Funding Easement Stewardship

By Raina Regan posted 7 days ago

  

Preservation organizations that accept and hold preservation easements assume the long-term responsibility to manage the easement, often in perpetuity. Easement administration typically includes routine monitoring, staff time to respond to owner requests, and legal costs for questions about easement interpretation and enforcement. Having the necessary resources to enforce its easements is one of the requirements of the Internal Revenue Service in identifying a qualified organization for easement transactions pursuing a qualified conservation contribution (see IRC §170(h)(3) for additional information on qualified organizations).

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Landis and Pamela Gores House, New Canaan, Connecticut. Protected by a Preservation and Conservation Easement donated to the National Trust in 2019. |Credit: National Trust for Historic Preservation

Most preservation organizations request that concurrent to the donation of a preservation easement, the donor provide a cash contribution to the organization to assist in the long-term stewardship of the easement. Sometimes referred to as a “stewardship fee,” “fair share contribution,” or "easement endowment,” this financial donation helps ensure that the organization will have the necessary resources to administer its preservation easements in perpetuity. Typically, preservation organizations place these financial contributions as a restricted fund and/or endowment that can be utilized for yearly easement stewardship costs (monitoring, staff time) and legal enforcement. 

Preservation organizations should regularly review their easement donation policies and procedures, including any financial contributions expected of easement donors. The Land Trust Standards and Practices (Standards) are a set of guidelines for how to run a land trust legally, ethically, and in the public interest, with a sound program of land transactions and land stewardship. The Standards are considered the best practices in easement stewardship, and Standard 11A discusses Funding Conservation Easement Stewardship—specifically, that organizations should:

  1. Estimate the long-term stewardship and enforcement expenses of each conservation easement transaction.
  2. Track stewardship and enforcement costs.

For those preservation organizations considering holding easements for the first time, those that may be restarting an easement donation program, or those who want to ensure their current financial contributions meet ongoing needs, it is important to identify and implement a calculation model that will provide the necessary funding to responsibly administer each preservation easement. There are four typical ways to calculate this contribution:

Method 1: Case-by-case Calculation of Projected Annual Costs

This method involves estimating the actual annual stewardship costs for a specific easement on a case-by-case basis. These can be either very detailed or more general breakdowns of actual expense categories, but it should capture all actual costs including staff time, travel expenses, organizational overhead, and legal enforcement. The annual expense for the easement is then capitalized to an amount that will generate the funds needed annually from the endowment investment income, based upon the organization’s endowment draw rate. 

Method 2: Percentage of Property’s Fair Market Value (FMV)

Some organizations base their endowment calculation on a fixed percentage of the property’s fair market value (FMV). Preservation organizations that use this model typically have limited travel costs, for example, the L’Enfant Trust, which only holds easements in the District of Columbia. Preservation organizations are discouraged from calculating based upon the value of the easement, as it is a less consistent method for understanding the true stewardship costs of an easement and it may create an incentive for organizations to allow the overvaluation of an easement donation to obtain a larger endowment. 

Method 3: Flat Rate

This method involves setting a flat rate, or a range of flat rates, based upon certain factors. Once again, this model is best for organizations with limited travel costs and/or centralized easement programs. For example, one way is to provide flat rates based upon the property’s FMV, such as $5,000 for properties with a FMV up to $250,000; $10,000 for properties with a FMV from $250,000 to $500,000, and so on. 

Method 4: Base Rate

This method involves setting a standard base rate and adding to it based on a set of specific factors. This approach is more common in the land trust community, where they have a base rate based on the easement’s total acreage and specific types of easement terms. For example, if the easement includes subdivision rights and public access requirements, each of those items will result in additional fixed amounts being added to the base rate. 

Ideally, whichever model is used, the funds raised should cover the ongoing stewardship activities of holding the specific easement. While organizations typically use a standard easement format, each property and transaction is different. Generally, the monitoring and enforcement costs will vary depending on the complexity of the property being protected, the restrictions imposed by the easement, and the organization’s in-house legal capacity. If an organization is using a flat rate or percentage of a property’s FMV, they should ensure these represent an average of the typical costs for types of properties in its portfolio.

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Dining Room at The Octagon, Washington, District of Columbia. Protected by a Preservation and Conservation Easement held by the National Trust which includes extensive easement protections on the interior of the building. | Credit: National Trust for Historic Preservation

As a general example, an easement-holding organization accepts a preservation easement on a historic farm with numerous outbuildings, existing and ongoing commercial activities, and the conditional right for future subdivision of the agricultural lands. Allowing the subdivision of the easement property in the future may significantly increase the costs of stewardship if a property owner exercises this right. The additional structures and commercial activities may require increased review of activities at the property, along with the potential for increased enforcement actions. These are examples of factors that should increase the endowment contribution based upon the organization’s potential for increased stewardship of the easement. 

A Note on Transfer Fees

Some preservation easement-holding organizations have placed the right in their deed to collect a transfer fee each time a property changes ownership. This is typically a percentage of the sales price [i.e. .25 percent or a flat fee (i.e. $100)] which is collected and placed into the organization’s easement fund. Some preservation organizations use this as a tool to ensure they are notified whenever the property transfers, while others utilize it as an additional funding source. This transfer fee would be identified by the title company at the time of transfer, but it can be overlooked. Any organization that has considered adding this requirement to its easement document should consult with its legal counsel to ensure it is permitted under the appropriate state statutes.  

Tracking Stewardship and Enforcement Costs

For those easement-holding organizations with a calculation model or fee structure in place, it is helpful to track the stewardship and enforcement costs to validate your funding model. Additionally, the tracking of stewardship and enforcement staff time and costs is required for nonprofit preservation easement-holding organizations as part of its conservation easement reporting requirements on its IRS Form 990.

In FY2018, National Trust Easement Program staff validated our case-by-case calculation model by tracking actual time and expenses for a sample of our easement portfolio. To provide a representative sampling, properties were selected based on their location, age of the easement, original endowment amount/calculation method, condition of property, and complexity of the easement. Properties at the absolute extremes of staff time were purposefully excluded as outliers in the context of the entire easement portfolio.

From July 1, 2017 to June 30, 2018, Easement Program staff tracked actual staff time and travel expenses for seven easement properties. Time was tracked on quarter-hour increments and was entered in a yearly spreadsheet. Office time included reviewing requests for approvals, communicating with property owners, general research, preparation for site visits, or other associated administrative tasks.

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Lola Maverick Lloyd House, Winnetka, Illinois, protected by a Preservation and Conservation Easement held by the National Trust. | Credit: National Trust for Historic Preservation

As a result, this study confirmed the current National Trust easement endowment calculation (case-by-case calculation model) appears to be generally accurate in estimating the direct expenses and staff time associated with holding a specific easement for one year. However, it was identified that we had been generally underestimating staff travel time and office time, so we set new minimums for these items.

A modified version of the National Trust’s easement endowment calculation is available here for download. There are two tabs in the template, providing variations on this case-by-case calculation model. Calculation Model 1 estimates the legal expenses on an hourly, yearly basis while Calculation Model 2 allows for a flat rate contribution to the organization’s legal reserve. This calculation model can be further refined to meet your organization’s needs.

Conclusion

Funding ongoing preservation easement stewardship is critical for easement-holding organizations. Having the necessary staff to monitor the easement or review requests, along with the financial resources to legally remedy easement violations, will only help strengthen an easement-holding organization’s easement stewardship. While some donors may hesitate at the request to make a cash contribution in addition to the easement donation, they must understand the importance of the perpetual obligation being assumed by the easement-holding organization to administer the preservation easement. Having a sound fee structure in place will help easement donors understand the long-term stewardship the organization accepts, while providing the essential funding needed to support your organization’s easements. 

Resources

 Raina Regan is the senior manager of easements at the National Trust for Historic Preservation.


#Legal
#easements
#PreservationTools
#Funding

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