Firm Thinking - Episode 12

Paul Lumia, Exc. Dr. North Branch Land Trust - 4/28/21

Firm Thinking is a podcast created by the Law Firm of Hourigan Kluger and Quinn. Topics vary from legal matters to current events. Host Atty. Jim Shoemaker and Brian Stahl talk with Paul Lumia, Executive Director of North Branch Land Trust.

HKQ Firm Thinking -Episode #12- Paul Lumia Exec.Dr. North Branch Land Trust.mp3: Audio automatically transcribed by Sonix

HKQ Firm Thinking -Episode #12- Paul Lumia Exec.Dr. North Branch Land Trust.mp3: this mp3 audio file was automatically transcribed by Sonix with the best speech-to-text algorithms. This transcript may contain errors.

Jim Shoemaker:
Welcome to Episode 12, the firm thinking I am Jim Shoemaker, and we are here with Paul Lumia. Welcome, Paul.

Paul Lumia:
Welcome, gentlemen. Thank you for having me.

Jim Shoemaker:
You're welcome. And we're also here with my partner, Brian Stall. Welcome, Brian. Hi Brian. So a little bit of background about us. I am the immediate past chair of the North Branch Land Trust. Paul is the executive director of the North Branch Land Trust, and Brian is the current director of the North Branch Land Trust. So collectively, we have a lot of knowledge about land trusts and conservation easements, and that's something that may not be something that a lot of people know much about. So we're going to try to give a quick primer on what land trust and conservation easements are all about. So, Paul, beginning with you, why don't you just tell us generally what the North Branch Land Trust is?

Paul Lumia:
Certainly the North Branch Land Trust is a land conservation organization, of which there are we're a non-profit and of which there are probably thirteen hundred nonprofit land conservation organizations or land trusts, if you will, in the United States. And our main mission is to conserve important natural lands in the regions where we work some land trusts or small. Some are big, some are medium sized. North Branch Land Trust is the land conservation organization that works in northeastern Pennsylvania in eight counties of northeastern Pennsylvania. And we work to basically, very simply put, however, we can manage it to conserve important natural land so that they are basically never developed and left in a natural state. That's our main mission. And we are again a non-profit. So we rely on community donations and grants to fund our operations.

Jim Shoemaker:
So how does a conservation organization like the North Grant Land Trust actually conserve land?

Paul Lumia:
That's a good question, Jim. And I will say that there are basically three buckets. There is the bucket where we might raise funds to go out and purchase land and own it as a land trust and make it available to the public, sort of like a like a park, if you will. The second bucket might be where we would raise funds to purchase a large tract of land and then transfer it to a like minded organization like the Pennsylvania Game Commission or the Pennsylvania Bureau of Forestry, so that that land is available to the public for for recreation opportunities and it is left in a natural state. The third bucket, which maybe we can explore a little further, is the conservation easement, which is the main thrust of our business where we work with private landowners to basically put an easement or encumber their property so that it is no longer developable. We don't own the property. We just put an easement on the property to ensure that is never developed again. And there's many benefits and reasons why private landowners want to protect their land from any future development. So that's that's the main area where we focus our our our efforts working with private landowners to conserve their land so that it is protected in perpetuity and left in a natural state.

Jim Shoemaker:
Well, let me kick this one out to Brian with regard to the third bucket and the conservation easements, because, Brian, you've drafted more conservation easements than anybody else. I know. So generally, what is a conservation easement?

Brian Stahl:
That's a great question. And I think Paul hit on some of those topics. But at its core, Jim, a conservation easement is a voluntary agreement between a property owner and land conservancy like North Branch Land Trust or a government agency where the parties crap's certain requirements that they can and cannot accomplish with their property. And so it identifies areas of high protection value, medium protection value, low protection value, for example. But at its core, it's a it's a contract document. And actually a landowner gives up certain rights, gives up certain conservation rights and in exchange with the with the conservation.

Jim Shoemaker:
So a conservation easement is in perpetuity. Is that correct? Meaning it goes on forever.

Brian Stahl:
Absolutely. That's the intent. Is that at last. So it's a binding document that if I own the property today, I can enter into a conservation easement. But that easement then runs with the land in perpetuity going forward.

Jim Shoemaker:
And could you explain a little bit about how that's different than if somebody wanted to enroll his or her property in clean and green gork?

Brian Stahl:
So clean green is another tool. Sometimes they're used in conjunction with conservation easements to conserve land. One of the main differences, though, is that perpetuity. So for those viewers that don't know what the clean and green program is, it's an by tax program that's established by statute that encourages land to be maintained for either farming purposes, forestry purposes or open space. And in exchange for a rolling property into that program, a landowner is taxed at a lower tax rate for local tax purposes. But that perpetuity element is a key difference between clean and green. In an easement, easements are intended to last forever. Clean and green can be broken, so whomever the current land owner is, they can choose to opt out of clean and green. There are some rollback, penalties and interest that that landowner would pay. But it really is that that perpetuity element. Jim, a couple other differences are the the the incentives. So local tax breaks are the key benefit for clean and green program for giving up that development value. Conservation, even, on the other hand, is a federal tax benefit. So it really serves as a deduction for income tax that would be owed. We encourage our clients, obviously, to work with their accountants to to best optimize that. But that's that's one other key difference. And then the third difference between clean and green and conservation is flexibility. As Paul had mentioned, you work in conjunction with the landowner on a conservation easement and the parties together and choose to craft the terms that work for both sides, whereas a clean and green program is set by statute. So it's the clear statutory rules that you have to follow to be able to maintain compliance.

Jim Shoemaker:
Ok, and since we're primarily here speaking about conservation easements, can any land be conserved as their criteria? Can we put a conservation easement on an apartment building or what? What kind of lands can be conserved?

Paul Lumia:
Yeah, Brian, do you want to take that or shall I take it?

Brian Stahl:
Absolutely. And I was just going to kick it to you all anyhow, so that that's a good point. There needs to be some particular conservation value to the property before an easement is granted. And so why don't you run through some of the conservation criteria that the North Branch Land Trust uses when it evaluates conservation easements?

Paul Lumia:
Sure, so a conservation easement in theory could be placed on anything, could be a historic it could be a you could do a historical conservation easement on a building what have you, but we won't go there. We'll talk about real estate and natural lands because that's what most land trusts do. And basically, if you are going to conserve your land, there's criteria that the that that the landowner has to meet with with the land trust. And there's criteria that the landowner has to meet with the federal government if they're going to take a tax deduction. So without getting into too much detail, basically the land has to have some sort of conservation value that that can be recognized by everybody, the land trust, the federal government, what have you. It has to have woodlands, open space, wetlands, anything that is unencumbered is basically OK as far as conservation goes. If it has lots of buildings on it, lots of pavement, lots of improved surfaces, that doesn't have much of a conservation value to it. So that's not going to qualify. But open space generally with woodlands, wetlands, fields, farms, they would all qualify. Now, breaking it down a little further, you can't it's hard to conserve or or put an easement on a two acre piece of land in the middle of northeastern Pennsylvania out in the wild somewhere. It wouldn't make much sense financially if the land trust to do that. So the land size has to be relatively a nice size, a nice parcel of land. Is there a minimum? Not really. For instance, if you were in an urban environment and there was a two acre pocket park, well, that would qualify because that's a unique piece of green space in the middle of an urban area. So that would be an instance where a smaller parcel would qualify. So at the end of the day, there has to be conservation value there for the land trust to do the easement and also conservation value for the land owner to to to to to receive a tax deduction if they were to go that route as well.

Jim Shoemaker:
Somebody had to say a farmhouse on a piece of land, I mean, that wouldn't preclude the farm from being subject to a conservation easement. Is that correct? I mean, there could be a building envelope on the land.

Paul Lumia:
Correct to that that's where Brian was talking about the negotiation of the conservation easement, each easement is different. It's not boilerplate. You have to craft each easement to the landowners and the land trusts and to the federal government's requirements to make it all work. So with that said, you could if you had one hundred acre parcel farm with a farmhouse on it, you would carve out a farmhouse that maybe would not be considered part of the conservation easement, or you would call it the least conserved area on the property. And it would be noted in the conservation easement. And then you might carve out maybe if it was along a road, you carve out another two acre parcel that the landowner maybe in a future time a child or a relative could build another farm house and that would be it. And that would all be written into the conservation easement so that everybody understands going forward that the remaining, let's say, ninety six acres is going to be left for farming and for woodlands and what have you. And those two two acre parcels would be available for an estate house or outbuildings, what have you. So that's all written into the conservation beforehand. Now, obviously, you can't go too overboard with building envelopes and improve services because then that would reduce the conservation value and it wouldn't quite jibe with the federal tax incentives or with the land trusts interest in conserving the land in perpetuity. So there are negotiations that can take place there. But yes, you can have a building envelope on the property, you can have trails and what have you. But as long as those conservation values are maintained, you'd be in good shape.

Brian Stahl:
We've talked about some of those benefits, Paul, and some things that the land owner gives up in connection with a conservation easement, the ability to develop their property as they see fit. What are the benefits to a property owner in giving a conservation easement?

Paul Lumia:
Ok, I'll just back up one step further and say just when we first talked about those three buckets, I want people to understand that when we're taught, when we're negotiating conservation easements in the landowners going to give up those rights to develop that property, that's all they're giving up. They're not giving up any access issues. What have you. The land's not public. It's not available to the public to go on that land if it's conserved. It's a private transaction between the land trust and the landowner now getting into those those those development value rights that they're giving up. Yes, they negotiate the easement. They say this land is going to be protected in perpetuity. And for that, the the IRS and the federal government says to the landowner, well, we appreciate you giving up those development rights and keeping that land protected in perpetuity. And for that, we're going to give you a tax incentive on your income taxes. So it's been made permanent by the IRS over the last five years that the landowner can deduct the value of the development rights they're giving up. So if your land is worth five hundred thousand dollars prior to the easement and worth two hundred thousand dollars after the easement, there's a three hundred thousand dollar, right. That you're giving up you could have gotten if you develop that property. So the IRS says you can deduct that three hundred thousand dollars from your adjusted gross income over a period of 15 years. And there's a formula to to to to determine how much you can deduct each year from from your from your income taxes, hopefully using up that three hundred thousand dollar deduction over 15 years. So that's a nice little incentive for a landowner who wants to conserve their land and also reduce reduce their income taxes over time.

Brian Stahl:
That's a really great point, Paul, on the carryforward period being a very nice permanent addition to the tax code, allowing the carryforward period to extend to 15 years from, I believe it was five years before that. How about as an estate planning tool or do conservation easements? You work with the states and with people that are looking for long term estate planning, or are there any different rules when it comes to estates and conserving land?

Paul Lumia:
Yes, there are, and there's again, consult your attorney or your your accountant who knows these rules and regulations inside and out, but from a layman's standpoint, I can tell you this, that as an estate, the landowner can put a conservation easement in their will and have it kick in after they pass or the estate. The executor of the estate can place a and easement on the land after that person passes if they didn't have one in their will. Now, the IRS says for estate planning purposes that if there is an E been in place in the estate, that the land will own, the estate taxes will only apply to the value of the land with the conservation easement on it. So like we talked about before, if it's a five hundred thousand dollar piece of land and now it's only worth three hundred thousand or two hundred thousand, with the conservation easement on it, the estates only going to be taxed on the two hundred thousand dollar value, not the five hundred thousand dollar value. So really reduces the estate taxes on that piece of real estate. Now, the IRS also says that if an easement is put on by the estate or it's in the will, that they will also allow an additional 40 percent reduction in the value of the land that that's going to be taxed for estate purposes.

Paul Lumia:
So not only is the land only taxed on the easement or on the encumbered value with the two hundred, like we said, the two hundred thousand dollars. But the IRS says you can also deduct an additional 40 percent from that. Two hundred thousand. So now that's an additional eighty thousand dollar reduction in the value of the land. So now the estates only pay taxes on one hundred and twenty thousand dollar value. So there's a little extra bump there. So those two things can really reduce the value of the estate taxes on land, which can be a big deal for people who, you know, maybe were given land or something like that and don't have the wherewithal to pay all these estate taxes. Easement can really can really reduce that estate tax and make it affordable for them to keep the land and also protect it in perpetuity. A little complicated, but, you know, check with your accountant, your lawyers, and they can really spell it out for you and show you the real value. But at the end of the day, the land is conserved. And that's what we're looking to do with with with estate planning.

Jim Shoemaker:
Well, Paul, obviously that can be huge for certain people, but I want to go back and emphasize the point because I do think there's a misconception with some folks. I think some folks think that if you serve the land, that it has to be open to the public. And that's not the case. Is that correct?

Paul Lumia:
That's correct. That's what I was discussing earlier. Again, the land trust, we're here as a community resource to protect land in perpetuity. However we can, whether it's those three buckets I talked about, whether it's purchasing land, purchasing land and giving it to a like minded organization. But the third bucket in the conservation easement, which we've been talking about, is a private transaction between the land trust and landowner and crafting that conservation easement so that land is protected for that landowner and all of the people that may take ownership of that land going forward. No public access is permitted on that property. It's still in that family's ownership. All that's happened is they've chosen not to have their land developed today and any time in the future in perpetuity, as we say. And it's a private transaction again. And there is no public access permitted on that property.

Jim Shoemaker:
And sort of in that same vein, Paul, so if let's say we're talking about a farm and the farm is conservative, the farm still operate as a farm with farming still be allowed or logging or those sorts of activities if the property were concerned by a conservation easement.

Paul Lumia:
Yes. If the the IRS, federal government, land trusts take farmland very, very seriously. As you know, we're losing a lot of our farmland in the United States. So farmland is included in all the benefits that I that I mentioned earlier. And conservation easements can definitely be put on agricultural land. In fact, it's so important to protect the farmland that the IRS is determined that. Remember, we talked about that 50 percent. Let's take that deduction of 50 percent of your income each year to use up that that that value you're giving up. Well, the IRS says that the farmer can deduct one hundred percent of that. So if their adjusted gross income of the farm is two hundred thousand dollars and they have a two hundred thousand dollar easement value because they put an easement on their property, they can wipe out their their tax, their their income tax to zero. So that's another benefit. Farmers get the one hundred percent deduction of the adjusted gross income of their of their conservation easement value. So that's another incentive.

Jim Shoemaker:
And again, that could be a huge incentive for the right folks. And let's talk about something that would maybe the use of the land by the individual who conserves it could be that the landowners will hunt and fish and trap on the land if it's subject to a conservation easement.

Paul Lumia:
Certainly every other right is is is is owned by the landowner and anything that they would have done prior to the conservation easement can be done after the conservation easement except developing the property with with house lots and streets and what have you. That's the only restriction they can hunt, they can fish, they can they can log the property as long as they have a sustainable logging plan in place, all those they can farm the property, all those things can take place. The only things that can't take place, again, like I said, are other than what's written into the easement with your building envelope and maybe one house or two, you can't build any permit or have any hard hardscape on the property, permanent structures, but everything else can take place.

Jim Shoemaker:
And how about one issue that's a big one here in northeastern Pennsylvania, and that's natural gas rights. If a property is subject to a conservation, is the property owners still have natural gas rights in the natural gas lease will be put on the property. And what are the rules and regulations regarding that?

Paul Lumia:
That's a really good question, Jim, and the answer is yes, they can take advantage of sub-surface, natural resources, oil, gas, whatever else they may be interested in extracting from their property. However, there is a caveat. Remember, we talked about those conservation values. You can't set up a drilling or mining operation on the land after it's been conserved because that would that would reduce the conservation value of the property and that would go against the ease the terms of the conservation easement. However, with technology that's in place today, landowners can choose to have the natural resources extracted from a remote location. We hear all about these ways that they can drill sideways, go down and drill sideways underneath property to extract oil and gas resources. So that is permitted as long as the actual physical drilling operations are taking place on a piece of property not encumbered by a conservation easement, they can come in horizontally underneath and take the resources underneath. Now, that's the rules and the laws that exist today. Could that change? It might. But right now it is possible to take advantage of a of a natural gas or oil lease, if you will, as long as physical operations are not taking place on that conserved property.

Jim Shoemaker:
Ok, and thank you for that one final question for you, Paul, if someone wanted to conserve his or her land, how should they go about doing it? How do they contact the North Range Land Trust?

Paul Lumia:
Well, I would suggest that they, first of all, read up on conservation easements and there's some great resources online, we have a national organization called the Land Trust Alliance. You can search it on the Internet. And then on the Land Trust Alliance site, you can read all about conservation easements and the value of a conservation easement for the landowner. You can also go to North Branch Land Trust Web site, which has a lot of good resources as well, and BLT Dog and read about conservation easements. And also our contact information is on there as well. So you can contact us through our Web site or give us a call at our office, which is a good way to to start a conversation. And we can discuss the the the your interest in a conservation easement and what you're interested in trying to conserve on your property. That number, by the way, is five seven three one one seven eight one, if you want to call us directly. But it's all on our website as well. So you can you can start there.

Jim Shoemaker:
Well, thank you very much, Paul, I hope folks are going to find this useful if they have questions about the North Rangeland Trust or conservation easements. And thank you, Brian, and thanks, everyone, for listening.

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