Senate Agriculture Committee Chairman Jerry Sonnenberg to Chair Hearing on Conservation Easements

Saguache Creek
Saguache Creek

From The Prowers Journal (Russ Baldwin):

Senate Agriculture Committee Chairman Jerry Sonnenberg (R-District 1) today announced the holding of a special August 5 public hearing, focused on the state’s conservation easement program. It’s scheduled for between 9:00 a.m. and noon in SCR 356 at the state Capitol.

“This conservation easement process continues to be confusing and somewhat challenging,” said Sonnenberg. “We need to figure out why after a number of years some of these easements are still in limbo.”

More conservation easements coverage here and here.

Colorado hopes to protect the integrity of conservation easements by cracking down on the monkey business

Saguache Creek
Saguache Creek

From the High Country News (Jennie Lay):

Perched at the podium during a Colorado Coalition of Land Trusts gathering, Erin Toll wears a poker face, a smart black pencil skirt and sassy Jimmy Choos. Among the jeans-and-hiking-boot-clad crowd attending, this wry New York transplant seems an unlikely hero. As recently as last fall, Toll, director of the Colorado Division of Real Estate, had no idea what a conservation easement was. But now, she says, protecting the integrity of land conservation is her number-one priority – and she’s cracking down on crooked deals with a vengeance.

Toll’s new enthusiasm for conservation easements, which offer landowners tax breaks in exchange for accepting limits on their right to develop, couldn’t come at a better time for Colorado’s land trusts. The state has seen some of the fastest-paced land conservation in the country, driven by a boom in both land trusts – the nonprofit organizations that hold easements – and in government open-space programs. Coloradans have protected nearly 1.8 million acres with conservation easements, much of it fueled by innovative tools, including a lottery-funded land protection program and a transferable state income tax credit.

Unfortunately, though, tax benefits sometimes breed abuses. And questionable conservation deals are drawing intense scrutiny – including Toll’s investigation into inflated real estate appraisals in Colorado and an ongoing Internal Revenue Service audit of hundreds of tax returns nationwide claiming federal tax breaks for donated easements. While state investigation and reform is moving swiftly, the federal audits have dragged on, frustrating landowners and creating confusion about easement appraisals.

The legal and financial complexities of conservation easements have reached a crossroads in Colorado. “What happens in Colorado could bleed out to the rest of the country,” says Lynne Sherrod, Western policy manager for the national Land Trust Alliance.

To help ferret out abusers, Toll has issued 30 subpoenas since November. So far, she’s suspended two appraisers who inflated appraisal values on more than 35 conservation easements. (She’s still wading through 44 boxes of evidence and says, “Every day we find more.”) The jacked-up appraisal values exploit a state program that offers landowners up to $375,000 in transferable tax credits for conservation easement donations. Land-conservation professionals say the program has been critical in protecting more than a million acres (at a cost of about $274 million) across the state since it took effect in 2000.

Although the majority of the state’s conservation easements are rock-solid, Toll rolls her eyes as she reveals some of the more outrageous exceptions. In a sampling of conservation easements from one group, Noah Land Conservation (also known as Colorado Natural Land Conservation), Toll found gross overvaluations of 111 easements on the eastern plains. The scheme involved 6,100 acres valued at $76.5 million (hence eligible for $37 million in state tax credits) by a mere three appraisers, on parcels that were meticulously subdivided so they could slip past county and state laws regarding acreage or subdivision development. In one particularly egregious example, the appraised value of a single 640-acre ranch leaped more than $14 million in a matter of days. Toll’s investigation is ongoing, but she’s narrowed the state’s spoilers down to about eight appraisers (including the two she’s already sanctioned), a couple of attorneys and a promoter or two – and their offenses, including possible securities fraud, could spread into the realm of other government agencies.

More conservation easement coverage here and here.

2015 Colorado legislation: SB15-130 (Assist Conservation Easement Tax Credit Buyers) dies in committee

Saguache Creek
Saguache Creek

From The Denver Post (David Migoya):

A bill that aimed to offer relief to taxpayers who bought into the early days of Colorado’s conservation easement program and were blind-sided years later by hefty penalties was defeated in committee Tuesday.

The bill, SB-130, by Sen. John Kefalas, D-Fort Collins, met with stern opposition from state revenue officials who said taxpayers who purchased millions of dollars worth of easement tax credits were on their own, and the state shouldn’t have to fix their errors.

“This bill would place the government in the middle of a financial transaction between two private parties, and that is an area we should not occupy,” said John Vecchiarelli, Colorado’s director of taxation at the Department of Revenue. “Those responsible should be held accountable and the people of the state should not have to provide that relief.”

The Senate Finance Committee voted 5-0 to defeat the measure despite acknowledgments of testimony from taxpayers who were forced to pay as much as 10 times the original amount of their income tax bill.

“It’s our obligation to pay taxes so government works, but don’t do it in a way that makes me feel robbed,” said Julius Medgyesy, who runs Front Range Cancer Specialists in Fort Collins. “We’ve done nothing wrong in trusting a government program.”

At issue were millions of dollars in tax credits given to landowners in return for preserving their property from future development. The tax credits could be sold and taxpayers bought them at a discount and used them against their personal tax liability.

The first years of the program were not policed by the state and credits were claimed on donations whose underlying appraisals were grossly inflated — some by as much as 166,000 percent, state officials said.

Credit buyers learned of the abuses and poor appraisals years after they’d already used the credits, only to learn they had to pay the state their original tax debt. Worse, the landowners they’d bought the credits from no longer had the cash to repay the buyers and their land was now virtually worthless, stuck in the conservation easement forever.

“We are left taking bankrupt or broke landowners to court to collect money that’s no longer there,” testified Mark Heiden of Fort Collins. “What’s been fair to the credit buyers? Nothing. I’ve paid 150 percent to the state of what my normal tax liability would have been. The landowners got my money and spent it. The state got the rest.”

Senators said they struggled between an obvious injustice and the state’s liability to cover the taxpayers’ losses.

“This was a troubling afternoon of testimony,” said Sen. Mike Johnston, D-Denver. “We have those who supported (a program) and got short-changed on their investment, and that’s unfortunate and catastrophic. But the challenge is I can’t fit it into the precedent of the state’s obligation to correct it for them.”

More 2015 Colorado legislation coverage here.

Conservation easements aren’t working out for everyone, assessed land values were inflated

Saguache Creek
Saguache Creek

David Migoya hits it out of the park with this in-depth look at Colorado’s conservation easement program, which was designed to be self-regulated and what happened when that didn’t work out. Take the time to read the whole thing. Follow the links as well:

From The Denver Post (David Migoya):

Rocky Ford hay farmer Timothy Crow despises staring at bankruptcy. The 61-year-old says he hates it even more that Colorado put him there. “This was supposed to be a good thing for everyone,” Crow says of the state’s conservation easement program, where land-rich but cash-poor ranchers and farmers like him can preserve their property forever in return for needed income. “It’s become a living nightmare,” he said.

Crow and thousands of others like him preserved millions of acres of land in return for state income-tax credits they could either sell for cash or use to pay their own income tax bill.

Now, the state is forcing a handful of those landowners — and hundreds of people who bought those credits — to pay as much as $220 million in back taxes because the state says the land isn’t worth what the landowners claimed.

“It’s like a bait-and-switch scam,” Crow said. “Now my land is worth nothing, and I’m broke because of it. The only one making out is the state.”

At issue are nearly 500 conservation easements like Crow’s, the bulk of them donated between 2003 and 2007, that were created under a state law that for years had no oversight.

Things went wrong from the start. Wealthy investors and their lawyers latched onto an apparent loophole where the amount of tax credits they could get — and later sell at huge profits — were maximized by way of an appraisal method the state later said was flawed.

And although many landowners went into the program honestly, they relied on appraisers who used the flawed method.

Although it took years to unravel, state investigations ensued, and corrective action was taken to prevent further abuses and works well today.

But the fallout to taxpayers who bought in during the program’s earliest days is just now reaching a crossroad.

Instead of looking to the landowners who reaped the cash from selling the tax credits, the state is reaching into the pockets of the taxpayers who used the credits to pay their tax bills. The taxpayers say they bought the credits believing the state had scrutinized the process.

“This just stinks all the way around,” said Fort Collins businessman Michael McCurdie, who today is staring at a $100,000 bill for back taxes and penalties because he bought $65,000 in easement credits in 2003.

“How is any of this our fault?” he asked.

Landowners also are reeling, with many pushed into bankruptcy or its edge, because the taxpayers who bought the credits now want their money back. Landowners, such as Crow, used the tax-credit money to keep their farms and ranches operating. A few made improvements to homes or vehicles. There isn’t much left for refunds.

“The state created, advertised, and promoted the conservation easement program with the full understanding of the (land) appraisals, and (knew about) them for years,” said Fort Collins businessman Mark Lueker, who paid $52,000 to buy about $60,000 in easement tax credits. The state has since disallowed most of his credits and forced him to pay an additional $43,000 in taxes and penalties.

State officials say they’re merely collecting on taxes due.

“It is inaccurate to suggest that buyers of (conservation easement) credits, which were subsequently disallowed, have paid their tax twice,” state Department of Revenue spokeswoman Daria Serna said in an e-mail to The Denver Post. “They were private deals negotiated by private parties, and as with any investment there is risk.”

Serna said the original idea in creating the tax credits was for landowners and tax-credit buyers to keep each other honest, not for the state to police them.

The legislation was enacted in 1999 “with the intention the program would be self-regulated,” Serna said. [ed. emphasis mine]

Lueker, like others, says the state is culpable for creating the monster and not keeping track. The mere existence of the state tax credits led many buyers to believe they were safe, he said.

“The state has to accept responsibility for fiscal losses due to its internal negligence,” Lueker said.

Triple play

The conservation easement program was to be a triple play for Colorado.

“You want landowners to put their property into easements. That’s what makes our state beautiful. That’s a win,” McCurdie said. “And the tax credit helps us, the taxpayer, facilitate it. Everyone is winning.”

The state wins because easements are donated to a nonprofit land trust that ensures it remains pristine forever, protected from urban sprawl and development.

That’s how Crow saw it when he placed his 30-acre farm into an easement in 2003. He said he wanted to ensure it would never be developed, “that it would stay part of the valley forever.”

Crow claimed income-tax credits worth $160,000 based on an appraisal that valued his land on its potential use for a housing development should nearby Rocky Ford reach him.

Crow either could apply the credits against what he owed on his own income taxes, or he could sell the credits to someone else, who in turn could use the credits to pay their taxes.

To entice buyers, tax credits are typically sold at a discount, so $10,000 of tax credits would sell for as little as $8,000. The buyer can claim the whole $10,000 against their state income-tax debt or stretch it out over a few years.

And instead of paying the state, the buyer’s money went to the landowner.

Thousands bought into the idea. To date there have been 4,243 easement donations comprising nearly 2 million acres of land since it began.

Like hundreds of other ranchers, Crow had little use for tax credits — he never owed that much — and preferred the cash-flow for his small farm.

“I’m one of the small guys,” he said. “Like so many others, I’m usually just waiting around for the wrath of God to change things.”

He sold the credits through a broker.

“We didn’t get rich, but that money sure helped when times were tough,” Crow said. “Those were not easy years.”

Everything would have been fine had state revenue agents not noticed some tax-credit buyers were making claims in dollar amounts that were out of line from others participating in the program. Something was wrong.

Money-making scheme

Investigators found a small group of investors and attorneys had twisted the fledgling program into a monumental money-making scheme.

Not only were land appraisals abused, but the investors decided a 1,000-acre donation could garner many more times the state maximum of $260,000 in tax credits by carving it into smaller donations.

Suddenly one property was worth millions of dollars in tax credits that could then be sold for cash.

Retired attorney Stanley Mann led a group of real-estate investors whose 1,000-acre development near Walsenberg was at a near stand-still with only two houses built.

“Developing in Walsenberg doesn’t happen overnight, and we saw a minimum of 19 years to get it done,” Mann said. “But we were getting older, and the (easement) idea made perfect sense.”

The group pared the land into two dozen 35-acre donations at $260,000 in tax credits each, then sold them.

It was a payday. Between 2003 and 2007, there were 2,417 donations statewide totalling $498 million in tax credits, state officials said.

About a third of them — covering nearly half the tax-credit total — were found to have faulty appraisals.

Landowners such as Crow saw only needed money they could make on land they never wanted used for anything other than what it had been for generations — for pasture and plow.

“There were those who got sucked in because it probably seemed like just another Farm Bill program,” said John Swartout, special policy adviser to Gov. John Hickenlooper and former executive director of Outdoors Colorado.

Faulty appraisals

Irregularities first caught investigators’ eyes in about 2007. The early abusers eventually were taken down, some attorneys were sanctioned, a handful of appraisers lost their licenses, and a few speculator investors repaid millions of dollars of credits they had sold to hundreds of unsuspecting taxpayers.

Meanwhile, the state backtracked through hundreds of other donations, disallowing tax credits that were claimed on 682 donations based on faulty appraisals from 2000 to 2010.

More than 80 percent of the problem donations were from 2003 to 2007.

So many credits were disqualified that the state Department of Revenue, which was in charge of the easement program at the time, couldn’t keep up. Cases were tied up in administrative red tape and legal challenges for years.

In 2011, the legislature devised a shortcut in HB11-1300, creating three regions of conservation easement district courts where the cases would go. All those involved — the state, the taxpayers and the landowners — would be part of a court process to work out who was to pay and how much.

Although landowners could choose a hearing before revenue department administrators, few did. Ultimately 478 easements headed to court, each with a dozen or more credit buyers.

“The state encouraged the conservation easements then turned around to nail everyone who had one,” said Walter Kowalchik, a retired lawyer in Jefferson County who was part of Mann’s group. “It was a horrible disappointment to hundreds of people.”

In dozens of cases since, tax-credit buyers have been told they can either repay the original amount of income tax they owed from as long as a decade ago — penalties and interest forgiven — or fight it out and risk hefty add-ons later.

“Basically I had two choices: Settle, be happy and pay the smaller amount, or complain and then pay the whole thing with penalties and interest,” said Julius Medgyesy, who runs Front Range Cancer Specialists in Fort Collins. “I had to cut another fat check.”

Not every credit buyer had to pay. Some wealthy landowners and developers, like Mann’s group, covered the tab because tax credits are sold with a promise of indemnity. If something goes wrong, the seller agrees to pay up.

Many, like Crow, couldn’t afford that. They had little money left or not enough equity in their property to pay the taxpayers back.

The money was spent long ago on their farms. Worse, their land is permanently stuck in a conservation easement that’s worth nothing now. They can never develop it, never change its current use. Selling won’t get very much. For Crow, it’s forever a hay farm.

“It’s a State of Colorado Ponzi scheme,” Medgyesy said.

“The state doesn’t care”

When the Department of Revenue told Crow the appraiser’s error on his easement donation meant he should not have gotten $160,000 in tax credits, his heart sank.

“When they pulled the plug, that was it for us,” Crow said.

The 10 people who bought the tax credits from Crow had to pay up.

That meant Jeannine Thomas, who in 2003 paid Crow about $12,000 for $15,000 of his income tax credits, had to write a second check for taxes she thought she’d handled years ago.

In all, she’s repaid about $40,000.

“What I’ve paid the state is on top of what I gave the land donors,” she said. “I can put a lien on their property or force a sale of what little they have left.”

Thomas takes a long pause.

“So, I can either kick them out of their homes or simply be quiet and eat the loss,” she said. “The state says the easements did not meet their standards, and that it’s just business. Is this what this program was intended to do? Pit the tax-credit buyers against the conservation easement donors? To hurt people?”

Many say they’ve simply put their head down and accepted their fate.

“We’ve tried to make noise, but no one wants to go toe to toe with state (tax) revenue,” McCurdie said.

The Lamar landowner from whom McCurdie and 13 others purchased tax credits works three jobs today, his land nearly worthless because of the easement on it and the subsequent disallowance of its donation value. All the money from the tax credits he sold years ago was put into the farm.

With penalties and interest, Colorado pegged McCurdie and the others for roughly $1.4 million — on top of the nearly $1 million they’d already paid for the tax credits.

“We’ve tried to make the point that we bought into (the program) on good faith,” McCurdie said. “The state simply doesn’t care. They’re very clear this is their money and they will have it.”

No one has helped

Efforts at fixing the problem have fallen on deaf ears, several say. There have been letters to officials, meetings with agencies, phone calls to the governor’s office. No one has helped.

“Our point is that the (Department of Revenue) had by far the better chance to catch this abuse back in 2004 than we did,” Fort Collins builder David Neenan wrote Hickenlooper in March, appealing for a solution.

Neenan bought $80,000 of tax credits for himself and his family for $64,000. Earlier this year, he paid the state $128,000 in back taxes, penalties and interest.

A tax bill of $80,000 has now cost him more than $200,000.

“I received a form letter thanking me for my letter,” Neenan said of his plea to Hickenlooper.

The farmers from whom Neenan bought the credits have gone bankrupt or have only a small house or a few tractors in assets.

“There’s nothing to collect from,” he said.

Sen. John Kefalas, D-Fort Collins, said he’d like to take up the cause, but it’s uphill. Two earlier legislative efforts at amnesty have died.

“There’s an element of fairness here, and we need to find a way to deal with that,” Kefalas said. “But it’s a challenge.”

Even some businesses have suffered.

“We thought of participating with the state for a good cause,” said Mark Bower, executive vice president and CFO at Home State Bank in Lafayette. “It was their program. We thought we’d be a good corporate citizen and participate.”

In all, the bank lost $225,000 because of disallowed credits. Bower said it was “unpleasant” having to explain the loss to the bank’s board of directors.

“And what were we going to do, evict a rancher over it?” Bower said.

Today, mostly disabled and a widower, Crow gets by on his wife’s death benefit, too proud, he says, to apply for disability.

“This whole thing sucked the last bit of life right out of my wife,” he said of his wife, Jane, who died last year.

Looking north over the barren land behind his small home, Crow sighs.

“I was broken-hearted about how it’s all fallen apart,” he said, “and now we’re all backed into a corner.”

Even if Crow had the money to pay the buyers back, nothing would change.

His small farm is trapped in an easement for Colorado to enjoy — forever.

Click here to go to the November 23, 2007 Coyote Gulch post when things first breaking. Here’s a post about HB11-1300 designed to provide some relief to taxpayers that got caught up in the shenanigans.

Kudos to The Denver Post for keeping links alive in the archives.

More conservation easement coverage here.

Land trust closer to purchasing 1,000 acres in Ark River Valley — The Mountain Mail

Arkansas River near Leadville
Arkansas River near Leadville

From The Mountain Mail (J.D. Thomas):

The Land Trust of the Upper Arkansas is closer to its goal of purchasing 1,000 acres scattered throughout the valley, thanks to its fifth annual fundraising event. The land trust raised a net total of $16,990 Friday at Salida SteamPlant.

Andrew Mackie, executive director, said 120 tickets were sold for the event, with tickets ranging in price from $35 for land trust members to $45 for nonmembers.

“The event is open to anyone who wants to come out and support what we do,” Mackie said. “We are limited to the amount of people who can attend because of the size of the venue.”

Of the $16,990 raised, $6,230 went to the $10,000 goal for the land trust to purchase 1,000 acres scattered throughout the Arkansas Valley, said Mackie. “We did pretty solid,” he said. “Over the next few weeks we will be seeking to reach our goal.”

Mackie said he couldn’t be specific as to the locations of the various properties because he wanted to protect the confidentiality of the landowners and is still negotiating the deals.

Mackie said the fundraiser typically raises between $8,000 and $10,000.

The event included a light dinner provided by Kalamatapit Catering, a cash bar, silent auction and a program, “Rivers Are More Than Water: Linking Land and Water in Colorado’s Water Plan.”

Items such as alcohol, guided trips and outdoor gear were included in the silent auction.

The program was presented by Ken Neubecker, associate director for the Colorado River Basin Program with American Rivers. Neubecker said he hoped his informative talk would advance the discussion of Colorado’s Water Plan.

Mackie said people who wish to find out more about the organization and to donate to Land Trust of the Upper Arkansas can visit http://ltua.org or call 539-7700.

More conservation easement coverage here and here.

Saguache Creek: 140 years of ranching tradition and 13,000 acres under conservation easements #RioGrande

Saguache Creek
Saguache Creek

From The Pueblo Chieftain (Matt Hildner):

The creek that drops out of La Garita Mountains and snakes its way toward the north end of the San Luis Valley floor has sustained ranching for 140 years. The ranchers who live in the narrow drainage and the Colorado Cattlemen’s Agricultural Land Trust want to ensure that doesn’t change.

“They really believe in that lifestyle and the importance of that lifestyle to the rest of us that live in urban areas,” Erik Glenn, the land trust’s deputy director, said.

Last month, the land trust finalized a conservation easement on the Werner Ranch east of town, pushing the amount of voluntarily protected acreage along the Saguache Creek to 13,000 acres.

The push to protect the drainage started nearly two decades ago when the Nature Conservancy began reaching out to landowners about protecting their land. But that initial push, which encompassed much of the north end of the San Luis Valley, was slow to take.

“At that time, conservation easements and the Nature Conservancy in the traditional ag community were probably viewed with some hesitation,” Glenn said.

The Nature Conservancy’s efforts coincided roughly with the formation in 1995 of the cattlemen’s land trust, which was put together by the membership of the Colorado Cattlemen’s Association. The link to the association, which has been protecting and promoting the interests of the industry since 1867, helped ease some of the locals’ apprehensions, Glenn said. By the late 1990s, a few ranchers in the area led by the Coleman family went ahead with easements. That example made a difference with their neighbors.

“The landowners down there are very connected to each other,” he said. “It’s a lot of the same families that have been there for years and years.”

Some of the families along the creek have had their ranches as far back as the 1870s.

Today, there are 26 easements on parts or all of 21 ranches. The conservation easements share some common traits, Glenn said. They include keeping water rights tied to the property in perpetuity. The easements also restrict the right landowners would otherwise have to subdivide the property and often limit the construction of outbuildings or a new home to small sections of the property. The landowners retain ownership of the land and, in turn, can gain access to federal tax deductions, state tax credits and estate and local property tax benefits, among other potential incentives.

Glenn said the land trust has gotten financial help from Natural Resources Conservation Service programs in the farm bill that aim to preserve irrigated agriculture. Great Outdoors Colorado also has made grants toward the group’s work. The land trust, which also has done extensive work along Tomichi Creek near Gunnison and the Elk River near Steamboat Springs, will keep working along Saguache Creek.

Glenn said he hopes the recent conservation of the Werner Ranch will influence others at the eastern end of the drainage.

“We think that one will probably catalyze additional efforts along the creek east of town,” he said.

More conservation easement coverage here.

Conservation Easements: Water Conservation in Northeast Colorado — High Plains Public Radio

mallardducktakingflight

From High Plains Public Radio (Dale Bolton):

When Denver physician and sportsman Kent Heyborne bought land in northeast Colorado, his intent was to leave it undeveloped as bird habitat.

But working with Ducks Unlimited along the South Platte River, he created a water-conservation project resulting in neighboring farms gaining additional irrigation credits. By putting the land under perpetual easement, he created a development-free zone spanning from one wildlife park to another, ensuring a corridor of waterfowl habitat several miles long. Plus, he earned state and federal tax credits along the way.

More South Platte River Basin coverage here.