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6.3. SR 12-20-2010~l River REQUEST FOR ACTION TO Ci Council ITEM NUMBER 6.3. AGENDA SECTION MEETING DATE PREPARED BY Administration December 2Q 2010 Lori ohnson, Ci Administrator ITEM DESCRIPTION REVIEWED By Bailey Point Paxk Purchase REVIEWED BY ACTION REQUESTED Authorization to continue to work with the Minnesota Land Trust to secure funding to purchase Bailey Point from John and Nancy Babcock. BACKGROUND/DISCUSSION At the September 13, 2010, woxksession, the Council requested that discussion on the purchase of Bailey Point be brought back after adoption of the City's budget. In addition, I informed the Council that I would continue to pursue grant opportunities to fund this purchase to the greatest extent possible. Since the September meeting, property owner John Babcock and I have continued to work with Sarah Strommen, Associate Duectox of the Minnesota Land Trust, to secure funding for this purchase. The Land Trust has indicated that this is one of their high priority parcels for purchase of a conservation easement and that funding may be available for this parcel in July, 2011, following legislative approval of the Land Trust's funding. Fox those of you not familiaz with the Land Trust and conservation easements, attached is information from the Land Trust discussing conservation easements and appraisals. In summary, the Land Trust purchases a conservation easement over the property and the fee title is held by another party, in this case the City. The easement defines a set of land use restrictions placed on the property to preserve the land's unique natural features and characteristics. The Land Trust would pay the property owner the value of the easement and the City would pay the property owner the value of the fee title remaining after the restrictions are placed on the property. The restrictions requested by the Land Trust for inclusion in the conservation easement fit with the City's plans to maintain this as a natural area with very minimal change to its existing character. Ms. Strommen will be at the CouncIl meeting to further discuss the Land Trust's interest in this property and the funding that maybe available for this purchase. Finally, as requested all property owners within 350 feet of Bailey Point have been notified of this meeting. Unfortunately, because we were not certain this item would be on the agenda until late in the week, the notices could not go out until that confirmation was made on Thursday. N:\PobGc Bodies\City Council\Lori\2010\Bailey point 12 2010.doc FINANCIAL IMPACT As I stated earlier, the Land Trust would purchase the conservation easement and the City would be responsible fox the remaining land value. In cases similar to this one, the easement has had more value than the fee title. However, the values would not be finalized until an appraisal was completed by the Land Trust. ATTACHMENTS • Minnesota Land Trust Conversation Easement and Appraisals Action Motion by _ Second by _ Vote Follow Up N:\Public Bodies\City Council\Lori\2010\Bailey point 12 2010.doc Minnesota Land Trust Conservation Easements and Appraisals Introducfron A conservation easement is a set of land use restrictions a landowner voluntarily places on his or her property in order to preserve the land's unique natural features and characteristics. These rights are conveyed by the landowner to a land trust or other conservation easement holder. Protecting these natural qualities provides important benefits to the community-protecting wildlife habitat, preserving water quality, and maintaining scenic vistas. Although the owner retains most ownership rights, conservation easements limit the use and development of the property in order to conserve the identified conservation values. Most conservation easements-including all of those held by the Minnesota Land Trust-are perpetual. By permanently restricting property, a landowner has reduced the land's value. This reduction in value can be attributed to the conservation easement. An appraisal estimates the value of a conservation easement by calculating the impact of the easement on the value of the subject property. The discussion below addresses several of the basic questions and rules regarding conservation easement appraisals. Please be aware ihax there have been a number of recent changes to the easement appraisal rules. For more precise detail on rules regarding conservation easement appraisals, please refer to the resources listed below. What is the purpose of an appraisal of a conservation easement? A conservation easement appraisal may have several uses. For charitable contribution purposes, the appraised value of the easement is used to determine the amount of any income tax deduction available. In this case, the appraisal procedure and report must conform to specific IRS standards noted below. An appraisal may also be important for estate planning or in reviewing value for property tax purposes. Additionally, while the Minnesota Land Trust does not routinely purchase conservation easements, an appraisal may be used to substantiate the purchase price in such a situation. Is an appraisal required to complete a conservation easement with the Minnesota Land Trust? An appraisal is not always necessary. However, a landowner is required to obtain a gual fled appraisal if the landowner is donating a conservation easement valued at more than $5,000 and intends to seek a federal charitable income tax deduction for the gift. A landowner may also need an appraisal to obtain a mortgage subordination, to support a request for a property tax adjustment or to receive payment in exchange for the easement. In other situations, an appraisal may not be necessary. What is considered a "qualified appraisal"? For federal tax purposes and until further guidance is issued, the IRS currently considers a gualifed appraisal to be one that complies with the requirements in Treasury Regulations Section 1.170A-13(c) and is conducted by a qualified appraiser in accordance with generally accepted appraisal standards. What are "generally accepted appraisal standards"? An appraisal will be treated as having been conducted in accordance with generally accepted appraisal standards if the appraisal is consistent with the substance and principles of the Uniform Standards of Professional Appraisal Practice or "USPAP." These standards can be found on the web site of the Appraisal Foundation, www appraisalfoundation ore. Who is a "qua[ified appraiser"7 The IRS defines a qualified appraiser an individua] who has: • Eamed an appraisal designation from a recognized professional appraiser organization or has otherwise met minimum education and experience requirements set forth in regulations prescribed by the Secretary, • Regularly performs appraisals for which the individual receives compensation, and • Meets such other requirements as may be prescribed in federal regulations or other guidance. An appraiser may be considered to have met minimum education and experience requirements if the appraiser is licensed or certified by the State of Minnesota for the type of property being appraised. What should landowners consider in selecting an appraiser? Landowners should ask a number of questions when considering who should conduct this critical part of the conservation easement process, including: • Is the appraiser designated by a recognized appraiser organization and/or licensed by the State of Minnesota? What type of license does the appraiser hold? There are four levels of licensure in Minnesota. With its potential for complicated analysis, a conservation easement appraisal may require an appraiser licensed at the highest level-certified general real oroneriv anpraiser. • Does the appraiser have experience in and regularly perform conservation easement appraisals? Has the appraiser taken classes specifically targeting conservation easement appraisals? Knowledge and experience are not only essential to obtaining a competent appraisal, they are now part of the definition of having that appraisal qualify for chazitable contributions. • How much will the appraisal cost and how long will it take to complete? Easement appraisals are complex by nature and landowners should question extraordinarily inexpensive or speedy appraisals. • Can the appraiser provide an independent appraisal of the value of the easement? Landowners should avoid contracting with an appraiser that is in any way related to the land, the landowner or the transaction. The IRS prohibits appraisals by immediate family members or their spouses. • Is the appraiser experienced in appraising property in the area and with similar circumstances? Landowners should feel free to ask the appraiser for references of other clients. • Is the appraiser aware of the new regulations and penalties for appraisers? Have they had to defend appraisals in front of the IRS? How does an appraiser estimate the value of a conservation easement? Typically, an appraiser determines the value of an easement by comparing the value of the property without the easement restrictions in place and the value of the property with the restrictions in place. The difference between the two is the value of the easement itself. This procedure is typically known as the "before and after approach." As a simple example: Value of the land before the conservation easement: $500,000 Value of the land after the conservation easement: $275,000 Difference =value of the conservation easement: $225,000 Proportionate value of the conservation easement: 45% Generally, a more restrictive easement will result in a higher proportionate easement value. But each parcel of land and each set of conservation restrictions are unique. Therefore, no set or average percentage of value can be attributed to the rights relinguished in an easement. What does an appraiser look at to estimate the value of a conservation easement? An appraiser will look at a variety of factors concerning both the specific property subject to the easement and the surrounding area. Relevant factors will include: • Location and character of the property, • Existing zoning regulations and other laws or contracts that affect the property, and • Development potential and future land use trends. The appraiser will need to understand the specific restrictions placed on the land and the specific rights reserved by the landowner in the conservation easement being appraised. The appraiser will also need to evaluate the easement in the context of any contiguous or other property owned by the landowner or the landowner's family and the potential of the easement to enhance the value of the other property. Any enhancement value will need to be subtracted from the amount that a landowner can take as a charitable deduction for the donation of an easement. What information needs to be included in an appraisal? While the specific format, length, and content of appraisals vary, the IRS requires very specific information for charitable gift appraisals. That information is identified on the attached summary. When should the appraisal be completed? For charitable deduction purposes, the appraisal must be completed no earlier than 60 days before the date of the gift (the date on which the conservation easement is signed and accepted by the Minnesota Land Tmst) and no later than the date on which the tax return for that year is due. In some circumstances, an older appraisal can be updated with more current data. For other non-tax purposes, timelines may vary. Conservation easement appraisals are complex and time consuming. As such, landowners should contact an appraiser early in the process as it may take up to 4 to 6 months or more to complete an appraisal. Is it necessary to be concerned about the integrity of the appraisal? YES. The IRS views this issue very seriously and may impose substantial penalties on both the landowner and the appraiser for gifts that are overvalued for tax putposes. Congress recently created new thresholds and penalties for donors and appraisers who artificially inflate the value of an easement for tax purposes. Landowners are well advised to choose an appraiser carefully and to work with the appraiser, a tax advisor and the Land Tmst throughout the process of completing a conservation easement. Remember the simple rule: if it looks too good to be true, it probably is. What are same additional resources for conservation easement appraisals? Please refer to the following references for more detail on conservation easement appraisals: • Treasury Regulations §L170A-13(c) and §1.170A-14(h) • IRS Publication 561 Determining the Value of Donated Property • IRS Notice 2004-41 Charitable Contributions and Conservation Easements • Pension Protection Act of 2006, Section 1219 • IRS Notice 2006-96 Guidance Regarding Appraisal Requirements for Noncash Charitable Contributions • Appraising Easements, Third Edition, published by the Land Trust Alliance in cooperation with the National Trust for Historic Preservation Minnesota Land Trust • 2356 University Avenue West, Suite 240, St. Paul, MN 55114 • 651.647.9590 • www.rnnland.org © May 2008 Printed on recycled paper