Economic Incentives

Easements

What is an Easement?
Another effective too is an historic preservation easement, a flexible, negotiated preservation tool that provides perpetual protection of a building. An easement is a legal agreement between a property owner (grantor) and a preservation organization (grantee) that gives the organization the right to monitor and protect the architectural and historical character of the property. The Cleveland Restoration Society (CRS) can be a grantee for an easement.) When granting an easement, the owner agrees not to alter specified portions of the property without permission of the recipient organization. Because the easement “runs with the land,” it is binding on all future owners.

Easements are designed to provide the perpetual protection and preservation of significant historic structures. Easements are tailored to each individual property and may cover interiors and/or exteriors, specific features of a building and its setting. Just as every property is unique, so too should be an easement.

How Can My Building Qualify?
Though any historic building can be the subject of a historic preservation easement, the current tax laws restrict charitable deductions for easement contributions to only properties listed on the National Register of Historic Places, either individually or as a contributing building within a historic district. The grantee organization may decline acceptance of an easement for a property where the physical integrity has been severely compromised or where serious maintenance problems are anticipated.

How Does an Easement Work?
The easement is filed with the deed for the property and is perpetual. An easement does not effect zoning regulations and/or ordinances. Grantors must notify all mortgage holders of the proposed easement donation; the easement is filed ahead of the lender’s lien. Because an easement will likely reduce the appraised value of the property, owners should experience a reduction in the property tax assessment. (Note: this may not happen automatically; it may be necessary to request a re-valuation).

What Are the Benefits of an Easement to a Donor?
Donors are usually eligible for a federal income tax deduction equal to the fair market value of the easement. For example, if a property is appraised at $50,000 prior to the donation of the easement and following the easement donation is appraised at $40,000, the owner is eligible for a federal charitable contribution deduction in the amount of $10,000. In some cases, property tax assessments are reduced after donation of an easement, benefiting the donor as well as subsequent owners. An easement may reduce the value of a property owner’s estate for federal estate tax purposes. The donor, as well as all subsequent owners, receive technical assistance from CRS. The findings of annual inspections by CRS assist owners with identifying and prioritizing maintenance and provide guidance as to appropriate treatment.

What Are the Obligations of the Owner/Grantor?
The owner is required to meet minimum maintenance standards and seek approval of any proposed alterations and/or additions in advance of commencing work. The grantor and all subsequent owners will be prohibited from demolishing the property, may be limited regarding subdivision of the property and must seek approval from the grantee for alterations.

What Are the Obligations of the Grantee Organization?
CRS is required to make regular inspections, to provide written inspection reports and recommendations to the owner regarding appropriate maintenance, repair and treatment practices. Further, consultation with the grantee is available upon request and as needed, and is not limited to the annual inspection. The grantee assumes responsibility for enforcement of the easement.

How Do I Apply for an Easement?
Contact the Cleveland Restoration Society and complete an easement application. CRS staff will inspect the property and the CRS Board of Trustees will determine whether or not to accept the easement donation. The owner must then obtain appraisals to determine the easement value. CRS will photograph the building for purposes of documentation. The terms of the easement are negotiated. An easement document is then prepared and recorded.

How Are Easements Valued?
The difference in the “before and after” fair market value of the property determines the value of the easement. Using this method of calculation, the fair market value of the property after the granting of the easement is subtracted from the property’s fair market value prior to the easement donation. The difference is the value of the preservation easement for federal income, estate and gift tax purposes.The actual value of a preservation easement should be determined by a qualified appraiser.Donors and their appraisers are advised to exercise care in determining valuations that can be defended if challenged by the Internal Revenue Service. Nationally, “valuations of easements have ranged from 1 percent of the fair market value of the land in fee simple, to 91 percent for an easement in the middle of a high-density residential area.” *

When is the Best Time to Pursue an Easement?
An owner may utilize both the Investment Tax Credit and a deduction for an easement donation; often both are critical to the financing of a rehabilitation. However, the timing of the easement donation must be carefully considered. An easement may be given at any time, but to avoid recapture of tax credits, it should be donated prior to the building being placed in service or after the five-year recapture period. An easement donated within the first five years following a building being placed in service would result in a recapture of the Investment Tax Credit.

What is an Easement’s Relationship to Liens?
The relationship of mortgage liens to easements depends on the order of filing. If an easement is recorded after the recordation of a mortgage lien, it follows the lien until it is paid. Alternatively, if an easement is in place before the recordation of a lien, it takes precedence. In the event that an easement follows a mortgage that is refinanced, the easement would move ahead of the new lien.

What Are the Associated Costs of an Easement?
Costs associated with easement donations vary, but in general are minimal relative to the financial benefit derived from donation. Donors can expect to incur costs for appraisals, accountant, and attorney fees. While fees are negotiable, CRS generally requires an application fee and donation fee before acceptance of an easement. The donation fee is used to offset the cost of monitoring the easement in perpetuity, including annual inspections.

Sample Residential Fees: 
Application Fee: $250
Donation Fee: Greater of $500 or 1% of auditors fair market value produced by tax value on currently available tax duplicate
Sample Commercial Fees: 
Application Fee: $2,000
Donation Fee: Greater of $1,000 or 5% of easement value
Based on percentage of easement value; no annual fee.

Enabling Legislation: Ohio Revised Code Ann. § § 5301.67 to 5301.70 (page 1990).
NOTE: Owners contemplating the donation of an easement are advised to consult with experienced and qualified real estate appraisers and tax attorneys.

*Establishing An Easement Program to Protect Historic Scenic, and National Resources, Information Series No. 25, Washington, DC: National Trust for Historic Preservation, 1991. when a person holds property, he possesses a “bundle” of rights. The bundle is called a “fee simple estate” and the owner is said to own the property “in fee simple.” Each of the rights is sometimes referred to as a “less-than-fee “interest.”

 

For additional information, contact:
Michael Fleenor, Director of Preservation Services
MFleenor@clevelandrestoration.org

The Cleveland Restoration Society
3751 Prospect Avenue
Cleveland, OH 44115-2705

p: (216) 426-3109
fax: (216) 426-1975