For 30 years, I was an appraiser and a frequent expert witness on the value of property. Sometimes government agencies would condemn property under eminent domain, and I would estimate what the agency should pay the owner; at other times, I estimated the value of land or easements given to a conservation group such as the Nature Conservancy.
Appraisals are sometimes complicated. For instance, the government taking of about 20 small, old cottages in Rocky Mount, North Carolina, known as Red Row. The homes were right next to the railroad tracks and owned or rented by black families. The condemning agency (the city as I recall) accurately valued each house—each was worth very little. But I discovered that these houses sat on the only B2 (business industrial) land left in the town—that’s why the city wanted it. I calculated a value for what we call assemblage—all the properties together. The homeowners received the much higher valuation.
Appraising the value of land has taken on new importance because of the growth of conservation donations. These donations can be either land itself or easements (the latter are limitations on the use of land). Even with legitimate donations, the donor can sometimes obtain a tax deduction that exceeds the price paid for the land. This usually occurs because an appraiser finds reasons that the potential value of the land is much greater than the price paid. As in the case of Rocky Mount’s Red Row the property has a use different than its present use.
My guess is that most conservation donations are reasonable and most appraisals objective. However, cheating on such donations does occur, and recently “buyer syndicates” have been escalating dubious appraisals and putting a valuable conservation tool into disrepute. What used to be just one more small-scale method of cheating has become big business, happily played by property investors and conservation groups.
That is why a bipartisan coalition of senators is trying pass a bill that would put a limit on the valuation of donated land—without success so far.
Stretching the Limits of Legitimacy
Here’s a summary of a legitimate donation:
I own 200 acres worth $10,000 per acre or $2 million. I donate a conservation easement on 100 of my 200 acres, so that those acres can’t be used for anything except walking. The value of that land for a nature preserve (where walking only is allowed) is estimated to be $1,000 per acre, not $10,000.
Thus, the total value of the land after I have given the easement is the original 100 acres at $10,000 each or $1 million in total, plus 100 acres reduced by easement to $1,000 each, or $100,000. The total value of the land is now $1.1 million, and the value of my donation is $900,000.
For a donor in a 30 percent tax bracket, this has a cash value of $270,000.
Suppose, however, that I, the owner, have so little income I can’t use the deduction. I could sell my land to a Daddy Warbucks for its original value, $2 million. Daddy would donate the easement and get a $900,000 tax deduction worth $270,000 in cash. He would still have a $1.1 million piece of land. And I would get his $2 million.
That is all on the up and up. Daddy Warbucks has indeed decreased the value of the property he bought from me.
Also on the up and up: Suppose I didn’t know my property was worth $2 million and I sold it for $500,000. Daddy Warbucks still gets the benefit of the tax deduction with a $270,000 cash value and owns land worth $1.1 million but, given the value of the deduction, his net cost for that land is $230,000. That assumes he can show that the actual value of the land before the donation was $2 million. Except for my ignorance, there is not a thing wrong with such a deal. Caveat venditor.
Today, the buyer might be a syndicate of, say, five investors investing $100,000 each. Assuming that they can get the land appraised for $2 million, each gets a fifth of the $270,000 tax deduction, or $54,000 each. In addition, they each have a fifth of the remaining $1.1 million, or $220,000 a share. Presto! For a $100,000 investment each reaps $274,000. And why should the conservancy with the easement care? It cost them a few small transaction fees. Yes, I suffer from my ignorance of real value, but everything is legal.
The structure of such profitable deals, however, is now being exploited. The key player is a dishonest appraiser with accomplices of various kinds, including investors lured by big returns and a chance to beat the IRS to syndicators who take a cut for management to conservation non-profits that get free land. Throw in some accountants and lawyers.
I stumbled on my first illegitimate case in the late 1970s when I was on the board of the Conservation Council of North Carolina. While preparing material for an education workshop, I noticed that members of a prominent family, owners of a major North Carolina bank, had donated several acres of a barrier island beach to a private school, Ravenscroft, to which the family had donated liberally. The land was under water, however, and worth nothing. The IRS, once informed, followed up and some months later sent the Conservation Council a reward check for $5,000, presumably a portion of the fine paid by the family.
Such a scam may have been rare at the time. Today, however, the potential for fraud is great, especially due to syndication. For example, the Wall Street Journal in 2016 reported one involving Foothills Land Conservancy in Tennessee (Richard Rubin, “Land-Donation Deals Face IRS Scrutiny,” Dec. 16, 2016).
“To justify a donation exceeding $10 million on a 440-acre parcel, the 2012 plan for the land envisioned a maximum use of 116 residential lots, in a county whose population rose by 169 between 2000 and 2015.”
Indeed, local realtors scoffed at the appraised value of some $20,000 per acre, the Journal reported. Currently, land listings in the county show no large-acreage tracts over $10,000 per acre and most under $5,000. Recently a 126-acre tract for sale on the exit to the popular Falls Creek State Park was listed at $6,341 per acre. (See Zillow listings in Van Buren County, Tenn., for current prices.)
Yet another lawsuit where Foothills is named a defendant was filed by syndicate investors socked when the conservation easement plan blew up, and the IRS socked investors with a 40% penalty. Investors then filed a suit claiming Foothills conspired with the syndicator, appraisers, and leaving the naïve investors liable for big fines. In that case the syndicator sold investors an interest in 840 acres and promised large tax benefits from a highly inflated appraisal. The 150-page complaint is a catalog of methods used to defraud the IRS and thus other taxpayers.
Foothills Land Conservancy is a well-established organization that has engaged in hundreds of conservation donations. Yet to show how seductive these deals are to conservancies getting free property rights, Foothills approved a gift from Coal Property Holdings of an easement on 3,713 acres that had been strip-mined some 25 years earlier.
The details emerge in a 2019 U.S. Tax Court decision. The donor, essentially one individual owning the CPH partnership, bought the land for some $32.5 million and three days later in 2013 gave a conservation easement to Foothills. For that it claimed a $155 million gift deduction. The appraiser had valued the land as “a conceptual mining operation” worth $160.5 million before the conservation donation and $5 million afterward. The IRS vetoed the deduction and levied a 40% inaccuracy penalty for “a gross valuation misstatement.” Besides, Foothills had allowed for potential underground mining in the future, and that would have nullified most or all of the deduction due to loss of mineral value.
President Donald Trump took widely reported and dubious tax deductions of $21.1 million for his Seven Springs estate in New York. (Michael R. Sisak, “Claimed Value of Sleepy NY Estate Could Come to Haunt Trump,” ABC News, March 8, 2021). That was for forest land in an area where local government had repeatedly turned down subdivision plans.
And, when years of litigation failed to get part of his California driving range at the Trump National Golf Course near Los Angeles approved for seaside housing, Trump donated a conservation easement on the unbuildable 11.5 acres of land to the Palos Verdes Peninsula Land Conservancy (Joseph Tanfani, “Special Report: How Trump Scored a Big Tax Break for Conserving a Golf Range,” Reuters, April, 30, 2021).
With the advent of syndicates buying land and making conservation donations, conservation groups can no longer hear, see, or speak no evil, as has sometimes been the case in the past. Indeed, many refuse to deal with syndicates. That doesn’t mean they refuse the less noticeable fraudulent appraisals.
Without a dishonest appraiser, no fraud is possible unless the IRS is asleep. The IRS is not asleep and has classified syndicated conservation easements as “listed transactions” that receive special scrutiny. But enforcement is spotty, and the properties flagged for scrutiny are those where the value of the donation is 250% of the price paid for the land.
When there is a beautiful and desirable piece of land whose acquisition might depend on an exaggerated appraisal, how often does legal virtue trump environmental desire?