Amending Conservation Easements

Amending Conservation Easements Natural Gas and Land Conservation Conference June 20, 2008 Andy Loza, Executive Director Pennsylvania Land Trust Association Who has amended?   How do you want landowners, donors and your community to perceive your amendment decision? How much tolerance for various risks do you have – whether through action or inaction? Context    Success! 1700 land trusts. Skyrocketing numbers of conservation easements Increased scrutiny by Congress Increased questioning and shotgun approach to easement issues by the IRS LTA Response    Land Trust Alliance brought together a national working group to develop guidance Peer reviewers, lots of drafts, loads of pain… Amending Conservation Easements: Evolving Practices and Legal Principles released in September 2007 Conclusions    There is no consensus on many key issues and plenty of conflict. There needs to be continuing discussion. Be careful! Conclusions II  Adopt an amendment policy covering:   guidelines and criteria for making decisions procedures for evaluating potential amendments   Include an amendment provision in all new easements Carefully draft easements Standards & Practices 11I   The land trust recognizes that amendments are not routine, but can serve to strengthen an easement or improve its enforceability. The land trust has a written policy or procedure guiding amendment requests that:      includes a prohibition against private inurement and impermissible private benefit; requires compliance with the land trust’s conflict of interest policy; requires compliance with any funding requirements; addresses the role of the board; and contains a requirement that all amendments result in either a positive or not less than neutral conservation outcome and are consistent with the organization’s mission. Three Legal Perspectives    “Amend at will.” The easement is a private real estate transaction and unrestricted transfer of property rights which allows the land trust and landowner to change it subject only to laws regarding charitable purposes. “Charitable trusts.” Charitable trust doctrine applies and requires a judicial process before changing anything that adversely affects a conservation purpose. “Get the job done but cover my...” Seek outside counsel or approval proportionate to the risk factors. Legal constraints on amendment activity (1)  Internal Revenue Code and Treasury Regulation requirements regarding:   Nonprofit 501(c)3 status Conservation easement donations receiving tax benefits under 170(h) -- perpetuity, … The Internal Revenue Service 990 Schedule A questions, etc. Private Benefit & Inurement   Private Benefit: Tax-exempt organizations can’t confer direct substantial private benefits to any individual or entity impermissibly. Incidental benefit -- a necessary concomitant to an activity that benefits the public and is insubstantial in relation to that activity -- is acceptable. Private Inurement: A land trust can’t confer benefits to insiders. Insiders potentially include directors, officers, key employees, spouses, major donors and others. No special treatment for insiders! Evaluating Private Benefit and Inurement     Who is asking the land trust to do something? A donor, a board member, the spouse of a staff member? Why is she asking? If we do this, will the public benefit? What will the other person gain? Is that gain significant? If we can’t answer these questions, who can? An appraiser? Can the other person achieve his goal without land trust involvement? Legal constraints on amendment activity (2)  The requirements of conservation easement enabling laws in each state. Conservation and Preservation Easements Act  Pennsylvania Act 29 of 2001 states:  “Except as otherwise provided in this act, a conservation or preservation easement may be created, conveyed, recorded, assigned, released, modified, terminated or otherwise altered or affected in the same manner as other easements.” Legal constraints on amendment activity (3)      Laws governing nonprofit management and the administration of restricted charitable gifts and charitable trusts. Laws on fraudulent solicitation, misrepresentation to donors, consumer protection and fiduciaries. Laws governing land use and conveyances. Contractual obligations to easement donors, grantors, funders and others. Land trust governance documents, including articles of incorporation, bylaws and IRS tax-exemption approval documents. LTA’s 7 Amendment Principles    A conservation easement amendment should meet all of the principles. No amendment policy should be more permissive than these principles allow. Land trusts may choose to adopt more conservative amendment guidelines. An amendment must: 1.Clearly serve the public interest and be consistent with the organization’s mission. 2.Comply with all applicable federal and state law. 3.Not jeopardize the land trust’s taxexempt status or status as a charitable organization under federal or state law. 4.Not result in private inurement or confer impermissible private benefit. An amendment must: 5. Be consistent with the conservation purpose(s) and intent of the easement. 6. Be consistent with the documented intent of the donor, grantor and any direct funding source. 7. Have a net beneficial or neutral effect on the relevant conservation values protected by the easement. Outside the Amendment Principles   Condemnation Substantial Alteration or Elimination of a Resource/Conservation Purpose Four Corners Question     Some consider only the original eased land (“within the four corners”) in their analysis. Others consider benefits of new land protection (“outside the four corners”) and spillover benefits to offset negative impacts of relaxed restrictions on the original easement land. Few deem it proper to reduce restrictions on one parcel in exchange for added restrictions on an unrelated parcel. No clear law exists but removal of restrictions does create risk. Corrective Deeds  Modifications that correct mutual mistakes can be recorded as “corrective deeds” Amendment Screening Tests        Public interest and organizational mission test Legal tests Financial test Conservation purposes test Existing and prospective donor test Conservation results test Public perception test Questions        Effect on stewardship and administration? Opportunity to update old easement with better, more enforceable provisions? Others with legal interests? Title issues? Other stakeholders? Conflicts of interest? Additional expert advice needed? Baseline update needed? Legal Risk Spectrum Low risk IRC/Reg Concerns: impact on conservation purposes Amendment does not affect conservation purposes protected in perpetuity or affects in positive ways only Amendment has a beneficial effect on conservation values of the CE land Amendment corrects a scrivener's error Amendment has a neutral effect on conservation values of the CE land Amendment makes de minimis changes or clarifications More risk Amendment affects conservation purposes protected in perpetuity both positively and negatively Highest risk Amendment might harm conservatio n purposes protected in perpetuity Amendment definitely harms or negates conservation purposes protected in perpetuity IRC/Reg Concerns: impact on conservation values Amendment has a negative effect on conservation values of the CE land Amendment alters basic provisions and protections IRC/Reg Concerns: extent of language change Valuation Risk Spectrum Low risk Private Inurement No LT insider is involved at all LT insider involved but receives no benefit at all "Incidental" private benefit to unrelated parties; risk grows by liberal construction of "incidental" Appraisal to confirm lack of private benefit is clearly unnecessary No net financial benefit to any private party; any benefit is offset by detriment More risk Highest risk Amendment might benefit LT insider modestly/remo tely Possible net financial benefit to a private party Amendment clearly benefits LT insider Private Benefit No financial benefit at all to any private party Clear financial benefit to a private party Appraisal Full appraisal shows lack of private benefit No consideration of appraisal to assess possible benefit to private party No appraisal despite possible benefit to private party No appraisal despite clear benefit to a private party or amendment when appraisal reveals private benefit Interested Party Risk Spectrum Low risk Violation of Third-Party Rights Created by CE Amendment protects third-party rights in CE and is approved by those third parties Donor, heirs, grantor approves this amendment Donor, heirs, grantor approves this sort of amendment More risk Amendment is not inconsistent with third party rights Highest risk Amendment damages third-party rights Donor/ Grantor Approval Donor, heirs, grantor knows and is unconcerned Donor, heirs, grantor does not know/is not consulted Donor, heirs, grantor opposes amendment Funder Approval Funders fully approve this amendment Funders approve this sort of amendment Funders know and are unconcerned Funders do not know/ are not consulted Funders oppose this amendment Public and Media Risk Spectrum Low risk More risk Highest risk Neighbors/ LT Members, Communit y Approval Neighbors, members, community approve this amendment Neighbors, members, community approve this sort of amendment Neighbors, members, community know and are unconcern ed Neighbors, members, community are unaware/ not consulted Adverse media attention is likely Neighbors, members, community oppose this amendme nt Adverse media attention is certain Media Attention Amendment likely to receive positive or no media attention Administrative Risk Spectrum Low risk Degree of LT Review and Analysis Amendment is fully reviewed by LT staff and/or knowledgeable committee, full board and qualified attorney Relevant expert scientific or other advice is obtained, or it is clearly not needed and documented More risk Highest risk Amendment is minimally reviewed by LT staff and/or committee or board without qualified attorney Amendment is minimally reviewed by LT staff and/or committee without qualified attorney or full board review No expert scientific or other advice is obtained but clearly needed Degree of Expert Consultation Degree of LT Effort and Expense LT staff time and expenses will be fully paid by requesting party or will be minimal Amendment imposes no new or unendowed stewardship obligations; or amendment improves CE enforceability Amendment does not improve enforceability of CE Amendment will impose heavy financial and time burdens on LT with little or no hope of payment Amendment adds new, unendowed stewardship obligations Effect on LT Stewardship Capacity Alternatives to Amendments?     Corrective deeds Waiver Interpretation letter (Discretionary approval or license where originally built in to easement) Hardships?  Should extraordinary personal hardship ever be considered in making amendment decisions?