PARTNERING WITH NONPROFITS

LEAGUE OF CALIFORNIA CITIES CITY ATTORNEYS DEPARTMENT CITY ATTORNEYS CONTINUING EDUCATION FEBRUARY 24 NEWPORT BEACH FEBRUARY 25 OAKLAND PARTNERING WITH NONPROFITS TO IMPLEMENT LAND USE POLICY MICHELE M. CLARK TRANSACTION DIRECTOR CALIFORNIA RANGELAND TRUST 1221 H STREET SACRAMENTO, CA 95814 916-444-2096 FAX: 916-444-2194 MCLARK@RANGELANDTRUST.ORG WWW.RANGELANDTRUST.ORG PARTNERING WITH NONPROFITS TO IMPLEMENT LAND USE POLICY By Michele M. Clark INTRODUCTION Conservation easements are increasingly being used in California to mitigate for loss of land and natural resources due to development. Although widely used in the eastern United States for many years, conservation easements are a relatively new tool in California to keep land in private ownership while ensuring the natural resources of the land are protected. Protection may be required under federal, state or local law, or may be desired by a community to ensure open space, scenic corridors, agricultural productivity or habitat. Land trusts are nonprofit conservation organizations formed to hold conservation easements. In California, there are 173 land trusts currently operating and 298,472 acres of land are protected by conservation easements. See 2003 Land Trust Alliance Consensus @ http://www.lta.org/aboutlt/census.shtml. This paper describes conservation easements and provides information on selecting a land trust and working with that land trust to successfully complete a conservation easement transaction. WHAT IS A CONSERVATION EASEMENT? A conservation easement is a “limitation in a deed, will, or other instrument in the form of an easement, restriction, covenant, or condition, which is or has been executed by or on behalf of the owner of the land subject to such easement and is binding upon successive owners of such land.” California Civil Code §815.1. The purpose of a conservation easement is to retain land predominantly in its natural, scenic, historical, agricultural, forested, or open-space condition.” California Civil Code §815.1. A conservation easement is a voluntarily created interest in real property transferred by the property owner to the recipient by gift, bargain sale, sale, or other lawful means. California Civil Code §815.2. The agreement between the landowner and the holder is recorded in the office of county recorder where land is located. Once recorded, the agreement becomes a permanent restriction on the title to the property. The conservation easement is perpetual in duration. California Civil Code §815.2, §815.5 Conservation easements are negative in character – the agreement restricts or prohibits certain activities identified in the agreement (e.g., residential or 2 commercial development). California Civil Code §815.2. As a general rule, conservation easements do not impose affirmative obligations on a landowner. The particular characteristics of a conservation easement are defined in the instrument creating or transferring the easement. All interests not transferred and conveyed by the instrument creating the easement remain in the landowner, including the right to engage in all uses of the land not affected by the easement, nor prohibited by the easement or by law. California Civil Code §815.4. The landowner retains all responsibilities inherent in the ownership of land, including the payment of real estate taxes because land subject to a conservation easement remains on the county tax rolls. Public access is not required, and is generally not desired by most owners considering placing a conservation easement on their land. Some owners are willing to grant public access on a limited basis provided such access does not interfere with the customary use and operation of the property. For example, an owner may be willing to allow a land trust access for a limited duration (e.g., specified days during specified months of the year) for the sole purpose of conducting bird watching or to allow the land trust to hold an annual fundraiser on the property. If allowed, the terms governing access are described in the agreement. Owners are more reluctant to grant access to a governmental entity than to a local land trust, a factor to consider when considering whether a governmental entity should hold an easement. A conservation easement may impose the same restrictions on the entire property or it may differentiate between different parcels within a property and provide different restrictions. For example, a conservation easement may identify a portion of a property as “forever wild” and prohibit any activity in that area of the land. In the same easement, another portion of the property may be designated an agricultural area and allow agricultural activities such as plowing and harvesting crops, while a third area may be designated the residential area and allow the construction of a dwelling and related structures and improvements in that area. If different areas are described in the easement, it is important to carefully identify each area on a map attached to the easement. In some cases, it may be necessary to survey the areas for accurate delineation. For example, if one purpose of the easement were to protect a riparian corridor while another purpose is to maintain the agricultural productivity of the property a survey would be necessary to accurately describe the boundary of the riparian corridor where the owner would be precluded from agricultural activities. Baseline Conditions Report A baseline conditions report is prepared prior to the recordation of a conservation easement. This report establishes the condition of the property at the time the easement is created and is used thereafter to guide the annual monitoring of the 3 property. It is also documentary evidence if a dispute arises as to changes in the use of the land that may be prohibited by the terms of the easement. As a general rule, the baseline conditions report is not recorded with the conservation easement. A few land trusts do record portions of the report, and at least one land trust records the entire report. Some land trusts prepare their own baseline reports using photographs and narratives to describe the property. For more complex easements, a consultant may be engaged to document species, topography, soil conditions, precipitation patterns and vegetation. Biologists with the Natural Resources Conservation Service of the USDA are willing to assist in the preparation of baseline reports. Why Owners Place a Conservation Easement on their Land The reasons an owner would willingly restrict the use of his/her land in perpetuity vary. Farmers and ranchers have cited their love of the land and the desire to provide a legacy for future generations. Some owners seek to protect the family unity by removing the ability to divide the property following death of the parents. Two economic reasons are to receive tax benefits by donating the easement to a charitable organization or to generate cash by selling an easement. However, even those motivated by an economic reason have a strong desire to preserve the land in its current condition. Who May Hold a Conservation Easement in California? In California, only the following entities or organizations may acquire and hold conservation easements: (1) A tax-exempt nonprofit organization qualified under Section 501 (c)(3) of the Internal Revenue Code which is qualified to do business in California and which has as its primary purpose the preservation, protection, or enhancement of land in its natural, scenic, historical, agricultural, forested, or open-space condition or use. California Civil Code §815.3 These organizations are commonly referred to, as “land trusts.” (2) California or any city, county, city and county, district, or other California or local governmental entity, if otherwise authorized to acquire and hold title to real property and if the conservation easement is voluntarily conveyed. California Civil Code §815.3 Under the California Civil Code, no local governmental entity may condition the issuance of an entitlement for use on the applicant's granting of a conservation easement. California Civil Code §815.3. An easement created under this condition is 4 referred to as an “open space easement” and is governed by California Government Code Sections 51070-51097. They are recorded and can be in perpetuity or for a number of years. Note that under California law, the federal government and its entities are not recognized as holders of conservation easements. SELECTING THE RIGHT LAND TRUST Finding a Responsible Land Trust A land trust may be a publicly supported organization, but may not be conducting business in a responsible manner and thus a city considering a conservation easement transaction faces the potential that the holder of the easement will be unable to meet its obligations. The Land Trust Alliance (“LTA”) is the national association based in Washington, DC representing land trusts (www.lta.org). LTA was founded in 1982 to promote voluntary land conservation and to strengthen the land conservation movement by providing leadership, information, skills and resources to land trusts throughout the country. Over 1,500 local and regional land trusts are members of LTA. LTA has promulgated Land Trust Standards and Practices to serve as ethical and technical guidelines for the responsible operation of a land trust. Originally drafted in 1989, the Standards and Practices are premised on the belief that the continued success of land trusts depends on public confidence in, and support of, the conservation efforts of land trusts, and on building conservation programs that stand the test of time. Members of the land trust community throughout the country recently revised the Land Trust Standards and Practices in 2004 following a lengthy review and analysis. LTA member organizations must adopt the Standards and Practices as the guiding principles for their organizations, indicating their commitment to upholding the public trust and the credibility of the land trust community as a whole. A City Attorney should take comfort in an organization that has agreed to uphold “high standards of ethics in implementing its mission and in its governance and operations.” [LTA Standard I, Practice D: Ethics.] Any land trust who has not adopted the LTA Standards and Practices is suspect. A list of California land trusts that have adopted the LTA Standards and Practices can be found at www.lta.org/findlandtrust/CA. In November 2004, several land trusts in California joined together to form the California Council of Land Trusts (the “Council”). Based in Sacramento, the Council seeks to serve as a statewide voice protecting the needs and advancing the goals of California land trusts. Once the Council is officially launched in 5 March 2005, the Council will be another source of information about land trusts in general and specifically California land trusts. Real Land Trust vs. Rogue Land Trust All tax-exempt organizations under Section 501(c)(3) of the Internal Revenue Code of 1986 are either private foundations or publicly supported organizations. Public land trusts prefer status as a publicly supported organization to avoid operating restrictions and excise taxes applicable to private foundations. Private foundations are also subject to less favorable contribution limits by donors. A publicly supported organization is one that receives a substantial part of its support from direct and indirect contributions from the general public and governmental bodies. Treas Regs §1.170A-9(e)(1). The method most land trusts employ to demonstrate they receive a substantial part of their support from the general public and governmental bodies is commonly referred to as the “substantial support” test. The land trust must receive a substantial part of its support (not including income received in the performance of the organization’s exempt functions) from governmental units and contributions from the general public. The land trust can satisfy the test if the total amount of contributions from the general public and support from governmental units “normally” equals at least 33 1/3 percent of the organization’s total support for a period of four consecutive years. Treas. Regs. §1.170A-9(e)(4) Alternatively, the land trust may still qualify as a publicly supported organization under the “facts and circumstances” test, wherein at least 10% of the land trust’s support is from the general public and governmental units, and the organization is organized and operated so as to attract new and additional public or governmental support on a continual basis. Treas Regs §1.170A-9(e)(3)(i) and (ii). A land trust that maintains a continuous and bona fide program for solicitation of funds from the general public or community will meet this requirement. A recent trend has been the emergence of an organization that claims to be a land trust but is in reality not organized to serve the public but rather is operated by the developer for the purpose of holding a conservation easement for mitigation. These so called “rogue” or “designer” or “captive land trusts” have the potential of undermining the credibility of publicly supported land trusts whose mission is to serve the public interest by ensuring the conservation values of a particular property are protected in perpetuity. The risk of allowing an organization controlled by the developer to hold the mitigation easement is the termination of the easement at a point in the future when it is politically and financially expedient to do so. To ensure the land trust selected to hold the conservation easement is a publicly supported organization, a city attorney should inquire into how the land trust meets the substantial support test referenced above. The IRS has a list of factors it considers when examining whether the “facts and circumstances” test 6 can be met. Treas Regs § 1.170A-9(e)(3). Those factors can equally guide a city attorney who questions the legitimacy of a land trust. They are as follows: 1. 2. 3. 4. 5. The percentage of public support received by the organization. The sources of the organization’s support. The constitution of the organization’s governing body. The provision for public facilities or services by the organization. The degree of public participation in the organization’s programs or policies. Of particular relevance to the issue of discovering whether the selected land trust is a “real” land trust or is one controlled by the developer is the third factor listed above. Ask whether the selected land trust has a governing body that represents the broad interests of the public rather than personal or private interests of a limited number of donor (or persons standing in a relationship to such donors) and how often the board of directors meets. Treas Reg.§1.170A-9(e)(3)(v). Land Trusts Know Conservation Easements Land trusts have expertise in structuring, negotiating and completing a conservation easement transaction. Responsible land trusts know the current issues and trends. LTA, for example, holds an annual multi-day conference where land trusts throughout the country join together for seminars and lectures on the state of conservation. LTA also sponsors regional seminars addressing specific topics of interest. Most land trusts have their own form of conservation easement that they use as the starting point for negotiations. Many land trusts post their form easement on their website. A simple conservation easement transaction may take a year. A transaction that involves a state agency such as Department of Fish and Game or a federal agency such as the US Fish and Wildlife Service or Army Corps of Engineers can take several years. The process can frustrate owners. The land trust will maintain a relationship with the owner during the lengthy process of completing a conservation transaction. Moreover, the land trust may have experience with local staff at the state and federal agencies and know how to maneuver through the process. One executive director of a community land trust related to me how she arranged a meeting among a diverse group of federal, state and local governmental staff to discuss a potential project. Because she had organized the meeting at her land trust’s office, the turf battles that had accompanied previous attempts to build a coalition were eliminated. Most land trusts are also familiar with state and federal funding programs for conservation easement transactions. They may even have contacts that will 7 enable them to determine relatively easily whether a particular project would qualify for the program. A Local Trust Ensures a Local Presence Most land trusts in California are locally based, with members of the local community serving as members of the Board of Directors. This local connection is of benefit to the owner and to a City who is considering using a conservation easement to protect mitigation land. Locals know when property changes ownership or if the use of the property changes. Early detection can avoid serious problems in the future. Many local land trusts are also a good resource for strategic planning purposes. A land trust may have prepared maps of properties with important natural resources. A land trust often knows which owners are willing to consider entering into a conservation easement transaction. The local land trust can be that much needed bridge between a governmental entity and a reluctant or suspicious landowner. For many land trusts in California, monitoring is performed by members of the Board of Directors or by volunteers directed by staff members. This local presence builds a strong relationship with the owner of the property and works to prevent easement violations. Does the Purpose of the Conservation Easement Meet the Mission of the Land Trust? Each land trust should have a mission statement that governs the organization. In fact, Standard 1 of the LTA Standards and Practices states: “The land trust has a clear mission that serves a public interest, and all programs support that mission.” Whenever considering a particular land trust as the holder of a conservation easement, it is important to determine whether the easement meets the mission of the selected organization. While some mission statements are broad, others are more limited. For example, the Solano Land Trust works to preserve agricultural land, open space and natural resources. The Pacific Forest Trust is dedicated to enhancing, restoring and protecting private, productive forests. The California Rangeland Trust seeks to preserve the open space, habitat and rangeland of working ranches. Most California land trusts are also defined by a geographic boundary. The mission of the Bolsa Chica Land Trust is to acquire, restore and preserve 1700 acres of the mesa, lowlands and wetlands of the Bolsa Chica, an area along the coast near Huntington Beach. Napa Land Trust works to protect the natural diversity, scenic open space and agricultural vitality of Napa County by 8 preserving lands with significant conservation values for present and future generations and by fostering an appreciation and understanding of the natural environment. The mission of the San Joaquin River Parkway and Conservation Trust is to preserve and restore San Joaquin River lands having ecological, scenic or historic significance. A prudent City Attorney should inquire into the mission of the selected land trust to confirm the proposed conservation easement meets the organization’s mission statement. Co-Holding an Easement Governmental entities may desire co-holding an easement with a land trust. This is problematic for the land trust and some will refuse such an arrangement. Land trusts fear the political nature of the governmental entity, particularly a local entity where the governing body can change after each election. The land trust’s duty is to protect the easement in perpetuity, which may be at odds with a co-holder who has lost the political will to aggressively defend the easement. WHAT HAPPENS AFTER A CONSERVATION EASEMENT IS CREATED Owner Retains All Rights of Ownership After an easement agreement is signed and recorded, the owner continues to own fee title to the land and retains all rights of ownership that are not transferred or restricted by the terms of the easement, including the right to engage in all uses of the land not affected or prohibited by the easement or by law. California Civil Code §815.4. The owner may sell, gift or otherwise transfer the land; however, the conservation easement remains in place and the new owner or heir is bound by the terms of the easement. Annual Monitoring Representatives of the holder of the easement conduct annual monitoring usually by walking the land to observe its condition and to determine whether any changes have occurred since the easement was recorded or the last monitoring visit. The condition of the land is compared to the condition of the land as described in the baseline conditions report. A monitoring report is prepared and retained by the land trust. These annual reports serve as documentary evidence the land trust is conducting monitoring, and the owner of the land is complying with the terms of the easement. Most land trusts view monitoring reports as confidential since they contain specific information about a property. 9 All responsible land trusts have developed a monitoring policy and their own monitoring protocol or checklist to use during the annual visits. The monitoring protocol is defined by the terms of the easement. Any land trust that does not have a monitoring policy and established monitoring protocols and practices should be questioned. Land trusts collect funds at closing to pay for the annual monitoring of the easement. These funds are usually placed in a nonwasting endowment fund, with the land trust using the annual interest generated to pay costs to monitor the easement. Funding the monitoring endowment is an important consideration for the land trust. A responsible land trust will avoid accepting any easement for which there is no monitoring fund. It is critical that every easement be monitored on an annual basis to avoid potential for violation of the easement. An early indication that a problem exists should be resolved with the owner prior to the matter escalating into a violation for which judicial relief may be required. Although easements can be judicially enforced, the cost of legal action may be prohibitive, particularly for smaller land trusts. State governmental agencies and even some of the national, well-known land trusts fail to annually monitor their easements. One benefit of a local land trust is the involvement of members of the community in the monitoring process. One executive director of a local land trust told me she rarely worries about a violation occurring on one of their conserved properties because local community members willingly inform her at the grocery store of the happenings on the land trust properties. Conservation Easement Restrictions Can Be Enforced An owner who violates the restrictions imposed by the conservation easement may be sued and forced to restore the land to the condition required under the easement. California courts can prohibit, enjoin, or restrain actual or threatened injury to or impairment of a conservation easement, or actual or threatened violation of the terms. California Civil Code §815.7 The holder of the easement is entitled to recover money damages for any injury to the easement or to the interest protected by the easement or for violation of the terms. California Civil Code §815.7 Most land trusts collect funds at closing to endow an easement defense fund. How much is collected varies from land trust to land trust. 10 WORKING WITH LAND TRUSTS The foregoing has been a primer on conservation easements and land trusts. As a former attorney now working for a land trust as a non-lawyer, I offer the following advice on working with land trusts. • It costs money to do a conservation easement transaction. When considering an individual conservation easement transaction or a programmatic approach to achieving mitigation, remember that the land trust will need to be reimbursed for its transaction costs, including staff, project consultants and attorney fees, as well as closing costs. In addition to the normal escrow and recording fees, a responsible land trust will obtain a title insurance policy insuring the land trust’s ownership of the conservation easement is free and clear of any prior liens or encumbrances. These transaction costs are in addition to the monitoring endowment and defense funds described above. • If an easement is held by two entities, there must be a written agreement defining the roles and responsibilities of each entity. The agreement should include the following: whether both entities monitor the easement and how to resolve a conflict between the two; who pays for monitoring; who maintains the primary relationship with the landowner; how to respond to a landowner’s request for consent to a permitted activity and how to resolve a conflict between the two holders; how to respond to a potential violation by the owner; who pays the legal defense. Consider whether the governmental entity’s role should be defined more as the successor holder rather than a co-holder. As the successor holder, the governmental entity would step in only in the event the land trust fails to perform its functions or ceases to exist. Consider whether there is staff available to fulfill whatever role is assigned, and whether there is a method to monitor the easements held in the entity’s portfolio. • Work together to achieve the common goal – protection of land. Consider the position of the land trust entering into a permanent relationship with the owner of land. It is analogous to a marriage for which there is no divorce. The working relationship between the city and the land trust should be structured to provide support to the land trust during the negotiation process with the landowner, as well as after the easement is recorded. Land trusts are charged with acting in the public interest, and responsible land trusts take that charge seriously. By keeping in mind during the transaction process the broader goal – the permanent protection of land – the process should flow more smoothly and everyone can celebrate their common achievement at the end of the transaction. 11