A conservation easement is a legal designation of a privately-owned tract of land that carries restricted uses of the property in order to preserve its natural resources. The type and amount of natural resources varies with the land, and may include wildlife habitats, scenic vistas or areas, and minerals. The basic principal of the conservation easement is that the potential development of the natural resource is forfeited by the land owner in exchange for federal or state tax deductions (available for some states). The intended purpose of the conservation easement is to preserve or maintain the land, water, forest, and or wildlife resources for the benefit of the general public, and for the heirs of the landowner.
The specific rights and restrictions of a conservation easement are dependent upon the agreement contract and consider the specific natural resources and character of the land. In general, the “conservation” aspect permits the land owner to use the land for most ongoing and non-invasive social practices which are compatible with long-term conservation and environmental values, maintaining wildlife habitats, open space, scenic, or ecological resources. The “easement” aspect allows the land owner to live on and use their land for farming, ranching, hunting, fishing, or other recreational activities generally associated with the land use type for the region. Mineral extraction performed by commercial mining or from oil and gas production is considered an invasive use of the land and is not permitted. The land owner hence forfeits the right to sell, lease, or grant the right to develop or extract mineral deposits from the surface and subsurface, and prohibits the development of any related mine or oil and gas surface infrastructure.
The designation of a conservation easement and the monetary valuation that is listed by the owner for annual tax deductions is approved by the Internal Revenue Service (IRS). To qualify for a conservation easement where mineral deposits are present, the owner or his qualified representative must submit a written report to the IRS detailing two very different aspects of the minerals. One part of the report must include a mineral reserve tonnage estimate for each of the mineral types claimed, whether coal, limestone, oil, gas, or other minerals, using industry and government approved standards of mineral reserve and resource classification. This estimate must be based upon available and verifiable geologic data derived from the subject property. The principal geologic data types used to determine the amount of reserve tonnage are core hole records in the form of “driller’s logs”, and the quality of the reserve tonnage is supported by analytical results of the chemical assays or concentrations of the core samples derived from the subject property.
The second part of the written report, which should be completed by a qualified mineral appraiser, must include a mineral valuation or appraisal of each of the mineral commodities claimed. The valuation must be based upon the mineral reserve tonnages estimated for the subject property (listed in the first part of the report), and an estimate of anticipated annual production for the subject. The estimate of annual production must consider the type and extent of mining that would logically be expected to be used for the nature, extent and depth of the mineral on the subject property, a description of the current local and regional market for the minerals considering the anticipated competition with other active operations in the local area, and a hypothetical annual schedule or listing of the anticipated production tonnage and sales price per ton over the life of the mine or operation.
The IRS decision to approve the application for a conservation easement is based upon the merits of the reserve estimate and the associated valuation listed in the mineral reserve and appraisal report that is submitted for their review. The data and records supporting the mineral reserve estimate must be verifiable, meaning that it was produced by a reputable source which can be readily documented from specified, online information, or from data or information directly appended to the written report. Too often, the reserve estimate and valuation cannot be supported due to a lack or scarcity of data and information from the subject property, and or a lack of a market analysis of the anticipated sales and production of the minerals. In such cases, the application for a conservation easement is commonly rejected by the IRS.
ECSI regularly conducts and produces mineral reserve estimates and valuations for individuals or parties considering tax deductions for conservation easements. Our clients include law firms, banks and financial agencies, realty agencies, non-profit conservation agencies, and private individuals. The ECSI staff includes certified professional geologists, mining engineers, and mineral appraisers who have produced reports regarding the tonnage and valuation estimates of coal, limestone, sand and gravel, oil and gas, and various other minerals on single tracts less than 200 acres in size, and for multiple tracts comprising more than 36,000 acres located in a four-county area of two adjacent states. Please contact ECSI to discuss your interest in a potential conservation easement for your property and how we can be of service to you.