Historic preservation easement

An historic preservation easement (also preservation covenants or preservation restrictions) is a voluntary legal agreement between the owner of an historic or cultural property and a qualified nonprofit organization or governmental entity made for the purpose of protecting a property’s intrinsic historic or cultural values. Historic preservation easements are similar to conservation easements, which are used to protect land that has outdoor recreational value, natural environmental value (including natural habitat), or open space (including farmland, forest land, and land with scenic value). While the principle purpose of preservation easements is to protect property with historic, architectural, or archaeological significance, they may also be used to protect natural land values as part of a property’s historic setting. By donating a preservation easement, the property owner may qualify for a tax-deductible charitable contribution equivalent to the fair market value of the easement.

Transfer of rights
An historic preservation easement affords its recipient a "partial interest" in the real property in question. As such, the property owner continues to own the property but transfers the specific set of rights represented by the easement to the easement-holding organization. A preservation easement typically protects against changes to a property that would be inconsistent with its preservation, such as demolition of historic buildings, inappropriate alterations, or subdivision of land. The easement may also protect against deterioration by imposing affirmative maintenance obligations. The restrictions of the easement are generally incorporated into a recordable preservation easement deed that is part of the property’s chain of title. This title interest is binding both on present and future owners of the property.

Protections afforded
Typically, preservation easements address five basic issues: (1) What physical features of the property are covered by the easement; (2) What activities by a property owner that could damage or destroy significant historic or architectural features are absolutely prohibited; (3) What activities are allowed, subject to the approval of the easement-holding organization; (4) What activities are permitted by the owner as a matter of right; and (5) what type of affirmative maintenance obligations are required to be undertaken by the owner. The easement will also address other “boilerplate” issues, such as insurance, public access, amendment, and casualty damage. Most preservation easements protect, at the very least, the exterior character-defining features of an historic property, but many go beyond this to include interior features, the historic setting of a property, and/or specific landscape features. Most easements restrict the owner’s use of development rights such as subdivision or air rights. Some allow the owner to exercise those rights, but only as approved by the easement-holding organization. Some prohibit additions or construction of secondary structures; others permit them if approved as compatible with the historic character of a building. The criteria used by easement-holding organizations in deciding upon the appropriateness of changes proposed by property owners may vary, but many organizations rely on the Secretary of the Interior’s Standards for Rehabilitation or the Secretary of the Interior’s Standards for the Treatment of Historic Properties. Some organizations follow the criteria established by a local historic preservation commission for review of changes to historic properties in a designated historic district under local law. The obligations of an easement run in two directions: the owner of the property has the obligation to comply with the terms of the easement, and the easement-holding organization has the obligation to monitor and enforce the easement.

State law
Preservation easements are created under state law. Most states have specific enabling laws that authorize the creation of easements as discrete interests in real property. The terms and requirements of an easement may vary depending on the laws of a particular state. As such, it is important that the easement-giving property owners considering and the easement-accepting organizations work with a lawyer familiar with the laws of the state in which the property in question is located. In some states, for example, state and local approval must be obtained before an easement will be deemed valid under state law.

Federal tax incentive
As an incentive to preserve historic resources, federal law permits the donation of an historic preservation easement to be treated as a tax-deductible gift. Through this program, the easement-giving property owner qualifies for a tax-deductible charitable contribution under Internal Revenue Code Section 170(h) equivalent to the fair market value of the preservation easement, as determined by a qualified real estate appraiser. Because each preservation easement valuation depends upon a number of variables that are unique to each property, including existing historic preservation laws that may already impact the property, there is no "one size fits all" approach to valuing preservation easements. For example, the valuation for a facade preservation easement typically ranges anywhere from 5% to 15% of the historic structure's fair market value; however, depending upon local zoning rules, the valuation may exceed this range because of lost development rights.

Even though preservation easements are created under state law, easement donors seeking federal tax incentives will need to meet the requirements of the IRS regulations. To qualify for federal tax benefits, a property must be either a certified historic structure or historically important land area. The tax deduction can be spread over six tax years and, in the majority of cases, may be applied to the property owner's federal and state income tax returns. Individuals, including Partnerships, LLC's, S-Corporations and Trusts that pass tax benefits through to individual shareholders or beneficiaries, are limited to an annual charitable contribution deduction of 50% of the adjusted gross income prior to the charitable contribution deduction in which the non-cash component (i.e., the preservation easement) cannot exceed 30% of the adjusted gross income. In contrast, Corporations that file IRS Form 1120 are limited to an annual charitable contribution deduction of 10% of the adjusted gross income prior to the charitable contribution deduction.

The IRS Form 8283, titled Non-Cash Charitable Contributions, should be filed with the tax return for the year in which the preservation easement is contributed and a deduction is first claimed. This form must be signed by a professional real estate appraiser and by the qualified 501(c)(3) nonprofit charitable organization accepting the donation. The appraisal, including building photographs and the easement deed, should also be attached to the tax return.

Duration
The duration of preservation easements differ according to the policies of the easement-holding organization. Some easements are for a term of years, with the interests of the organization expiring at the end of the term. However, most easements are written to last permanently. Easements that qualify for the federal tax deduction must be perpetual.

Stewardship Fee
Most easement-holding organizations request – or may require – that easement donors provide a cash donation together with the easement, sometimes called a stewardship fee or endowment contribution. This monetary payment helps to assure that the easement-holding organization will have resources to enforce the restrictions of the easement, as required by the IRS for easements qualifying for the tax deduction. Whether described as a fee or contribution, this cash payment is considered by most easement-holding organizations to be an integral part of the easement donation. Donors wishing to deduct the amount of this monetary payment accompanying the easement donation are advised to check with their own tax advisors to determine whether the cash payment is deductible as a charitable contribution.

Organizations use different methods to calculate the amount needed to cover their stewardship responsibilities. Some organizations charge a flat amount, some use a percentage of the easement’s appraised value, some use a percentage of the property value prior to the easement donation, some use a sliding scale with a cap, and still others estimate annual expenses and then capitalize that amount as an endowment that can be drawn upon annually to cover stewardship costs.

There are likely to be additional costs to the donor beyond the endowment contribution or stewardship fee paid to the easement-holding organization, such as fees paid to lawyers, appraisers, and banks (for executing subordination agreements required to meet the requirements for the federal tax incentive), and for consultants. Some of these additional costs may be considered “miscellaneous itemized deductions,” which are deductible to the extent that they exceed two percent of a taxpayer’s adjusted gross income. Again, donors are advised to check with their own tax advisors. As stated earlier, donors and preservation organizations are strongly encouraged to consult with qualified legal counsel and tax advisors if they are contemplating donating or accepting preservation easements.