Conservation easements are good for the environment and business

Green Acres - Conservation easements are good for the environment and business.

BY MARGOT CARMICHAEL LESTER

Developer Walt Busby initially turned his nose up at the thought of setting aside a goodly portion of recently acquired land as a conservation easement. His firm, Galo Properties, had purchased 4.5 miles of land along the south fork of the San Gabriel River in Texas in order to extend a sewer line to a planned development called Water Oak at San Gabriel, about 30 miles north of Austin.

“The city of Georgetown suggested a 30 percent set-aside, and I wasn’t sure I was interested,” admits Busby, Galo’s COO. “My attitude was, I just paid $16 million for this land—how do we get the money back?’”

After two years of wrangling, Busby gave in to secure approval, declaring 680 acres of the project’s 1,906 acres as city and community parkland and wilderness areas. That makes Water Oak—with 4,000 high-end homes, 100 acres of commercial and retail development, and 1,500 multifamily units—one of the first and largest conservation subdivisions in Texas.

Conservation easements are becoming more prevalent as municipalities attempt to reduce environmental impacts, ensure the preservation of green space and create sustainable communities that limit uses or prevent development on the designated land. The parcels can be part of the actual development or outlying tracts that merit protection. Yet, such easements also come with distinct benefits and challenges—and developers are finding ways to embrace both.

A MIXED BAG

The concept of easements was pioneered in 1964 when the IRS officially sanctioned a charitable income tax deduction for the donation of conservation lands. But it wasn’t until the 1980s that these set-asides began gaining popularity, according to Laura Bernhardt, a land use and planning consulting with Los Angeles- based law firm Loeb & Loeb.

As part of the Tax Treatment Extension Act of 1980, Congress made the conservation easement deduction provision a permanent part of the tax code, giving developers a break for preserving open spaces, irreplaceable places, agricultural lands, and sensitive habitats. The deduction made it more financially attractive to give back to the community, provide unique amenities to residents, and create more responsible, profitable developments.

But set-asides aren’t a slam dunk for every developer. Andrew Gutman, CFO of the Southfield, Mich.-based Farbman Group, isn’t quite sold on the idea. “We have looked at providing conservation easements on all of our properties in the last two or three years,” he says.

But Farbman, the largest full service real estate company in the state with 20 million square feet in its portfolio, has yet to do one. Chief among his concerns: _ Lender approval is needed in order to place easements on the property. Many lenders do not see the benefit and believe the easement reduces the value of the property. _ As each easement is audited by the IRS, there is a concern that the value attributed to the easement may not hold up under scrutiny. _ The process, inclusive of the IRS audit, is extremely lengthy. Gutman’s advice: “Be thorough in your analysis and go into [the process] with your eyes wide open.”

SEEKING APPROVAL

Despite the challenges related to conservation easements, agreeing to a set-aside plan can speed the entitlement and permitting process. Municipalities may waive certain fees or expedite permitting, particularly those with some provision for public land uses such as city or county parks, recreational areas, nature preserves, or wildlife areas.

Working with government and citizen groups to identify the right parcel is crucial. Sierra Properties, a Tampa, Fla.-based developer of master-planned communities, is using a conservation easement in conjunction with its Hickory Hill golf community and Cypress Creek Town Center retail project, both in the greater Tampa area.

In addition to green space in the community (hiking trails, golf courses, and open space) and retention ponds at the mall, Sierra acquired a $5 million conservation easement on 249 acres of critical environmental land along Hillsborough River, which runs northwest from Tampa Bay through Tampa to the Green Swamp of Central Florida.

Known as the Alston Conservation Land, the tract had been targeted for public acquisition for some time and is surrounded by government-owned property. To meet a no-net-loss-of-wetlands requirement—and thus get the project approved—Sierra Properties proceeded to deed the conservation easement to the Southwest Florida Water Management District.

“We like to work closely with the local governments and agencies to make sure the [set-aside] adds value,” explains Sebring Sierra, the company’s vice president of operations. “Everyone agreed that the property completed protection in an important area. By listening to what the regulators and government representatives want [we] ensure a win-win situation for everyone.”

BIG BENEFITS

Faster approvals and lower fees are nice, but they’re not enough to offset acquisition costs or lost revenues. To sweeten the pot for developers, municipalities provide incentives.

“If we were putting $16 million in, we needed to be reimbursed,” Galo’s Busby says. The City of Georgetown allowed us to create an in-city municipal utility district.”

The utility district collects fees and taxes to cover the cost of providing services such as conservation, irrigation, power generation, firefighting, solidwaste management and recreational facilities. “That gets us about $100 million and helps us offset the cost over time of giving up the land,” Busby explains.

Other options include declaring the project a public improvement district or a road improvement district, which also allows for bond funding and other revenue generation.

Being environmentally sensitive also gives developers green credibility they can use in marketing. “These projects add value to developments because green-minded homeowners are willing to pay for them,” says Sean Compton, a landscape planner and designer with TBG Partners in Austin. “Consumers will be demanding it more in the near future as the sustainability tidal wave grows.”

Busby agrees: “We’ve got 2.5 miles of river running through this property. You can live here and take care of a 50- to 100-foot front lot and have lots of wild space. In Texas, that’s a boon because most subdivisions have such high density you have to go a long way [out] to find a natural area.” Even then, those areas won’t stay open spaces. They just haven’t been built out.

Conservation-mindedness also creates the all-important good will that developers crave, Sierra adds.

“We would like to think that by providing the protection of environmentally important land that we have gained good will,” she says. “Of course, we hope it reinforces our reputation for doing things right.”

BOTTOM LINE

With a better understanding of how to capitalize on the upside potential of conservation easements, more developers are beginning to ride this green wave, Compton says. “While developers may dread being a pioneer, my belief is that they will quickly understand and begin utilizing the array of sustainable solutions that we have available to us,” he explains.

Busby certainly came around. “The reason I did it the first time was the city made me,” he admits. Now he’s a believer— he’s even planning a project in San Antonio including a 50 percent set-aside for a bird habitat.

“It was kind of hard at first,” Busby allows. “What do you mean I have to give up the land? But I’ve quit grimacing. We’ll do this on anything of size from now on.”