[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]
TO REVIEW THE TAX DEDUCTION FOR FACADE EASEMENTS
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HEARING
before the
SUBCOMMITTEE ON OVERSIGHT
of the
COMMITTEE ON WAYS AND MEANS
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED NINTH CONGRESS
FIRST SESSION
__________
JUNE 23, 2005
__________
Serial No. 109-34
__________
Printed for the use of the Committee on Ways and Means
_____
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COMMITTEE ON WAYS AND MEANS
BILL THOMAS, California, Chairman
E. CLAY SHAW, JR., Florida CHARLES B. RANGEL, New York
NANCY L. JOHNSON, Connecticut FORTNEY PETE STARK, California
WALLY HERGER, California SANDER M. LEVIN, Michigan
JIM MCCRERY, Louisiana BENJAMIN L. CARDIN, Maryland
DAVE CAMP, Michigan JIM MCDERMOTT, Washington
JIM RAMSTAD, Minnesota JOHN LEWIS, Georgia
JIM NUSSLE, Iowa RICHARD E. NEAL, Massachusetts
SAM JOHNSON, Texas MICHAEL R. MCNULTY, New York
PHIL ENGLISH, Pennsylvania WILLIAM J. JEFFERSON, Louisiana
J.D. HAYWORTH, Arizona JOHN S. TANNER, Tennessee
JERRY WELLER, Illinois XAVIER BECERRA, California
KENNY C. HULSHOF, Missouri LLOYD DOGGETT, Texas
RON LEWIS, Kentucky EARL POMEROY, North Dakota
MARK FOLEY, Florida STEPHANIE TUBBS JONES, Ohio
KEVIN BRADY, Texas MIKE THOMPSON, California
THOMAS M. REYNOLDS, New York JOHN B. LARSON, Connecticut
PAUL RYAN, Wisconsin RAHM EMANUEL, Illinois
ERIC CANTOR, Virginia
JOHN LINDER, Georgia
BOB BEAUPREZ, Colorado
MELISSA A. HART, Pennsylvania
CHRIS CHOCOLA, Indiana
DEVIN NUNES, California
Allison H. Giles, Chief of Staff
Janice Mays, Minority Chief Counsel
______
SUBCOMMITTEE ON OVERSIGHT
JIM RAMSTAD, Minnesota, Chairman
ERIC CANTOR, Virginia JOHN LEWIS, Georgia
BOB BEAUPREZ, Colorado EARL POMEROY, North Dakota
JOHN LINDER, Georgia MICHAEL R. MCNULTY, New York
E. CLAY SHAW, JR., Florida JOHN S. TANNER, Tennessee
SAM JOHNSON, Texas CHARLES B. RANGEL, New York
DEVIN NUNES, California
J.D. HAYWORTH, Arizona
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C O N T E N T S
__________
Page
Advisory of June 16, 2005 announcing the hearing................. 2
WITNESSES
Internal Revenue Service, Steven T. Miller, Commissioner, Tax-
Exempt and Government Entities Division........................ 5
______
National Architectural Trust, Springfield Management Services,
Steven L. McClain.............................................. 14
National Trust for Historic Preservation, Paul W. Edmondson...... 23
New York Landmarks Conservancy, Peg Breen........................ 27
Delta Associates, David C. Lennhoff.............................. 31
TO REVIEW THE TAX DEDUCTION FOR FACADE EASEMENTS
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THURSDAY, JUNE 23, 2005
U.S. House of Representatives,
Committee on Ways and Means,
Subcommittee on Oversight,
Washington, DC.
The Subcommittee met, pursuant to notice, at 2:01 p.m., in
room 1100, Longworth House Office Building, Hon. Jim Ramstad
(Chairman of the Subcommittee) presiding.
[The advisory announcing the hearing follows:]
ADVISORY
FROM THE
COMMITTEE
ON WAYS
AND
MEANS
SUBCOMMITTEE ON OVERSIGHT
CONTACT: (202) 225-1721
FOR IMMEDIATE RELEASE
June 16, 2005
OV-2
Ramstad Announces Hearing to
Review the Tax Deduction for Facade Easements
Congressman Jim Ramstad (R-MN), Chairman, Subcommittee on Oversight
of the Committee on Ways and Means, today announced that the
Subcommittee will hold a hearing to review the tax deduction for facade
easements. The hearing will take place on Thursday, June 23, 2005, in
the main Committee hearing room, 1100 Longworth House Office Building,
beginning at 2:00 p.m.
In view of the limited time available to hear witnesses, oral
testimony at this hearing will be from invited witnesses only.
Witnesses will include officials from the Internal Revenue Service
(IRS) and easement-holding organizations.
BACKGROUND:
In 1980, Congress passed the Tax Treatment Extension Act (P.L. 96-
541), which made permanent a charitable tax deduction for certain
conservation contributions to a qualified organization for conservation
purposes. This law supplemented two previous laws--the 1966 National
Historic Preservation Act (P.L. 89-665), which set guidelines for
defining and listing historic properties, and the 1976 Tax Reform Act
(P.L. 94-455), which established the historic preservation tax
deduction on a temporary basis. Federal law allows a charitable
deduction under Section 170(h) of the Internal Revenue Code for
donations of qualified real property interests, including easements
with respect to a certified historic structure granted in perpetuity to
a qualified organization. A ``certified historic structure,'' is any
building, structure or land area listed in the National Register or
located in a registered historic district. The building must be
certified by the National Park Service as contributing to the historic
character of the district.
A historic preservation easement, like other deed restrictions, is
a voluntary legal agreement made between the property owner and a
qualified organization to protect a significant historic, archeological
or cultural resource in perpetuity from demolition, alteration or
development. Under the terms of this type of easement, the property
owner grants a portion of, or interest in, the owner's property rights
to a qualified organization whose mission includes historic
preservation. By donating a facade easement to a qualified
organization, a property owner promises in perpetuity not to alter the
facade of his or her structure without the permission of the easement-
holding organization. In return, the property owner may take a
deduction equal to the value of the easement.
In recent years, there has been a dramatic growth in the number of
facade easements. Recent media reports have raised concerns about
abuse, especially relating to inflated deductions that some taxpayers
may be claiming. Some reports have also raised questions about the role
of for-profit facilitators in marketing and promoting the donation of
facade easements. According to some reports, some facilitators are
advising potential donors that the easement will not negatively impact
the value of the property, while at the same time encouraging the
property owner to take a large deduction. In addition, when conducting
a valuation of an easement, many appraisers appear to be applying
similar percentage values to easements, regardless of the location,
local historic ordinance restrictions or the varying types of
restrictions in the easement deed.
In announcing the hearing, Chairman Ramstad stated, ``The
Subcommittee is interested in learning if the tax deduction for facade
easements has been abused. I think it is important to review this
deduction and how it is being administered to make sure American
taxpayers are getting their money's worth.''
FOCUS OF THE HEARING:
The hearing will review the tax deduction for the donation of
facade easements, including the valuation of facade easements, and
potential abuse relating to the marketing and promotion of facade
easements.
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Chairman RAMSTAD. The hearing would please come to order. I
would like to welcome our witnesses, distinguished members of
the panel, as well as our visitors here today. The last 5 years
have witnessed an exponential growth in the number of historic
preservation easements donated by property owners. These
easements are intended to serve an important historic
preservation purpose. However, the rapid growth in easement
donations combined with some, I must say, troubling accounts of
abuse relating to the easement deduction, led us to hold this
hearing today. As you all know, the Tax Code allows a deduction
for a number of different conservation-related contributions.
Today, we will focus solely on facade easements. Let me repeat:
today, we will focus solely on facade easements. When owners
donate an easement, they are effectively giving up control over
the facade of that structure to a nonprofit organization. The
Tax Code allows the property owner to take a deduction for
giving up that partial property interest. The policy reason
underlying this deduction is to encourage easement donations as
a tool for historic preservation, to provide an incentive for
historic preservation.
While this deduction and the policy reasons underlying this
deduction sound simple in theory, in practice it has become
much more complex. The valuation of a facade easement is not a
simple matter. How much is it worth for a property owner to not
be able to alter the facade of his or her structure? That
should depend on a number of different factors for which I
believe there is a consensus. First, does the owner have the
right to alter the facade of the building? Does the right exist
to alter the facade? Many areas of our country are already
subject to strict historic preservation laws that keep the
property owner from changing the facade. Two, what does the
easement cover? Some easements cover simply the facade; others
cover the entire building. Different types of easements should
obviously be worth different amounts. Three, does the appraisal
reflect the actual facts and circumstances of the facade? It
appears that some disturbing practices have emerged in the
appraisal of easements. Rather than making careful
individualized determinations concerning properties, it seems
that a number of appraisers are applying a uniform rule in
which they estimate all facade easements are worth between 10
and 15 percent of the value of the property. Valuations like
this are contrary to Internal Revenue Service (IRS) regulations
and cast doubt on the easement deduction, generally.
Today, we will hear testimony from the IRS, from three
different easement holding organizations, and from an expert
appraiser. We will try to learn more about the role that
easement holding groups play in the valuation process and
whether there are, in fact, problems with the way these
organizations solicit and oversee easement donations. In a book
about the easement appraisal process written several years ago,
before the growth in easement donations, the Land Trust
Alliance and the National Trust for Historic Preservation wrote
the following, ``Organizations accepting easements should
ensure to the extent possible that donors claim deductions
based on competent independent appraisals. Failure to do so may
result in disallowance of the donor's charitable contribution
claim. More fundamentally, excessive deduction claims undermine
public confidence in our tax system and could conceivably lead
to congressional curtailment of this very important
conservation and preservation tool.'' I agree with the caveat
just read and provided by the Land Trust Alliance and the
National Trust for Historic Preservation. I agree with their
warning. If historic preservation tools are marketed as a way
for some homeowners to take a hefty inappropriate tax deduction
without giving anything up, it is clear some changes may be in
order. I hope this hearing will allow this Subcommittee to
determine the extent of the abuse of the facade easement
deduction, so we can consider any necessary and appropriate
reforms.
Thank you again to our colleagues who are here today and
our witnesses for being here. The Ranking Member, Mr. Lewis,
called and said he was unable to be here today, as did a number
of other Members on the other side of the aisle. Are there any
opening statements from this side? If not, I would ask the
panel to begin the testimony, recognizing the 5-minute rule
that we have here. If you could keep your comments to 5
minutes, by unanimous consent, the entire text of your prepared
testimony will be entered into the record. Now that Mr.
Lennhoff has arrived, we have the full complement of five
members of the panel. Welcome, Mr. Lennhoff. Thank you for your
call. I am sorry you got held up in traffic, but we are glad
you are here. The five members of the panel are Mr. Steven T.
Miller, Commissioner of the Tax Exempt and Government Entities
Division of the IRS; Mr. Steven L. McClain, Director of the
National Architectural Trust (NAT), and President of
Springfield Management Services (SMS); Paul Edmondson, Vice
President and General Counsel of the National Trust for
Historic Preservation; Ms. Peg Breen, President of New York
Landmarks Conservancy; and Mr. David C. Lennhoff, President of
the Appraisal Division of Delta Associates. Mr. Miller, your
testimony, please.
STATEMENT OF STEVEN T. MILLER, COMMISSIONER, TAX-EXEMPT AND
GOVERNMENT ENTITIES DIVISION, INTERNAL REVENUE SERVICE
Mr. MILLER. Yes. Thank you, Mr. Chairman, distinguished
Members of the Subcommittee. Deductions for facade easements
appear to be on the rise, as you have mentioned. They warrant
our attention because of troubling valuation problems we are
finding in this area. While we are still early in our
enforcement work, let me say that we are concerned that some
homeowners are being misled by charities, promoters, and
appraisers into believing that a donation of a facade easement
entitles them to a deduction in excess of what we believe is
appropriate. I want to make it clear to the Subcommittee and to
those in the easement community that those individuals who take
improper facade deductions will hear from us. I outlined the
law in this area in my written testimony, and while I will
touch on it here, I want to concentrate more on our enforcement
efforts and our challenges.
Facade easements are intended to preserve historically
important land areas or certified historic structures,
including buildings, structures, or land areas that are either
listed in the National Register of Historic Places, or located
in a registered historic district and certified by the National
Park Service as being of historic significance to that
district. Thus, we generally rely upon the Park Service to
determine historic significance. If an easement meets Park
Service requirements, the question then becomes one of value.
Generally, the amount of a deduction may not exceed the value
of the property that is given up by the donor. We have
enforcement efforts under way in this area. We have established
an IRS team to lead our efforts. The team currently is
overseeing 30 facade donor audits and is reviewing data to
determine which, of an additional 1,600 or more identified
donors, we will contact next. We are also examining a number of
charities and promoters concerning their easement practices. As
in some other areas within our sector, there may be
overenthusiasm and commercialism creeping into this area.
It is still too early to draw conclusive findings, but I do
have some preliminary observations. The appraisal of facade
easement presents opportunities for abuse and manipulation, and
we are seeing problems. The validity of an appraisal of the
valuation assigned to an easement depends upon the facts and
circumstances of each case, and each case is unique. With
respect to residential easements, appraisals we have seen to
date do not include any meaningful analysis, but instead simply
claim a flat percentage, generally between 10 and 15 percent of
the value of the property. Let me state plainly that those who
say the IRS will uniformly accept the flat 10 to 15 percent as
a reasonable valuation without any underlying analysis are
wrong. There is no such rule, and promoters, appraisers, and
taxpayers should not proceed under the false assumption that
this is some sort of safe harbor. Fixed percentage valuations
are not based on the facts and circumstances of the individual
case, and they ignore local factors, such as zoning ordinances,
which must be taken into account. As opposed to residential
facades, the issues we find in commercial property facade
easements are often more complex. Although we have seen some
fixed percentages being taken here as well, there are often
additional valuation problems stemming from the way
restrictions on further development of the property are valued.
So, although facade easements serve a vital role in the
preservation of our heritage, the problems we have seen so far
concern us. These problems also present the issue of whether
existing rules governing appraiser qualifications, appraisal
standards, and the standards for referral to the Office of
Professional Responsibility are sufficient. As you consider
these issues, I ask you also to consider the IRS challenges and
questions outlined by Commissioner Everson in his May testimony
before the full Committee. First, are there gaps in the
statutory or regulatory framework? For example, are current
appraisal standards sufficient and are the standards for
referral for disciplinary action workable? A second issue is
whether the IRS has the flexibility it needs to respond
appropriately to compliance issues. For example, should there
be an intermediate sanction, as the Administration proposed in
its 2006 budget proposal, for those charities that do not
monitor the easements entrusted to their care? A third issue is
whether more should be done for transparency purposes. This
includes not only form changes and the need for enhanced
electronic filing, which I have outlined in my written
testimony, but the ability of the IRS to share information with
those in the States and the Federal Government who co-
administer the conservation area. I would be happy to take any
questions.
[The prepared statement of Mr. Miller follows:]
Statement of Steven T. Miller, Commissioner, Tax-Exempt and Government
Entities Division, Internal Revenue Service
Mr. Chairman, Mr. Lewis, and distinguished Members of the
Subcommittee, thank you for this opportunity to discuss the law
relating to the deductibility of contributions for facade easements,
and the steps the Internal Revenue Service is taking to enforce it.
Congress has allowed an income tax deduction for owners of certified
historic structures who give up the right to change the exterior
appearance, the facade, so that the historic qualities of the structure
might be preserved for future generations.
The conservation contribution provisions of the Internal Revenue
Code \1\ play a vital role in the preservation of historic structures
with unique public value.
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\1\ Internal Revenue Code (IRC) Section 170(h).
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As I will discuss below, donations of facade easements appear to be
on the rise based on the number of properties located in registered
historic districts that are applying for certification by the National
Park Service as of historic significance to the district. The rise in
donations of facade easements warrants our attention because the IRS
has seen signs that certain valuation practices employed with regard to
facade easements may compromise the policies and the public benefit
that Congress intended to promote.
Let me say here that we are concerned that some taxpayers are being
misled by charities, appraisers, and promoters into believing that the
donation of a facade easement entitles them to a deduction greatly in
excess of what is allowable. Taxpayers who are taking improper
deductions for donated facade easements can expect to hear from us.
Later, I will discuss these trends and problems in more detail, and
explain what we are doing about them. But let me first briefly explain
the tax provisions relating to conservation easements generally and to
facade easements in particular.
Legal Requirements for Deductions for Facade Easements
The analysis of a facade easement focuses on two issues. The
threshold question is whether the interest the taxpayer conveys is a
valid conservation easement, in this case an easement exclusively for
the preservation of a certified historic structure. The second is
whether the value of the easement is correct, that is, whether the
required appraisal is honest and reasonable, or fanciful and inflated.
Threshold question_conservation easements in general
A facade easement is one of four types of qualified conservation
contributions described in section 170(h) of the Code. I will focus on
facade easements today, but will cover all four types because they
share some common features and sometimes intertwine. As we have
recently testified, the Service has a large examination program
underway with respect to open space conservation easements where we
have seen problems due to a lack of significant public benefit and
inflated valuations, but we have also begun an expanded examination
program for facade easements.
To begin, let me note an important distinction between donations of
real property and donations of qualified conservation contributions,
including conservation easements. Under general income tax rules, to be
eligible for a deduction for a charitable contribution, a taxpayer must
give his or her entire interest in the property to the charity,
reserving no substantial rights for himself or herself. Under these
rules, the recipient charity becomes the owner of all title and
interest in the property. The donor generally may take a charitable
contribution deduction for the fair market value of the property. In
these cases, as with other gifts of property, our main concern usually
is whether the donor has valued the gift correctly.
There are only a few exceptions to this general rule, and a
conservation easement is one of them. Section 170(f)(3)(B)(iii) allows
a deduction for a qualified conservation contribution, even though it
is only a gift of a partial interest in property.
Section 170(h) defines ``qualified conservation contribution.'' It
is a contribution:
Of a qualified real property interest, including an
easement granted in perpetuity that restricts the use that can be made
of the property. Section 170(h)(2)(C).
To a qualified organization. Generally, these are public
charities and governmental units. Section 170(h)(3). Importantly, the
recipient charity must have the resources and commitment to monitor and
enforce the restrictions.
Exclusively for conservation purposes.
With respect to the last requirement, there are four allowable
conservation purposes.
1. The preservation of land areas for outdoor recreation or
education of the general public.
The donation of easements to preserve land areas for the
recreational use of the general public or for the education of the
public is the first conservation purpose enumerated in section
170(h)(4) of the Code. Examples include the preservation of a water
area for public recreation such as boating or fishing, or the
preservation of land for a nature trail or hiking trail. Unlike
easements for the three other conservation purposes, these easements
require regular and substantial physical access by the general public.
2. The protection of a relatively natural habitat of fish,
wildlife, plants or similar ecosystem.
The second category of conservation easements is to protect a
significant natural habitat or ecosystem in which fish, wildlife, or
plants live in a relatively natural state. Significant natural habitats
include the habitats of rare, endangered, or threatened species of
animals, fish, or plants, or natural areas that represent high quality
examples of a terrestrial or aquatic community, or natural areas that
contribute to the ecological viability of a park, nature preserve,
wildlife refuge, or wilderness area. Limitations on public access to
these areas will not render an easement donation nondeductible. For
example, a restriction on access to the habitat of a threatened species
is consistent with the conservation purpose of the easement.
3. The preservation of open space (including farmland and forest
land) for either the scenic enjoyment of the public, or pursuant to a
clearly delineated governmental conservation policy.
To determine that an easement will protect the scenic enjoyment of
the public, it must be shown that development of the land would result
either in an impairment of the scenic character of the landscape, or
would interfere with a scenic view that can be enjoyed from a public
place. At a minimum, visual access to or across the property is
required. Under the terms of an open space easement on scenic property,
the entire property need not be visible to the public, although the
public benefit from the donation may be insufficient to qualify for a
deduction if only a small portion of the property is visible to the
public. No matter whether the easement is for the scenic enjoyment of
the public or, alternatively, is pursuant to a governmental
conservation policy, there must also be a significant public benefit
that arises from an open space easement.\2\
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\2\ In determining whether a significant public benefit is present,
the regulations provide a non-exclusive list of eleven factors that may
be considered. Section 1.170A-14(d)(iv)(A). Some of these factors
involve the uniqueness of the land; the intensity of current or
foreseeable development; the likelihood of development that would lead
to the degradation of the scenic, natural, or historic character of the
area; the opportunity for the general public to use the property or
appreciate its scenic values; and the importance of the property in
maintaining a local or regional landscape or resource that attracts
tourism or commerce to the area. These factors indicate the kind of
open space contemplated as having a significant public benefit.
4. The preservation of a historically important land area or a
certified historic structure. Facade easements fall within this
category, and this is the area that I am primarily concerned with in
this testimony. The following discussion covers the law in this area.
Facade Easements for Certified Historic Structures
Historic preservation easements are intended to preserve
historically important land areas or certified historic structures.
Historically important land areas include:
An independently significant land area including any
related historical resources (such as an archeological site), that
meets the National Register Criteria for Evaluation administered by the
National Park Service;
Any land area within a registered historic district
including any buildings on the land that contribute to the significance
of the district; and
Any land area, including related historical resources,
adjacent to a property listed individually in the National Register of
Historic Places, if the land contributes to the historic or cultural
identity of the listed property.
Certified historic structures mean buildings, structures, or land
areas that are:
Listed in the National Register of Historic Places; or
Located in a registered historic district and certified
by the National Park Service as being of historic significance to the
district.
For a contribution of a historically important land area or
certified historic structure to qualify for an income tax deduction,
the public must have at least some visual access to the donated
property. In the case of a historically important land area, the entire
property need not be visible to the public, but the public benefit from
the donation may be too small to qualify for a deduction if only a
small part of the property is visible. If the historic land area or
certified historic structure is not visible from a public way (for
example, if it is hidden by a wall or by shrubbery, or is too far from
the public way), the terms of the easement must be such that the
general public is given the opportunity on a regular basis to view the
characteristics of the property that are preserved by the easement.
Factors to consider in determining the type and amount of public
access include the historical significance of the property, the nature
of the features that are the subject of the easement, the remoteness or
accessibility of the site, the possibility of physical hazards to the
public viewing the property, the extent to which public access would be
an unreasonable intrusion on any privacy interests of individuals
living on the property, the degree to which public access would impair
the preservation interests that are the subject of the donation, and
the availability of opportunities for the public to view the property
by means other than visits to the site.
If the terms of an easement allow future development in a
registered historic district, a deduction is allowable only if the
easement requires such development to conform to appropriate local,
state or federal standards for construction or rehabilitation within
the historic district.
Amount of the deduction_the appraisal and rules of valuation
If the facade easement contribution meets all requirements of
section 170, and qualifies as a conservation contribution, the inquiry
then turns to the valuation of the easement. Generally, the amount of
the deduction may not exceed the fair market value of the easement on
the date of the contribution (reduced by the fair market value of
anything received by the donor in return). Fair market value is the
price at which the contributed property would change hands between a
willing buyer and a willing seller, neither being under any compulsion
to buy or sell, and each having reasonable knowledge of relevant facts.
If there is a substantial record of sales of easements comparable
to the donated easement (such as purchases pursuant to a governmental
program), the fair market value of the donated easement is based on the
prices of the comparable sales. If no substantial record of marketplace
sales is available to use as a meaningful or valid comparison, as a
general rule (but not in all cases) the fair market value of a
conservation restriction is equal to the difference between the fair
market value of the property before the granting of the restriction and
the fair market value of the property after the granting of the
restriction.
Under the regulations, if such before-and-after valuation is used,
the fair market value of the property before contribution must take
into account not only the current use of the property but also an
objective assessment of how immediate or remote is the likelihood that
the property, absent the restriction, would in fact have been
developed, or its historic character modified. The valuation also must
take into account the effect of any zoning, conservation or historic
preservation laws that already restrict the property's potential
highest and best use. Further, there may be instances where the grant
of a conservation restriction may have no material effect on the value
of a property, or may in fact enhance, rather than reduce, the value of
property. In such instances, no deduction would be allowable. For
certified historic structures, the fair market value of the property
after contribution of the restriction must take into account the amount
of access permitted by terms of the easement. Additionally, if before-
and-after valuation is used, an appraisal of the property after
contribution of the restriction must take into account the effect of
restrictions that reduce the potential fair market value represented by
highest and best use, but nevertheless permit uses of the property that
will increase its fair market value above that represented by its
current use.
If the donor reasonably can expect to receive financial or economic
benefits greater than those to be obtained by the general public as a
result of the donation of a conservation easement, no deduction is
allowable. If development is permitted on the property to be protected,
the fair market value of the property after contribution of the
restriction must take into account the effect of the development.
The recipient of the easement_qualified organizations
To be qualified to receive a conservation easement, an organization
must be a governmental unit, or one of several types of public
charities. To be a qualified organization, the organization also must
be committed to protect the conservation purposes of the donation, and
must have the resources to enforce the restrictions. However, it need
not set aside funds for this purpose.
As with any charity, a qualified organization is subject to certain
rules described in section 501(c)(3). The organization must operate
exclusively for charitable, educational, or other tax-exempt purposes.
It cannot serve private interests unless such interests are only
incidental to its exempt purposes, and it cannot serve a substantial
nonexempt purpose. If the organization becomes derelict in its duties
to ensure that donated easements continue to serve an exempt purpose,
or if the organization subordinates the interests of the public to the
interests of the donor, the organization's tax exemption may be open to
question.
Role of the National Park Service and Trends with Respect to Facade
Easements
A principal qualification for eligibility for a historic easement
income tax deduction is that the National Park Service (NPS) list the
property in the National Register of Historic Places, or recognize the
property as located in a registered historic district and certify that
the property is of historic significance to that district. Thus, the
NPS serves as a gatekeeper for what is historically significant. The
Service relies upon the NPS for this determination. As years pass, the
NPS, using its criteria for evaluation of these properties, will
certify as historic an increasing number of our older houses,
buildings, and neighborhoods that significantly or uniquely represent
our past. We should expect more and more neighborhoods that meet the
NPS criteria to apply for certification and be deemed historic. We also
should expect the owners of more and more structures in those and in
existing historic districts to apply for certification as the tax
benefits of facade easement donations are promoted.
As we work these cases, there appear to be two distinct categories
of property with respect to which a facade easement is donated:
residential and commercial. The distinction matters to our discussion
because the valuation problems discussed below vary by type of
property. That is, appraisers have used different approaches in valuing
these two categories.
The number of possible facade easements is large. NPS data tells us
that there are more than 1.27 million buildings that either are already
listed in the National Register of Historic Places or are existing
properties that may contribute to the historic character of an existing
historic district (a new building in a historic district would not be
included in the above number).
Our information systems do not currently provide us with the
ability to identify the number of current easements or the claimed
value of deductions for these easements, including any facade
easements. However, it appears that the number of facade easements is
increasing based on the number of certifications applied for and
approved by NPS. The number of applications to NPS for certification of
historic property has grown in the last five years. NPS data shows that
74 applications were submitted between 1995 and 1999; 154 were
submitted in 2001; 705 in 2003, and 750 last year. While we believe
that this growth is reflected in the number of residential facade
easements, it is less clear whether commercial facade easements are
also increasing.
Certifications also seem to be geographically clustered. The
largest number of facade easements is concentrated in three locations:
Washington, D.C., New York City, and Chicago. We believe that qualified
recipient organizations actively solicit easements in selected
neighborhoods by promising large deductions. One resident on a street
applies, and then another, and soon the whole block may be dotted with
them.
Internal Revenue Service Enforcement in the Area of Facade Conservation
Easements
Overview
In this portion of my testimony I will outline the enforcement
actions the IRS has taken in this area and what we have found to date.
First, I will discuss the reporting requirements for exempt
organizations and their donors, and steps the IRS is taking to improve
such reporting. Then, I will discuss our examination activity in the
area.
Reporting
Facade easements are easier for us to track than other types of
conservation easements because of valuable data we receive from the
NPS. At least with respect to newer certifications, NPS has information
that identifies the owners of properties eligible for facade easement
donations. Consequently, the reporting improvements for donors which I
will outline, while helpful in the facade easement area, will assist us
primarily with respect to open space, wildlife habitat, and
recreational easements, for which we do not have a source of
information similar to the NPS.
We need to be able to determine systematically which organizations
and individuals have been involved in conservation easement
transactions. To address this, we are revising our tax forms to gather
more information about organizations with conservation easement
programs and their donors. We recently revised Form 1023, ``Application
for Recognition of Exemption Under Section 501(c)(3) of the Internal
Revenue Code,'' to add new questions that will help us identify
organizations with conservation easement donation programs in order to
ensure that they meet the requirements for exemption, including the
ability to meet conservation responsibilities.
Charities and other tax-exempt organizations annually file Form
990, ``Return of Organization Exempt From Income Tax,'' an information
return that reports income, expenses, assets, and liabilities of these
organizations, along with specific information about their operations
and programs. We are concerned that the public is not getting enough
information from Form 990 to understand what activities many of our
charities are engaged in. As an interim step, we will revise the 2005
Form 990 so that both the IRS and the public have a better
understanding of which organizations receive easements. We expect that
this will be in the form of a new checkbox that will identify those
organizations that received a conservation easement donation during the
year.
All exempt organizations can now file their annual returns
electronically. Electronic filing was available for Form 990 and 990EZ
filers in 2004, and is available this year as well for private
foundations, which file Form 990-PF. We want to encourage e-filing
because it reduces taxpayer errors and omissions and allows us, and
ultimately the public, ready access to the information on the return.
For this reason, we have required e-filing in certain cases. Under
proposed and temporary regulations, we will require electronic filing
for larger public charities and all private foundations by 2007.
We also are working on larger scale improvements to the Form 990.
The current form could be more user-friendly while also eliciting more
of the information that we need. We anticipate that the revised form
will have specific questions or separate schedules that focus on
certain problem areas. For example, filers should not be surprised to
find specific schedules or detailed questions relating to credit
counseling activities, supporting organizations, compensation
practices, and organizational governance. The easement area is also
under consideration. The timing of the revision of the Form 990 is
dependent on budget issues and our partners, including the states, 37
of which use the Form 990 as a state filing, and software developers.
When donors make gifts of property in one year with a claimed value
that exceeds $500, they file Form 8283, ``Noncash Charitable
Contributions,'' with their income tax returns. On the form donors list
the property they are donating. For most donations with a claimed value
that exceeds $5,000, the form requires a written appraisal \3\ and the
identity and signature of the appraiser, along with a signed
acknowledgement of the gift by an officer of the charity that receives
the gift.
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\3\ The requirements for qualified appraisals are set forth in
section 1.170A-13(c)(3) of the Income Tax Regulations. Such appraisals
must be made by a qualified appraiser no earlier than 60 days before
the date of the donation and no later than the due date of the return
(including extensions) on which a deduction is claimed. The appraiser
must sign and date the appraisal and may not charge a fee based upon a
percentage of the value of the property or based upon the amount of the
deduction claimed by the donor. The appraisal must include certain
specified information.
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We are revising Form 8283 to provide a new checkbox to identify
donors of conservation easements, and we are modifying the form's
instructions to better describe what is permissible and to obtain
better information on the type of property donated. The revised form
also will reflect new qualified appraisal requirements enacted by
Congress last year in section 170(f)(11). Where the donation is in
excess of $500,000, the form will require taxpayers to attach the
appraisal to the return.
Once implemented, these changes will enable us to better identify
the universe of organizations and donors who are involved in
conservation easement transactions, including facade easement
transactions, and they will allow us to better target our future
enforcement efforts. In the meantime, we will pursue the active
enforcement program we have in place now.
Examination Activity in the Area of Facade Conservation Easements_
Review and Findings to Date
Formation of a cross-functional team
Earlier this year, we formed a cross-functional team to attack all
aspects of the problem of conservation easements. The team includes
members from three IRS business units (Large and Midsize Business,
Small Business and Self-Employed, and Tax Exempt and Government
Entities), as well as representatives from the IRS Appeals Office,
Chief Counsel, and the Office of Professional Responsibility.
Our team has selected cases and set strategic priorities as to
which cases are worked first. It has trained and is continuing to train
IRS agents and appraisers on conservation easement issues, and will
serve as a resource for legal and technical questions for our field
personnel.
Toward this end, the IRS is sponsoring an e-mail address to receive
questions and concerns from the community, so that the group can
collect stakeholder input as we move forward in this area. The address
is [email protected], and it is up and running.
We are looking not only at donors and recipient charitable
organizations, but also at promoters. The team will be alert for
developing patterns of abuse and will identify promoters of potentially
abusive easement donations. In the course of our examinations, we are
finding appraisers that appear to be associated with abusive promotions
on a recurring basis. We are going to shine a searchlight in their
direction, and will use all civil and criminal tools at our disposal to
combat abuses. We also will continue to partner effectively with both
the NPS and state and local preservation offices.
Inventory of cases and findings to date
Donor Audits. As noted, the Service has a more mature enforcement
program looking at open space easements. However, we also have done
work in the facade area and will be doing much more into the future.
Currently, we have 30 facade easement audits underway, including 9
audits of facade easement donations relating to commercial property.
With regard to residential properties, the team is currently comparing
the NPS data on some 1,600 certifications to our master file to
determine which cases to pursue next. We are also comparing this data
to partnership return data in order to identify and select appropriate
cases involving commercial property.
In some of the geographic areas where residential facade easements
are clustered, we may also pursue market studies to determine the
proper valuation of easements in those areas to use in our enforcement
program.
Our findings to date indicate that while the threshold requirements
for a qualified conservation contribution are being met, taxpayers are
taking excessive deductions for facade easements. As I have mentioned,
there are two categories of property, residential and commercial.
Generally, appraisers have used different approaches to these two
categories, but with inflated results in both.
In granting a facade easement, residential owners agree not to
modify the facade of their historic house and they give an easement to
this effect to a recognized charity. However, if the facade was already
subject to restrictions under local zoning ordinances, the taxpayers
may, in fact, have nothing or very little to give up. A taxpayer cannot
give up a right to change the facade of a building if he or she does
not hold the right in the first place, as may be the case where a
zoning ordinance has taken this right from the property owner. Even if
a zoning variance is possible, both the likelihood of that variance and
the extent of change likely to be permitted under a variance would
reduce the value of a facade easement.
Some rather troubling valuation practices in residential housing
have come to our attention. Based upon a sample of cases from
Washington, D.C., New York City, Chicago, and Cleveland, it appears
that appraisers are not undertaking any meaningful analyses with
respect to facade easements, but instead may simply be placing a value
on a donated facade easement that is equal to a fixed percentage
(generally 10-15%) of the value of the underlying property, with little
support provided for the percentage selected.
Let me state plainly that those who say the Service will accept a
flat percentage of 10-15% as a reasonable residential facade valuation
without any underlying analysis are wrong. There is no such rule, and
taxpayers and appraisers should not proceed under the assumption that
this constitutes a safe harbor. It does not.
Issues we find in commercial property facade easements are
different. Although we have seen fixed percentages being taken in these
cases, there are often additional valuation problems. In some cases,
the appraiser may use extraordinary valuation methods to achieve a high
value for the donation. These methods include inflating the value of
the property before the donation by ignoring sales of comparable
properties and asserting instead an inflated value for a theoretical
highest and best use of the property. The commercial cases tend to
resemble the issues we see in the valuation of open space easements,
such as how to value restrictions on future development. Appraisals may
ignore one or more important issues, such as whether the claimed
highest and best use is in fact economically feasible. We have seen
cases where development is assumed to be successful (for example, added
office or hotel space) where such development actually is questionable
because of current market conditions (for example, where there is a
glut of such space).
Other assumptions are made that are equally troubling. Existing
zoning restrictions are disregarded by assuming that the restrictions
will be waived by local authorities, where experience indicates
otherwise. Some appraisals may even assert an enhanced valuation of the
property before the easement is donated by assuming the foregone
development has already taken place, and by ignoring the time and
expense associated with carrying out the potential development.
Audits of the recipient charity. We are also looking at a number of
charities that are engaged in the receipt of conservation easements
generally, including some that pertain specifically to facade
easements. This includes some charities that we believe may have been
involved in particular abuses. Currently, we have seven organizations
under examination, and we will begin examination of four more
organizations shortly. As I mentioned, it appears that certain of these
organizations actively solicit facade easements within historic
neighborhoods. The promotional materials offer the possibility of large
deductions to the owners, and supply everything the owner needs to
complete the conveyance of the easement. The solicitation materials may
refer the owner to preferred appraisers, and may require the owner to
pay a fee to the organization for arranging the transaction and,
ostensibly, for monitoring the easement into the future.
Promoter referrals and audits. We are also seeing promoted investor
syndications seeking to profit from conservation easements. To date
these appear to be limited to areas other than facade easements. This
may be more prevalent in certain states that allow transfers of tax
credits. Some of these states have provided referral information to us
on questionable easement donations.
We are currently looking or have looked at the activity of more
than 20 promoters, including some involving facade easements, and five
promoters involved in easements have been recommended for
investigation. Promoters and other persons involved in these
transactions may be subject to penalties under sections 6700, 6701, and
6694, or an injunction under section 7408.
Sanctions against appraisers. Before 1984, attorneys and
accountants, but not appraisers, could be barred from practice before
the IRS. In 1984, Congress amended the law, and Circular 230 was
modified to include appraisers. Circular 230 currently requires that
the section 6701 penalty, aiding and abetting in the understatement of
tax, be imposed before action may be taken against an appraiser. The
IRS must demonstrate, by a preponderance of the evidence, that the
appraiser had actual knowledge that the taxpayer would rely on a
document that would lead to an understatement of tax by the taxpayer.
When a section 6701 penalty is asserted against an appraiser, an
information referral to the Office of Professional Responsibility is
mandatory. The Office of Professional Responsibility may disqualify any
appraiser against whom such a penalty has been assessed. Thereafter, a
disqualified appraiser is barred from presenting evidence or testimony
in any administrative proceeding before the Department of the Treasury
or the IRS, and an appraisal he or she makes after the date of
disqualification will have no probative effect.
In light of the appraisal practices I have outlined above, we are
actively considering penalties against appraisers. We have alerted the
Director, Office of Professional Responsibility, of possible referrals
of at least three appraisers arising out of questionable valuations of
donated easements. To date, these appraisers work in the open space
easement area.
IRS Challenges
Although the conservation contribution provisions of the Internal
Revenue Code play a vital role in the preservation of our historic
structures, we are concerned with valuations of property that appear to
be informed primarily by tax considerations rather than actual property
values. In challenging such valuations, our outstanding but small staff
of appraisers (48 in all, 20 of who work wholly or in part on 170(h)
cases) must perform detailed appraisal work using accepted and
recognized valuation standards. It is neither easy nor quick work. Our
work to date raises the question of whether rules governing appraiser
qualifications, appraisal standards, and the standards for referral to
the Office of Professional Responsibility are sufficient.
As you discuss changes in this and other areas involving the tax-
exempt sector, I also ask you to recall and consider the focus areas
outlined in Commissioner Everson's testimony before the Committee on
Ways and Means on May 26, 2005. You may recall that these focus areas
include whether there are gaps in the statutory or regulatory
framework; whether the IRS has the flexibility it needs to respond
appropriately to compliance issues; whether more should be done to
promote transparency; and whether we have the resources we need to do
the job. In this regard, please consider the intermediate sanction
recommended by the Administration when taxpayers claim charitable
contribution deductions for contributions of perpetual conservation
restrictions, but the charities that receive those contributions fail
to monitor and enforce the conservation restrictions for which the
charitable contribution deductions were claimed.
The Administration has made this recommendation in its FY 2006
budget proposals.\4\ Specifically, the proposal would impose
significant penalties on any charity that removes or fails to enforce a
conservation restriction for which a charitable contribution was
claimed, or transfers such an easement without ensuring that the
conservation purposes will be protected in perpetuity. The amount of
the penalty would be determined based on the value of the conservation
restriction shown on the appraisal summary provided to the charity by
the donor.
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\4\ General Explanations of the Administration's Fiscal Year 2006
Revenue Proposals, Department of the Treasury, February 2005, pp. 112-
113.
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The Secretary would be authorized to waive the penalty in certain
cases, such as if it is established to the satisfaction of the
Secretary that, due to an unexpected change in the conditions
surrounding the real property, retention of the restriction is
impossible or impractical, the charity receives an amount that reflects
the fair market value of the easement, and the proceeds are used by the
charity in furtherance of conservation purposes. The Secretary also
would be authorized to require such additional reporting as may be
necessary or appropriate to ensure that the conservation purposes are
protected in perpetuity.
In conclusion, the IRS remains committed to doing all it can to
make the conservation easement provisions of the tax code work in the
manner Congress intended. Legitimate conservation easements serve an
important role in the preservation of our open lands and our cultural
heritage. However, what began as a laudable conservation easement
program to save our open space, natural habitats, and historic sites
may have become distorted. We are committed, as we progress through our
enforcement program, to determine the size of this distortion and to
take all steps necessary to stem the abuse of these programs. Clearly,
the public should be able to expect that only those donations of facade
and other easements that are fairly valued and that result in an
identified public good will result in favorable tax treatment.
Chairman RAMSTAD. Thank you, Mr. Miller. Mr. McClain,
please.
STATEMENT OF STEVEN L. McCLAIN, DIRECTOR, NATIONAL
ARCHITECTURAL TRUST, AND PRESIDENT, SPRINGFIELD MANAGEMENT
SERVICES
Mr. MCCLAIN. Mr. Chairman, Congressman Lewis, Members of
the Subcommittee, thank you for the opportunity to testify in
this hearing on conservation easements. I am Steve McClain,
Senior Vice President of NAT. Formed in 2001, the Trust is a
Section 501(c)(3) organization dedicated to the protection of
property certified as historic by the Secretary of the
Interior. While Federal legislation provides for the Department
of the Interior to be the resource for listing historic places,
the Constitution does not give the Federal Government the
authority to regulate the preservation of these properties.
This authority only exists with the State and municipal
governments. Destruction of many historic properties during the
urban renewal era of the 1960s and 1970s brought to light the
fact that political and economic pressure on municipal and
State governments have and will result in destruction of our
historic resources. Critics of the program argue that
properties in which conservation easements are granted are
already protected through local ordinances. This criticism is
not supported by facts. Many, but not all, of the properties in
our portfolio are located in cities that have passed local
ordinances restricting changes to historic properties.
For approximately 25 percent of the properties in which NAT
holds an easement, there is no local protection of any kind.
The National Architectural Trust is the only institution with
the legal authority to protect these properties from changes,
neglect, or demolition, and to retain and restore property in
the event the property owners fail to act. Our easements are
permanent and carry on in perpetuity. Local ordinances may be
canceled at any time. Conservation easements are an effective
tool for neighborhood revitalization. In fact, 50 percent of
all properties in Federal historic districts are in poverty
areas as defined by the last census. A report by the Federal
Reserve Bank of New York states that ``Conservation easements,
when combined with other economic incentives such as the
historic rehabilitation tax credit, have proven to be effective
in revitalizing neighborhoods throughout the United States.''
Some nearby examples include the Willard Hotel, the Old Post
Office Building, and the planned development within the
Anacostia Historic District.
Some question whether an easement granted on a property
covered by local ordinances and commissions should qualify as a
charity deduction-donation. This position is taken in spite of
the fact that the value of conservation easements granted on
such properties was thoroughly considered six times by U.S. tax
court. In each case, the court ruled that easements generate a
loss of value through a reduction in the property owners'
bundle of rights that constitutes property ownership in this
country. In each of the six cases, the property was located in
a district protected by local ordinances. There is criticism of
the monitoring and enforcement of conservation easements by
easement holding organizations. The NAT currently holds
approximately 550 easements. We take the responsibility to
monitor and enforce the easements forever as our most important
responsibility; in so doing, NAT has taken the necessary steps
to ensure that it has the resources to carry out all its
responsibilities in perpetuity.
The NAT has had growing pains. Everything we have done has
been in consultation with legal advisers and was done to
further the mission of NAT. However, in response to criticism
of our organization and to ensure that there is no doubt about
our commitment to our mission, we have taken the following
actions: We have adopted the practice of having an annual
financial audit conducted by an independent accounting firm; we
have adopted the Land Trust Alliance's new standards and
practices; we have terminated NAT's contractual relationship
with SMS, a for-profit company that previously provided
marketing and processing services to NAT.
In conclusion, I would like to discuss possible reforms to
the conservation easement program. First, NAT, along with other
preservation and conservation organizations, opposes the Joint
Committee on Taxation's recommendations regarding conservation
easements. These recommendations would effectively dismantle
what has proven to be a highly effective, cost-efficient
conservation and historic preservation program. Second, to
ensure that the program continues as an effective preservation
tool and to eliminate possible abuses of the program, NAT
suggests for the Subcommittee's consideration the following:
One, adopt the President's fiscal year 2006 budget proposal to
impose penalties on easement holding organizations that fail to
enforce the restrictions contained in their conservation
easements; Two, adopt the Appraisal Institute's recommendations
to require all appraisals to be certified as competent in
easement donation valuation, and to follow accepted Uniform
Standards of Professional Appraisal Practice (USPAP) appraisal
standards; Three, require easement holding organizations to be
certified by an organization such as the Land Trust Alliance;
and four, require easement holding organizations to set aside
sufficient financial resources to enable them to monitor and
enforce the easements they hold in perpetuity. That concludes
my statement. Thank you again for allowing me to testify today.
I will try to answer any questions.
[The prepared statement of Mr. McClain follows:]
Statement of Steven L. McClain, Director, National Architectural Trust
and President, Springfield Management Services
Mr. Chairman, Congressman Lewis and members of the Subcommittee,
thank you for the opportunity to present the views of the National
Architectural Trust at this hearing on conservation easements. I am
Steven McClain, Senior Vice President of the National Architectural
Trust. Formed in 2001, the National Architectural Trust is a Section
501(c)(3) tax-exempt, nonprofit organization dedicated to the
protection of properties certified as historic by the U.S. Secretary of
the Interior. The legal mechanism the National Architectural Trust uses
to protect historic properties is a Conservation Easement which is
recorded in the local land records and runs with the land in
perpetuity. This easement legally requires the current and all future
owners to honor its restrictive provisions forever. The easement
identifies the external historic features of the property; prohibits
changes to the appearance of the protected features without the
National Architectural Trust's specific consent; requires that the
structural integrity of the entire property be properly maintained;
grants the National Architectural Trust enforcement rights; and
includes all provisions required by IRS regulations Sec. 1.170A-14 to
qualify as a charitable donation.
The National Architectural Trust supports ``voluntary
preservation;'' whereby property owners protect their historic
properties by granting an easement on the property to the National
Architectural Trust. In accepting the easement, the National
Architectural Trust pledges to monitor and enforce the easement
forever. Since the acceptance of our first easement in 2001, our
portfolio of protected historic properties has grown to approximately
550. The National Architectural Trust has accepted these easements on
historic properties in New York, Massachusetts, Maryland, Virginia and
New Jersey.
While Federal legislation provides for the Department of the
Interior to be the resource for listing historic places, the United
States Constitution does not give the Federal Government the authority
to regulate the preservation of these properties. This authority only
exists with state and municipal governments. Congress is forced to rely
on these governments through the adoption of local ordinances to
protect our nation's architectural heritage. If allowed by state or
municipal governments, any building identified as an individual
landmark or contributing to a historic district on the National
Register can be legally destroyed.
The destruction of many such historic properties during the urban
renewal era of the 1960's and 1970's brought to light the fact that
political and economic pressures on municipal and state governments
have and will result in the destruction of our historic resources.
Thus, Congress passed Public Law 94-445 in 1976 which provides a tax
incentive for the preservation of certified historic properties. The
program was designed to encourage owners of properties on the National
Register to participate directly, and voluntarily, in the historic
preservation process.
Conservation easements remain an effective tool for permanently
protecting America's historic treasures by encouraging owners of
properties deemed to be of high historic importance to voluntarily
ensure that these architectural treasures remain intact for the
enjoyment and enrichment of future generations. A donation of a
conservation easement provides a personal income tax deduction to the
owner, which is an important incentive that ensures participation in
the program. After all, these owners are surrendering property rights
and assuming a number of obligations for the benefit of the public.
The National Architectural Trust and the many other nonprofit
organizations that accept easement donations exist for the purpose of
championing historic preservation. The National Architectural Trust was
co-founded four and a half years ago by me and James Kearns. Mr. Kearns
was a career public servant who retired as a Vice President of the
World Bank. I have been a preservationist for twenty-five years, and am
a member of numerous preservation organizations, such as:
Society of Architectural Historians
Institute of Classical Architecture
DC Preservation League
National Housing & Rehabilitation Association's Historic
Preservation Development Council
The National Architectural Trust's primary mission is to protect
historic properties and the historic neighborhoods they anchor by
accepting easement donations that are monitored and enforced in
perpetuity.
Municipal Ordinances Fail to Protect Historic Properties
Critics of the program argue that properties on which conservation
easements are granted are already protected through local ordinances.
This criticism is not supported by the facts.
Many but not all of the properties in our portfolio are located in
cities that have passed local ordinances restricting changes to
historic properties and that have created local historic preservation
commissions. For approximately 25% of the properties on which the
National Architectural Trust holds an easement, there is no local
protection of any kind. The National Architectural Trust is the only
institution with the legal authority to protect these properties from
changes, neglect or demolition, and to maintain and restore property in
the event that property owners fail to act. Even for the properties
covered by local restrictive ordinances, the protection that our
easement provides goes much further than the local protection
mechanisms. Our easements are permanent and carry on in perpetuity;
local ordinances may be cancelled at any time.
For example, the Chicago Tribune reported that after the city
identified 17,000 historically significant buildings as requiring
protection in a survey published in 1996, nearly 800 of them had been
destroyed by 2002. Chicago is not alone. Boston recently granted
permission for demolition of the historic Gaiety Theater despite the
objections of historians and preservation advocates. Historic buildings
continue to disappear all across the country despite local protections.
In addition, recent studies and reports reveal that local
ordinances and enforcement commissions have significant weaknesses. A
report of a survey conducted by the National Alliance of Preservation
Commissions in 1998 revealed many weaknesses, including:
42% of the commissions lack an operating budget;
30% have no professional staff;
41% need owner consent to designate a building historic;
and,
Only 60% have the power to enforce their orders, while
40% are just advisory.
Even in Washington, DC, which is thought to have the best historic
preservation ordinances and enforcement in the nation, Tresh Boasborg,
Chairman of the DC Historic Preservation Review Board, was recently
quoted in the North West Current as saying to the DC Council: ``We
don't have the power to enforce our own orders.''
Architectural Historian Anthony Robins prepared a recent report at
the request of the National Architectural Trust entitled THE CASE FOR
PRESERVATION EASEMENTS--When Municipal Ordinances Fail to Protect
Historic Properties. In it Mr. Robins, once an employee for the New
York Landmarks Preservation Commission, wrote the following:
``One major reason for the continuing losses is that most
landmarks regulation takes place at the local level, and the
hundreds of landmarks or historic district commissions across
the country vary enormously in their ability to protect
landmarks. . . . Even the strongest commissions are hobbled by
limited resources, political pressure, and weak enforcement
powers. And many--perhaps most--communities still lack
preservation ordinances of any kind.''
Additionally, Mr. Robins found that:
``One of the major issues facing local communities is the
price of preservation. Historic preservation is a public
benefit that is often purchased at a private cost. Ultimately,
owners of historic properties are the ones who bear that cost,
either through lost development opportunities or through the
extra costs associated with restoring or maintaining an
historic property. . . .''
``Today there is only one tool available that both offers a
level of protection for historic landmarks that is consistent
across the country, and also provides a nationally available
source of financial support for the owners of historic
properties: historic preservation easements. . . .''
Mr. Robins concludes that ``Preservation easements make a major
contribution to historic preservation, and therefore both to the
livability of our towns and cities and to their economic development.
Undoing such a successful--and in the long run economical--program
would be a serious blow to the future of preservation. Given the minor
savings that, at best, would accrue to the Treasury, the country is
likely to lose far more than it would gain by eliminating preservation
easements.'' I request permission to add to the record the Executive
Summary of Mr. Robins' report.
Conservation Easements Revitalize Historic Neighborhoods
Conservation easements are an effective tool for neighborhood
revitalization. Not only does the conservation easement program
preserve historic properties, many donors apply their tax benefit to
the restoration of their properties, thereby furthering the
preservation effort and boosting their local economy.
In addition, 50% of all properties in Federal Historic Districts
are in poverty areas as defined by the last Census. The Federal Reserve
Bank of New York has completed a report stating that conservation
easements when combined with other economic incentives such as the
Historic Rehabilitation Tax Credit have proven to be effective at
revitalizing neighborhoods throughout the United States. The
conservation easement tax benefit has been combined with the Historic
Rehabilitation Tax Credit to revitalize many historic neighborhoods.
Some examples are:
Downtown Washington, DC
Willard Hotel
Old Post Office Building--offices
Woodward & Lothrap Building--offices and retail
Anacostia Historic District
New York
100 Atlantic Avenue, Brooklyn--condominiums
21-23 South William Street--offices
20 Exchange Place--offices
Pittsburg, Pennsylvania
H.J. Heinz Factory--300 loft apartments
Armstrong Cork Building--offices and retail
Richmond, Virginia
Projects in the Fan Historic District
Projects in the Franklin Street Historic District
Georgia
Projects in Savannah's North Historic District
Atlanta, Americus Hardware Building--offices
Athens, The Sun Trust Bank Offices
Denver, Colorado
Wynkoop Brewing Company--restaurant
1818 Blake Street--offices
Cleveland, Ohio
Colonial Arcade--offices
Bingham Building, West 9th Street--offices
Marshall Building--offices
Indianapolis, Indiana
Black Building--offices and retail
Detroit, Michigan
Book Cadillac Hotel Project
These revitalization projects may never have been initiated in
these historic neighborhoods had the developer not had federal tax
incentives to help make the project financially feasible.
Loss of Value Created by Conservation Easements
There is criticism of the appraisal process when determining loss
of value created by conservation easements. Tax deductions taken for
easement donations, as with all deductions for non-cash donations
valued at greater than $5,000 require an independent, professional
appraisal to determine proper valuation. The National Architectural
Trust has received easement appraisals from over sixty different
appraisal companies; some of these companies are the largest and most
respected in the United States, including: Jefferson & Lee; Cushman
Wakefield; Mitchell, Maxwell and Jackson; Jerome Haimes and Associates.
The National Architectural Trust has never accepted a donation without
a qualified appraisal.
Some people question whether an easement granted on a property
covered by local ordinances and commissions should qualify as a
charitable donation. This position is taken in spite of the fact that
during the 1980s the value of conservation easements granted on such
properties was thoroughly considered six times by the U.S. Tax Court.
In each of the six cases, the Tax Court ruled that easements generate a
loss of value through a reduction in the bundle of rights that
constitute property ownership in this country. In each of these six
cases, the property was located in a district covered by a local
ordinance enforced by a local commission.
The Appraisal Institute and the American Society of Appraisers have
written the members of the House Committee on Ways and Means
recommending that Congress should require that appraisers adhere to the
Uniform Standards of Professional Appraisal Practice (USPAP) to correct
appraisal abuse for conservation easements. The National Architectural
Trust supports this recommendation.
In the book: Appraising Easements, 3rd edition, published by the
Land Trust Alliance, there is guidance to appraisers and easement
holding organizations. The guidance to easement holding organizations
is:
1. Appraisals must be adequately documented.
2. Easement holding organizations should have a basic
understanding of the appraisal process.
3. The easement holding organization may not be involved in the
appraisal process; the appraiser must be independent, however the
organization may reject a donation if the appraisal seems over-valued.
The National Architectural Trust follows this guidance.
Monitoring and Enforcement of Conservation Easements
There is criticism of the monitoring and enforcement of
conservation easements by easement holding organizations.
The National Architectural Trust supports President Bush's fiscal
year 2006 budget proposal to impose penalties on easement holding
organizations that fail to enforce restrictions contained in their
conservation easements.
The National Architectural Trust currently holds approximately 550
easements. The National Architectural Trust takes its responsibility to
monitor and enforce the easement forever as its most important
responsibility. And, in doing so, the National Architectural Trust has
taken the necessary steps to ensure that it has the resources to carry
out all of its responsibilities in perpetuity.
As such, the National Architectural Trust has demonstrated its full
commitment to easement monitoring and enforcement by:
1. Creating a Stewardship Fund of approximately $12.5 million that
is reserved exclusively for future year monitoring and enforcement--55%
of all cash contributions to the National Architectural Trust, since
its inception, have been and continue to be deposited and remain
securely in the Stewardship Fund;
2. Creating a state-of-the-art database to store data and images
about each easement the National Architectural Trust holds with
appropriate backup and security protections;
3. Annually informing each owner of property on which the National
Architectural Trust holds an easement of his obligations and the
beginning of the annual monitoring effort;
4. Visiting properties each year to photograph the protected
facade and observe the structural condition of the building; and
5. Reviewing the new photographs against the originals and
subsequent photographs to detect any unauthorized changes.
The National Architectural Trust is extremely proud of its vigilant
monitoring process and believes its process and thoroughness is
unrivaled in the historic preservation community. To review easements
the National Architectural Trust has three university-trained
architectural historians on staff and relationships with other
respected architectural historians in cities the National Architectural
Trust serves.
Conservation Easement Quality Control
In addition to the care and attention the National Architectural
Trust applies to easement monitoring and enforcement, the National
Architectural Trust is also highly attentive to ensuring that the
easements it accepts are proper in every respect.
Donating an easement is complicated and time-consuming. There are
numerous IRS regulations that must be strictly followed. The National
Architectural Trust is committed to making sure that each easement it
accepts is proper in every respect. The actions the National
Architectural Trust takes to review each conservation easement
application are essential to ensure the legality and appropriateness of
the donation. The National Architectural Trust's efforts ensure:
The required photographs are those of the actual property being
donated and are of sufficient quality to serve our ongoing
monitoring and enforcement efforts.
The property has been properly certified as historically significant
by the Secretary of the Interior.
The mortgage holder(s) has subordinated to the easement's restrictive
and enforcement provisions.
The appraiser chosen by the client understands the laws and history
associated with the conservation easement program.
Donors seek and follow the advice of their own legal and tax
professionals.
Sufficient cash funds are donated along with the easement to cover
the current operating costs and to supplement the Stewardship
Fund to cover the future costs of monitoring and enforcement;
and
The appraisal report specifies both the fair market value of the
property and the loss of value produced by the donated
easement; incorporates a copy of the easement; has followed
appropriate valuation methodologies; and contains reasonable
valuations.
The National Architectural Trust also ensures that its
representatives are trained and competent in the National Architectural
Trust's policies, practices and ethical values.
National Architectural Trust Internal Reforms
The National Architectural Trust has had growing pains. Everything
we have done has been in consultation with legal advisors and was done
to further the mission of the National Architectural Trust. However, in
response to criticism of our organization and to ensure that there is
no doubt about the National Architectural Trust's commitment to its
mission, the National Architectural Trust's Board of Directors has
taken the following actions:
1. Adopted the practice of having an annual financial audit
conducted by an accounting firm that is completely independent of the
National Architectural Trust and reports its findings directly to its
Board of Directors. The National Architectural Trust has completed its
audit for 2003 and is about to complete the audit for 2004. The
auditors have made helpful recommendations but have found no
irregularities or weakness in our operations;
2. Adopted the Land Trust Alliance's New Standards and Practices
and have developed, with the approval of the Board, a plan to be in
full compliance by June, 2006;
3. Adopted a strict conflict of interest policy and obtained
conflict of interest disclosure statements from all officers, directors
and staff members;
4. Worked closely with expert legal counsel and tax advisers to
ensure that all policies and practices of the National Architectural
Trust are in strict compliance with all applicable laws and
regulations;
5. Adopted compensation practices that are in strict accordance
with the standards of the Association of Fundraising Professionals; and
6. Terminated the National Architectural Trust's contractual
relationship with Springfield Management Services, a for-profit company
that previously provided marketing services to the National
Architectural Trust and easement processing services to the National
Architectural Trust and its easement donors.
Recommended Reforms to the Conservation Easement Program
In conclusion, I would like to discuss possible reforms to the
conservation easement program.
First: The National Architectural Trust, along with other
preservation and conservation organizations opposes the Joint Committee
on Taxation's recommendations regarding conservation easements. These
recommendations would effectively dismantle what has proven to be a
highly effective, cost-efficient and long standing conservation and
historic preservation program.
Second: To ensure that the program continues as an effective
preservation tool and to eliminate potential abuses of the program, the
National Architectural Trust suggests for the Subcommittee's
consideration the following:
Recommended Reforms for Easement Holding Organizations
1. Adopt the President's fiscal year 2006 budget proposal to
impose penalties on easement holding organizations that fail to enforce
the restrictions contained in their conservation easements;
2. Establish credentialing or standard setting for organizations
that accept easements on properties for conservation and preservation
purposes; and
3. Require additional information on IRS Form 8283, which is
required of all non-cash charitable donations. This additional
information could be collected on an additional form that would better
allow the IRS to identify possible abuse.
Possible additional disclosures might include:
Whether the value of the donation is significantly greater than the
donee's cost or basis (which would be normal in long-held
properties, but an indicator of potential problems in
properties held for a shorter period of time);
Whether the donee or any employee or board member of the donee has
had a business relationship with the easement donor within the
past 5 years, and the nature of that relationship;
Require two independent appraisals of properties where large
donations are taken. The average of the two appraisals could be
used for the final donation amount. These additional appraisals
should only be required in cases where there is a very large
deduction; otherwise the additional appraisal costs could be
prohibitive; and
Prohibit donations by any board member of the accepting easement
holding organization.
Recommended Reforms for an Independent Appraisal
1. Require appraisals of conservation easement donations to be
performed by state-licensed general certified appraisers. This is the
highest of three state licensing standards required of states by
federal statute (Financial Institutions Reform Recovery and Enforcement
Act (FIRREA));
2. Require that appraisals conform to the Uniform Standards of
Professionals Appraisal Practice (USPAP). All appraisals used for
federally related mortgages and all federal property acquisition
appraisals are required to meet the USPAP standard;
3. Require that appraisers include in the appraisal report the
effect existing local historic preservation laws, if any, have on the
appraiser's valuation of a loss from a facade conservation easement and
certify that this has been taken into consideration in the value
reflected on the IRS Form 8283;
4. Increase penalties for over-valuation of donations by donors,
promoters and appraisers. Taxpayers can be fined based on the amount by
which they have inflated the value of their donation. There is no
objection to raising those fines, or to increase penalties for
appraisers and other parties to an inflated appraisal, who currently
face only a $1,000 maximum penalty; and
5. Disqualify an appraiser who is found to have ``substantially
misstated'' a valuation in an appraisal used for tax purposes from
being allowed to submit future appraisals for federal tax purposes.
Current law defines a ``substantial misstatement'' as being 200 percent
of the actual value (see IRC 6662(E)).
That concludes my statement. Thank you again for the opportunity to
testify before the Subcommittee.
I am prepared to answer any questions you may have.
THE CASE FOR PRESERVATION EASEMENTS
How Municipal Ordinances Fail to Protect Historic Properties \1\
EXECUTIVE SUMMARY
During the past half century, historic preservation in the United
States has grown from a marginal activity focusing on house museums and
memorials into a major cultural and economic force at the local, state
and national levels. Preservation is generally recognized as a major
success story--a movement that contributes to a common sense of shared
American history, helps create attractive environments and stable
neighborhoods, and plays a constructive role in economic development
and urban revitalization.
---------------------------------------------------------------------------
\1\ Prepared by Anthony Robins, Thompson & Columbus, Inc., February
15, 2005.
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Most landmarks regulation takes place at the local level, where it
is overseen by hundreds of landmarks commissions and historic district
commissions all across the country. Contrary to popular belief,
however, those commissions vary widely in the resources at their
disposal, and in the level of protection they bring to local historic
properties. Many areas have no local commission at all. Many have weak
commissions--some because their powers are strictly advisory, others
because their regulatory decisions can be, and often are, overruled by
higher bodies.
Even strong commissions have weaknesses. Some commissions with the
legal power to turn down inappropriate alterations and demolitions
sometimes approve them instead. Some commissions lack the resources to
enforce their decisions. Some commissions offer strong protection to
many of their landmarks, but a lesser level of protection to other
historic properties. In general, commissions are only as effective as
their political support allows them to be, and can only protect the
buildings that their often limited resources enable them to designate
as official landmarks.
One of the chief issues facing local commissions is the price of
preservation. Specifically, historic preservation is a public benefit
that is purchased at a private cost. Ultimately it is the owners of
historic properties who bear that cost, either through lost development
opportunities, or through the extra costs associated with caring for an
historic property. Various states and cities attempt to offer some
financial relief, but such attempts are spotty and inconsistent. In the
meantime, sentiment against imposing private costs for land-use
regulation is growing nationwide. There is only one nationally
available source of financial support for owners of historic
properties: preservation easements. In exchange for a one-time federal
tax deduction, owners voluntarily give up--in perpetuity--the right to
make inappropriate alterations to their historic properties.
Created in 1976 as part of a major national initiative to support
historic preservation, easements are a carefully constructed tool that
supports preservation in two ways. On the one hand, easements help
property owners pay the private cost of the public benefit of
preservation. On the other, easements provide an additional layer of
protection for those properties, no matter how strong the local
landmarks commission may be.
Easements bring additional benefits to historic preservation. Being
national in scope, easements operate independently of local politics.
Being voluntary, easements eliminate the contentious issue of owner
opposition to landmarks designation. And being financially attractive,
easements eliminate a major impediment to owner acceptance of
preservation.
Moreover, many historic properties are protected by easements but
not by local commissions. To qualify for an easement, a property must
be listed in the National Register of Historic Places, a program
administered by the states in partnership with the National Parks
Service. Unlike local commissions, which designate new landmarks
according to their own schedules and priorities, the State Historic
Preservation Offices will consider any meritorious nomination presented
to them. In response to the financial incentive offered by easements,
the owners of many historic properties not yet protected by local
commissions have supported the nomination of their properties to the
National Register, and donated preservation easements that are now
protecting those properties.
The value of preservation easements has long been recognized by
dozens of organizations across the country. Easements today are
accepted by national nonprofit organizations, statewide organizations,
citywide organizations, and even local governments.
Yet, despite their proven worth, preservation easements--and the
protection they bring to the nation's historic resources--might
disappear, in whole or in part. On January 27th of this year, the staff
of Congress's Joint Committee on Taxation released a study, Options To
Improve Tax Compliance And Reform Tax Expenditures, which includes a
proposal to ``Modify Charitable Deduction for Contributions of
Conservation and Facade Easements'' (sec. 170). The study proposes
dramatically reducing the value of the easement for non-residential
properties, and completely eliminating the availability of easements
for residential properties.
Preservation easements currently offer the only nationally
available tool for protecting historic properties. They offer the only
nationally consistent mechanism for helping private property owners
bear the cost of the public good of preservation. They bring those
owners to a commitment to preservation voluntarily. And in the long
term, they represent a bargain: The cost of an easement, in foregone
tax revenues, is paid just once, but the easement continues in
perpetuity--over time, the cost amortizes to very little. And the cost
of monitoring and regulating those easements is borne not by the
public, but by the nonprofit easement-holding organizations--financed
by property-owner donations. Undoing such a successful--and in the long
run economical--program will harm the nation's historic preservation
efforts, while realizing only minor savings to the Treasury.
Chairman RAMSTAD. Thank you, Mr. McClain. Mr. Edmondson,
please.
STATEMENT OF PAUL W. EDMONDSON, VICE PRESIDENT AND GENERAL
COUNSEL, NATIONAL TRUST FOR HISTORIC PRESERVATION
Mr. EDMONDSON. Good afternoon, Mr. Chairman, and Members of
the Subcommittee. I appreciate being invited to appear today.
For more than 50 years, the National Trust has worked to
protect the Nation's heritage as the congressionally chartered
leader of the private preservation movement in America.
Consistent with our congressional charter and with the support
of a quarter of a million members, we carry out a wide variety
of programs and activities to ensure that the places that
reflect our history as Americans will continue to be enjoyed
for future generations. Since 1973, the National Trust has
effectively used easements as a tool for historic preservation.
We protect some 100 historic sites around the country with
easements, and we also assist and encourage preservation
organizations, at the statewide and local levels, to use
easements as a preservation tool. There are many qualified
preservation organizations that accept and administer easements
as part of a broad range of statewide or community-based
preservation activities, including nonprofit organizations like
the Florida Trust for Historic Preservation, Historic Denver,
The Preservation Alliance of Minnesota, The New York Landmarks
Conservancy, or the Georgia Trust for Historic Preservation,
just to name a few.
A number of governmental entities at the State level also
hold preservation easements. These organizations take seriously
their responsibility to monitor and enforce easement
restrictions to ensure the effective, long-term preservation of
these historic places. In fact, our policy is to encourage
easement donations to be given to statewide and local
organizations rather than to us. Because we consider
preservation easements to be such an effective tool and because
we value the tax incentive that supports them, reports of
abuses in this area are alarming to us. My written statement
provides a more detailed discussion of the subject, but I would
offer a few observations that may be of interest to the
Subcommittee.
First, regarding the problem of exaggerated deductions, we
fully agree that taxpayers who grant simple facade easements in
tightly regulated historic districts should not expect to be
well rewarded under the Tax Code. A simple facade easement on a
residential property, particularly an easement that only
restricts changes to the front, should not produce a
significant tax deduction if the easement does little more than
is already required by strong local preservation law. That is,
of course, a big ``if.'' Many local preservation laws, in fact,
provide little more than honorific recognition, and many
historic properties actually have no level of local protection.
In addition, many preservation organizations use easements and
impose restrictions going well beyond the obligations imposed
by local preservation laws, and in those cases, an easement
deduction may justify significant tax benefits. To suggest that
simple easements in strong local districts shouldn't produce
significant deductions is not simply a matter of common sense,
but it is a concept embodied in the IRS regulations that cover
this area. It also happens to be the guidance that the National
Trust has provided to preservation organizations and to the
public for the past 20 years through the publication of
Appraising Easements, which the Chairman noted. Another area of
concern relates to the way that facade easements have been
aggressively promoted in recent years as a tax-saving device.
While most preservation organizations are highly responsible,
we have seen too many examples of promotions that grossly
oversimplify the tax benefits of easement deductions, in
particular by suggesting a standard 10 to 15-percent deduction
for simple facade easements. We think that those who solicit
easement donations have an obligation to be clear that
significant deductions are only available if the obligations of
the easement significantly reduce the value of the property.
Unfortunately, this has not always been the case.
How can these problems be addressed? First, it is worth
noting that actions already taken by the IRS, in particular
statements that it will aggressively audit in this area, are
already having an effect. We have seen both historic
preservation organizations and appraisers approach this issue
with a new sense of caution. Steps can also be taken, and are
being taken, by the broader preservation community. The
National Trust and our preservation partners are committed to
developing standards and practices that will help to ensure the
integrity of this important program. We also believe that
Congress should consider changes that would, in particular,
address valuation problems. Appraisal standards should be
enhanced to ensure that appraisers are properly trained and
certified, that valuations are accurate, and that the impact of
local preservation and zoning laws are fully considered.
Stronger penalties should be adopted for valuation
misstatements; easement deductions should not be granted for
easements that protect only a facade if other significant
historic features of a property are unprotected or if the
structure is at risk; and easements, as well as easement
holding organizations, should adhere to the highest
professional standards. Thank you again for the opportunity to
provide the views of the National Trust for Historic
Preservation. We stand ready to work with Congress to address
these issues and to ensure that this important incentive is
retained.
[The prepared statement of Mr. Edmondson follows:]
Statement of Paul W. Edmondson, Vice President and General Counsel,
National Trust for Historic Preservation
Good afternoon, Mr. Chairman and members of the Subcommittee. I
appreciate this opportunity to assist the Subcommittee as it reviews
the federal tax incentives for historic preservation easements. The
National Trust considers easements and the tax deductions that support
them to be valuable tools for historic preservation, and we are deeply
concerned by reports of abuses in this area. We are eager to work with
Congress to ensure that steps are taken to ensure the integrity of this
important incentive for historic preservation.
By way of background, the National Trust is the only nonprofit
organization chartered by Congress to promote public participation in
the preservation of America's heritage. For more than half a century,
the National Trust has actively pursued this mission--through the
operation of historic sites open to the public; through public
education, financial assistance, and advocacy; by providing technical
assistance to hundreds of independent historic preservation
organizations operating at the statewide and local levels; and by using
preservation as the core focus of community revitalization activities
across the country. With the support of more than a quarter of a
million members, the National Trust has sought to ensure that the
places that reflect our history as Americans will continue to be
enjoyed by future generations.
With the pressures of urban sprawl, in-town tear-downs, and the
bottom-line realities of the real estate development world, the
preservation of America's historic places could not be accomplished
without effective public policy tools and incentives at the federal,
state, and local levels. Municipal landmark laws, state regulations and
incentives, and federal laws that promote rehabilitation and reuse of
historic properties all create a framework of policies and incentives
that help to promote historic preservation as a strong public value.
While these policies and incentives are relatively modest in scope and
cost, they are incredibly important, because without them our history
would simply be history.
Historic Preservation Easements Serve as a Valuable Preservation Tool
Preservation easements are a uniquely effective preservation tool--
a tool that uses private--and voluntary--agreements to protect historic
structures and significant historic areas from demolition or
inappropriate alteration. For well over three decades, hundreds of
nonprofit organizations--and governmental agencies at the federal,
state, and local levels--have responsibly used preservation easements
to protect many thousands of historic structures, archaeological sites,
battlefields, and rural landscapes. For many of these properties,
easements serve as the only legal protection to preserve their historic
or architectural values. And, for more than a quarter of a century,
Congress has recognized the value of such easements by granting tax
incentives to taxpayers who donate them to qualified easement-holding
organizations.
Since the early 1970s, the National Trust has actively encouraged
the use of conservation and preservation easements to preserve historic
places. Pursuant to our mission and Congressional Charter, the National
Trust has published reference materials on easements, and has provided
advice and assistance to other preservation and conservation
organizations holding easements. Over that same period--over the past
30 years--the National Trust has itself acquired approximately 100
easements, protecting a variety of historic sites in 21 states and the
District of Columbia. Some of these easements were donated to the
National Trust, some were obtained by the National Trust as a condition
of grants or other financial assistance, and many were imposed on
historic properties given outright to the National Trust for other
disposition.
The easements that the National Trust holds and administers protect
a wide variety of historic resources, including archaeological ruins in
rural Colorado, open farmland next to our historic sites in Virginia, a
modest but unaltered Cape Cod saltbox cottage in Massachusetts, a
modernist classic in California, a frontier fort in Texas, and a number
of important National Historic Landmark structures from Florida to
Oregon. Our easements are very restrictive, going far beyond a simple
``facade'' easement, by protecting the entire structure, its historic
setting, and, very often, interior historic features as well. And these
restrictions are backed up by an active monitoring and enforcement
program, with support from an endowment of more than $1 million, and
with the help of an on-staff architect specifically assigned to this
area.
While the National Trust is an easement-holding organization, it is
worth noting that the National Trust does not actively solicit easement
donations for itself. Instead, pursuant to a board policy adopted in
1995, we first encourage prospective donors to work with qualified
statewide and local preservation organizations that accept and
administer easements as part of their mission to serve a broad range of
community-based preservation activities. There are many capable
easement-holding organizations at the state and local levels that also
rely on restrictive easements, and that take seriously their
responsibility to monitor and enforce easement restrictions to ensure
the effective long-term preservation of these historic places. Some of
these organizations include prominent nonprofit preservation groups,
such as the New York Landmarks Conservancy, the Preservation Resource
Center of New Orleans, Historic Denver, the Cleveland Restoration
Society, the Pittsburgh History & Landmarks Foundation, the Georgia
Trust for Historic Preservation, the Florida Trust for Historic
Preservation, the Utah Heritage Foundation, the Foundation for San
Francisco's Architectural Heritage, the Historic Charleston
Foundation--just to name a handful. Others are state government offices
that are specifically dedicated to protecting historic sites, such as
the Texas Historical Commission, the Minnesota Historical Society, the
Virginia Department of Historic Resources, and the Maryland Historical
Trust.
Concerns About ``Facade'' Easement Valuation Abuses
Because of our longstanding interest in easements, and the tax
incentives that help to encourage them, the National Trust is seriously
concerned by reports that some donors of historic ``facade'' easements
have abused this important tax incentive by submitting exaggerated
deduction claims. While we have no specific information regarding the
actions of individual taxpayers, the fact that the IRS believes that
there has been widespread overvaluation of facade easement donations
should be of concern to any easement-holding organization. On the other
hand, the recent announcement by the IRS that it plans to conduct pre-
audit reviews of a large number of facade easement donations is an
important sign that the agency plans to take a more active and critical
role in this area, which we hope will in turn lead to greater caution
on the part of easement donors, and the appraisers, accountants,
lawyers--and, yes, the preservation organizations--who advise them.
Statements made by the IRS on this topic note one concern in
particular: that donors often claim significant deductions for simple
facade easements on historic properties located in historic districts
that are already tightly regulated by local municipalities, and where
the imposition of new restrictions would likely have little valuation
impact. While each situation must be addressed on its own merits (for
example, many historic district laws are actually quite weak, or poorly
enforced), the National Trust agrees that simple facade easements--
particularly those that only restrict changes to the front of a
historic structure--are generally not likely to justify significant tax
deductions for historic properties already subject to strong local
preservation laws, and especially for properties that have substantial
market value because of their historic character. This is not only a
matter of common sense, but it is a concept embodied in the regulations
accompanying this area of the tax code. It also happens to be the
guidance that the National Trust has long provided, first published in
the 1984 manual ``Appraising Easements'' (jointly produced by the
National Trust and the Land Trust Alliance, and currently in its third
edition).
On the other hand, it is essential to stress that many qualified
easement-holding organizations use restrictive easements that go well
beyond the preservation restrictions of local preservation laws, and
that many easement donations protect historic sites that are not
protected in any other manner. In these cases, both the IRS regulations
and the guidance available to appraisers suggest that significant
deductions should be permitted for such easements, again depending on
the circumstances of any individual case.
And, it is important to state that, from a substantive preservation
standpoint, most easements do provide important preservation values,
even for properties already regulated by local historic preservation
laws. Such easements can serve--and indeed have served--as an important
``backstop'' to local preservation ordinances, which are often subject
to economic hardship or special merit exemptions, variances, or changes
to permit development as a result of political or economic pressure.
These additional protections should be considered as part of the
valuation process, as noted in the applicable IRS regulations.
Concerns About Over-Promotion of ``Facade'' Easement Donations
In addition to concerns raised about exaggerated valuation claims
for facade easements, recent media reports have focused on the
significant increase over the past several years in activities by
organizations and individuals involved in promoting facade easement
donations as a tax-saving device.
There is nothing wrong, per se, with easement-holding
organizations--or private promoters--encouraging donors to take
advantage of duly authorized tax incentives. Congress created the tax
incentive in 1976 to encourage the use of this tool for historic
preservation, and it is important for potential donors to understand
that such incentives exist. However, the National Trust has been quite
concerned with the marketing practices used by some organizations in
recent years to solicit donations of simple facade easements. Some of
those promotions have prominently claimed that easement donations
should be worth between ten and fifteen percent of a historic
property's overall value, without making any qualification regarding
the nature of the easement or the other restrictions to which the
property may already be subject. Although promotion of this ten to
fifteen percent figure may have been prompted by guidance once used by
the IRS, the Service's regulations and the decisions of the Tax Court
in this area have long made it clear that there is no ten to fifteen
percent ``safe harbor'' for easement donations. Deductions may be far
less--or in some cases even greater--than these percentages, depending
on the type of property, the restrictiveness of the easement, and the
effect of existing local preservation and zoning controls.
The National Trust has also been concerned that many easement
promoters have failed to provide any meaningful acknowledgement that
significant tax deductions for easement donations can only be obtained
if the easement's restrictions result in a corresponding reduction in
the value of the property encumbered by the easement. Instead, a number
of statements in promotional materials have effectively reassured
donors that the real impact of easements on property rights is truly
minimal--particularly when the property is already regulated as part of
a local historic district. And, for easements that truly have a minimal
impact on property rights--such as easements that only protect the view
of the front facade of a property from the other side of the main
frontage street--the easement may actually be less restrictive than
local preservation laws, and have little or no value at all, both from
a substantive preservation standpoint, and from a valuation standpoint.
Recommendations
As previously indicated, it is the view of the National Trust that
historic preservation easements, and the tax incentives that support
them, serve as important tools to promote the preservation of America's
historic places. The National Trust is committed to working with our
partner organizations to provide increased training and guidance, and
to develop standards and practices that will help to ensure that the
integrity of this important program is not compromised. We have also
discussed with our partners the concept of creating a voluntary system
of accreditation for historic preservation organizations that accept
easement donations. In addition, we have had discussions with
representatives of the appraisal industry about creating better
guidance and additional training for appraisers.
Fundamentally, however, we believe that many of the concerns raised
about valuation problems, and about questionable promotion of easement
deductions can--and should--be addressed by Congress. Appraisal and
appraiser standards should be enhanced to ensure that appraisers are
properly trained and certified, that valuations are accurate, and that
the impact of local preservation and zoning laws are fully considered.
Stronger penalties should be adopted for valuation misstatements, and
appraisers who significantly misstate easement values should be barred
from practice before the IRS. Easement deductions should not be granted
for easements that protect only a facade if other significant historic
features of a property are unprotected, or if the structure itself is
at risk. And easements--as well as easement-holding organizations--
should also adhere to the highest professional standards for review and
approval of changes.
We stand ready to work with the Ways & Means Committee to address
these issues, and to ensure that this important incentive is retained.
Chairman RAMSTAD. Thank you, Mr. Edmondson. Ms. Breen,
please.
STATEMENT OF PEG BREEN, PRESIDENT, NEW YORK LANDMARKS
CONSERVANCY, NEW YORK, NEW YORK
Ms. BREEN. Mr. Chairman, Members of the Subcommittee, I am
Peg Breen. I am President of the New York Landmarks
Conservancy, and I thank you for this opportunity to testify.
The Landmarks Conservancy is a 31-year-old, private, nonprofit
organization based in New York City. We offer financial and
technical help to building owners. Our professional staff
includes architects, an engineer, and trained building
conservators. The Landmarks Conservancy holds 34 preservation
easements. These range from Fraunces Tavern in Lower Manhattan,
where General Washington bade farewell to his troops, to
individual row houses, a Civil War-era loft building, to a
small Dutch-era farmhouse in southern Brooklyn. None of these
easements are limited to the front facade; they protect the
entire structure. Some of these properties are within local
historic districts, several are not. There are several historic
neighborhoods in New York, many, in fact, that have no local
protection. Conservancy staff monitors each of these properties
annually. Every 5 years we also hire outside architects and
engineers to inspect the buildings and prepare thorough
condition assessment reports. Any deficiencies identified in
the reports must be repaired by the owner in a timely manner.
Our easement agreement is 41 pages long and emphasizes the
owner's preservation and maintenance responsibilities. We must
also review and approve any proposed changes or alterations. If
a property is within a historic district, the owner then must
also seek approval from the city's Landmarks Commission. If an
owner does not comply with the provisions of our easement
agreement, we have the right to seek redress in court. In two
recent instances we came close to commencing court actions.
Fortunately, the required repairs were made prior to the actual
start of legal action, but if we had to go to court, we would
not hesitate to do so. Our ability to enforce the easement
provisions gives us an unmatched ability to proactively
safeguard the historic significance of each property.
Despite a strong landmarks law, in most respects, our local
Landmarks Commission does not have the power to proactively
require that buildings be kept in good repair. Our easement
agreement gives us that clear authority. We believe that the
public value of an easement is directly related to the easement
holding organization's ability to enforce it, and their
expertise in historic preservation and the regulation of
historic properties. We have never advertised nor promoted our
easement program. We received several of our early easements
from a separate nonprofit organization that realized it did not
have the staff nor expertise to monitor them. The city's
Landmarks Commission required the owners of some individual
landmarks to give us an easement in return for the ability to
sell unused development rights. Since NAT started vigorously
promoting easements in New York City, we have received hundreds
of calls from property owners possibly interested in donating
easements. As a result, we have accepted 10 new easements in
the past 2 years. We took many early easements without asking
for a donation from the property owner; then we realized that
we needed to cover inspection costs and possible legal costs
associated with enforcing the easements.
We do not have a set formula or percentage to determine
donations. We look at each property and try to determine the
costs of our cyclical inspections. We keep an easement reserve
fund of more than $1 million. The interest generated helps to
defray the inspection costs, and the fund is there in case we
need to go to court or make repairs ourselves. We have always
kept at arm's length from the appraisal process. We believe it
is between the owner and the IRS. We only see the appraised
value when we receive the IRS Form 8283 for our signature.
Since we firmly believe that easements are an important
preservation tool, let me suggest some reforms and refinements
that might help eliminate any abuses or concerns. Several of
the panelists have already mentioned them, but we also agree
that appraisers should receive specific training, that very
high appraised valuations over a set threshold should trigger a
second independent appraisal; and these should be the property
owners' responsibility. Nonprofit groups do not have the
expertise to second-guess or judge the accuracy of appraised
valuations. Easement holders should perform regular inspections
and have sufficient easement reserve funds. We also have no
problem with President Bush's suggestion of fines for groups
that fail to perform proper inspections. Easement holders
should not agree to accept proposed changes that don't conform
to the highest standards of accepted historic preservation
practice. Groups should be very cautious in promoting specific
tax benefits to individuals. Property owners should be guided
to think of easements as long-term preservation protection for
property they care about. While we welcome constructive
suggestions or changes, we believe Congress was right to have
created tax incentives for preservation easements. We hope to
work with you so that responsible groups may continue to employ
this program which is doing so much to save our Nation's
architectural heritage.
[The prepared statement of Ms. Breen follows:]
Statement of Peg Breen, President, New York Landmarks Conservancy, New
York, New York
Good afternoon Chairman Ramstad, Ranking Member Lewis, Members of
the Committee.
I'm Peg Breen, President of the New York Landmarks Conservancy, and
I thank you for the opportunity to testify as you examine easements, an
important preservation tool.
The Landmarks Conservancy is a 31-year-old private nonprofit
organization based in New York City. We offer financial and technical
help to building owners throughout the City and State of New York. We
have so far lent or granted over 28 million dollars to individual
building owners seeking to preserve and restore New York's historic
buildings. We have a professional staff of architects, an engineer and
trained building conservators. We also advocate for preservation at the
city, state and federal levels of government.
The Landmarks Conservancy holds 34 preservation easements. Over
twenty years ago, the Conservancy saved an entire block of early
nineteenth century buildings from demolition through preservation
easements. That block includes the Fraunces Tavern, where General
Washington bid farewell to his troops after the Revolutionary War.
Recently, we accepted an easement on a small, Dutch-era farmhouse in
southern Brooklyn, in an area that would not qualify as an historic
district. Many of our easements protect row houses. We also hold
easements on two historic commercial office buildings, on several
apartment buildings, on a Civil War-era loft building and on an 1854
former bank in Lower Manhattan that now houses a club and restaurant.
None of these easements are limited to the front facade, they protect
the entire structure.
Some of these properties are within local historic districts,
several are not. Conservancy staff monitors each of the properties
annually. In addition, every 5 years, we hire outside architects and
engineers to inspect the buildings and prepare a thorough conditions
assessment reports. Copies of these reports are mailed to the owners
and any deficiencies identified in the reports must be repaired in a
timely manner by the owner. These inspections ensure that the buildings
are kept in sound, first-class condition.
Any changes or alterations proposed by the owners are also reviewed
by us and require our written approval prior to their execution. In
cases where a property is located within an historic district, we
review the changes first. If we approve the proposed changes the
application goes on to the City's Landmarks Commission for their
review.
In cases where an owner does not comply with the provisions of our
easement agreement, we have the right to seek redress in court. In two
recent instances, we have come close to commencing court actions to
ensure that proper repairs and restoration occurred. In these cases,
the required repairs were made prior to the actual start of legal
action. But if we had to go to court, we would not hesitate to do so.
The ability of our organization to enforce the provisions of the
easement gives us an unmatched ability to pro-actively safeguard the
historic significance of each property. Ongoing maintenance is crucial
to the conservation of historic buildings. Despite a strong Landmarks
law in most respects, our local Landmarks Commission does not have the
power to pro-actively require that buildings be kept in good repair.
Our easement agreement does give us the clear authority to require that
each of our historic buildings be kept in good repair and that they
receive appropriate levels of maintenance based on the findings of our
cyclical inspections.
We believe that the public value of an easement is directly related
to the easement holding organization's ability to enforce the
easement's preservation requirements and their expertise in historic
preservation and the regulation of historic properties. Our easement
agreement is 41 pages long and emphasizes the owner's responsibility to
maintain and keep the building in good repair.
We received several of our early easements from a separate
nonprofit organization that was affiliated with the City's Landmarks
Preservation Commission. That group realized that it did not have the
staff or the expertise to monitor easements. We have also accepted
several easements on properties that received special permits from the
Landmarks Commission allowing the transfer of unused development
rights. As part of the stipulations of those special permits, the
historic properties were always to be maintained in excellent repair.
The City's Landmarks Preservation Commission understood that the best
way to ensure this was to have the owners donate an easement to the
Conservancy.
We have not advertised nor promoted our easement program. Since the
National Architectural Trust started vigorously promoting easements in
New York City, we have received hundreds of calls from property owners
possibly interested in donating easements. People seek our advice
because we are the long-established nonprofit group in the city dealing
with historic preservation issues. As a result of these many calls, we
have accepted a total of ten new easements in the past two years.
We took many early easements without asking for a donation from the
property owner but then realized that we needed to cover inspection
costs and possible legal costs associated with enforcing the easements.
We don't have a set percentage to determine the size of each donation's
endowment. We look at each property and try to determine the costs of
our cyclical inspections. We keep an easement reserve fund of more than
$1 million, which generates interest income that defrays the cost of
the inspections and which is there in case we need to go to court to
enforce an easement or make repairs ourselves.
In terms of the appraisal report, we have no idea what it contains
until after we have closed on the easement and the owners send us the
IRS form 8283 for our signature. We have always kept at arms length
from the appraisal process because we believe that it is between the
donor and the IRS. Our interest in the property and amount of
contribution to us has nothing to do with the amounts contained in the
appraisal report.
Since we start from the firm belief that easements are an important
preservation tool, let me suggest some reforms and refinements that
might help eliminate any abuses or concerns.
We believe it would be helpful if real estate appraisers involved
in appraisals of easements were specifically trained and certified. We
believe that any easement appraisal needs to take into account whether
the property is subject to landmarks regulations at a local level and
how strict those regulations are.
In cases where very high appraised valuations are involved, a
threshold should be set that when exceeded would trigger the need for a
second independent appraisal. These should be the responsibility of the
property owner. Nonprofit groups do not have the expertise to second
guess or judge the accuracy of appraised valuations.
Easement holders should perform regular inspections and have
sufficient funds set aside that would allow them to go to court or to
make emergency repairs. We have no problem with President Bush's
suggestion of fines for groups that fail to perform proper inspections.
Easement holders should not agree to accept proposed changes that
do not conform to the highest standards of accepted practice in the
field of historic preservation. Groups should be very cautious in
promoting specific tax benefits to individuals. Property owners should
be guided to think of easements as long term preservation protection
for property they care about.
In conclusion, we believe very strongly that easements on
significant historic buildings have important public benefits. They
help to ensure that buildings that are important to the cultural and
aesthetic history of communities are protected from demolition or
unsympathetic alteration. Easements also ensure that these properties
are properly maintained and kept up regardless of who owns them or how
often they change hands. While we welcome constructive suggestions or
changes, we believe that Congress was right to have created tax
incentives for preservation easements and we urge Congress to allow
responsible groups to continue to employ this program, which is doing
so much to save our nation's architectural heritage.
Chairman RAMSTAD. Thank you, Ms. Breen. Mr. Lennhoff,
please.
STATEMENT OF DAVID C. LENNHOFF, PRESIDENT, APPRAISAL DIVISION,
DELTA ASSOCIATES, VIENNA, VIRGINIA
Mr. LENNHOFF. Mr. Chairman, good afternoon. Distinguished
Members of the Committee, I am David Lennhoff. I am a local
real estate appraiser, a Member-Appraisal Institute (MAI), and
appreciate the opportunity to talk with you. I apologize again
for being late. I have been asked to address a few issues
related to the appraisal process in facade easements,
specifically from an appraiser's perspective; I have selected
three general areas. Number one has already been touched on,
and that is the propriety of a benchmark percentage adjustment
as representative of the value of an easement. The second area
that I am going to address briefly will be the appropriate
methodology for valuing an easement, which gives you a little
bit of an insight into the first issue. The third area I am
going to address is the significance or importance of employing
qualified appraisers and having a regular review of the
appraisal process in place to protect the integrity of the
process.
The premise of the facade easement is that something is
lost when an easement is given; otherwise, no one would give
it. If they expect to be paid for something, it is because they
feel something is being lost, and, in fact, there are two
possibilities for a loss. One is, it restricts what you can do
to the property, and it forces you to do certain things,
depending on the specific easement. It might restrict additions
to the property, it might restrict demolition. On the other
hand, it may force you to paint it a particular color, it may
force you to use particular people to repair the property.
Those are the areas that create the perception that there is a
value loss; and when a donation is made, people expect such a
benefit. In 1985, the Hilborn court decision involving the IRS
resulted in a decision by the judge that 10 percent was the
appropriate value lost due to the easement, and perhaps it was.
What happened, unfortunately, was that a lot of appraisers
globbed onto that as being the right answer to every facade
easement question, and it simply is not.
There is no one answer to every facade easement value
problem. They are very complex appraisal assignments, and they
have to be approached individually. So, the answer to the
question of the propriety of a percentage benchmark is, ``It is
not appropriate.'' With respect to the appropriate methodology,
there is a method. It is a method that is used in almost all
condemnation appraisal. It is a method that is supported by
coursework in private-professional organizations such as the
Appraisal Institute and in the Federal Government itself in
publications such as the Yellow Book, which describes the way
that government values takings. The method is the before-and-
after method, and it is a simple concept. You value the
property as if there was no easement in it before, and then you
value the same property, as of the same date, recognizing the
restriction placed on it, and the difference between the two
represents the loss in value due to the easement. If it is 10
percent, it is 10 percent. The fact is, empirical research
evidence suggests that an urban row house in a historic
district--the example I am thinking of was in New Orleans--
incurs minimal loss. On the other hand, empirical research
evidence of a couple of office buildings in the Pioneer Square
district of Seattle, where we are talking about facade
easements, indicates that they sustained huge losses. So, the
point is, the 10 percent figure is insignificant; you have to
do an appraisal through an individual process.
My last issue is competent appraisers. This is an area
where you can solve a lot of the problems by requiring that
competent appraisers be hired. Competent appraisers mean people
with education, especially in this area, people with experience
in this particular valuation problem, and people with
accreditation beyond just licensing, which is pretty much just
an accounting mechanism. Organizations like the Appraisal
Institute, which award professional designations, give you some
assurance that you are going to get a quality product.
Notwithstanding that, the last area that I wanted to touch on
was the need for the donor to have in place a review appraisal
process; that also is a specialized area that requires a
reviewer with specific education and experience in this
particular problem. If you do have that, I think what you do
is, number one, you impress upon the appraisers that there is
some accountability there; if you are starting with the high-
level appraisers to begin with, you eliminate most of the
problem. Those are my comments. Thank you very much for
listening to me. I look forward to any questions that you might
have.
[The prepared statement of Mr. Lennhoff follows:]
Statement of David C. Lennhoff, President, Appraisal Division, Delta
Associates, Vienna, Virginia
INTRODUCTION
The purpose of a historic preservation easement is ``to preserve
and conserve the historic, architectural, scenic, and cultural values
of a certified historic structure. In the case of properties located in
registered historic districts, the easement will also protect the
historic district through limitations on uses that might jeopardize the
architectural scale, style, and sense of cultural identity of the
district. The easement does this by restricting alteration and
modification of the property in ways that would change its historic
appearance or remove or replace historic building fabric.''
Federal tax law provides for a donation of an easement to a
nonprofit organization or a government body, and that donors will
receive a deduction from income taxes equal to the market value of the
rights donated. ``The major premise underlying easement tax deductions
is that the value of property so encumbered is diminished. An
encumbrance that transfers rights in a parcel of real estate to another
entity cannot fail to affect the encumbered property.'' Usually, the
question is the matter of how much. Sometimes the value can be greatly
diminished, such as when the highest and best use of the property is
prohibited. On the other hand, if the easement is no more restrictive
than the controlling local landmark ordinances, then the loss might be
negligible. Furthermore, it has been noted that the imposition of a
facade easement, especially of the sort found on historic urban row
houses, may call attention to ``the character and prestige of a
particular building and possibly enhance its market value.''
Since the Hilborn decision in 1985, 10% has been widely used to
represent the diminution in value caused by a facade easement that does
not involve a potential change in use, with little property specific
analysis to support its appropriateness. This amount may or may not be
the correct market value of the easement. The value of the potential
loss will vary from property to property, situation to situation. No
one percentage applies to all situations equally. Accurate estimation
requires an expert real property appraisal. My testimony will describe
the appropriate methodology for estimating the market value of the
easement, and highlight the importance of properly selecting the
appraiser and carefully reviewing the appraisal.
BEFORE AND AFTER METHOD
``Before and After'' is the universally accepted method for
estimating the loss, if any, caused by a facade easement. The method
begins with an estimation of the market value of the real property
before the easement, from which the market value of the property as
encumbered by the easement is subtracted. Although simple sounding, the
calculation is not a simple matter. The ``before'' calculation must
take into account not only the value of the property for its existing
use, but the suitability of the property for other, more profitable and
presumably higher and better uses. The ``after'' calculation also must
consider any possible economic benefits to the value of the property
from the donation of the easement.
Both before and after valuations can be accomplished by whatever
combination of the three traditional approaches to value--Cost, Sales
Comparison, and Income Capitalization--might be applicable and
appropriate. Any method used in the before easement valuation, however,
should also be used in the after valuation.
The Cost Approach is helpful because it isolates the land and
building components; easement donors must reduce their building basis
in the property in proportion to the diminution caused by the easement.
The Income Capitalization Approach is best suited for identifying
changes in expenses. If sales of easement-encumbered properties are
available, the Sales Comparison Approach provides the most direct and
convincing measure of the after easement value.
The ``before'' valuation methodology does not differ from
appraisals for any other purpose. The ``after'' analysis, on the other
hand, must take into account the easement restrictions. Special
consideration should be given to restrictions that affect future use,
diminish anticipated future income, and increase operating expenses.
Market yield rates and overall capitalization rates are influenced by
risk and changes in income and value.
Some of the specific factors that can affect use and value include:
Effects on Operational Income
1. Because of the preserved components' age, normal maintenance
may be more expensive.
2. Maintenance in conformity with agreed upon standards to protect
the historic structure may be required. Typically, the maintenance
costs involved exceed the costs ordinarily anticipated for comparable
structures.
3. The owner may be required to keep the property fully insured
against casualty loss, and to reconstruct the improvements if they are
destroyed.
Effects on Reversionary Income
1. Prohibit demolition.
2. Prohibit or severely limit subdivision.
3. Prohibit or limit further construction or development
(additions, for examples).
4. Prohibit changes to the exterior (and sometimes interiors) of
historic or architecturally significant buildings.
QUALIFIED APPRAISERS
An accurate appraisal is the key element in any facade easement
donation program: it will influence the taxpayer's deduction on his or
her tax return, the donee organization that is seeking to preserve the
community appearance, the federal and state governments facing impacts
on revenue, and the public. Selection of a qualified appraiser,
therefore, is critical to the success of the process. That individual
must be competent--as indicated by a combination of specialized
education, experience and professional accreditation--to handle the
particular type of property and assignment conditions.
The current IRS definition of ``Qualified Appraiser'' includes
anyone who declares himself or herself capable of doing the valuations.
This low performance standard, unfortunately, opens the door for
participation by both the unscrupulous and unqualified.
A new definition of ``Qualified Appraiser'' has been proposed and,
if adopted, should greatly improve the situation. From ``Options to
Improve Tax Compliance and Reform Tax Expenditures,'' Joint Committee
on Taxation Staff Report, January 27, 2005,
Under the proposal, a qualified appraiser is ``an individual
who affirms: (1) that the fair market value of the subject
property has been determined in accordance with generally
accepted appraisal standards; (2) with respect to the specific
property and transaction type, that he or she: (a) has
successfully completed educational coursework, including for
continuing education credits, in generally accepted appraisal
practices, principles, concepts, methodologies, and ethics from
a recognized provider of such courses; or has earned an
appraisal designation from a recognized organization that
teaches, tests, and provides continuing education to its
members in valuation; and (b) regularly performs appraisals for
which he or she receives compensation and has a minimum of two
years experience in doing so; and (3) has not been subject to
disbarment from practice before the IRS by the Secretary
pursuant to 31 U.S.C. section 330(c).514.''
APPRAISAL REVIEW
Closely related to the selection of an appropriate appraiser is
careful review of the individual appraisals submitted to support the
denotation deduction amount. This highly specialized job requires
equally specific skills that include education, experience and
impartiality. This quality control mechanism is indispensable: no
program of this type will be reliable without regular, quality reviews
of the appraiser work product.
CONCLUDING COMMENTS
Rules of thumb are simply not adequate as a methodology for
estimating the market value of an individual facade easement. 10% is
just not the universal answer to the value question. These highly
complex appraisal problems require the services of specially educated,
impartial appraisers, with experience in easement valuation and
professional accreditation such as the designations MAI and SRA awarded
by the Appraisal Institute, which bind their members to adherence to
the Uniform Standards of Professional Appraisal Practice (USPAP) and
Code of Professional Conduct. Furthermore, the appraisers' work product
needs scrutiny by competent and experienced appraisal reviewers.
Proper, impartial easement valuations benefit and protect the
taxpayer, the donee organizations, governmental agencies and the
public. An understanding of the appraisal issues, and the need for
qualified, quality appraiser and appraisal review participation will
support the integrity of the program.
Thank you for allowing me the opportunity to share these comments
with you. I am hopeful they will be useful in your evaluation of this
important matter.
Chairman RAMSTAD. Thank you, Mr. Lennhoff. I want to thank
all five of you for your testimony here today. As I said
earlier, the complete text of your testimony will be printed in
the record. My first question is addressed to you, Commissioner
Miller. I understand that over the past several years a
substantial number, indeed a growing number, of easements have
been valued consistently between 10 and 15 percent--the bulk at
11 percent--of the value of the underlying property. I also
understand that a number of appraisers claim the IRS set a
guideline that facade easements should be valued between 10 and
15 percent of the property, and they point to an article which
we will put up on the screen here, Exhibit 6. As you can see,
the article from the mid-1990s states that ``IRS engineers have
concluded that the proper valuation of a facade easement should
range from approximately 10 percent to 15 percent of the value
of the property.''
[The information follows:]
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Chairman RAMSTAD. My question for you, Commissioner Miller:
Is it reasonable for appraisers to think this article
established the guideline for the appraisal of facade
easements?
Mr. MILLER. Thank you, Mr. Chairman. I will start with a
flat, ``No,'' it is not reasonable, and then I will explain why
I have that view. That article stems from an old audit
guideline that was used as a training mechanism for our agents.
It was not intended nor did it have any impact on the
regulation which requires a facts and circumstances appraisal
on each property. At best, it was a rule of thumb for an agent
who is taking a look at the tax return. Again, it didn't say,
``Appraisers, you do not have to do your job; you do not have
to do an appraisal, you can just use this percentage.''
Chairman RAMSTAD. I appreciate that explanation. So, the
simple answer to the question is, ``no,'' and it is not a
guideline?
Mr. MILLER. Right.
Chairman RAMSTAD. I appreciate also the explanation which
does shed some light certainly on the question.
Mr. McClain, do you use the acronym NAT?
Mr. MCCLAIN. National Architectural Trust? Yes.
Chairman RAMSTAD. National Architectural Trust. Most of
your easements are valued where?
Mr. MCCLAIN. Our easements vary from 6 percent to 15.5
percent.
Chairman RAMSTAD. It is true that most of them, the bulk of
them, the majority of them are valued between 10 and 12
percent?
Mr. MCCLAIN. Yes.
Chairman RAMSTAD. In fact, is it true that 99 percent of
your easements are valued at 10 or 11 percent of the property
value?
Mr. MCCLAIN. No.
Chairman RAMSTAD. It is not true that 99 percent of your
easements were valued between 10 and 11 percent of the property
value?
Mr. MCCLAIN. No.
Chairman RAMSTAD. Do you recall a meeting on April 8, 2005,
with members of the staff of this Subcommittee?
Mr. MCCLAIN. Well, I have had meetings with your
Subcommittee staff. I don't know the dates, sir.
Chairman RAMSTAD. You don't recall telling our staff that
99 percent of your easements, NAT's easements, were valued at
10 to 11 percent of the property value?
Mr. MCCLAIN. We had done a study--we had a statistics guy
go through all our easements, and basically, 46 percent of our
easements are not at 11 percent, and they vary from 6 percent
to 15.5. If I misspoke----
Chairman RAMSTAD. I am just trying to establish if it is
factually correct, the statement you made on April 8, 2005 to
members of our Subcommittee staff that--and I am quoting now--
``99 percent of your easements are valued at 10 to 11 percent
of the property value.'' Is that factually correct?
Mr. MCCLAIN. If indeed I did say that, then I misspoke. I
apologize.
Chairman RAMSTAD. I am sorry.
Mr. MCCLAIN. If indeed I did say that, then I misspoke, and
I apologize.
Chairman RAMSTAD. Let us digress for a minute. Where are
the bulk of your appraisals?
Mr. MCCLAIN. Over 50 percent are at about 11 percent. That
is true.
Chairman RAMSTAD. Over 50. Does that mean 60 or 90?
Mr. MCCLAIN. Fifty-four percent.
Chairman RAMSTAD. Fifty-four percent. Now, we have received
from various sources a number of examples of the ways in which
NAT has encouraged, has provided incentives to its donors to
expect an easement value of about 11 percent. We have three
statements we will put on the screen for you to see from your
marketing materials or from solicitors and facilitators
operating on your behalf, on behalf of NAT. The first: ``The
tax deduction is usually 10 to 15 percent of the fair market
value of your property as determined by a qualified
appraiser.'' The second: ``To estimate the easement value, when
completing the application the area manager should use his
experience in the area to estimate the fair market value of the
property and the easement value. If the area manager does not
have enough experience in the area, he can obtain comparables
to estimate the fair market value of the property and use 11
percent or 12.5 percent to calculate an estimated easement
value for residential and commercial properties, respectively.
Thirdly: ``The Federal historic preservation tax incentive
program provides for a tax deduction of approximately 11
percent of the property's fair market value, generating for a
$1 million property a tax deduction of $110,000 and in-pocket
savings of $55,000.'' That is Exhibit 7. Let me just ask you,
Mr. McClain, wouldn't you agree that NAT and solicitors,
facilitators working on behalf of NAT gave donors at least the
impression that their easement would be worth between 10 to 15
percent, usually 10 or 11 percent of the value of the property?
Mr. MCCLAIN. Yes, sir, but all that material is old
material. We don't have any of that material.
Chairman RAMSTAD. How old, Mr. McClain?
Mr. MCCLAIN. Well, 2003. We have altered everything as of
around 2004, except for the very top one, and that has been
changed as well. People do ask us, sir. They say, well, if I am
going to go through--it is a complex program. It takes 3 or 4
months; you have to have an independent appraisal. What do you
have--what is your estimate? We are not saying we have changed
this to say that it completely depends on the appraiser, but
the way they have been coming in is within this range; that is
an accurate statement. It is based on what the appraisals that
we are receiving are typifying.
Chairman RAMSTAD. Thank you, Mr. McClain. Ms. Breen, your
organization operated in the same market, I know, as Mr.
McClain's. Did you ever see any evidence that potential
easement donors had been given the impression by other
organizations that their facade easements should be worth about
10 or 11 percent of the property value? Is that common
practice? Did you see any examples of it?
Ms. BREEN. We saw examples of fliers that NAT distributed
in neighborhoods when they asked people to come to meetings to
talk about it, that initially had these percentages. It was
clear to us when people, who had been first approached by NAT,
called us, that the amount of the tax break was utmost in those
people's minds.
Chairman RAMSTAD. My time is up, and I am going to also try
to honor the 5-minute rule. Thank you, Ms. Breen. At this time,
the Chair recognizes Mr. Linder.
Mr. LINDER. Mr. Miller, you had 72 of these in 2000. Is
that correct?
Mr. MILLER. I am sorry, sir?
Mr. LINDER. You had 72 of these in 2000, and 760 last year?
Mr. MILLER. We have--I think the numbers you are referring
to, sir, are National Park Service certifications that they
have approved in those years. Last year I think it was in the
750 range or something like that, and it has spiraled up 95 to
99, I think it was, less than 100, maybe in the 74 range.
Mr. LINDER. How many people would be willing to save this
valued national architecture if they didn't have a tax break?
Mr. MILLER. That, I wouldn't know, sir. I am sure people
are driven by different things; I am quite sure it is an
incentive, and that was Congress's intention, obviously.
Mr. LINDER. Mr. McClain?
Mr. MCCLAIN. Yes, sir.
Mr. LINDER. How many people would be dealing with this if
there were no tax break for them? Do you sell the tax break
first before you sell the idea?
Mr. MCCLAIN. No, sir. Basically, the taxpayer receives a
benefit when these historic resources are protected. There are
aesthetic, historic, social and cultural benefits to all
taxpayers. The issue, though, is that the burden for protecting
these historic districts is borne by the individual property
owner; and it is unlikely that the property owner would put
permanent restrictions on his property that would reduce its
value without some kind of tax incentive.
Mr. LINDER. It is also unlikely that they would come to
your meetings without looking for some tax incentive, right?
Mr. MCCLAIN. Well, the incentive is in the law to
incentivize people to participate in the program, yes, sir.
Mr. LINDER. Ms. Breen, you have a private not-for-profit
organization?
Ms. BREEN. Yes, sir.
Mr. LINDER. How do you operate? Do you sell the idea to
various people based on tax deductibility?
Ms. BREEN. No. We don't advertise our program at all. We
have never promoted it.
Mr. LINDER. Then how do you do it?
Ms. BREEN. Many of our easements were required by the city
itself when an individual landmark sold unused development
rights, the city required them to give us an easement. We
received many from another nonprofit organization that realized
they didn't have the staff or expertise, and then, quite
honestly, it has never been much of an issue, but when NAT
started promoting them in New York, we received many more calls
coming in to us from people who were possibly interested in
donating easements.
Mr. LINDER. So, the instigation, in your case, comes from
the city wanting to protect facades?
Ms. BREEN. In a few of our instances. Again, there have
been instances where we have required easements. We saved a
group of early 19th century buildings next to Fraunces Tavern.
We bought them when a developer wanted to tear them down, and
then resold them to a developer who would use them, and placed
easements on them before the resale so that we could protect
them in perpetuity.
Mr. LINDER. At times when you get the easements, you get a
cash donation at the same time?
Ms. BREEN. In many of our early ones we didn't get a tax
donation. Then we realized that it costs us staff time and the
cost of outside experts--every 5 years we have our outside
experts do a thorough assessment report. So, we do ask for that
so that we can defray those costs.
Mr. LINDER. Are the cash contributions somehow related to
the size of the deduction?
Ms. BREEN. Not at all. Again, we don't know what the
appraised value is or the amount of their easement valuation is
until we see their tax forms. We tell everyone that that is
between--we ask them to get a qualified appraiser, and say that
the actual amount of their deduction is between them and the
IRS; and we have kept it at total arm's length.
Mr. LINDER. Then how do you determine what the cash
contribution is going to be?
Ms. BREEN. We look at each property and try to assess its
size, its complexity, and kind of cast out into the future how
much it is going to take to inspect it. There is no set
formula. We really look at each property as an individual.
Obviously, a smaller townhouse we would ask less for than a
commercial building, but we don't have set formulas.
Mr. LINDER. Mr. McClain, do you have a formula?
Mr. MCCLAIN. We ask for a contribution of around 10
percent, but it varies.
Mr. LINDER. Ten percent of the deduction?
Mr. MCCLAIN. Of the deduction amount. It is our feeling
that the greater the benefit to the property owner, the more
they should contribute to the stewardship fund for enforcing
and monitoring the program. It varies, though, all the way down
to 2 percent.
Mr. LINDER. Do the stewardship fund and NAT commingle----
Mr. MCCLAIN. National Architectural Trust.
Mr. LINDER. Do they commingle the moneys?
Mr. MCCLAIN. Commingle the money? Absolutely not.
Mr. LINDER. Thank you, Mr. Chairman.
Chairman RAMSTAD. The Chair now recognizes Mr. Nunes from
California.
Mr. NUNES. Thank you, Mr. Chairman, and thank you for
welcoming me to the Committee. It is a pleasure to be here.
Thank you for taking up this very important issue. I worked in
the Committee on Resources earlier this year on reauthorizing
the National Historic Preservation Act (P.L. 89-665), which--of
course, this is one part of the Historic Preservation Act. I
want to urge you to continue down this road of monitoring what
is happening with this act, because I think that there are some
abuses.
I want to say, Mr. Edmondson, that when I released a
draft--we had someone else from your nonprofit come and testify
before the Committee on Resources, and the comments that were
being made there were that we were trying to--with our draft,
we were trying to eliminate 70 percent of the historic sites in
America, which is complete rhetoric. It got to the point where
your group was sending out e-mails and conjuring up my own
constituents and other people's constituents such that other
Members on the floor were coming to discuss this with me, about
my elimination proposal of 70 percent of the historic sites in
America, which had to do with a change in Section 106, which I
am sure you are familiar with, of the Historic Preservation
Act. I would be curious to know, because I don't know this: You
are a nonprofit agency, correct?
Mr. EDMONDSON. We are a nonprofit, but we are
congressionally chartered. A Federal statute passed in 1949
that sets up the National Trust.
Mr. NUNES. Up until 1998, you received Federal dollars?
Mr. EDMONDSON. A portion of our operating funds were
covered by an appropriation from an appropriated grant,
essentially through the National Park Service; that was
eliminated some years ago. We have been on private funding ever
since.
Mr. NUNES. So, when you say you are privately funded, how
do you receive your funding? For example, who contributes to
you? Is it small donations? Large donations?
Mr. EDMONDSON. It is a mixture. Like many nonprofits, we
rely on a variety of sources of revenues. We have a quarter of
a million members who pay membership dues, which is a very
important source of revenue. We have grants that are received
from various foundations. We do have a very active fundraising
component and seek funding support from individuals and
corporations and others.
Mr. NUNES. You also have an active lobbying arm to some exte
nt?
Mr. EDMONDSON. Like any nonprofit organization at the
national level, we do engage in public policy issues, and that
includes lobbying. I have to say, I am not familiar with the
specifics of the circumstances that you just mentioned. If
there was some misstatement, I certainly would apologize for
that on behalf of the organization. I would be happy to convey
those concerns that you have raised to our policy staff and
have them contact your staff and figure out what, exactly, was
going on.
Mr. NUNES. Well, I think it is important, because I
believe--although I haven't gotten into enough on this
Committee with these tax provisions--that a lot of this is
being generated not to save historic America. I have just a
hunch that it is to save--there are a lot of people who are
profiting from these tax credits, not only from money that is
being authorized by the Park Service to give money to rebuild
these facades, but also through the tax credit side. A bigger
concern, other than the money trail that I think has definitely
happened in the past--I would like to ask you this, have you
seen these preservation easements as a tool to stop
development?
Mr. EDMONDSON. As a tool to stop development? Sometimes
easements are used as a tool to stop inappropriate development.
Sometimes they are actually used by developers. This is because
the incentive can be packaged with other types of tax
incentives at the Federal and State level, which provides
funding for redevelopment and rehabilitation of historic
properties.
Mr. NUNES. To be deemed historic, it has to be 50 years old
or older? Is that the same with these facades?
Mr. EDMONDSON. These properties have to be listed on the
National Register of Historic Places. That usually means at
least 50 years old. There are some exceptions to that. Or they
have to be certified as contributing structures in a National
Register historic district.
Mr. NUNES. Thank you, Mr. Chairman. My time has expired.
Chairman RAMSTAD. I want to say, as Chairman of the
Subcommittee, it is a real privilege and pleasure to welcome
you to the Subcommittee. You are a bright, rising star in the
Congress and we are grateful to have you on the Subcommittee on
Oversight. The Chair now would recognize Mr. Shaw, the
distinguished gentleman from Florida.
Mr. SHAW. If you would like to say something nice about me
before----
Chairman RAMSTAD. It would take too long. We have to
adjourn by 4:00.
Mr. SHAW. Maybe the falling star or something? Mr. Miller,
what type of documentation would be filed with one's income tax
return to substantiate--if any, to substantiate a deduction for
this type of a contribution?
Mr. MILLER. Well, Congressman, the individual would file a
Form 8283 with their tax return if, in fact, more than a $500
value was placed on this. If it was over $5,000, they would
have to fill out a portion of that that involves an appraisal.
So, they have to get an appraisal at $5,000. At $500,000, they
have to attach the appraisal as well, but it is the 8283 that
would be attached.
Mr. SHAW. Where does that document originate?
Mr. MILLER. It originates with the donor. It gets signed by
the donee organization as well.
Mr. SHAW. The donee signs it as well?
Mr. MILLER. Correct.
Mr. SHAW. That is just an attachment to the 1040?
Mr. MILLER. Yes, sir.
Mr. SHAW. In your experience, does this type of deduction
trigger an audit?
Mr. MILLER. In my experience--the experience is changing;
we will put it that way. In recent days when we have seen what
we are perceiving to be problems in valuation in the facade
area, those individuals who have taken deductions generally
will have gone to the National Park Service; and so they are
not difficult for us to identify and to take a look at and
classify as to whether we should begin an examination. We are
in that process as we speak.
Mr. SHAW. Mr. Lennhoff, when you go out and make an
appraisal, what has been your experience? Do you go and look at
the city ordinances or the applicable laws in the area that
might affect what one can do?
Mr. LENNHOFF. Yes, sir.
Mr. SHAW. I will give you an example. Here in Washington I
have a townhouse here on the Hill. I don't think I could change
the front of it if I wanted to.
Mr. LENNHOFF. That fact is, what creates the minimal
diminution, typically--or I would expect minimal diminution
with an urban row house in an historic district--it already is
restricted. It does raise a question of why, then, would
someone give a preservation easement if there is nothing to be
gained from it. Others have suggested that it may in some
situations enhance the value of the property because it calls
attention to the character and lends some prestige to the
particular building. The direct answer to your question is, it
would be my responsibility to investigate the neighborhood and
local ordinance, as well as the individual property regulation.
Mr. SHAW. As an appraiser, then, as your testimony was
given, you look at the diminution of value of the property more
than anything else as far as what type of deduction that you
would----
Mr. LENNHOFF. Well, Mr. Shaw, there may not be one. You
would go in and you would do a ``before'' and an ``after.'' I
think the appraiser has to be careful that you don't go in
assuming that there is going to be, for instance, a 10 percent
diminution when, in fact, there may be zero, or there may even
be an enhancement. You do go in and estimate the value without
the easement, and then you estimate with the easement, and you
do the math, and you see what the diminution or lack of
diminution is.
Mr. SHAW. So, you never use that 10 percent or 11 percent?
Mr. LENNHOFF. No, sir.
Mr. SHAW. Or 10 or 15 percent? That is just not done?
Mr. LENNHOFF. It is absolutely not an acceptable,
professional appraisal practice. I will say that it is not
inappropriate for an appraiser when he finishes his assignment
to step back and look at the answer and--okay, say, you come up
with 50 percent as a diminution. Typically, for this sort of
property, people are suggesting it is closer to 15. So, you go
back and look at your problem and see what might explain why
yours is so much higher. So, it does serve a purpose as kind of
a test of the reasonableness; but as a direct method, it has no
validity at all.
Mr. SHAW. Ms. Breen, in your experience do these easements
last in perpetuity? Or can something happen that would destroy
the easement that you might have, such as a fire or something
of that nature?
Ms. BREEN. The only thing that would extinguish our
easement would be the total destruction of the building, and we
would have to be satisfied that it was beyond repair and could
not be rebuilt. That is the only instance. Perpetuity is a long
time, but that is how they are supposed to last.
Mr. SHAW. Thank you, Mr. Chairman.
Chairman RAMSTAD. The Chair thanks the distinguished
Chairman of the Subcommittee on Trade, and would now recognize
Mr. Beauprez, the distinguished gentleman from Colorado.
Mr. BEAUPREZ. I thank the Chairman. Mr. Miller, I want to
go back to a point that was raised earlier. I think in your
testimony we found that in 2000 you had 72 of these properties;
but more recently, 2004, or last year, you had about 706. Is
that correct?
Mr. MILLER. The numbers are roughly correct.
Mr. BEAUPREZ. Where are they? I am curious where and what
kind of prompts are we finding coming into this program?
Mr. MILLER. Well, let me give you a little more background
on the numbers. Again, the numbers are stemming from those
people who have gone to the National Park Service to get a
certification that their building is of historical significance
to the district in which it sits. So, they fill out quite a bit
of information. We do have a sharing agreement with the Park
Service. We believe that most of the properties can be found--
and I think I put this in our testimony--at New York City. The
District of Columbia is number one, New York City is number
two, Chicago is number three, and there are some in Maryland as
well. They are fairly scattered across the other States, mostly
in the East, but they are fairly scattered as well.
Mr. BEAUPREZ. Historic preservation is a noble objective. I
have been involved in a little bit of that myself, but it
crosses my mind, and maybe Mr. Lennhoff wants to respond to
this. Have you seen evidence, Mr. Lennhoff, that by providing
this kind of tax incentive that what we are really creating--
and I guess with all due respect to all of you, you are
somewhat evidence of this, we have kind of created another
industry out there. More to the point, is it possible that what
we are seeing is just an inflationary factor on the value of
properties?
Mr. LENNHOFF. I think, frankly, to a certain extent that
does occur, because when you see 10 to 15 percent amounts as a
diminution for a row house on an exterior facade in a historic
district that already has restrictions, you have to wonder, why
is it so much? On the other hand, there are lots of situations
where the diminution is far greater than that, but that usually
involves a situation where the restriction prohibits using the
property to its highest and best use; either demolishing and
using the land for another use or something else. I think if
you see a lot of instances where there is this 10 or 15 percent
range on an urban row house, it is questionable. That is why I
think quality appraisal and appraisal review are important
elements.
Mr. BEAUPREZ. Recently there was a story, I think in the
local media, about what is going on out in Georgetown, and
specifically that local regulation--and I know this is the case
back in many of my communities in Colorado. Local regulation is
already--as I think Congressman Shaw mentioned--in place to
control, and in some cases prohibit or dictate what you can do
with a facade anyway. How necessary is this, I guess, is a
legitimate question. Ms. Breen? I see you are wanting to
answer.
Ms. BREEN. I see I can't conceal my facial expressions.
Sorry, Congressman.
Mr. BEAUPREZ. It will depend on your answer.
Ms. BREEN. Local laws vary. New York City does have a
strong local landmarks preservation law, but it varies from
community to community. In one case I know, in Pittsburgh, the
city rescinded half of a historic district so the buildings
could be torn down. So, I think it is very important for
appraisers to understand each of
the local regulations and how much regulation they actually impo
se.
Mr. BEAUPREZ. If I could very quickly--and you might want
to do this for the record, but I would be interested.
Obviously, to me, we have kind of stood up an industry again.
There is a layer of regulation and requirement and appraisal,
and there is some stuff out there. There is also, it seems to
me--and I think we have talked about this at least around the
edges, there is maybe an opportunity, almost an incentive, for
abuse out there. With that in mind, I would ask all of you if
you have advice for this Committee as to how we can better
reform the system to make it--if the objective is historic
preservation, how can we achieve that objective, not create
nightmares for Mr. Miller, undue expense and regulatory
headache for everybody else, and also address the possibility
of abuse of the system, which I think is this Committee's
primary concern, or one of them. With that, I would just ask
that you respond in writing, if you would, and I yield back.
[The information was not received at the time of printing.]
Chairman RAMSTAD. Thank you again to all the witnesses. We
do have time for some follow-up questions if the Members are so
inclined. Again, the 5-minute rule will apply. I would like to
ask Mr. Edmondson, is it fair to say that the National Trust
for Historic Preservation has had concerns for some time about
the relationship between NAT and SMS; and if it is true, could
you describe the nature of your concerns?
Mr. EDMONDSON. Mr. Chairman, I think it is fair to say the
National Trust for Historic Preservation has had a number of
concerns with NAT. We have discussed with the staff some of the
concerns we have had over the years. There are three basic
areas. One is the name. We feel that there is a problem with
public confusion about the name, and we actually have filed a
complaint with the U.S. Patent and Trademark Office. It is
still pending.
We have also raised issues with respect to their marketing
and promotional activities, and those are detailed in some of
the letters, exchange of correspondence, we have had with NAT,
which the Committee staff has seen. A lot of this relates to
this 10 to 15 percent concept. The informational pieces that
you provided, Mr. Chairman, on the screen, are just a few
examples of many other promotions that we describe as
referring, mantra-like, to a 10 to 15 percent reduction. As Mr.
McClain has indicated, they have changed their promotional
activities in recent years, which we think is important. We
think it is very unfortunate that promotions, whether it is by
NAT or others, have oversimplified the types of tax benefits
that should be available.
The other area of concern that we have raised is with the
relationship between NAT and SMS, a for-profit company owned by
several of the directors of NAT. We indicated to them last year
that we thought that there were some conflicts of interest
there--at least the appearance of a conflict of interest--that
should be addressed. I understand from Mr. McClain they have
been looking at that and have made some changes there as well.
Chairman RAMSTAD. Let me also ask Mr. Edmondson, are there
other similar organizations about which you have those
concerns?
Mr. EDMONDSON. Since NAT was created and became so active
in the last couple of years, really for the last 3 or 4 years,
there have been several other organizations that have also
recently been created. These are not established organizations,
such as the New York Landmarks Conservancy, but they have
recently appeared on the scene and they are focused primarily
on easement acquisition and often using similar types of
promotional activities. We have not had as much experience with
those. There is an organization in New Jersey and there is an
organization, I believe, in New Orleans. There is also an
organization that was created fairly recently in Washington,
D.C. I would say that we would express some of the same
concerns, particularly about marketing activities, but I think
the Committee staff has done a lot more looking into the
operations of those organizations than we certainly have.
Chairman RAMSTAD. In fairness, Mr. McClain, do you have any
response or any comments concerning those questions or Mr.
Edmondson's responses?
Mr. MCCLAIN. Yes, thank you. Everything that NAT has done
has been legal and proper. However, as I said in my opening
comments, it has been the Board's decision, given some negative
press regarding the relationship between SMS and NAT, that we
have terminated that relationship and we have adopted the Land
Trust Alliance's new best practices. The new best practices not
only require you to be legal and proper, but they actually hold
you to a higher standard than legal and proper; and basically,
you can't even have a perception of a conflict of interest. We
have all signed statements to that effect, and we are all
following through with that, so thanks for the opportunity to
speak on that.
Chairman RAMSTAD. Also, Mr. McClain, is it a fair
statement--it is your own statement that you changed your
promotional material?
Mr. MCCLAIN. We changed all of our promotional material.
Chairman RAMSTAD. In 2004?
Mr. MCCLAIN. Yes, sir.
Chairman RAMSTAD. I am just curious, how many years did you
use those representations? For how long did you use those?
Mr. MCCLAIN. The National Architectural Trust was formed in
2001.
Chairman RAMSTAD. Mr. Nunes, do you have further questions?
Mr. NUNES. Yes, Mr. Chairman, just briefly. Mr. McClain,
you are obviously taking some heat here, which may be right,
may be not right, but I think--one of the problems, I believe,
and I will make a statement here, is the Historic Preservation
Act has not been reauthorized for many years, has not been
looked over by Congress; and I think a lot of this comes from
section 106, which is related to 107. There were administrative
changes done in 1978 that were never approved by the Congress,
and I think part of that is what has led to some of the
problems that you are having. I am interested in not only
hearing from you, Mr. McClain, but I think the rest of the
panel--other than Mr. Miller, of course, since he is with the
government. I would like to know, don't you think it would be
beneficial for us, the Congress, to reauthorize historic
preservation and to really look at section 106? That way we can
clarify a lot of the problems that have happened not only to
your organization, but others in the past.
Mr. MCCLAIN. I would have to acquiesce to the judgment of
Paul Edmondson. I understand what 106 is, but I have very
little involvement with it, and I am not familiar with it.
Mr. NUNES. I understand. Mr. Edmondson?
Mr. EDMONDSON. I think 106 has been a very important piece
of legislation. The National Historic Preservation Act has
really been one of the core pieces of legislation that has
helped to preserve the character of many of America's
communities. Easements are really a very useful tool in
addressing some of the issues that section 106 raises. When
Federal agencies are required to consider the impacts of their
actions, and there are major projects that are involved, very
often there are mitigation solutions for Federal action that
impacts historic properties. Often these are in the context of
development, often in the context of things like base closures
and so on. Very often, easements are a very important tool that
is used by Federal agencies and by developers as well.
Mr. NUNES. I understand that section 106 was--there was an
administrative change that basically took power away from the
Secretary of the Interior. My question to you is, should we
look at this, to clarify the administrative change that was
made, and to try to reauthorize the Historic Preservation Act?
I think that--without reauthorization, I think section 107 is
going to be more heavily scrutinized by this Committee.
Mr. EDMONDSON. Congressman, I guess I am not sure what you
are referring to in terms of an administrative change that
changed the impact of 106. I would be happy on behalf of the
National Trust to talk to you and talk to your staff and figure
out ex-
actly how we might help to address some of the issues you are ra
ising.
Mr. NUNES. I think the point I am trying to make is that
because this has not been reauthorized, this act, I think it
would be beneficial to all involved in the historic community
to look at reauthorizing the act. Hopefully, that will cut down
on some of the rhetoric, like when we hear things like people
putting out draft releases that then create commotion that we
are going to eliminate 70 percent of historic sites. I don't
think that is helpful rhetoric which--you have already heard me
discuss this. I would be glad to send you a letter in writing.
I think you have already commented on reauthorization of the
Historic Preservation Act. Maybe not you, but your organization
has.
Mr. EDMONDSON. Certainly any other issues, or the issues
specifically you are raising, we would be happy to look at in
detail. As I said earlier, I have not been directly involved in
that, but on behalf of the organization, I would be certainly
happy to address the issues you are raising.
Mr. NUNES. Thank you. Ms. Breen, I don't know if you have
any comment.
Ms. BREEN. I am not familiar with the specific
administrative changes you are suggesting, but I certainly
would welcome a look at any and all practices of historic
preservation. I think it would withstand scrutiny. As someone
who used to work for the New York City Council and help with
legislative proceedings, I think it is healthy to have
occasional reviews.
Mr. NUNES. Thank you. Mr. Lennhoff?
Mr. LENNHOFF. Mr. Nunes, I am not close enough to that
topic. It probably wouldn't be appropriate.
Mr. NUNES. That is fair enough. Thank you, Mr. Chairman.
Chairman RAMSTAD. Thank you, Mr. Nunes. I just have some
follow-up questions, Mr. McClain: you said you have terminated
the relationship between NAT, and SMS; is that right?
Mr. MCCLAIN. Yes, sir.
Chairman RAMSTAD. Could you just explain why you and Mr.
Kearns decided to terminate the relationship? Was it the
adverse publicity?
Mr. MCCLAIN. Well, the Board of NAT terminated the
relationship because of the adverse publicity and to avoid any
sense of a conflict of interest, even though we had legal
counsel that said there was none. That is why that was done.
The reason SMS was terminated--it also helped a couple of other
nonprofits. Given the confusion evident from many of the IRS
statements in the press about the valuation of easements, there
was no purpose for SMS, because it basically was processing and
soliciting easements, and there is no way to solicit easements
without knowing under what conditions they would be accepted.
So, it wouldn't work. We certainly don't want to misrepresent,
so that is why.
Chairman RAMSTAD. It is true that there are six members on
the board of directors of NAT? You and Mr. Kearns are two of the
m?
Mr. MCCLAIN. That is correct.
Chairman RAMSTAD. You appointed the other four?
Mr. MCCLAIN. We didn't appoint them.
Chairman RAMSTAD. Can you tell us how they became board
members?
Mr. MCCLAIN. Well, I have been in preservation for 25
years, and I know lawyers and architects who have an interest
in that. Two of the people on the board, or one of them is an
architect who has been in Washington, D.C., for 25 years, 30
years, and the other one is a lawyer. Another person is a lady
who has been in preservation for a number of years. One of the
ladies that was on our board has since passed away. Then we
brought on someone who was a public relations expert, because
we felt that that would be useful.
Chairman RAMSTAD. A couple more questions: Is it accurate
that NAT, a nonprofit organization, loaned $157,435 to SMS for
a period of 5 years?
Mr. MCCLAIN. No, sir
Chairman RAMSTAD. That is not accurate?
Mr. MCCLAIN. No. When SMS was created, there a safe-harbor
was created. There was an outside source; an outside accounting
firm came in, did an analysis to determine the proper
compensation between what the for-profit SMS and the nonprofit
NAT should be, to pay for services to a for-profit, for what
services SMS was willing to provide. Once SMS was in place, it
was thought that since SMS was going to have other clients who
might do reasonably well financially, that NAT might benefit
from having an investment, which they agreed to. Then outside
counsel came in and said, no, because that might compromise
NAT's ability to fire SMS should they want to. So, the
investment was recharacterized as a loan and it was paid off in
full at 10 percent interest.
Chairman RAMSTAD. I want to thank you, Mr. McClain,
particularly, and all of the witnesses for being very
forthcoming in terms of answering the questions of our
Subcommittee staff in anticipation of this hearing. I would
also ask unanimous consent that the letter dated May 18, 2005,
from Mr. Steven McClain, President of SMS, to Mr. David Kass,
Staff Director of the Subcommittee on Oversight of the House
Committee on Ways and Means, be entered into the record.
[The information follows:]
Springfield Management Services
Washington, D.C. 20009
May 18, 2005
Mr. David Kass
Staff Director, Subcommittee on Oversight
House Committee on Ways and Means
1136 Longworth House Office Building
Washington, DC 20515
Dear Mr. Kass,
Springfield Management Services appreciates the opportunity to
provide the following information:
1. Total Compensation Received by James Kearns and Steven McClain,
September 2000 to April 2005
2. Springfield Management Services Compensation to Independent
Contractors
3. Tim Maywalt
We hope that this information answers your questions regarding
Springfield Management Services and the Historic Preservation
Conservation Easement program.
Sincerely,
Steven McClain
President
------
Total Compensation Received By Kearns and McClain September 2000 to April 2005
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
A B C D E F G H I J K L M
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
NAT SMS Total
----------------------------------------------------------------------------------------------------------------------------------
Average
2000 2001 2002 2003 2004 2005 2002 2003 2004 2005 NAT and SMS Annual
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Kearns $0 $0 $ 50,000 $105,000 $0 $16,666 $0 $220,000 $575,000 $75,000 $1,041,666 $227,438
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
McClain $0 $0 $125,000 $0 $0 $16,666 $58,333 $200,000 $566,667 $75,000 $1,041,666 $227,438
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Notes:
(1) Columns A-K are actual figures from NAT and SMS accounts.
(2) Compensation includes all receipts from the organization except expenses for which a documented expense reimbursement request was submitted.
(3) Averages are calculated using September 1, 2000 as the date Kearns and McClain began additional work that led to the creation of NAT and subsequently SMS.
(4) Part of Kearns/McClain compensation from SMS is attributable to work SMS performed on donations to the L'Enfant and Tri State/Capital Historic Trusts.
------
Springfield Management Services Compensation to Independent Contractors
02-03--The highest compensation to an independent contractor for
assisting donors to participate in the Historic Preservation
Conservation Easement program was approximately $151,000. The average
compensation to independent contractors was $37,391.
03-04--The highest compensation to an independent contractor for
assisting donors to participate in the Historic Preservation
Conservation Easement program was approximately $440,000 (this amount
represents 9.6% of the cash contributions to the Trust originated by
this independent contractor). The average compensation to independent
contractors was $115,330.
04-05--The highest compensation to an independent contractor for
assisting donors to participate in the Historic Preservation
Conservation Easement program was approximately $428,000 (this amount
represents 9.9% of the cash contributions to the Trust originated by
this independent contractor). The average compensation to independent
contractors was $122,500.
______
Springfield Management Services Tim Maywalt
During a three-year period, Tim Maywalt assisted approximately 100
donors per year participate in the Historic Preservation Conservation
Easement program. The majority of these donors live in Washington, D.C.
Chairman RAMSTAD. I just have one final question, Mr.
McClain. According to your letter and your chart here, entitled
Total Compensation Received by Kearns and McClain, September
2000 to April 2005, the statement just entered into the record,
according to your own statement here, from 2000 to 2005, just
from 2002 to 2004, the two principals of NAT and SMS made a
total of $1.9 million from those two organizations, that is,
you and Mr. Kearns. I want to ask you, Mr. Edmondson, did you
have any idea that their work in promoting facade easements are
that lucrative, and are there comparable organizations
profiting to that extent?
Mr. EDMONDSON. Mr. Chairman, I am not aware of any other
preservation organization that has the type of structure where
the directors of the nonprofit organization have contractual
relations through a for-profit entity that they own for this
type of work. So, I think the answer to that question is
``certainly not.'' In terms of the compensation level, we were
certainly aware that through the reports that NAT has provided
publicly that large amounts of funds were being received,
primarily through cash donations at the 10 percent of the
easement valuation fees, and this was in the range of millions
of dollars. That is the first time I have heard the actual
compensation numbers.
Chairman RAMSTAD. Mr. McClain, would you care to further
comment?
Mr. MCCLAIN. Yes, sir. From 2000 to 2004, my average annual
compensation has been $227,000, which is on that chart as well.
My 2004 compensation of $566,000 is a result of salary, bonuses
and deferred compensation. Since SMS, has been--has no
employees now and no clients and has to stay dormant for 3
years before it can be closed up, we have had outside human
resource experts come in, who are experts in nonprofit
compensation, and they have set parameters for every job in
NAT, and we are staying within the criterion that they have
established.
Chairman RAMSTAD. Thank you, Mr. McClain. Before we
adjourn, do any of the other witnesses have any further
comments in response to any of the questions that have been
asked?
Ms. BREEN. I would just like to thank you again for the
opportunity, and say that we have been working with the
National Trust and other long-standing preservation groups in
recent years on this issue, and we want to be held to the
highest standards and keep this valuable program working to the
best possible means.
Mr. EDMONDSON. I would like to echo that sentiment. We have
had some very frank discussions with the Subcommittee staff,
and we also have had a number of ideas that we think would be
helpful for the Subcommittee and the full Committee, when it
gets to it, to consider in terms of how to address some of
these issues. As I mentioned in my opening statement, we are
alarmed by the reports of abuses. We do think that the tax
incentive is important. It does help motivate donors, and we
would like to see it remain as a valuable preservation tool.
Chairman RAMSTAD. Mr. Lennhoff, anything further?
Mr. LENNHOFF. No, sir.
Chairman RAMSTAD. Mr. McClain?
Mr. MCCLAIN. No, sir.
Chairman RAMSTAD. Mr. Miller?
Mr. MILLER. No, sir.
Chairman RAMSTAD. I want to thank all five of you for
appearing here today. I believe this hearing shed some light on
facade easements. Hopefully, it will be a first step in curbing
some alleged abuses that have occurred in the past. I want to
thank you again for your time and your testimony. Before we
adjourn, I ask unanimous consent to include in the record the
opening statement of Ranking Member Lewis. Without objection,
so ordered.
[The opening statement of Mr. Lewis follows:]
Opening Statement of the Honorable John Lewis, a Representative in
Congress from the State of Georgia
June 23, 2005
Today's hearing will focus on the donation of facade conservation
easements to charitable organizations. The purpose of such an easement
is to ensure that the architectural integrity of a historic property's
exterior is maintained permanently. The historic trust organization
obtaining the easement is responsible for monitoring the preservation
of the structure's facade and for approving any changes. A taxpayer
making a facade conservation easement may be eligible to claim a
charitable donation income tax deduction for the value of the easement.
There are many important questions that need to be addressed by the
Subcommittee. News reports indicate abuse of the current law tax
deduction for facade easements. The Joint Committee on Taxation
recommends that the deduction be repealed for facade easements on
personal residences. Easement-holding historic preservation
organizations support continuation of facade easement donations and
believe they provide valuable conservation benefits to the public at
large.
Getting the facts is always helpful in evaluating the effectiveness
of a tax provision. Questions worth pursuing at this hearing include:
Do facade easements serve meaningful conservation purposes? Should
charitable deductions be allowed where state or local laws already
prohibit changes to the fronts of historic properties? Are proposals
for increased enforcement and additional standards on appraisers
realistic?
I commend Subcommittee Chairman Ramstad for having a hearing on
this subject. I look forward to our followup discussions.
Chairman RAMSTAD. Mr. Nunes?
Mr. NUNES. I want to thank you again, Mr. Chairman, for
holding this hearing. I think that if the historic community is
willing to work to reauthorize this Historic Preservation Act,
it would be very beneficial to what you are trying to do here.
If they are not supportive of trying to reauthorize that act, I
think it is very important that you continue down this path to
determine just where the money is going, and if there are
abuses by the historic community to the Tax Code and to the
taxpayer. So, I hope that we can work closely with the historic
community to reauthorize this act, and look forward to working
with you in the future.
Chairman RAMSTAD. I certainly associate myself with your
remarks and agree 100 percent. If there is no further business
before the Subcommittee, the hearing is adjourned.
[Whereupon, at 3:25 p.m., the hearing was adjourned.]
[Questions submitted from Chairman Ramstad to Steven T.
Miller, Steven L. McClain, Paul W. Edmondson and Peg Breen, and
their responses follow:]
Questions from Chairman Ramstad to Steven T. Miller
Question: Should the extent of existing legal restrictions on the
use of property have a significant impact on the appraisal of a facade
easement?
Answer: Yes. The extent of existing legal restrictions on the use
of property does have a significant impact on the appraised value of a
facade easement, and should be considered by the appraiser in
determining the change in value due to the placement of the facade
easement.
Question: Some argue that even if there are significant legal
restrictions on the use of property, an easement can have significant
value. This argument claims that because local historic preservation
laws can be changed, and because an easement theoretically lasts
forever, an easement can still have significant value. How do you
respond to this argument?
Answer: We believe that in most circumstances the argument has
little merit. To be successful, the taxpayer would have to show that
the law change was impending or highly likely to occur, based upon
specific evidence. For example, the taxpayer would need to show that
local authorities effectively had made the change or were about to do
so. However, the mere theoretical possibility that the law might be
changed at some unknown time in the future, or that existing legal
restrictions might not be enforced, is insufficient.
It is important to note that the change in the value of the
taxpayer's property as a result of a granting of an easement is
measured as of the date of the donation based upon facts known or
reasonably expected on that date, not based on uncertainties and
speculation. A taxpayer should not be permitted to value a property
today by treating an uncertain event (such as a potential law change)
as having occurred.
Questions from Chairman Ramstad to Steven L. McClain
Question: During the hearing, you mentioned that your office had a
study of the value of the National Architectural Trust's (NAT)
easements. You said that 54% of your easements were valued at 11%.
Please provide a breakdown of the number and percentage value of the
remaining easements along with their zip codes. Please state how many
easements were valued between 5%, 6%, 7%, 8%, 9%, 10%, 12%, etc. and
what percentage of NAT's easements were valued at each percentage
value. In addition, please provide the study you cited for the record.
Answer: The value for a conservation easement deduction is
determined by an independent professional appraiser. Final
responsibility for the adequacy and completeness of the appraisal data
submitted to substantiate a donor's claim for a charitable contribution
deduction rests with the donor. The National Architectural Trust
reviews all submitted conservation easement appraisals to determine
that they are done in a competent and professional manner.
When the Oversight Subcommittee staff asked several months ago what
proportion of easement donations held by the National Architectural
Trust were valued at eleven percent by independent appraisers, the
Trust did not have the necessary information to answer this question.
Subsequently, the National Architectural Trust requested that an
outside contractor review the easement appraisals the Trust had
received to determine the proportion of facade conservation easement
donations valued at eleven percent by independent appraisers. The
answer provided by the outside contractor was 54%.
After further in-house review and analysis, however, the National
Architectural Trust has determined that 52.4% of all facade
conservation easements held by the National Architectural Trust have an
easement percentage value of 11%. The National Architectural Trust's
easement percentage values range from 8% to 16%.
The following table, ``Easements Held by National Architectural
Trust through December 31, 2004,'' provides a breakdown of the number
and percentage value of easements held by the Trust as well as the zip
codes of easements at each easement percentage value.
Easements Held by National Architectural Trust through December 31, 2004
----------------------------------------------------------------------------------------------------------------
Percentage of Total
Number of Easements Held by National Architectural Easement Easements Held by
Trust Percentage Value National Zip Codes
Architectural Trust
----------------------------------------------------------------------------------------------------------------
1 8.0% 0.3% 10012
----------------------------------------------------------------------------------------------------------------
1 9.0% 0.3% 11215
----------------------------------------------------------------------------------------------------------------
01945, 02568, 07302,
08833, 10024, 11207,
11217, 11231, 21230,
18 10.0% 5.0% 22301, 10014, 11225
----------------------------------------------------------------------------------------------------------------
01945, 10014, 02116,
02464, 10024, 01983,
02108, 02114, 02118,
07302, 10003, 10011,
10013, 10014, 10021,
10023, 10024, 10025,
10027, 10028, 10128,
11201, 11215, 11217,
11231, 11963, 14801,
20003, 21210, 21217,
21218, 22079, 22301,
22314, 10010, 21224,
11201, 02115, 11225,
188 11.0% 52.4% 02116, 11238, 11225
----------------------------------------------------------------------------------------------------------------
02116, 10003, 10024,
02116, 11225, 10014,
02108, 10021, 11238,
01746, 01821, 02114,
02118, 02125, 10011,
10013, 10024, 11201,
11215, 11225, 14201,
21210, 21212, 21217,
21218, 21230, 21231,
21401, 01950, 10022,
02118, 02445, 11205,
67 12.0% 18.7% 02120
----------------------------------------------------------------------------------------------------------------
02461, 10011, 11215,
11238, 02116, 11215,
10128, 10018, 11217,
11201, 10028, 02556,
10013, 21210, 21212,
21218, 21401, 10016,
30 13.0% 8.4% 10014, 10128
----------------------------------------------------------------------------------------------------------------
02108, 02111, 02115,
02116, 02118, 02446,
11226, 10014, 02478,
02468, 01938, 02114,
02445, 02461, 10012,
21210, 10010, 10003,
28 14.0% 7.8% 11379, 10013, 10011
----------------------------------------------------------------------------------------------------------------
02116, 02118, 10010,
10003, 10024, 10021,
10013, 10027, 10011,
10001, 10023, 10028,
24 15.0% 6.7% 11215, 11235, 10014
----------------------------------------------------------------------------------------------------------------
2 16.0% 0.6% 10003, 10023
----------------------------------------------------------------------------------------------------------------
359
----------------------------------------------------------------------------------------------------------------
It is also important to note again (as referenced during the oral
testimony of Steven McClain), the National Architectural Trust is
completely independent from the appraisal process. The National
Architectural Trust accepts easement appraisals from over 60 different
appraisal companies and in no way is involved in the determination of
the value attached to an easement donation.
We again refer the Subcommittee to Mr. McClain's testimony on June
23rd in its relation to recommended reforms to the appraisal process
for facade easement donations.
Question: How many easements did the National Architectural Trust
receive before it revised its marketing materials in late 2004 to
remove the language indicating that donors could expect the easement to
be worth 10 to 15% of the value of the property, and other references
to the tax deduction? In addition, please provide a breakdown of the
number and percentage value of those easements.
Answer: This question is difficult to answer because a property
owner's decision to donate an easement is typically made over a long
period of time, after consultations with personal accountants, lawyers,
tax specialists, colleagues, and spouses. Although the National
Architectural Trust used the ``ten to fifteen percent'' language in its
educational materials for property owners, it is likely that a property
owner's final decision was influenced by advice and information from
other sources such as the National Park Service \1\ (NPS) and the
Internal Revenue Service (IRS). The National Architectural Trust was
relying on the ``ten to fifteen percent'' \2\ guideline included in the
NPS and IRS publications in the development of its educational
material.
---------------------------------------------------------------------------
\1\ The National Park Service Publication. Historic Preservation
Easements: A Historic Preservation Tool with Federal Tax Benefits.
\2\ Internal Revenue Service Website. ``IRS guidelines suggest that
in many cases facade easements can be appraised at approximately 10 to
15 percent of the value of the property.''
---------------------------------------------------------------------------
Therefore, even though the National Architectural Trust acted
quickly to remove the ``ten to fifteen percent'' language from the
information provided in its materials and website following the
issuance of IRS Notice 2004-41 concerning the valuation of facade
conservation easements and the removal of this valuation range from two
IRS publications, it is not safe to assume that all interested facade
easement donors immediately refrained from using the ``ten to fifteen
percent'' language as part of their decisionmaking process.
Although the National Architectural Trust eliminated the reference
to the ``ten to fifteen percent'' language from all marketing materials
as of approximately October 15, 2004, it could not change or eliminate
materials disseminated prior to that date. There is no way to determine
what material donors may have reviewed and how many donors had already
used the marketing material in their facade conservation easement
decisionmaking process.
The National Architectural Trust held approximately 380 completed
easements as of October 15, 2004.
Question: The National Architectural Trust holds approximately 550
easements. Have you ever found a violation of one of your easements?
Have you ever enforced an easement? If so, please provide a detailed
explanation of the violations and the action taken by the National
Architectural Trust and how these violations were resolved.
Answer: The primary mission of the National Architectural Trust is
to protect qualified historic properties in perpetuity. The means of
accomplishing this mission is the use of conservation deeds of
easement. Annually, the National Architectural Trust reminds property
owners of the deed restrictions on their property, that the Trust's
approval is required for any property changes, and that the Trust
conducts annual on-site inspections.
Many property owners discuss proposed facade changes with the
National Architectural Trust prior to the submission of a written
request. This discussion can occur during the application process or
subsequent to the completion of the easement donation. As a result, the
National Architectural Trust is able to address potential issues prior
to the submission of a formal change request.
In some cases, property owners in the process of applying for
participation in the Federal Historic Preservation Tax Incentive
program have consulted the National Architectural Trust regarding
proposed changes that did not meet the Secretary of the Interior's
Standards and Guidelines for Preservation and Rehabilitation--the
foundation for the National Architectural Trust's decisions on easement
enforcement. These property owners were informed that the proposed
changes would be denied. In these few instances, the property owners
did not proceed with the easement application process. A specific
example of this occurred at 5415 Spring Lake Way in Baltimore,
Maryland.
All change requests must be in writing and all changes should be
guided by the Secretary of the Interior's Standards and Guidelines for
Preservation and Rehabilitation. The annual review of each property
conducted by the National Architectural Trust serves to confirm that
the work done is according to specifications authorized by the Trust.
The National Architectural Trust has received formal written change
requests for the following properties, among others:
--439 West 22nd Street, New York, NY 10011
--120 West 88th Street, New York, NY 10024
--33 West 81st Street, New York, NY 10024
--71 Bedford Street, New York, NY 10014
--117 West 88th Street, New York, NY 10024
--492 1st Street, Brooklyn, NY 11215
--18 Fiske Place, Brooklyn, NY 11215
--5415 Spring Lake Way, Baltimore, MD 21212
--105 Saint Dunstans Road, Baltimore, MD 21212
The National Architectural Trust is presently conducting its 2005
annual review of each property. Thus far, we have identified the
following property changes made without prior written National
Architectural Trust approval. These changes were subsequently reviewed
and then approved.
--209 South Saint Asaph Street, Alexandria, VA 22314
--219 South Alfred Street, Alexandria, VA 22314
The National Architectural Trust 2005 annual review has thus far
identified one property (311 East Howell Avenue, Alexandria, VA 22301)
where a change was made without prior written approval and the change
violates the National Architectural Trust guidelines. This violation
issue has not yet been resolved.
Questions from Chairman Ramstad to Paul W. Edmondson
Question: Are there significant differences between the easement
deeds used by various easement holding organizations? For example, the
National Architectural Trust uses an easement deed which covers just
the front facade of a structure. Many other easement holding groups use
a deed which protects the entire building envelope. Should a front-
facade only easement be worth less than a whole building easement?
Answer: Yes, significant differences exist among easement deeds
used by various easement holding organizations around the country. The
National Trust for Historic Preservation publishes a model Preservation
and Conservation Easement as guidance for state and local preservation
organizations to use when drafting their own preservation and
conservation easements, but a number of organizations use different
models, and in any case the easement should be adapted to meet the
specific circumstances of a particular property.
Many preservation organizations use easements that protect all
significant historic features of the exterior of a historic property
and its historic setting--and some organizations, including the
National Trust, often protect interior historic features as well. It is
fairly common for preservation organizations to use easements that
protect all exterior facades and roof surfaces, although the specific
provisions of an easement may vary considerably in terms of the degree
of oversight and/or control held by the easement-holding organization
even for an easement that covers the entire exterior envelope of a
historic property. Many preservation easements also protect the context
of a historic property, for example prohibiting subdivision of historic
farm property and protecting historic gardens and outbuildings.
As you note, a small number of organizations accept easements that
protect only the publicly visible facades of a historic property as
seen from the other side of the main frontage street. This form of
``front-only'' facade easement is much less restrictive from the
property owner's perspective and may permit additional square footage
or other development.
Regarding the question of valuation, as a general matter we agree
that an easement that protects only the front facade of a building is
likely to be worth less than an easement that protects a building's
entire exterior envelope. Of course, easement valuation is a complex
process that requires consideration of a number of different variables.
But key among those factors is the nature of the restrictions imposed
by the easement. Depending on the property, an easement that only
limits a property owner's right to alter a structure's front facade is
likely to be far less restrictive than an easement protecting the
entire exterior envelope. A property owner who chooses to donate an
easement protecting the entire exterior envelope of a structure gives
up a greater portion of her ``bundle'' of rights to make alterations or
changes to her property. In addition, if the easement includes
affirmative maintenance obligations (which most do), an owner of a
property subject to a ``front-only'' facade easement may have
substantially less affirmative maintenance obligations than an owner
subject to an easement requiring maintenance of the entire property.
Question: Are front-facade only easements of much value as
preservation tools? For example it is my understanding that the
National Architectural Trust easement deed would allow a structure with
an easement on it to be entirely torn down, so long as the facade was
preserved.
Answer: From a preservation perspective, front-only facade
easements may help to maintain the historic ambiance of a streetscape,
and they may help to protect the historic or architectural character of
properties with character-defining features primarily limited to the
front facade, such as a simple row house. But in many other contexts,
where significant architectural features exist on other portions of a
historic property or where preservation of the property's setting is
important, a front-only facade easement would have limited value as a
preservation tool, since it may allow an owner to alter, damage, or
even demolish other portions of a historic property that have historic
or architectural significance in their own right. In this context, an
easement that protects an entire historic structure and its setting
would be far more valuable as a preservation tool.
In addition, depending on the wording of the easement, front-only
facade easements may allow a property owner to make inappropriate
alternations to, or even tear down, the remainder of the building (to
replace it with another building), so long as the facade is preserved.
This is a practice that is commonly described by preservationists as a
``facadomy'' or a ``facadectomy,'' and is not highly valued as an
effective preservation technique except as a last resort if other
preservation options are unavailable.
Question: Do you agree that an easement in an area where there are
strict historic preservation laws is worth less than an area in which
there are weak or nonexistent preservation laws?
Answer: Yes, as I indicated in my testimony, the National Trust
agrees that--depending on the circumstances of the particular case--a
simple preservation easement is likely to have less value in a district
that has restrictive preservation laws when compared to the value of a
similar easement granted on a similarly situated property subject to
weak or minimal restrictions under local law. But, as I also indicated,
many local jurisdictions have no local preservation controls, or only
minimal levels of restrictions, and in those cases even simple facade
easements may have substantial value. And, many easements in areas with
strict historic preservation laws go well beyond minimalist ``front-
only'' facade easements, and are in fact highly restrictive, and
therefore likely to be quite valuable. It is also worth noting that
easements on commercial properties may have a significant impact on
their value even in highly regulated historic districts, particularly
under the income approach to valuation.
Questions from Chairman Ramstad to Peg Breen
Question: Do you have any concerns about an easement holding
organization basing the amount of the cash paid to it on the appraised
value of the easement?
Answer: The Landmarks Conservancy is concerned about an easement
holding organization basing the amount of the donation paid to it on
the appraised value of the easement. While there are a number of bona
fide preservation organizations that use a percentage-of-value basis
for calculating cash contributions accompanying easement donations, we
believe that this practice may, either directly or indirectly, provide
an incentive to promote higher appraisals. As I mentioned in my
testimony, the Landmarks Conservancy has never based our donation
request on the appraised valuation of the property or the easement. We
base our request on a case by case assessment of the cost of our
inspections. In most cases, we do not see appraisal values until we are
sent IRS form 8283 to sign.
Question: Have you ever heard complaints from the National
Architectural Trust about the New York Landmarks Conservancy charging
less of a cash donation than the National Architectural Trust?
Answer: The National Architectural Trust did complain once about
the Conservancy charging less of a cash donation than the NAT. James
Kearns of the NAT called me in, I believe, the fall of 2003 after we
had accepted an easement on a commercial building NAT had solicited.
The owners asked the Conservancy if we would be interested in an
easement because they had dealt with the Conservancy architect in
charge of our easements on other issues in the past. Mr. Kearns took
issue with our donation request and I explained how we based such
requests on an estimate of inspection costs. Mr. Kearns suggested that
we cooperate in the future. NAT would tell us what easements they were
interested in and we could tell them if we had easement interests. I
told Mr. Kearns I did not wish to cooperate. The Conservancy has
avoided contact with NAT since that time.
Question: During the hearing you mentioned that your organization
had seen easement holding groups engaging in marketing practices that
concerned you. Please describe and provide examples of these practices.
Answer: The Conservancy became concerned about NAT's marketing
practices after we received numerous calls from homeowners NAT had
approached. These callers suggested to us that NAT was telling property
owners that there would be a tax deduction within a specific, narrow
range. Several callers were upset when we said we could not guarantee a
specific tax deduction and urged them to consult with their tax
attorney. Our understanding that NAT was suggesting a specific range
was confirmed when people sent us samples of NAT literature. Two
Conservancy staffers who live in separate historic districts also
received NAT flyers at their homes and each subsequently attended an
information session offered by NAT representatives in their respective
neighborhoods. One staffer expressed his concern with NAT's assurances
of a specific tax deduction. The other staffer was concerned that NAT
representatives told the attendees that they wouldn't have to worry
about additional regulation with an easement, that NAT would simply
take pictures of their building annually.