This guest blog article was written by Robert Trapp, Wisconsin Certified General Appraiser, JLL[1].
The views and opinions expressed are those of the author and do not necessarily reflect the views, positions, or policies of Gathering Waters.
Thank you, Bob, for sharing your knowledge with the Wisconsin land trust community!
Conservation Easement Donations and Land Trusts Under the Microscope
The U. S. Senate Finance Committee, the Internal Revenue Service, and the U.S. Tax court in the past decade have been giving close attention to the real estate appraisal reports that support charitable donations of conservation easements, especially appraisals supporting syndicated donations of conservation easements. Much of their attention has been focused on improper application of generally accepted valuation concepts and methods.
These valuation missteps, when determined to result in significant overvaluation of easement donations, can expose land trusts to regulatory and financial risk under Treasury Regulations related to promoters of abusive syndicated conservation easements and those found to be “material advisors” to the syndicators. According to the Land Trust Alliance website, the IRS released new regulations relating to syndicated conservation easements (on Oct. 8, 2024) requiring a land trust to report a different category of transactions if the land trust meets the criteria of being a “material advisor.”[2]
There are many defects in the appraisal methods highlighted by the IRS and the Tax Court in their recent reviews of easement donations. These include failure to differentiate between the value of a business that might be conducted on a piece of land and the value of the land itself, and failure to analyze sales of properties located in the same local market area as the property to be protected by the easement. In many of the appraisals flagged by the IRS and the Tax Court, there was little or no support provided for the appraisal’s conclusion that a change in land use was the “highest and best use” of the property prior to the donation of the conservation easement.
At JLL’s Complex Real Estate Analysis and Litigation Support (CREALS) division, our review of conservation easement appraisals in various types of assignments has found the same thing: unsupported assumptions about rezoning potential that result in unsupportable conclusions about the development potential of the property.
Conservation Easements and the Reasonable Probability of a Land Use Change
One of the foundations of credible conservation easement valuation lies in properly analyzing the development potential of a parcel of land. However, this analysis becomes especially complex when the analysis requires consideration of the potential for a change in zoning.
The professional standard for an appraisal conclusion that a land use change is supportable is clear: reasonable probability[3] requires demonstrating that achieving a timely land use change is “more likely than not,” based on comprehensive analysis of legal, physical, governmental, and market factors. The appraisal opinion cannot be based on speculation. It must be based on rigorous analytical work grounded in the Uniform Standards of Professional Appraisal Practice (USPAP).
Under USPAP Standard Rule 1-3, the appraiser is required to “a) identify and analyze the effect on use and value of: (i) existing land use regulations; (ii), reasonably probable modifications of such land use regulations.”[4] Appraisers who shortcut this analysis violate professional standards and expose all parties to unnecessary risk.
A Framework for Rigorous Analysis of the Reasonable Probability of Development
A systematic approach to reasonable probability analysis would address ten critical factors in the following three categories:
Legal and Regulatory Framework:
- Physical development feasibility (topography, utilities, site constraints)
- Zoning trend analysis and municipal rezoning history
- Comprehensive plan compatibility assessment
- Local land use compatibility evaluation
Market and Political Dynamics:
- Public hearing records and community sentiment analysis
- Professional consultation with land planners and zoning officials
- Market demand substantiation for proposed development
- Comparable transaction analysis involving rezoning scenarios
Judicial Precedent:
- Local court acceptance of reasonable probability standards
- Relevant case law analysis specific to the jurisdiction
Support for a value based on residential subdivision potential—a common conclusion in many of the appraisals challenged by the IRS—the analysis should extend beyond basic feasibility to include comprehensive market analysis, detailed development cost modeling, review of detailed engineering/utility extension and subdivision plans, and documentation from qualified land planning or engineering professionals.
The IRS Perspective on Subdivision Development Analysis Methodology
The Internal Revenue Service has explicitly cautioned against oversimplified subdivision development analysis, noting in Publication 5464[5] that “there are many variables involved in Subdivision Development” creating “greater chance of errors, which could result in an incorrect valuation.” This guidance underscores the necessity for sophisticated, well-documented analysis in any appraisal report concluding that the subdivision is the reasonably probably use of a parcel of land before the easement is donated. The Appraisal Institute in cooperation with the Land Trust Alliance has published a comprehensive textbook on the appraisal of conservation easements.[6]
Conclusion: The Value of Specialized Expertise
Conservation easement appraisal represents one of the most technically complex areas of real estate valuation practice. The intersection of environmental law, tax regulation, municipal planning, and sophisticated valuation methodology requires practitioners with deep, specialized experience.
At JLL’s CREALS division, our team brings decades of experience in complex conservation easement valuations, environmental property analysis, and litigation support. We have worked with taxpayers to prepare the appraisal reports, with land trusts to evaluate the appraisal reports they receive to support conservation easement donations, and with the Internal Revenue Service to review appraisal reports submitted with tax returns. We understand that successful conservation easement transactions require more than compliance—they demand excellence in methodology, documentation, and professional judgment.
The conservation easement landscape will only become more complex as regulatory scrutiny intensifies. Organizations serious about successful conservation outcomes assure that the appraisal reports supporting the conservation easement donations they accept comply with the highest standards of professional appraisal practice.
Our JLL team of experienced conservation easement appraisers is available to assist land trusts in this critical work by providing review and commentary on various aspects of appraisal reports supporting planned easement donations. We have developed a detailed “checklist” that has been published in The Appraisal Journal and can be used by land trusts to assure the high quality of easement appraisals.[7] Some of the services we offer land trusts include working with land trusts in the use of that checklist or in any of the following more limited ways:
- Review and commentary on support provided for conclusions that rezoning and development approvals are reasonably probable
- Review of assumptions in subdivision development analyses
- Commentary on methodology compliance with USPAP standards
- Market analysis research and comparable transaction verification
- Commentary on relationship between proposed provisions in a conservation easement document and the value of the conservation easement donation
[1] Robert Trapp is a member of the Complex Real Estate Analysis and Litigation Support (CREALS) team at JLL Valuation & Advisory, LLC. a division of Jones Lang LaSalle, a full-service real estate company with more than 80 offices around the world. Mr. Trapp and his team provide appraisal and consulting services in a wide variety of complex real estate valuation related assignments, including providing litigation support and expert testimony in federal, state and local courts and various types of administrative proceedings. Much of the team’s work is focused on assignments involving the appraisal of historic, scenic, and natural resource properties, including assignments involving valuation of conservation and historic preservation easements.
[2] https://landtrustalliance.org/resources/learn/explore/irs-requirement-update-for-land-trusts-working-with-donors-who-are-pass-through-entities; & Department of Treasury IRS Bulletin 2024-22963 (89 FR 81341).
[3] Valuation of Conservation Easements, 2016 Course developed by the Appraisal Institute, Part 5-7B.
[4] Uniform Standards of Professional Appraisal Practice, 2024 Edition.
[5] IRS Publication 5464 (revised 01-2021)- Conservation Easement Audit Technique Guide.
[6] Richard J. Roddewig, MAI & Charles T. Brigden, Appraising Conservation and Historic Preservation Easements, 2nd Edition, The Appraisal Institute, 2020.
[7] The checklist is presented and discussed in Richard J. Roddewig, JD, MAI & Anne S. Baxendale, “The Evolution of Land Trust Responsibilities in Reviewing Conservation Easement Appraisals,” The Appraisal Journal, Issue 2-3, 2023, 116-142. A slightly different version of the checklist is also available on the website of The Land Trust Alliance.