareness and Transparency........160
2. Reorienting Thinking Regarding What Should Be Protected...................................161
C. Improving the Quality of Easements and Easement-Holding Organizations.............................162
1. Strengthening Easements ......................162
2. Prioritizing Efforts.............................163
D. Improving the Range of Financial Mechanisms Utilized ...........................................164
1. Purchasing Easements .........................165
2. Separating the Endowment Contribution from the Easement Donation ........................165

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3. Partnering with Land Trusts to Protect Whole Places ......................................... 166
4. Exploring Revolving Funds .................... 167

V. Conclusion ............................................ 168

I was forced to fall back upon the unsatisfactory conclusion, that while, beyond doubt, there are combinations of very simple natural objects which have the power of thus affecting us, still the analysis of this power lies among considerations beyond our depth.(fn1)

I. INTRODUCTION

In May of 1910, the early preservationist William Sumner Apple-ton observed in the first Bulletin of the Society for the Preservation of New England Antiquities that "[o]ur New England antiquities are fast disappearing because no society has made their preservation its exclusive object."(fn2) The cover of this first bulletin bemoaned the fate of one lost antiquity-Boston's John Hancock House (built in 1737)-and described its teardown as "a classic in the annals of vandalism."(fn3) In 1863, amid limited public outcry, this historic landmark was torn down but its fate is now cited as contributing to the birth of the preservation movement.(fn4) By 1910, Appleton's newly formed Society for the Preservation of New England Antiquities (SPNEA) was poised to enter this void, proposing "to preserve the most interesting of [New

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England's historic] buildings by obtaining control of them through gift, purchase, or otherwise, and then to restore them, and finally to let them to tenants under wise restrictions."(fn5)

In March of 1912, SPNEA's sixth bulletin featured better news. Earlier that year, SPNEA had purchased the Fowler House (1809) in Danvers, MA to secure its long-term preservation.(fn6) Upon purchasing this property, SPNEA was confronted with several profound questions: what does one do with a historic house once it has been saved, and perhaps more importantly, how does one pay for its continued maintenance?(fn7) Initially, SPNEA's solution was to operate the Fowler House as a historic house museum but continued ownership proved untenable by the late 1970s.(fn8) The organization then began exploring the idea of deaccessioning the Fowler House along with approximately twenty-five to thirty other museum properties.(fn9) In 1980 SpNEA sold the property, but by then the Massachusetts legislature had authorized a "new" preservation tool-the preservation easement(fn10)-which allowed the Fowler House to return to private ownership while preventing certain changes to the property.(fn11) By the end of 1981,

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SPNEA formally launched its preservation easement program (the stewardship Program), which was designed to manage and monitor these properties.(fn12) The program soon began accepting donations of easements on privately owned properties which greatly expanded the scope and reach of the organization's efforts.(fn13) Perhaps somewhat surprisingly for an organization largely known for its historic house museum holdings, the program dovetailed quite nicely with SPNEA's original idea of obtaining control of significant historic properties and then letting them back to tenants "with wise restrictions"-an idea ahead of its time which would wait almost seventy years for the development of a legal mechanism to facilitate the attainment of this objective.(fn14)

Since the 1970s, easements have played a strong role in the preservation movement and have allowed preservation groups to preserve thousands of historic properties.(fn15) By utilizing this voluntary mechanism, preservation-minded property owners have been able to ensure the long-term protection of individual homes where local politics have

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frustrated efforts to adopt local preservation ordinances.(fn16) Moreover, easements have frequently gone beyond the exterior protections afforded by regulation of local historic districts to protect historic interior features which would almost certainly have lacked protection absent this treatment.(fn17) By preserving structures which would otherwise be vulnerable and by expanding the scope of protection to preserve interior elements, preservation easements have played a unique role, and when well crafted, they can be the most effective mechanism for protecting examples of our architectural history.(fn18)

over the same period, the introduction of significant federal tax incentives has made easements substantially more attractive and more widely used by states, local governments, and non-profit organi-zations.(fn19) By the early 2000s, however, the increased reliance on these tax incentives was targeted by the IRSas a form of tax fraud or abuse-essentially as a tool for wealthy homeowners to gain lucrative tax breaks.(fn20) Criticism of exterior easements, or so-called facade easements, was particularly acute. some of these easements protected exteriors already regulated by local historic districts where insensitive changes were either highly unlikely to occur or already

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prohibited.(fn21) In the view of the IRS and many others, very little was being given up by these property owners to receive what could often be considerable tax deductions.(fn22) In response, the IRS began to bolster its monitoring of easement donations and aggressively audit and challenge claimed deductions, causing the number of donors claiming the charitable deduction to plummet.(fn23) This enforcement activity made easement donations so fraught with risk that the IRS...