The productivity problem: an analysis of conservation easement taxation issues following South Dakota's implementation of a productivity-based land valuation system.

• Author: Fisher, Terra M.

Perpetual conservation easements have been a contentious issue for many years in the South Dakota Legislature. To date, however, the majority of the discussion surrounding these easements has focused primarily on their perpetual duration, rather than the more pressing issue of taxation. South Dakota's recent shift from fair market valuation to productivity valuation of agricultural property for taxation purposes has, in some circumstances, dramatically increased the amount of property taxes owners of conservation easement land must pay. This increase has led some counties to provide creative valuation reductions for conservation easement land, while other counties do not. The legislature should carefully scrutinize its current land valuation system for conservation easements and amend South Dakota's laws to provide county departments of equalization with a uniform valuation system. This article provides an overview of conservation easements, a synopsis of how some counties have coped with increased conservation easement land valuations, and an explanation of why the current valuation system for conservation easements is in dire need of change. Finally, this article provides recommendations for the South Dakota Legislature to implement that create a uniform system for taxing conservation easements.

1. INTRODUCTION

   Lyle Johnson, a landowner in Brookings County, owned land containing a perpetual conservation easement.* 1 He entered into an easement agreement in 2010 to preserve his land for conservation purposes. (2) His conservation easement prohibited almost all significant usage of his land, including the grazing and cutting of naturally-occurring plant growth. (3) The year after he signed the conservation easement agreement, Mr. Johnson received notification that under the state's new agricultural land valuation system his land was to be valued, for taxation purposes, at a significantly higher level than it had been valued under the previous fair market valuation system. (4) Even though Mr. Johnson could not use his conservation easement land, the state's new agricultural property valuation system values land based on its potential to yield crops, without regard for actual use or restrictions on the land. (5) As a result of the new valuation system, Mr. Johnson's land was valued at $845 per acre, when the previous year it was valued at $545 per acre. (6) Mr. Johnson, therefore, was required to pay significantly higher property taxes on his land even though it could not yield its potential level of productivity because of the conservation easement restrictions. (7) Mr. Johnson sold his land two years after implementing the conservation easement because of the increase in property taxes resulting from the new valuation system. (8)

   Mr. Johnson's story is not uncommon. (9) Landowners throughout South Dakota (especially in the northeastern and eastern parts) have been forced to pay significantly higher property taxes on their conservation easement land since the state's implementation of a productivity valuation system in 2010. (10) This article addresses issues conservation easement landowners have been dealing with since the implementation of the productivity valuation system and urges the South Dakota Legislature to take action to ensure a uniform system of valuation statewide. (11)

   First, this article will provide a general overview of easements and an explanation of how conservation easements emerged. (12) Second, this article will provide a history of South Dakota's legislative efforts to mitigate or eliminate conservation easements and will explain that further legislative mitigation efforts are fruitless because of restrictions under current federal law. (13) Next, this article will provide an overview of the changes made to the agricultural property valuation system and will explain how these changes affect conservation easement land. (14) Finally, this article will provide recommendations for the South Dakota Legislature to help correct the issues that have arisen as a result of valuation changes in conservation easement land. (15)

2. BACKGROUND

   1. What are Easements?

      Easements are non-possessory rights to land that are given to one who is not the possessor of the land, preventing the possessor of the land from interfering with that right. (16) Easements are either appurtenant or in gross. (17) Appurtenant easements allow owners or occupiers of one piece of land (the dominant parcel) to make use of another piece of land they do not own (the servient parcel). (18) The easement itself is located on the servient parcel. (19) Appurtenant easements run with the land, meaning ownership of an appurtenant easement is tied to a particular parcel of land and generally does not terminate with the easement holder. (20) Since appurtenant easements run with the land, they are transferable to subsequent owners of the dominant parcel. (21) A common example of an appurtenant easement is a private roadway easement, where an owner of one parcel of land is given the right to cross the land of another. (22)

      In gross easements, conversely, run with the easement holder. (23) A key feature distinguishing an appurtenant easement from an in gross easement is that the holder of an in gross easement does not hold property that is benefited by the easement. (24) A common example of an in gross easement is a utility easement, where a company runs a pipeline across another's property. (25) In gross easements generally are not transferrable, meaning they cease to exist with the holder of the easement. (26) The exception to this rule occurs when third-party entities, such as utility companies, non-profits, or governmental organizations, hold in gross easements. (27) Transferability is then permitted following the demise of the original easement holder. (28)

      Easements are also considered either affirmative or negative. (29) Affirmative easements permit an easement holder to use the land where the easement is located. (30) Affirmative easements include common easements, such as a private roadway easement or an easement to place utility lines on a specific property. (31) Alternatively, negative easements forbid the owner of the servient parcel (the land where the easement is located) from using the land for specific purposes. (32) Two examples of negative easements would include a prohibition on constructing a building on the land over a certain number of stories and a prohibition on blocking a waterway running through the land. (33) At common law, negative easements were disfavored and were permitted only if a servient parcel holder "den[ied] light, air, or support" to the dominant parcel. (34)

      Unlike common law negative easements, however, conservation easements--which are almost always in gross, negative easements--may be placed on property without regard for the denial of light, air, or support, and are generally allowed to continue into perpetuity. (35) Even though other easements were disfavored at common law, conservation easements are permitted because they are created purely by statute. (36) Thus, states that implement statutes for conservation easements have used legislation to avoid the common law prohibitions. (37)

   2. THE HISTORY BEHIND CONSERVATION EASEMENTS

      The first conservation easements were governmental in nature and began in the Boston area in the 1880s. (38) Thereafter, in the 1930s, the United States Fish and Wildlife Service ("FWS") obtained more than 200 conservation easements for the preservation of wildlife refuge areas in North Dakota, South Dakota, and Minnesota, leading to more than 21,000 conservation easements obtained by the FWS between 1965 and 1985. (39) The modern legislative push for these easements was a result of scenic preservation efforts along roadways. (40) Rather than taking a landowner's property by eminent domain, the government created conservation easement agreements with landowners, which permitted the owners to retain their property while compensating them for the nonuse of their land. (41)

      Between the late 1970s and early 1980s there were drastic increases in land and crop prices which led to rapid growth in the agricultural industry. (42) Shortly thereafter, however, crop and land prices plummeted, leading to major financial issues for farmers and many farm foreclosures (43) Federal entities such as the Farmers Home Administration ("FmHA") dealt with many of these foreclosures. (44) When the FmHA foreclosed upon a property, and while the property was still in its hands, it permitted other federal agencies such as the FWS to implement conservation easements on portions of these properties. (45) Thereafter, the land was sold with perpetual conservation easements on the land. (46) Congress also authorized the FmHA to cancel FmHA debts by creating conservation easements on secured property equaling the value of the debt owed to the FmHA. (47) The FmHA placed conservation easements on approximately 41,000 acres, comprised of 480 tracts of land, in South Dakota during that period. (48)

   3. THE EMERGENCE OF THE UNIFORM CONSERVATION EASEMENT ACT

      Early conservation easements faced potential legal problems because they were of questionable legal validity. (49) As a solution to this, the National Conference of Commissioners of Uniform State Laws ("NCCUSL") passed the Uniform Conservation Easement Act ("UCEA") in 1981. (50) The Act created model conservation easement legislation for states to enact. (51) The purpose of the Act was to:

      provide[] a simple, limited way to end impediments to the use of easements under the common law. It permits the acquisition of easements as limited interests in land with the minimum disturbance of other interests and uses. It does not force anybody to do anything, but, if it appears advantageous as a matter of gift, sale or other conveyance for the landowner to transfer an easement, the Uniform Act assures its validity. This conforms to the general American...