Legal Aspects of Conservation Easements: A Primer for Transportation Agencies (2013)

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19 easement is a contract and the parties may negotiate and agree to specific terms, including how proceeds will flow when the easement (or a portion thereof) is taken, sold, or otherwise conveyed and compensation is re- ceived. If sound and equitable, it is likely that such con- tractual provisions will be enforced. Lastly, the parties to the conservation easement should consider the taxation of proceeds from condem- nation. The IRS treats these proceeds as income (or loss) from a real estate transaction.145 Parties to the transaction should consult with their own professional real estate, accounting, and legal providers on how best to handle such situations. Nonlegal Issues: Political Defense Strategies Aside from the legal restraints, a number of practical considerations are relevant to the condemnation of con- servation easements. As discussed, except in a handful of states, relatively few legal impediments stand in the way of the transportation agency’s authority to con- demn a conservation easement. However, prior to doing so—even though the legal authority exists—the agency should consider the conservation values of the property identified for a transportation improvement. The follow- ing two examples illustrate these dynamics. The first relates to the construction of the US-17 Wilmington bypass in coastal North Carolina.146 In con- junction with right-of-way expansion, the NCDOT had identified property for condemnation in and around Futch Creek for stormwater retention purposes. The property, however, was subject to conservation ease- ments held by the North Carolina Coastal Land Trust. Seeking to defend Futch Creek and its surrounding wetlands, representatives from the land trust sought to negotiate with the transportation agency to identify alternatives for the department’s stormwater needs. When these efforts failed, the land trust brought a law- suit challenging the agency’s stormwater permit, not its underlying authority to condemn the easement. Ulti- mately, the parties settled the lawsuit after a suitable alternative location was identified, one which would avoid damaging Futch Creek and the property subject to the conservation easement. 145 IRS Publication 544, which can be found at http://www.irs.gov/publications/p544/ch01.html#en_US_publin k100072305, provides discussion of this topic. See also 26 IRC § 1033(g), and Kaufmann v. Commissioner, 134 T.C. No. 9 (2010), cited in IRS publication on Conservation Easement Audit Techniques Guide, available at http://www.irs.gov/ Businesses/Small-Businesses-&-Self-Employed/Conservation- Easement-Audit-Techniques-Guide. 146 Jon Halpin, Condemnation: Coming to an Easement Near You?: Tactics for Fighting a Growing Threat to Conserved Land 16–17, LAND TRUST ALLIANCE (2008), http://webcache.googleusercontent.com/search?q=cache:gwTK3 khaFH8J:www.landtrustalliance.org/conservation/conservation -defense/conservation-defense-insurance/CDdocuments/ condemnation-article.pdf/at_download/file+&cd=1&hl =en&ct=clnk&gl=us&client=safari. A second example, involving the 1,400-acre May- acamas Mountain Sanctuary in California, demon- strates how cost-benefit alternatives may be used to balance the objectives of a preexisting conservation easement with the objectives of the transportation agency.147 The City of Santa Rosa sought to establish both a wastewater pipeline and a road that would trav- erse a property owned by the National Audubon Society and subject to a conservation easement held by the So- noma County Agriculture and Open Space District. The Society brought a lawsuit against the city claim- ing that it failed to follow proper environmental review procedures. During the litigation, the Society demon- strated how an alternative route for the pipeline and road would both save money and reduce the risk of en- vironmental contamination. Thus, instead of challeng- ing the condemnation on its face, in the words of So- noma County’s Andrea MacKenzie, “I think we turned an unfortunate situation into an agreement that pro- vides major benefits to the public.” This, along with an agreement by the City to fund various mitigation ef- forts, provided the basis for reaching a settlement. IV. ESTABLISHING A CONSERVATION EASEMENT This section is devoted to the pre-creation phase, which encompasses planning, drafting, and partner- ships. Section VI covers the post-creation phase, includ- ing monitoring and long-term stewardship. A. The Conservation Easement Plan Prior to drafting and executing a conservation ease- ment, significant planning, analysis, and negotiation must take place between the parties to ensure the con- servation easement satisfies each party’s interests and applicable legal requirements. The relevant parties will include the landowner (i.e., the grantor); the transpor- tation agency; and the land trust, governmental agency, or other party who will act as holder (i.e., the grantee). No single step-by-step planning process or single con- servation easement template is appropriate for all cases. However, there are several universal planning and drafting considerations that are important and that can be summarized into the following steps: • Beginning the Process. • Parties and Negotiation. • Due Diligence. Beginning the Process Early in the project development process, a transpor- tation agency may know or suspect that a conservation easement is going to be needed to take the project to completion. At this point, the specifics of a conservation easement document should also begin to be considered. It is important to first consider the purpose of the con- 147 Robert H. Levin, When Eminent Domain Comes Knocking 20, no. 2, LAND TRUST ALLIANCE 6 (2001) (subscription needed to access document).

20 servation easement, i.e., environmental mitigation or beautification and the legal requirements of each. In addition to informing the language and mechanics of the easement document, the purpose of the easement will determine the type of appropriate holder, the level of access needed, and even the type of land to be pro- tected. The transportation agency needs to consider not only whether or not it is appropriate for the agency to be the easement holder, but also whether or not it has the ca- pacity or the desire to be the holder of the easement. If not, an appropriate holder should be identified, such as a land trust or natural resources agency. Beyond the needs of the transportation agency, pro- ject assessment also involves an information-gathering component, including visiting the prospective property. These visits can be used to observe the property and assess its conservation potential, identify potential con- straints, establish relationships and share information with landowners, and chart a path forward. During the site visits, critical issues may be uncov- ered. For example, it may be discovered that the land- owner wishes to continue agricultural or silvicultural operations that could be incompatible with the conser- vation purposes. Conversely, if the purpose of the con- servation easement is to protect farmland, ongoing ag- ricultural practices would be desirable. Identifying and assessing these issues during the initial site visit can help lay the foundation for a compromise on the conser- vation easement’s restrictions and reserved rights, as well as to identify points of fundamental misunder- standing or disagreement, which may derail the project entirely. In short, the site visit is a key step and should be conducted early on. Of course, project assessment is an ongoing process, which interrelates with the other planning efforts dis- cussed. Months into the planning process, perhaps dur- ing a subsequent site visit after preliminary negotia- tions have taken place, significant problems may become evident. For example, the prospective holder may realize that the property’s monitoring and en- forcement demands outstrip its capabilities, in which case a new holder, capable of handling necessary moni- toring, will need to be identified. Also, if title defects are detected during the due diligence process, the entire effort may need to be fundamentally reevaluated. Whatever the case may be, to ensure the transportation agency’s objectives and interests are preserved prior to executing a conservation easement, the project needs to be continuously and thoroughly vetted. Key Considerations in Initial Planning • Will a conservation easement be needed? • What is the purpose of the conservation easement: to meet regulatory requirements or to satisfy other concerns and local needs? • What type of land should be protected? • Are there any significant constraints: title issues, incompatible land uses, preexisting easements? • Is there an appropriate easement holder willing and able to monitor and enforce the conservation easement area? Parties and Negotiations Conservation easements offer benefits to the parties, but they also involve land-use restrictions and affirma- tive obligations, which may be controversial and require consensus. Often, once a prospective property has been identified, the acquiring party, likely the transportation agency or its agent, will seek an initial, coordinating meeting with the identified landowner. At this meeting all parties are introduced and the goals and objectives of each are put on the table. For the landowner, this meeting affords an opportunity to learn more about conservation easements and the crea- tion process. Landowners are often struck by the sever- ity of the required development and use restrictions, especially if the conservation easement has to meet fed- eral or state tax law requirements148 or strict environ- mental mitigation standards.149 It is important for the proponent of the conservation easement to understand fully the reasons a conservation easement is being pro- posed, how it will be applied, and the timing of the ac- quisition. If a transportation agency is seeking the easement for regulatory compliance, it is standard for the landowner to be paid for the sale of those property interests. While discussing money at the first meeting may not be appropriate, setting expectations is. Trans- portation agencies purchasing conservation easements directly will be able to purchase the conservation ease- ment only at the value set by the appropriate appraisal or other government-determined method. If the landowner does not wish to move forward after the initial meeting, no significant resources will have been expended at this point, though the agency may seek alternative authorized means of acquisition. How- ever, if the landowner wishes to move forward, the 148 As discussed throughout, landowners may receive tax benefits for donating a conservation easement. Land trusts and other conservation organizations are often tax exempt and must adhere to strict operating procedures to maintain that status. Both of these situations will dictate certain language and restrictions of the conservation easement. 149 Easements for compensatory mitigation projects will require review by the Interagency Review Team as discussed previously and also access for construction, monitoring, and enforcement.

21 meeting will have successfully shaped general expecta- tions and fostered an understanding of the conservation easement process. It is important to realize that, as with any negotiation, the conservation easement proc- ess may take many twists and turns. Some landowners may welcome the protections that a conservation ease- ment affords. Others may be fundamentally opposed to government restrictions. Generally, agreement is reached somewhere between these two points. Should the parties desire to move forward, negotia- tions typically follow on the terms of the conservation easement, the purchase price, and the responsibility for other associated costs. The parties, especially the land- owner, should consult with their own legal and tax pro- fessionals early in the negotiation process before mak- ing any decisions that may have taxation or other repercussions. How these negotiations will take place depends on a number of factors, including the identity of the parties and the nature of the conservation easement. However, the conservation plan technique used often by land trusts (in working with landowners) offers significant practical advantages.150 A conservation plan describes, in nonlegal terms, the key land-use restrictions and affirmative obligations to be created by the conservation easement. Periodically updating the plan based on con- tinuing negotiations and due diligence efforts helps the parties have a clear understanding of the conservation easement’s effect. Also, utilizing an informal conserva- tion easement plan in the course of negotiations, as op- posed to a draft conservation easement deed, enables the parties to more efficiently negotiate revisions and propose changes. Ultimately, the goal of the negotiations is to identify and reach agreement in principle on all of the signifi- cant elements of the conservation agreement. Once this has taken place, the parties will have obtained a meas- ure of security in committing additional time and re- sources to the project during the due diligence and drafting stages. Identifying Key Parties and Relevant Interests • Who is acquiring the easement: the transportation agency or another party, such as the intended holder? • What is the purpose and mission of the holder’s organiza- tion? • Is the landowner willing and interested? • Are all landowners represented in the negotiation? • What are the key concerns of each party? • Are the expectations of the parties being accounted for and reasonable? 150 BYERS & PONTE, supra note 4, at 52. Due Diligence Once the acquiring agency has decided that the property is suitable for its needs, the landowner has agreed in concept to a conservation easement, and an appropriate holder has been identified, the real work of due diligence begins. These efforts will vary given the nature of the property and the purpose of the conserva- tion easement. However, some common due diligence efforts include title examination, appraisal, and base- line documentation.151 Title Examination.—While the landowners whose names are on the deed for a property are the primary party to the conservation easement, other parties may hold a legal interest in the property, such as mineral and logging rights, utility easements, access easements, and financial encumbrances. Judgments and liens on the property must be removed or subordinated prior to placement of the conservation easement.152 Any inter- ests predating the conservation easement will remain with the property unless properly severed or subordi- nated prior to recordation of the conservation easement. Thus, identifying all parties holding any interest in the property is essential. The cost of a title report should be accounted for in the financial arrangements between the parties. The buyer (i.e., transportation agency) will most often bear the cost of obtaining the title opinion, but the land- owner may be responsible for clearing title issues as necessary. The holder of the conservation easement or other interested party153 may require title insurance prior to creation of the conservation easement. Title insurance will protect the investment of the transporta- tion agency should any latent title defects become known and ownership challenged in the future. Appraisal (Valuation).—In addition to obtaining in- formation about the property’s ownership, it is impor- tant to document the property’s value by appraisal. Re- gardless of the means of acquisition, an appraisal is appropriate to document value and to set pricing expec- tations. When a conservation easement is being donated 151 See Pinal County v. United States, 2010 U.S. Dist. LEXIS 92347 (U.S. Dist. Ariz. 2010) (County’s highway ease- ment survives eminent domain condemnation proceedings when contemplated in baseline document). 152 “An easement will be terminated by the sale of the servient parcel pursuant to a prior mortgage.” C. Timothy Lindstrom, Land and Water Division: Hicks v. Dowd: The End of Perpetuity, 8 WYO. LAW REV. 25, 42, n.87 (2008), hereinafter cited as “Lindstrom.” (citing ELY & BRUCE, supra note 124, at §§ 2:2, 10:41). “Unless the holder of a mortgage existing at the time of conveyance of a conservation easement agrees to subordinate its interest to the easement, a future default in payment of the sum secured by the mortgage can result in a mortgage sale in which the property is sold free of the conservation easement. For this reason federal tax law requires that outstanding mortgages be subordinated to any conservation easement for which a tax deduction is sought.” Id. at 42. 153 Such as a regulatory agency in the case of compensatory mitigation.

22 and the landowner is seeking tax benefits, IRS regula- tions require appraisals and place conditions on how they must be conducted. Appraisals are useful in de- termining the appropriate sales price in a purchase/sale transaction. Because a conservation easement is a par- tial interest in real property and not a commonly trans- acted interest, valuation can be subjective and compli- cated. It is not uncommon for the parties to disagree on price.154 As a result, appraisals may help inject a meas- ure of objectivity into the negotiation process. Baseline Documentation.—The final component of due diligence is the baseline report, which documents the condition of the property being protected and neces- sary monitoring and maintenance activities to maintain the conservation value. As with appraisals, these re- ports are required for easement donations when tax benefits are being sought. The holder of the conserva- tion easement often requires baseline documentation regardless of the means of acquisition. The holder should be consulted in preparation of the baseline document as the holder may have specific format or content requirements. It is important to note that base- line reports are often prepared prior to acquisition, and the time and cost of such should be factored in to the process. Investing in Knowledge—Due Diligence • Other than the grantor (landowner), who else has an interest in this land? • Are those interests incompatible with the conservation pur- pose? • Can those interests be removed or accommodated? • What is the conservation easement worth? • What is the fair market value of the conservation easement? • What is the difference in the value of the property before and after the easement? B. Drafting Ultimately, a conservation easement must be trans- lated into a formal, legal document. Though the land- owner and acquiring party may have been working on their own behalf to this point, the drafting of the actual document and review of the document by the other party should be done by attorneys specializing in the area. The conservation easement is generally drafted by whichever party is leading the transaction, by the party governing the transaction, or both. For example, in the 154 E.g. James Boyd, Kathryn Caballero & R. David Simpson, The Law and Economics of Habitat Conservation: Lessons from an Analysis of Easement Acquisitions, 19 STAN. ENVTL. L.J. 209, 234 (2000) (“Because there is no conventional market for easements, the usual procedure for valuing an asset—simple observation of an equilibrium market price resulting from a large volume of transactions—cannot be followed.”). development of a compensatory wetland bank, the sponsor (or party acquiring the easement and develop- ing the project) will propose the conservation easement language (often based on a template established by the overseeing regulatory agency). When a land trust pur- chases a conservation easement (rather than serving as the holder), it will handle drafting responsibilities. In both of these examples, it is not uncommon for the par- ties to use templates tailored to their specific interests or to meet regulatory requirements. The templates, however, should allow flexibility in drafting to best re- flect the negotiations and unique circumstances of an individual transaction and specific property. The conservation easement is the legal document that will govern not only how the property should be pro- tected and used, but also how each of the parties will interact. Remembering that the relationships created by the conservation easement are usually intended to exist in perpetuity will help to focus the drafters. Though parties may differ in their understanding of the project, this is the time to become as specific as possible in clarifying needs and expectations. While one party may want general language to allow flexibility, the other may want rigid language to avoid misinterpreta- tion. A balanced approach must be applied.155 C. Partnerships Conservation easements always involve at least two parties, the landowner and the holder, as discussed in the introductory sections. However, with the rise in the use of conservation easements and the role of regula- tions in the development of land, innovative partner- ships beyond the two parties have become useful. For transportation agencies, such partnerships may entail the involvement of a land trust or other conservation organization to acquire and hold the easement along with the agency, or simply employing the conservation organization in the technical components of the acquisi- tion. Creation and Acquisition Partnerships Since transportation agencies are not ordinarily in the business of land protection, the need to create a conservation easement provides a unique opportunity for agencies and land trusts to work together. Some- times a transportation agency will identify the need to establish a conservation easement, but will lack the authority or the desire to act as the holder and perform the required monitoring and enforcement duties. In these situations, the transportation agency (or some other governmental entity) may provide funding for the 155 An example of this might be the challenge of drafting easement language that both limits the presence of invasive plant species and prohibits the use of chemical herbicides in the easement area. In reality, the first provision may make the second impossible. Drafters should keep an eye out for such conflicting language and fix it from the beginning with the input of appropriate parties. Such care will avoid problems in the future.

23 easement acquisition, monitoring, and maintenance directly to the land trust. The source of the funding may require specific easement terms as well as management conditions that should be considered throughout the acquisition and drafting process. The Rodden Ranch case study illustrates a mutually beneficial partnership between Caltrans and the Trust for Public Land. Case Study: Caltrans Helps Fund Conservation Easement for Rodden Ranch Catlrans recently awarded $350,000 to help the Trust for Pub- lic Land, a renowned national land trust, purchase a conservation easement for Rodden Ranch. The 6,198-acre property, located near Copperopolis, California, possesses blue oak woodland, extensive wildlife corridor open space, and grazing areas. In addition to the funding from Caltrans, a million-dollar grant was awarded by the Sierra Nevada Conservancy. Efforts to attain all necessary funding and complete the acquisition are ongoing.156 In addition to partnerships designed to secure fund- ing, occasionally land trusts may partner with trans- portation agencies when ultimately the latter will act as the holder. The impetus for these types of partnerships stems from the legal, bureaucratic, and administrative delays that may be associated with governmental ac- quisition of conservation easements. Case Study: 770,000 Acres Preserved in North Carolina Between 2003 and 2005, the North Carolina Ecosystem En- hancement Program (NCEEP) teamed with the Conservation Trust for North Carolina and its regional land trusts to locate, ac- quire, and protect large preservation parcels throughout North Carolina. The effort was largely funded by NCDOT to meet a backlog of compensatory mitigation needs. Each acquisition was secured either by a fee simple purchase or a perpetual conserva- tion easement. While preservation is not the preferred means of compensa- tory mitigation, this large-scale preservation effort allowed trans- portation projects to move forward. Subsequent NCEEP mitigation projects have been predominantly restoration based. The North Carolina case study describes one such extraordinary partnership between a state compensa- tory mitigation program that is largely funded by the state department of transportation and the state’s pri- vate land trust community.157 This was an example of a 156 Rodden Ranch Moves Closer to Conservation Easement, http://myvalleysprings.com/pdfs/new2011/Rodden%20Ranch%2 0moves%20closer%20to%20conservation%20easement_CE_06_ 07_11.pdf, and phone correspondence between author and TPL on May 30, 2012. 157 Protecting North Carolina’s Land and Waterways, http://www.nceep.net/pages/pdfs/EEPbooklet.pdf. situation where quick action was needed to meet an immediate need and the private land trust community was seen as nimble and responsive.158 The state holds the vast majority of the conservation easements that have been acquired through the partnership.159 Part- nerships such as this one should be structured pursu- ant to a written agreement to ensure that both parties’ interests are honored and that public funds are used with care and transparency. Technical Assistance Partnerships As discussed and demonstrated throughout this di- gest, conservation easements can be complicated to cre- ate and to subsequently monitor and enforce. For these reasons, transportation agencies may best accomplish conservation goals by contracting with private conser- vation professionals for technical assistance in the ini- tial process and for the ongoing obligations of monitor- ing and enforcing conservation easements. To begin, the Rocky Pee Dee Farms example provides a specific illus- tration of North Carolina’s EEP/DOT/Land Trust part- nership. Case Study: Rocky Pee Dee Farms, North Carolina— Maximizing the Property’s Conservation Easement Potential Rocky Pee Dee Farms, located in Anson County, North Caro- lina, and encompassing more than 600 acres, illustrates a unique partnering arrangement between a federal agency, a state agency, and a land trust. The federal agency, the United States Department of Agriculture through its Farm and Ranch Lands Protection Program, purchased a conservation easement cover- ing the uplands of the property. The state agency, NCDOT, pur- chased a conservation easement along a stream corridor for wet- land mitigation purposes. A conservation easement covering the remainder of the property was then donated to the Land Trust for Central North Carolina. A single conservation easement was used to effectuate all three of the above purposes. This effort required extensive com- munication and collaboration between all three entities and the landowner. Also, to help facilitate the project, local real estate professional Kevin Redding offered assistance with the transac- tion. He noted that “[i]t's a tremendous accomplishment for all the parties involved to be able to come together in a way that secures the permanent protection of this farm. It's easy to criticize the bureaucracy of the state and federal governments, but this is a case of both being flexible and willing to work towards a common goal."160 158 Press Release, Conservation Trust of North Carolina (May 10, 2006), http://www.nceep.net/news/releases/5_10_06_ CTNC_eep_report.pdf. 159 North Carolina has a legislatively created Conservation Easement Program (N.C. Statutes Article 16, § 113A-230) that provides for the holding, monitoring, and maintenance of conservation easements through the state’s Stewardship Program. http://www.ncga.state.nc.us/EnactedLegislation/ Statutes/PDF/ByArticle/Chapter_113A/Article_16.pdf. 160 Rocky Pee Dee Farms, http://landtrustcnc.org/2011/