Purchase of Development Rightsand Conservation Easements:

Frequently Asked Questions

Technical Report 34

Agricultural Experiment Station • Cooperative Extension Service

College of Agriculture and Home Economics

ACKNOWLEDGMENT

This report was made possible through thesupport of New Mexico State University’sAgricultural Experiment Station.

INTRODUCTION

Agriculture in the United States has changed dra-matically over the last several decades. It is often aproductive activity conducted on the urban fringe. Ag-ricultural land regularly is converted from farming tosuburban development. The value of land in agriculturaluse often is significantly less than the value of land soldfor development. For many agricultural landowners inurban fringe areas, there appears to be only one long-runchoice—sell the farmland for development. However,purchase of development rights (PDRs) and conserva-tion easement tools may provide other options. PDRsand conservation easements also have been applied tofarm and ranch properties in areas where land valueshave increased dramatically as a result of purchases byindividuals whose primary financial interest is not agri-cultural production.

OBJECTIVE

The objective of this report is to answer many of thequestions agricultural landowners often have when theyfirst learn about PDRs and conservation easements.

What is the nature of land ownership in theUnited States?

Property ownership in the United States is based onthe principle of fee simple title. A landowner is vestedwith all necessary rights to treat land as a fully market-

Purchase of Development Rightsand Conservation Easements:Frequently Asked Questions

John B. Wright and Rhonda Skaggs*

able commodity. Land ownership rights may be sepa-rated and legally conveyed in the marketplace. Water,mineral, and timber rights commonly are bought andsold.

Land ownership involves having title to some or allof a bundle of rights. For instance, ownership mayinvolve the right to farm or live on a property, but not theright to extract subsoil minerals. Also, land ownershipoften involves utility and road easements.

What is a development right?

A development right is the right to subdivide prop-erty. For example, larger tracts of agricultural land aredivided into smaller properties, which are then sold asrural residences or “ranchettes.” Nationally, almost 5million acres of agricultural (crop and livestock produc-ing) land have had their development rights severed.

How is the value of development rightsdetermined?

Roughly, the value of development rights is thedifference between what agricultural land would sell forif it were sold for development and its value in agricul-tural use. The agricultural use value and developmentvalue are determined through traditional appraisal pro-cesses. The value of development rights can range from10% to more than 90% of the full market price, depend-ing on development pressure.

*Associate professor, geography and planning, NMSU; Associate professor, agricultural economics and agricultural business, NMSU, respectively.

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How can development rights be severed fromagricultural lands?

Throughout the United States, development rightshave been severed from agricultural lands in two pri-mary ways. Development rights have been purchasedby different entities (usually a nonprofit land trust), andthey have been donated by landowners to nonprofit landtrusts or conservation organizations. The severance ofdevelopment rights is a perpetual deed restriction, andfuture landowners must uphold easement terms.

What happens to the development rightsafter they are severed from agricultural land?

The buyers of development rights do not acquire theright to build anything on the land. Rather, they hold theright and responsibility to prevent development of theland. After the development rights are severed fromagricultural land, the landowner retains all other rightsof ownership, including the right to keep the land inagricultural production, apply chemical fertilizers andpesticides, prevent trespassing, sell the land, or pass onthe land to heirs.

What happens to the value of agriculturalland once development rights are severed?

The value of the land decreases to reflect its agricul-tural production value, since subdivision or develop-ment of the land is no longer possible. The market valueof the property is not frozen, and fluctuates with marketconditions for agricultural properties.

How is agricultural land taxed if thedevelopment rights have been severed?

Most agricultural land in the United States, includingfarmland and rangeland in New Mexico, currently istaxed at a lower rate as long as the land remains inagricultural production. This preferential taxation struc-ture does not change if the development rights aresevered.

What is a nonprofit land trust?

A land trust usually is a local organization that holdstitle to development rights that have been severed fromagricultural properties. Each land trust has its own goals

related to land protection. A land trust may be dedicatedto preserving the agricultural land base in a particularregion, or it may be primarily concerned with maintain-ing open space or wildlife habitat. Land trusts holddevelopment rights, which, if exercised, would damagethe agricultural productivity, health, and beauty of aproperty.

Land trusts that hold development rights can neveruse the rights and must monitor the land to assure thatland-use agreements are upheld. For instance, if agricul-tural landowners transferred their development rights toa land trust and then attempted to develop the land, theland trust would respond through civil, legal action dueto breach of contract.

What is the history of land trusts in theUnited States?

The first U.S. land trusts were established in Massa-chusetts in the 1890s. More than a thousand land trustscurrently exist in the United States, with most of thegrowth in numbers of land trusts occurring since theearly 1980s. Currently, land trusts exist in every statebut they are more concentrated in the eastern UnitedStates, the Great Lakes region, the Pacific Northwest,California, and Colorado. The Colorado Cattlemen’sAssociation Land Trust holds development rights onmore than 30,000 acres of agricultural land. Growth ofland trusts in the intermountain West has been increas-ing steadily for the last 20 years. New Mexico currentlyhas seven organizations, including the Southern RockiesAgricultural Land Trust based in Capitan.

There are a small number of large, nationally activeland trusts. The Nature Conservancy has been activethroughout the United States (and internationally) in itsefforts to maintain biological diversity. The AmericanFarmland Trust is a national organization dedicated tothe conservation of the nation’s best farmland. Thetrust’s activities involve public education, policy devel-opment, and holding title to farmland developmentrights.

What other organizations can receivedevelopment rights?

In recent years, receivers of development rights alsohave expanded to include some quasi-governmentalorganizations in areas where public funds have been

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used to purchase development rights. Federal land man-agement agencies, cities, and counties also can and havereceived title to development rights.

Can development rights be severed fromagricultural lands in New Mexico?

Yes, New Mexico statutes are typical of other states.Development rights can be transferred legally fromagricultural land to nonprofit land trusts. These non-profit organizations also can be established according tocurrently existing Internal Revenue Service (IRS) regu-lations.

What are the similarities and differencesbetween PDRs and conservation easements?

Both are voluntary means by which agricultural landcan be protected from development or subdivision. Inboth cases, landowners decide if they want to involvetheir property in the process. Both involve the transfer,in perpetuity, of development rights to a third party, forthe purpose of protecting open space, and scenic, eco-logical, recreational, agricultural, or historic resources.

A conservation easement involves the donation ofdevelopment rights by a landowner. When a conserva-tion easement is paid for, and traded in a market betweena willing buyer and a willing seller, it is called a“purchase of development rights” or PDR. Typically,the severance of development rights is referred to as a“conservation easement,” without reference to whetheror not it was a market transaction or a donation process.PDR also is sometimes referred to as “purchase ofagricultural conservation easement” or PACE, usuallywhen public funds are used to purchase developmentrights.

What are the tax implications of a PDRversus a conservation easement?

Severing development rights from or creating con-servation easements on agricultural land has numeroustax implications. If development rights are purchasedfrom the landowner through a market transaction, theseller is responsible for paying taxes on the gain fromthe sale.

If the development rights are donated in the form ofa conservation easement to a nonprofit organization,there are large potential tax savings. Landowners maydeduct the full fair market value of a perpetually con-

veyed conservation easement. The deduction in any taxyear cannot exceed 30% of the taxpayer’s adjusted grossincome. If the value of the gift exceeds this limit, theexcess may be carried forward for up to five additionalyears. Corporations are limited to a 10% deduction.

A landowner can donate a conservation easement fora property prior to selling it to another agricultural landuser. This provides the prior owner shelter from capitalgains taxes derived from the sale. The donated conser-vation easement is treated as a charitable gift by the IRS.

A conservation easement also can be used to reducethe value of an estate that is subject to taxation. Ease-ments may help people keep land in the family withoutselling off large tracts to pay estate taxes. By IRS code,heirs have nine months after the death of the landownerto develop a conservation easement donation. Estatetaxes can be huge unless actions like easement dona-tions are taken.

Recent acts by Congress (i.e., the Taxpayer ReliefAct of 1997) have provided additional tax benefits forconservation easements. Further tax benefits also areavailable when easements are established for specificpurposes, such as the provision of wildlife habitat.

A temporary or term conservation easement (i.e., onewith an expiration date) provides no tax benefits.

Clearly, if agricultural landowners are interested inestablishing conservation easements, they should con-sult early with both an accountant and an attorney!

Is there a “one-size-fits-all” conservationeasement?

No. Conservation easements (whether PDR or dona-tion) must be tailored to individual properties and land-owners’ needs. The enabling legislation for donatingdevelopment rights is flexible. The decision to severdevelopment rights is voluntary, and landowners do nothave to accept a conservation easement if they do notaccept the terms of the agreement. For example, someagricultural landowners might want to establish conser-vation easements on only part of their property. Or theymay want to reserve the right to have future homesitesfor several family members or the right to constructother farm buildings or structures.

A conservation easement is established through ne-gotiation between the grantor of the development rights(the landowner) and the grantee of the developmentrights (the land trust). Obviously, the agreement must bemutually acceptable.

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Does a conservation easement placerestrictions on how or what agriculturalpractices can be conducted on the land?

A conservation easement can be written to includecurrent and future (undetermined) agricultural prac-tices. Or it can be written to restrict certain agriculturalpractices. This is the landowner’s decision. A conserva-tion easement also might be written to preserve alandowner’s right to allow fee hunting or other recre-ational or agri-tourism activities.

Do I have to allow public access after mydevelopment rights are severed?

No. Public access is not automatically related toconservation easements. A landowner may choose toallow public access, but the landowner also can estab-lish public access limits or guidelines in the conserva-tion easement agreement.

Does a conservation easement involvezoning or regulations?

No. A conservation easement (whether donated orthrough the PDR process) has no link to zoning. Specialregulations to create agricultural zones or zoning rulesdesigned to keep agricultural land in agricultural pro-duction involve police powers and the government.

How are conservation easements differentfrom agricultural zoning?

Regulatory systems (or zoning) that attempt to pre-serve agricultural lands have been tried in many statesand regions around the country. Agricultural zoningregulations have proven to be temporary and also havebeen very unpopular with agricultural landowners.Agricultural zoning involves an uncompensated “tak-ing” of property away from landowners (specifically,their development rights). A conservation easement isvoluntary and can provide financial compensation ortax savings.

Can conservation easements be vacated orare they perpetual?

Unlike zoning, conservation easements provide ameans to keep land in agricultural use in perpetuity.However, if the original purpose of the easement can nolonger be met through no fault of the landowner, the

easement can later be vacated. For example, if irrigationwater were to become unavailable to a parcel of land thatis dependent on the water for production, the easementwould no longer be valid. In a case such as this, theeasement holder and the landowner would jointly peti-tion the court to dissolve the easement.

Some landowners have chosen to engage in tempo-rary or term easements. These conservation easementsimpose restrictions for a specified number of years. Inthese cases, there are no tax advantages to establishingthe easement.

How can conservation easements be “good”for agriculture?

As described above, donated conservation easementscan provide significant tax benefits to agricultural land-owners, particularly to those with sizable estates andwho wish to have agricultural land remain in productionand/or in the family.

When landowners are financially compensated fortheir development rights, the sale of the easement al-lows them to cash in part of their equity. This money canbe used to pay off mortgages, establish secure retire-ment funds, expand, or recapitalize the farming orranching operation.

In areas facing heavy development pressures, manyyounger or would-be farmers are unable to purchasefarmland because land prices are so much greater thanthe value of the land in agricultural production. A supplyof good, agricultural land that does not carry develop-ment rights could help new or young people enterfarming.

How can conservation easements be “good”for communities?

Conservation easements keep land on the tax rolls,because the land stays in private ownership. The landalso remains in agricultural production, which for somecommodities may help maintain the critical level ofregional output necessary to support agricultural pro-cessing, agricultural input suppliers, and related agri-cultural industries. Jobs and output in these sectors areretained.

Research also has found that extensive, large-lotsubdivisions on agricultural lands cost much more ingovernment-provided services than the amount paid inproperty taxes. In contrast, government-provided ser-vices to agricultural areas have been shown to cost lessthan the amounts paid in agricultural property taxes.

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If a state assesses agricultural land at its use value, asNew Mexico does, the “removal” of development rightswill not affect property taxes collected.

Keeping land in agricultural production helps topreserve open space and provides natural amenities(such as wildlife) that may be incompatible with devel-opment. In many U.S. communities, the agriculturalsector is an essential part of local heritage, history,culture, and social activities.

What are some problems with conservationeasements?

Some agricultural landowners may not need the taxbenefits provided by donating conservation easements.When donating a conservation easement, a landownermust be prepared to pay for the legal and accountingexpertise required to design an easement that fullyprotects the landowner. However, these expenses alsoare tax-deductible.

PDRs require willing sellers and willing buyers.Often, sellers are interested in selling developmentrights for financial gain. However, buyers with avail-able funds are scarce.

The holders of development rights (the nonprofitland trusts) must be willing and able to engage inperpetual monitoring and legal enforcement of conser-vation easement provisions. The majority of local landtrusts have small annual budgets. However, litigationbetween landowners and land trusts has been extremelyrare, due primarily to the participating landowners’commitment to the objectives of the conservation ease-ments.

In areas where there is already extensive subdivisiondevelopment, conservation easements on remainingagricultural properties may not be feasible due to neigh-boring nonfarm residents’ intolerance of traditionalagricultural practices.

How have conservation easements been paidfor in other states?

Some areas and states have used public funds raisedthrough voter-approved bond issues to purchase devel-opment rights. Local communities that have done thisinclude King County, Washington; Suffolk County,New York; Boulder County, Colorado; and severaltowns in Vermont. States that have used public funds topurchase development rights include Connecticut, Mary-land, Massachusetts, New Hampshire, New Jersey, andRhode Island.

Funds provided by the federal Farmland ProtectionProgram (FPP) have been used to purchase develop-ment rights in California, Michigan, Wisconsin, Mary-land, Pennsylvania, and several other states. The FPPwas authorized for six years under the 1996 Farm Bill.The program was funded with $35 million to matchlocal funds (at 50%) raised for the purpose of protectingfarmland threatened by development.

In 1998, the U.S. Congress passed the SouthernNevada Public Land Management Act (Public Law105-26). This new law provides for sale of up to$1 billion of public lands in the Las Vegas Valley by theBureau of Land Management (BLM). More than 80% ofthe funds generated from sales of BLM land in the LasVegas area will be used to purchase environmentallysensitive private land and development rights in Nevada(with preference to the Las Vegas area) and improveparks and recreation areas around Las Vegas. The 1998act is a departure from previous regulations that havepermitted the BLM to only engage in land trades, ratherthan land sales.

Some thought has been given to the idea that a similarpiece of legislation might be obtainable for New Mexico.Funds generated from the sale of BLM lands in the statecould be used to purchase development rights fromagricultural landowners in areas facing heavy develop-ment pressure. BLM lands sold into the private marketwould then be available for development and furtherrelieve development pressure on the limited irrigatedfarmland in the state.

Where can I find more information aboutPDRs, conservation easements, land trusts,etc.?

There are many resources available online. TheAmerican Farmland Trust is an excellent place to startbecoming more informed about the subject. The WorldWide Web site is at www.farmland.org. The Trust alsocan be contacted through its national office at theaddress and phone below:

American Farmland TrustNational Office1920 N. Street, NW, Suite 400Washington, DC 20036Phone: 202-659-5170Fax: 202-659-8339

Much information also can be located by using key-words such as “farmland protection,” “farmland preser-

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vation,” and “conservation easement” with any goodInternet search engine. The Alta Vista search engine ishighly recommended. Internet searches using these keywords will return hundreds of web pages, many provid-ing information for specific states, communities, legis-lative initiatives, and land trusts.

REFERENCES

American Farmland Trust. Various factsheets. InternetWorld Wide Web site: www.farmland.org.

Lockeretz, William. Sustaining Agriculture NearCities. Ankeny, IA:Soil and Water ConservationSociety, 1987.

Stokes, Samuel N., A. Elizabeth Watson, Genevieve P.Keller, J. Timothy Keller. Saving America’sCountryside: A Guide to Rural Conservation.Baltimore, MD: The Johns Hopkins University Press,1989.

U.S. Department of Interior - Bureau of Land Manage-ment. “Southern Nevada Public Land ManagementAct of 1998, Public Law 105-263. Internet WorldWide Web site: www.nv.blm.gov/plma/plma.htm.

Wright, John B. “Conservation Easements: AnAnalysis of Donated Development Rights.” Journalof the American Planning Association, Vol. 59, No.4, Autumn 1993, pp. 487-493.

Wright, John B. “Designing and Applying Conserva-tion Easements.” Journal of the American PlanningAssociation, Vol. 60, No. 3, Summer 1994, pp. 380 -388.

Wright, John B. Rocky Mountain Divide: Selling andSaving the West. Austin, TX: University of TexasPress, 1993.

New Mexico State University is an equal opportunity/affirmative action employer and educator. NMSU and the U.S. Departmentof Agriculture cooperating.

Reprinted November 2002 Las Cruces, NM5C