1. Valuation Basics and Procedures

2. Company Background o Stone & Associates, Inc.  Full service real estate appraisal and consulting firm  Over 75 years of combined real estate experience - 50 of which have been dedicated to the appraisal profession  Staff of 9 full time appraisers  Charles B. Stone, MAI (Owner) – received MAI designation in 1991  7 SC Certified General and 2 apprentice appraisers  Licensed in SC, GA, and NC  Appraise varied property types, including Conservation Easements

3. “Scope of Work” I. General Easement Information a. Define conservation easement b. Discuss characteristics of an easement II. Valuation Procedures a. Analyze typical techniques b. Discuss easement scenarios c. Reporting d. Examples and application of techniques III. Summary IV. Questions/Feedback

4. Easements: Definition What is a Conservation Easement?? The Dictionary of Real Estate Appraisal defines a conservation easement as “a restriction that limits the future use of a property to preservation, conservation, and or wildlife habitat.” 1 The Uniform Conservation Easement Act defines them as: “a nonpossessory interest of a holder in real property imposing limitations or affirmative obligations the purpose of which include retaining or protecting natural, scenic, or open- space values of real property, assuring its availability for agricultural, forest, recreational, or open-space use, protecting natural resources, maintaining or enhancing air or water quality, or preserving the historical, architectural, archaeological, or cultural aspects of real property.” 2 1 Appraisal Institute, The Dictionary of Real Estate Appraisal, 4 th ed. (Chicago: Appraisal Institute, 2002), 60. 2 James Boykin, MAI, SRA, PhD, “Valuing Scenic Land Conservation Easements,” The Appraisal Journal (October 2004): 420.

5. Definition: Cont. It is a reduction in the owner’s bundle of rights  Conservation easements convey future development rights; restrict the use and development of a property  Conservation easements are voluntary  Restrictions can be as limited and/or substantial as the landowner desires  Typical easements are established in perpetuity and remain with the property’s title  The greater the restrictions established by the easement = higher value of easement

6. Definition: Cont.  Many agencies hold conservation easements; governmental bodies, preservation agencies, charitable corporations, associations, and trusts  Conservation easements can be sold – but are predominately donated  Owners may be entitled to receive a federal income tax deduction  Owners may also reduce their overall tax burden  The easement may create no change in the market value; if the land area is already restricted or would not be physically adaptable to development

7. Valuation  Identify the Problem/Assignment  Collect data Conservation Easement document (many times in draft form) or summary of restrictions and permitted uses Comparable Data (Based on highest and best use)  Utilize the applicable approaches to value  Reconcile Values

8. Valuation Procedures Before and After Valuation  The value of a conservation easement equals the market value of the subject property prior to being encumbered by an easement, less the market value of the subject property with the easement in place.  The appraiser is basically required to provide two appraisals in one – a “before value” and an “after value”. Subject PropertyValue Pre-Easement$2,000,000 Post-Easement$1,000,000 Value of the Easement$1,000,000

9. Valuation: Cont. Highest & Best Use:  Both values must be based on the highest and best use of the subject property  The reasonably probable and legal use of vacant land or an improved property, which is physically possible, appropriately supported, financially feasible, and that results in the highest value. The Appraisal of Real Estate, Eleventh Edition, The Appraisal Institute, 1996, Page 50.  Even though conservation is the desired use – it is typically not the highest and best use

10. Valuation: Cont.  There are several techniques utilized when estimating the value of conservation easements Within these techniques, the primary methodology is: Sales Comparison Approach Sales Comparison Approach: Value indication is determined by locating sales of similar properties within the marketplace and making adjustments based on various elements of comparison

11. Valuation: Cont.  Another commonly utilized method is: Subdivision Development Analysis (Discounted Cash Flow Technique) This analysis considers techniques used in both the Sales Comparison and Income Capitalization approaches. In this approach to value, the market value of each individual lot is estimated. The individual lot price is then utilized to estimate the total retail value of the subdivision. Once this is determined, the expected expenses of marketing the lots and the developer’s profit commensurate with the risk are deducted from the gross retail sales to arrive at the projected net income. After estimating the net income figures, they are discounted to reflect the time value of money during the expected marketing period.

12. Valuation: Cont.  There are several well recognized techniques: 1.) Compare subject property post-easement to land that is similarly zoned Example: The proposed conservation easement will only allow timber management and several single-family residences in the after situation Subject Tract Pre-Easement: Zoned for single-family residential subdivision in the before: Value Pre-easement: 100 acres x $15,000/acre = $1,500,000 Subject Tract Post-Easement: Compare to tracts zoned for timber management in the after Value Post-easement: 100 acres x $5,000/acre = $500,000 Value of Conservation Easement = $1,000,000

13. Valuation: Cont. 2.) Compare subject property post-easement to other tracts of land that were sold after being encumbered by a conservation easement Example: 200 acres with highest and best use of single-family development in the before. After easement, tract can only be used for trails, primitive campsites, etc. Subject Tract Pre-Easement: Single-Family land sales in the before show a value of $12,000/acre Value Pre-easement: 200 acres x $12,000/acre = $2,400,000 Subject Tract Post-Easement: Sales of tracts encumbered by similar easements show a value of $6,000/acre Value Post-easement: 200 acres x $6,000/acre = $1,200,000 Value of Conservation Easement = $1,200,000

14. Valuation: Cont. 3.) Subdivision Development Analysis (Discounted Cash Flow Technique) Example: 200-acre tract with a planned subdivision - Prior to easement 200 lots are allowed - Actual subdivision will only include 150 lots Subject Tract Pre-Easement: Discounted Cash Flow based on 200 lots: 6 lot/quarter absorption @ $50,000/lot = $5,000,000 Subject Tract Post-Easement: Discounted Cash Flow based on 150 lots: 6 lot/quarter absorption @ $60,000/lot = $4,500,000 Value of Conservation Easement = $500,000

15. Valuation: Cont. 3.) Similar Easement Sales  Sales of other easements to conservation agencies can be utilized  This data can be limited – but should become more prevalent  Make sure the easement sale is a market value transaction

16. Valuation: Cont.  The overall value of the conservation easement can vary substantially, from case to case  There are some estimations for diminution in value for the typical easement (although, each case is unique): According to an article written by Janis A. Lassner, SRA, Valuing Agricultural Conservation Easements, The Appraisal Journal, April 1998, “Because land values differ from location to location, so does the dollar value of easements”. For her article, she interviewed 14 private land trusts and government agencies active in preserving agricultural land. “As a percentage of unencumbered fee value, the broad opinion is that a conservation easement can range from 25% -85%. This is because the terms of a conservation easement can vary. The more restrictive the conditions on the easement, the higher the percentage in terms of acquisition cost. The more development rights the property owner retains, the less value the easement has, and therefore the cost is lower. While the broad opinion of value is 25% - 85%, the majority of easements are acquired at 40%-60% of fee ”. In the case studies mentioned in Ms. Lassner’s article, “the conservation easements were 75% of unencumbered fee value”.

17. Valuation: Cont. Be Wary of Valuation Pitfalls:  The highest and best use must adhere to all the requirements in the before and after analysis. For instance, an appraiser cannot assume a use that is not legally permissible!  If assuming subdivision – valuation must be based on approved subdivision plan and appraiser must not give credit to infrastructure that is not yet complete.  Must provide good support for absorption, hard and soft costs, discount rates, entrepreneurial incentive, etc.

18. Valuation: Cont.  Overvaluing land that would be considered undevelopable in the before  Appraiser must determine if entire tract, or simply a portion of the subject is encumbered by the easement

19. Summary  As with any appraisal assignment – the key to conservation easement valuation is HIGHEST AND BEST USE: a.) Legal Permissible b.) Physically Possible c.) Financially Feasible d.) Maximally Productive *These tests must be analyzed in the before and after situations* * Many times placing a conservation easement will substantially reduce the uses that are legally permissible, for a portion of, or for the total subject property*

20. Summary:Cont.  Valuation of Conservation Easements basically involves two appraisals: - Before value, or unencumbered appraisal - After value, or encumbered appraisal  The difference between the two values represents the Value of the Conservation Easement

21. Summary: Cont.  Easement restrictions can be straightforward, or detailed and complex - Review the actual easement document (or draft of document) - If not provided, make a summary of reserved rights, and restrictions - Analyze the objectives/purposes of the easement – why is this tract a good candidate for a conservation easement? (assists when writing report and describing property)

22. Reporting  Similar reporting requirements as normal appraisal assignment  Intended use is typically for “income tax purposes”  “As Is” Value  Description of tract should include some detail about the conservation worthy attributes of the subject  Provide before value and after value sections  Conservation Easement section should discuss the restrictions and/or permissions of pending easement  Include copy of conservation easement

23. Examples Example #1 1.) 250-acre mountain tract: EasementHighest & Best UseValue Prior to Easement Single Family Development $10,000/acre Based on similar high-end mountain type developments = $2,500,000 Post- Easement Easement restrictions will only allow five residences (with 2- acre lots), hunting, fishing, and limited timber management. $4,000/acre for 240 acres Based on recreational/timber tract sales – with limited ability to develop, plus; $25,000/acre for 10 acres Based on rural residential lots = $1,210,000 Value of Easement$1,290,000

24. Examples Example #1 (Cont.)  Rural residential sales & recreational/timber tracts provide after value  Recreational/timber tracts were approximately 40% of unencumbered value  Rural residential lots used for 10 acres of allowable development  The highest and best use changed in the after situation (single-family development is no longer permissible); therefore your comparables and market data must change.

25. Examples Example #2 1.) 200 acre Subdivision – Phase I infrastructure complete: EasementHighest & Best UseValue Prior to Easement 270 –Lot Subdivision Average lot value = $60,000 Absorption = 8 lots per quarter (less remaining infrastructure costs) DCF = $ 7,000,000 Post- Easement 150-Lot Subdivision (Easement incorporates a total of 120 lots) Average lot value = $72,500 Absorption = 7 lots per quarter (less remaining infrastructure costs) DCF = $4,500,000 Value of Easement$2,500,000

26. Examples Example #2 (Cont.)  The infrastructure that has not yet been completed, must be deducted within the Subdivision Development Analysis  The subdivision has been reduced from the potential density of 270 lots, to a total of 150 lots. This area incorporates a total of 75 acres and is to be utilized for green space.

27. References  http://www.irs.gov/charities (IRS) http://www.irs.gov/charities  http://www.scstatehouse.net (SC Legislature ) http://www.scstatehouse.net  http://www.appraisalfoundation.org http://www.appraisalfoundation.org  http://www.appraisalinstitute.org (Appraisal Institute) http://www.appraisalinstitute.org

28. Questions