Easements: appraisal is hard

How do you determine what a given piece of real estate is worth? For a group of appraisers experienced in valuating a particular kind of property, the answers would probably be fairly similar.

But what about the value of a piece of property, such as the rights to cut timber from it, fish on it, develop open land for suburban tract housing or an industrial park, or to knock down an older building and put up a much taller new one in its place?

That's the puzzle many land-conservation and historic-preservation groups must struggle with all the time when they buy or accept donations of ''easements ,'' or restrictions on the future development of a building or a piece of land.

By purchasing such partial interests in property, preservation and conservation organizations have found they can protect notable historic buildings, open land, and special natural environments at a lower cost than they can by buying properties outright.

These partial rights on a piece of property can also be donated to a charitable group while the owner continues to use and enjoy the property. The gift's value can be taken as a deduction for income-tax purposes.

One of the biggest problems, however, with either sales or donations of easements is deciding their true value.

With other real estate, where there is complete ''fee simple'' ownership, appraisers use three standard methods for determining property value: A direct comparison with similar properties is generally favored. Another approach involves isolating the component cost of the land and each of the buildings located on it. A third method, common with agricultural and timber land, is to look at its income-producing potential.

The major difficulty comes from having to decide the value of a piece of property and its potential uses both before and after an easement is imposed. For land with limited development possibilities because of zoning restrictions or unfavorable geography, an easement may cause only a small diminution in value.

In other situations, such as with a small older building that could be replaced with a much larger new one, the loss could be substantial.

Only a small number of appraisers nationwide are experienced in doing these valuations. And the cost of a thorough analysis can be a deterrent for middle-income persons who wish to make an easement donation to a charitable organization.

Faced with this dilemma, some persons have chosen to use poorly qualified appraisers or ones willing to greatly inflate the value of the rights given up with the easement donation.

Pressures for improving easement-valuation procedures are coming from the Internal Revenue Service, as well as the Treasury Department. In the last several years, the IRS has begun scrutinizing more closely the tax returns of easement donors in an effort to cut down on revenue losses from such overinflated valuations.

One of several private groups taking steps to deal with these problems is the Land Trust Exchange, a Boston-based association that serves as an information clearing house for local land trusts, private groups that accept donations of land easements and agree to monitor them in perpetuity.

The Boston group is planning a basic manual that would detail proper land-easement-appraisal techniques. No such text now exists, nor does the IRS have any such written standards.

Other groups are working on similar projects. The Southern States Legal Center in New Orleans has begun a study of appropriate methods for appraising building-facade easements. The center hopes to eventually propose regulations for the IRS to use in looking at easement contributions.

Specific guidelines on easement appraisals are under consideration by the North American Conference of Appraisal Organizations, too. These would supplement the more general professional standards that each of the six major US appraisal organizations has for its own members.

Historic preservation and land-conservation groups are optimistic that such models will lead to wider acceptance, both by the public as well as the IRS, of easement contributions and help curtail any abuses in their valuation.

of 5 stories this month > Get unlimited stories
You've read 5 of 5 free stories

Only $1 for your first month.

Get unlimited Monitor journalism.