Generally the best way to value things is by looking at what similar things sell for. There is not a lot of buying and selling of facade easements. So what you do is value the property as it is and then value it as encumbered by the easement. If you can’t find sales of similar properties both with and without the easement, it all becomes rather hypothetical.
Proving the value of something is not easy. It's hard enough when you are trying to value tangible items, but what about those intangibles? A particular intangible, non-market benefit of great importance has become all the harder to prove: the easement valuation.
The developing trend against easement valuations was pointed out in a recent Forbes article titled “Easement Valuations Not So Easy Anymore” If you have any possible interest in leaving an easement then it’s a problem well worth your planning attention.
So what is an easement and why would you be interested in leaving one? Essentially, an easement is a charitable gift of the right to change your property, or anyone else’s right should they purchase it from you. If you own forested land in the country and you want to conserve that forest as it is instead of putting up a strip mall, then protect it with a conservation easement. If you own historic property in the city and you want to conserve that historic building as it is instead of allowing for yet another contemporary high-rise, then protect it with a conservation easement.
There are lots of hurdles to qualifying as an easement and there must be a charity to eventually run it. Regardless, value is the utmost important hurdle to clear in taking a deduction for the donation without also ruining the value of the property itself. After all, just because you are foregoing utter capitalization of the property doesn’t mean you were hoping to debase any value at all.
As the original article points out, valuation has been a tricky game and it’s getting trickier. With nothing but rough estimates to live off of – there is no market rate for an “easement” after all – valuations fell to simple principles and the (hopeful) applications of percentages. This is what the IRS is now challenging. No surprise there.
Read the original article for a better understanding of the cases in the works and the challenges now being levelled by the IRS against easement valuations. The bottom-line: this should underscore how important valuation is and how important it is to build your easement plan carefully.
Reference: Forbes (April 5, 2014) “Easement Valuations Not So Easy Anymore”