Clay County sits in a remote southwestern corner of Georgia, more than 60 miles from any interstate, with no hospital, pharmacy, red light or high school inside its borders. Yet in 2013 developers claimed more than $12.1 million in tax write-offs by promising to protect hundreds of acres of undeveloped land from a major construction project: an 800-unit seniors housing facility, according to a report from the U.S. Senate Finance Committee.
Conservation easements — tax breaks granted to protect undeveloped land — have become an increasingly common practice over the last decade, especially in Georgia.
Syndicated conservation easements, such as the one in Clay County, grant write-offs to multiple partners, each buying a share in a tract of land. They are attracting increased scrutiny from lawmakers and the IRS as a means for the wealthy to avoid paying their appropriate share of taxes.
As of February, about 84 percent of syndicated easements were in some stage of an IRS audit, according to the finance committee report, which was released in August. The report found that about $10.6 billion of tax revenue was lost to syndicated easements between 2010 and 2017. And lawmakers in September introduced a new bill aimed at closing such loopholes.
The IRS publicly flagged syndicated conservation easements in December 2016, and the Department of Justice filed suit against several Georgia-based promoters two years later. But the amount of tax revenue lost to easements continues to grow. IRS data shows total deductions claimed through syndicators rose to $9.2 billion in 2018 from $6.8 billion in 2017.
“The IRS shamed these scammers by publicly listing these transactions, but the continued growth in their numbers shows that shame alone won’t do the trick,” Sen. Charles E. Grassley (R-Iowa) said in a statement in September. “The IRS and the Department of Justice will continue to do their job enforcing the law. Now it’s the job of Congress to clearly prohibit these abusive schemes.”
If it becomes law, the Senate bill would prevent entities’ taking a charitable deduction greater than 2.5 times what was paid for the land.
Conservation easements grant tax write-offs for the value a piece of land loses to remain undeveloped when it might otherwise become apartments or a big-box store, prioritizing what has been described as “cows over condos.”
The syndicated deals targeted by the Senate bill involve land that was likely never going to be developed anyway. They rely on a sharply inflated appraisal, the finance committee report found, sometimes valuing land at more than 250 times what was paid for it just a few years prior, then writing off the difference in value once the easement is granted.
“These transactions really have nothing to do with conservation and everything to do with claiming tax deductions,” said Adam Looney, a senior fellow at the Brookings Institution who has written about syndicated easements. “Many of these transactions are designed just based on the financial incentives to save money on taxes. The conservation value, the whole public purpose of the subsidy, is not part of the analysis or part of the transaction.”
Promoters, mostly in the Southeast, who organize the deals, finding the land and marketing it to potential investors, have discovered a business model to sell “investments” in sham projects, according to the Senate Finance Committee report. As part of their operation, the promoters to vote on an easement, and then share millions of dollars in tax write-offs with those investors after the easement is granted. Generally, these efforts save $2 in taxes for every $1 paid in to the tax shelter, according to the Senate report.
Under current law, those tax write-offs can be distributed among multiple partners, with emails included in the Senate report showing clients essentially placing orders for how much easement write-off they’d like to buy.
“This is the only area of law where a taxpayer can claim a charitable deduction for giving away something that they can still use for themselves,” Looney said. “And they have an enormous amount of autonomy over how much the donation is worth.”
According to an analysis by Looney, 36 percent of all easement deductions nationally between 2010 and 2012 were claimed by Georgia taxpayers. One individual in Rome made $1.5 million arranging three easements in 2016 alone, the Senate report found.
Why Georgia? While a state income tax break approved in 2006 probably played a role, no one is exactly sure how the Peach State became the syndicated conservation easement state.
“I don’t think there’s any good explanation,” Looney said. “Why did Silicon Valley become Silicon Valley? Just a handful of guys in and around Rome invented this. I assume they all know each other. They had some mix of legal knowledge, experience in real estate translations, tax planning services, and then they figured out they could supercharge it with these syndications. I don’t think it takes a lot to become the largest player in the conservation easement space.”
One of the biggest questions surrounding conservation easements is whether they’d be suitable for building if left unprotected. Clay County’s population today is less than half what it was 100 years ago, with thousands of acres sitting undisturbed and unlikely to see development.
The 227-acre Clay County property originally sold for $609,246, was appraised at $12.4 million factoring in the seniors’ development, then valued at $295,100 after an easement was granted. The result: $12.1 million in tax write-offs that were split among several investors, as noted in the Senate report.
Land owner Adam Smith Ventures LLC and developer Webb Creek Management Group also made money in the deal. Webb Creek Management Group received $200,000, plus $10,000 per year through 2017. The appraiser received $12,500, a law firm received $35,000, accountants received $12,000, and wealth management firm Dempsey Lord Smith got $250,000 in “broker placement fees.”
Webb Creek did not respond to requests for comment, forwarding the requests to the Partnership for Conservation, a lobbying group that advocates for syndicated easements. The lobbying group did not comment directly on the Clay County deal. In a statement on its website, Webb Creek called the Senate Finance Committee report a disappointment.
“Although the SFC’s conclusion that syndicated conservation easement transactions ‘cannot reasonably be characterized as anything other than abusive tax shelters’ did not come as a surprise, it was nevertheless disappointing,” the statement said. “Equally disappointing was the wholesale refusal to acknowledge or even inquire into the benefits provided by the preservation of thousands upon thousands of acres of important real estate across the country.”
The Adam Smith Ventures property was rezoned by the county’s board of commissioners for high-density residential, but the project was never built, and seven years later there still has been no significant new seniors housing in Clay.
The county administrator and commission chair who approved the rezoning have since left their posts, and neither responded to attempts to reach them. Clay County’s current administrator, Ronnie Crozier, expressed doubt that the property was suitable for housing, describing it as swampy. Asked if the land could support 800 seniors homes, he said, “maybe if you put them on stilts.”
Easements often allow limited development even after being granted, such as private homes or recreational buildings. Crozier said the Clay County property has been used for hunting, and some of it was recently harvested for timber.
Ken Penuel, the county’s economic development director, played down the easement’s impact on the local area, calling it “a non-issue for Clay County” and “an IRS tax issue” via email.
Controversy around syndicated conservation easements has swirled in tax circles for years, eventually landing on the doorstep of lawmakers.
The Senate investigation was spurred in part by competing lobbying groups, Partnership for Conservation and the Land Trust Alliance, with Partnership making the case for syndicated easements and Alliance arguing against them.
The Senate launched its investigation on March 27, 2019, sending letters to 14 individuals suspected of promoting syndicated transactions. Eighteen months and more than 500,000 pages of documents later, the finished report laid out the case that syndicated easements are “abusive” tax shelters that risk undermining public trust in both the tax system and environmental conservation efforts.
Technically, syndicates must vote on whether to develop a property, hold it for investment or grant an easement, the report found. In practice the investigation found these votes were often 95 percent or more in favor of easements. One deal didn’t even get a vote, the easement apparently a foregone conclusion.
The Land Trust Alliance applauded the report and is pushing for passage of the Senate bill.
“[The bill] doesn’t allow a deduction if you exceed 2.5 times the initial investment,” said Lori Faeth, the group’s government relations director. “It goes right at the heart of the problem and drives a knife through it.”
She added that syndicated easements are open only to the very wealthy, a loophole “for rich people to get wealthier.”
Robert Ramsay, chairman and president of Partnership for Conservation, argues that the bigger issue is inflated land appraisals, which he said the bill does not address. “Valuation is the big issue here, not the land ownership type,” he said.
Ramsay, the former head of the Georgia Conservancy, also noted that the bill would not address land deals involving just one wealthy individual. “It doesn’t apply to an individual owner like a President Trump, a Steve Jobs, a Ted Turner, or any other mega-wealthy landowner.”
The bill aims to not only wipe out future syndicated easements but also is retroactive all the way to 2016, potentially wiping out billions of dollars’ worth of tax write-offs.
“Shady tax deals often have a low profile with the public,” Grassley said in a statement when the Senate investigation was released. “That doesn’t make them any less wrong.”