Conservation easement and its tax credit

This is the tool for someone with land of natural, agricultural or cultural value who wants it to stay that way after them. What you do is encumber your own farm in perpetuity with an easement limiting what can be done on it — up to prohibiting its economic exploitation, if you so agree — and place it in the name of an authorised agency or an accredited non-profit. In exchange, the Act gives you two things worth distinguishing. One is a tax credit of fifty per cent of the easement’s value, which you can use, carry forward ten years or even sell. The other, less known and sometimes more valuable, is that property tax is exempt on the encumbered value. The farm stays yours: you can sell it, leave it to your heirs, live on it. What you can no longer do is undo the easement.

On the owner’s side: any natural or juridical person owning a rural or urban plot. The Act sets no minimum size, residence or income. What it does set is what falls outside the tax benefits, and it should be checked before spending on an appraisal. Article 16(c) excludes four things: properties whose conservation an agency, public corporation or municipality required, wholly or partly, as a condition or requirement for approving a construction project, even where the agency did not say which part was to be conserved; properties subject to a purchase or forced expropriation process; properties with a mortgage lien or recorded lis pendens notice, unless the mortgage creditor consents by recorded deed to subordinate its lien to the easement; and structures situated on the land, except those of cultural value certified by the Institute of Puerto Rican Culture. Additionally, Article 4(11) excludes as eligible land that forming part of a natural reserve or an agricultural reserve. On the holder’s side: only the Commonwealth, represented by the Department of Natural and Environmental Resources, the Department of Agriculture or the Institute of Puerto Rican Culture, or a non-profit meeting the five requirements in Article 8.

• The easement must be constituted in perpetuity; a term easement under the Civil Code gives no right to the tax benefits (Article 12).Verified against the official source
• It must be constituted by public deed with the consequent inscription in the Property Registry (Article 11).Verified against the official source
• The holder must be the Commonwealth — through Natural Resources, Agriculture or the Institute of Culture — or a non-profit with at least ten years of active operation and Land Trust Alliance accreditation (Articles 4(3) and 8).Verified against the official source
• For the credit, the easement must be eligible: constituted in perpetuity after 31 December 2003 by deed of donation (Article 4(10)).Verified against the official source

• Certification of Important Natural or Cultural Value, issued by Natural Resources or the Conservation Trust, by the Institute of Culture, or by Agriculture according to the type of value (Article 16(a) and (e)).
• Valuation or appraisal report prepared by an appraiser licensed in Puerto Rico with the certifications Article 17(g)(8) requires, including training in conservation-easement valuation.
• Negative debt certificates from the Treasury Department and CRIM, and tax return filing certificates (Article 17(g)(2)-(3)).
• Copy of the deed of donation and evidence of its inscription or presentation at the Property Registry, plus a title study contemporaneous with the application (Article 17(g)(4)-(6)).

1. 1

   Step 1: First check your land is not excluded

   This step comes first on purpose, because the others cost money. Article 16(c) leaves four situations outside the tax benefits. If an agency, public corporation or municipality required you to conserve the land, wholly or partly, as a condition for approving a construction, it is excluded — and the Act clarifies this applies “even where the agency did not say which part of the property or land specifically should be conserved.” If the property is subject to a purchase or forced expropriation process, it is excluded. If it carries a mortgage lien or a presented or recorded lis pendens notice, it is excluded, unless you get the mortgage creditor to consent to subordinate its lien to the easement by recorded document or public deed, and it must be done for each lien. And structures on the land fall outside, except those with cultural value certified by the Institute of Culture.

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   Step 2: Decide what you constitute it for and who will hold it

   Article 7 lists five purposes: conserving the natural, agricultural, forest or scenic attribute of a property or its condition as open space; protecting watersheds; maintaining or improving air or water quality; conserving properties of cultural value; and conserving properties of agricultural value. You do not freely choose the holder: Article 8 admits only the Commonwealth — and Article 4(3) specifies that its only authorised representatives to receive these titles are the Department of Natural and Environmental Resources, the Department of Agriculture and the Institute of Puerto Rican Culture — or a non-profit meeting five requirements: Treasury certification as a non-profit; its principal function or purpose being protection or conservation; being a bona fide entity with at least ten years of active operation recognised in Puerto Rico for its conservation work; having obtained and maintaining Land Trust Alliance accreditation; and being registered with Treasury as an entity that may hold one. Treasury keeps a public registry of those organisations.

3. 3

   Step 3: Obtain the value certification

   It is called a Certification of Important Natural or Cultural Value. It is issued by the Department of Natural and Environmental Resources or the Conservation Trust of Puerto Rico if the value is natural, the Institute of Puerto Rican Culture if cultural, or the Department of Agriculture if the land is classified as of high agricultural productivity. It carries, at minimum, the petitioners’ names, the registry description per finca with area, entry and cadastre number, the justification of value, the title of the supporting documents, and declarations that conservation was not required by an agency and that the property is not subject to expropriation. An important detail: the certification includes no reference to appraised value or to the tax credit, and the issuing agency “has no power to suggest, negotiate or determine what the tax benefit will be.” That is decided solely by the Secretary of the Treasury. Agencies asked for supporting certifications must issue them within ninety days of the request date.

4. 4

   Step 4: The appraisal, which not just anyone may do

   Article 17(g)(8) is demanding and worth reading before hiring. The valuation report must have been prepared following the methodologies applicable to conservation easements, such as the Land Trust Alliance and federal Internal Revenue Service guides; and by an appraiser duly licensed in Puerto Rico who additionally holds the Authorised Professional Evaluator licence, the General Certification, courses on conservation-easement valuation per Land Trust Alliance recommended practices, and the certifications for the Uniform Standards of Professional Appraisal Practice and the law-and-regulations courses, all current, with copies included in the report. The report must exclude every structure save those of cultural value certified by the Institute of Culture, include a survey plan or georeferenced map per finca, and carry a certification under penalty of perjury from the appraiser. The appraisal cost is paid by the petitioner.

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   Step 5: The deed, the Registry and the Registrar’s three months

   Article 11 requires a public deed with the consequent inscription in the Property Registry. Natural Resources, the Conservation Trust, Agriculture and the Institute of Culture are obliged to present the deeds at the Registry, and may request from the donor payment of a reasonable charge for doing so, stipulated by regulation. Evidence of presentation must be delivered to Treasury for the person to be considered for the credit. And here is a term worth knowing: the Property Registrar has three months from the date of presentation to qualify the deeds, and on or before that term expires must notify their determination. The Act adds something that saves money: “The inscription or release of the conservation easement shall be exempt from payment of fees.”

6. 6

   Step 6: The tax credit: how much, when and for how long

   Article 17 sets it at fifty per cent of the value of the eligible easement or eligible land at the donation date. It is taken in two instalments: the first half in the year the easement is established or the donation made, and the balance the following year. Credit not used in a tax year may be carried forward up to a maximum of ten subsequent tax years. It may be used against any contribution determined under the Internal Revenue Code, including the alternative minimum and the basic alternate contribution. It may further be assigned, sold or transferred, wholly or partly, once: after being transferred it may not be assigned again. And there is an island-wide ceiling: the maximum credits available in a particular fiscal year is fifteen million dollars. Note an election the Act forces: you may opt for this credit or for the tax deduction under the Internal Revenue Code, but “may not benefit from both tax benefits jointly.”

7. 7

   Step 7: The property tax exemption

   It is the part most people overlook and on large farms it can weigh more than the credit. Article 21 provides that, for purposes of paying property tax to CRIM, the assessed value of property encumbered by a conservation easement shall be totally exempt where the easement is granted over the whole property; if it burdens only part, the reduction in assessed value shall be reduced in that same proportion. In cases of donation of eligible land, the property is totally exempt from property tax. The Act adds that the Commonwealth will compensate municipalities for the revenue lost through the exemption.

8. 8

   Step 8: What happens if someone breaches

   Article 13 opens the door wider than one would expect. If the deed’s obligations are breached, a civil action may be brought by the easement’s holder, the Commonwealth and any person, natural or juridical, “who shows an interest in the conservation of Puerto Rico’s natural resources.” They may claim the affected plot be returned to its original condition at the breaching party’s cost; and where that is impossible, the breaching party shall compensate the holder with a sum “that may amount to three times the easement’s value.” On the tax side, Article 17(e) provides for recapture of the credits if obtained by fraud, if the deed’s obligations are breached — only where returning the plot to its original condition is impossible — or if the perpetuity requirement is breached. And Article 17(n) makes false or fraudulent representation in a credit application or certification a felony, by any person including the appraiser, with a fine of the greater of fifty thousand dollars or twenty-five per cent of the appraised value, or imprisonment of up to five years, or both.

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   Step 9: The interpretation rule, in case of doubt

   It is worth keeping in mind because it tips the balance. Article 23 says: “In case of doubt, the interpretation of the easement shall favour the greater ecological, historical, cultural or agricultural preservation to the purposes stated in Article 6.” And Article 15 clarifies that nothing in the Act limits the constitution of conservation easements between private parties: what the Act regulates are those seeking the tax benefits.

The value certification is issued by the Department of Natural and Environmental Resources or the Conservation Trust of Puerto Rico, the Institute of Puerto Rican Culture or the Department of Agriculture, according to the type of value. The tax credit certification application goes to the Secretary of the Treasury, who is the only one with power to determine whether the credit is granted. The deed is recorded in the Property Registry. Article 16 mentions the certification will be processed through the Interagency Validation Portal for the Granting of Economic Development Incentives, and adds that while that portal is not in operation the traditional procedure remains with the agencies mentioned; the Act does not publish the portal’s address.

• Constituting it for a term: only a perpetual easement gives right to the tax benefits.
• Spending on an appraisal without checking the exclusions: conservation required by an agency as a condition of a construction permit leaves the property out.
• Forgetting the mortgage: with a mortgage lien there are no benefits unless the creditor subordinates it by recorded deed, and it must be done for each lien.
• Hiring just any appraiser: Article 17(g)(8) requires the Authorised Professional Evaluator licence, General Certification and specific courses in conservation-easement valuation.
• Taking the credit and the deduction at once: the Act requires choosing one of the two.
• Counting on selling the credit more than once: the assignment may be made only once; afterwards it may not be assigned again.
• Ignoring the island-wide ceiling: fifteen million dollars in credits are available per fiscal year for the whole island.
• Believing you lose the farm: the easement is an encumbrance, not a transfer of ownership; the property stays yours.
• Overlooking the CRIM exemption: the encumbered value is exempt from property tax, totally if the easement covers the whole farm.
• Assuming only the holder may sue: any person showing an interest in conservation may bring the civil action.

These are the government pages this guide is based on.

• Departamento de Recursos Naturales y Ambientales (DRNA)

  DRNA

  bvirtualogp.pr.gov