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By RUSTY DENNEN
The impact of a state challenge in New Kent County of the appraisals used to justify millions of dollars in conservation land tax credits could be felt across the state, including the Fredericksburg area.
The Silver Cos.--Fredericksburg's largest developer--placed 437 acres in conservation easements valued at nearly $56 million and then sold tax credits on the easements at its Celebrate Virginia project.
Because the program affects state revenues, the Virginia Department of Taxation is analyzing appraisals on a number of large-acre parcels placed in easements, which prevent future development of the land.
Easement donors are eligible to take up to $100,000 tax credit annually, and since 2002 they have been allowed to sell unused credits to others.
Meanwhile, the popularity of the program has several Virginia lawmakers looking at imposing caps on tax breaks.
That effort is drawing concern from conservation groups who say such caps will have a chilling effect on preserving important private land through easements.
Last year, the state tax department questioned the appraisal on the New Kent County tract and sent independent appraisers to re-crunch the numbers. New Kent County is southeast of Richmond, bordered by the Chickahominy, York and Pamunkey rivers.
"In New Kent, we proposed a reduction in the amount of credits claimed by 89 percent," said Larry Durbin, the tax department's assistant commissioner for customer service.
"They had a fair market value on their easement around $18 million, and we reduced that" based on three independent appraisals, he said.
The re-appraisals dropped the value from $18 million to about $2 million.
The property is Ware Creek Preserve, an undeveloped tract owned by Ware Creek Preserve LLC. The easement holder is Wetlands American, which works with Ducks Unlimited. The company in May filed suit disputing the lower assessment. A pretrial hearing is scheduled in February.
Durbin said that any entity that donates land for a conservation easement or transfers tax credits has to notify the department and provide information about the easement, its fair-market value, where it's located and a copy of the appraisal.
Of the New Kent property and other parcels under review, "We look at them from a number of perspectives--especially some of the early ones and ones with the largest credit values, and ones where there was some significant issue," Durbin said.
He said reviews on other tracts are pending, but he would not identify them. Taxpayer information is confidential until it winds up in the public record, such as a court file.
"We have completed some appraisals and expect to assign some additional ones," Durbin said. The tax department works in conjunction with the state attorney general's office.
The Silver Cos. and easement holders have acknowledged that the state is looking at the Celebrate Virginia tracts.
Big write-offsIn January 2003, the Silver Cos. donated 129 acres in Celebrate Virginia South along the Rappahannock River in Fredericksburg to the Virginia Outdoors Foundation and the city.
KTR Newmark Real Estate Services of New York did the appraisal, setting the easement's fair market value at $31.8 million. A 308-acre easement in Celebrate Virginia North, on the Stafford side of the river and held by the Northern Virginia Conservation Trust, was valued at $24 million.
Under Virginia's tax-credit program, the Silver Cos. qualified for $28 million in tax credits, based on 50 percent of the land's total appraised value.
Companies can use what credits they need, up to $100,000, and sell the rest. Del. Bill Howell, R-Stafford, now House speaker, helped to expand the conservation program by making the credits transferrable.
To make its excess credits even more attractive to investors, Silver Cos. offered them at 50 cents on the dollar. For each Class A share, costing $1,000, purchasers received $2,000 in Virginia Land Preservation Tax Credits.
A number of Fredericksburg-area residents purchased the credits.
If the value of the easements here were to be lowered, the tax man would first look to the company for redress, then to the tax-credit buyer.
Jud Honaker, vice president of the Silver Cos., said he hasn't heard of any new developments from the tax department regarding Celebrate Virginia easements.
"I don't have a clue," he said Wednesday. The company has maintained that the appraisals are correct.
"They only thing you can argue is the accuracy of the appraisals," Honaker said, adding that with the size of the easements here, on valuable riverfront land, it wasn't surprising that the tax department would check them.
Closing loopholesTax credits have gotten the attention of state legislators.
Sen. Emmett Hanger, R-Augusta County, has reintroduced a bill to cap an individual's total tax credit at $600,000, with the same limit on the transfer on any unused credits.
Another provision would allow no more than one donation from the same land parcel over 15 years, and starting Jan. 1, 2007, any donations would have to be reviewed by a licensed reviewer.
Hanger, an author of the 1999 legislation, said he wants to tweak the law to continue to encourage land donations while addressing some areas of concern.
"I think it's important to modify it somewhat to ensure we're getting good value for our tax dollars," he said yesterday.
Hanger said he wants Virginia to "continue to allow a very valuable tool for land conservation statewide."
Sen. John C. Watkins, R-Midlothian, introduced a similar bill, with the $600,000 cap and the added provision that any land dedicated as open space within a residential or commercial development--such as the Silver Cos. land--would in the future not qualify for a tax credit.
Another bill, put in by Del. R. Lee Ware Jr., R-Powhatan, proposes a $2.5 million cap or 50 percent of the fair market value, whichever is less on each donated easement. But that could go up to half the fair market value if the taxpayer submits two qualified appraisals from two different appraisers, and if the land is deemed by the state secretary of natural resources to have exceptional qualities.
To date, 694 land donations have been made under Virginia's tax-credit program, with a total value of about $308 million.
The Internal Revenue Service has already weighed in on similar programs around the country, putting taxpayers on notice that it would take a more careful look at tax deductions connected with conservation easements.
Bob Lee, executive director of the Virginia Outdoors Foundation, the state's largest holder of conservation easements, says that while some changes might improve tax-credit program, caps under discussion might hurt.
"We think that Sen. Watkins' bill might have a chilling effect, whereas the Ware bill addresses some of the issues to make the program better," Lee said.
Lee said the Ware bill would make nonprofit agencies ineligible for tax credits.
"We've done a number of easements with charitable groups that own land," he said. VOF holds over 1,800 conservation easements encompassing about 350,000 acres.
To reach RUSTY DENNEN:
Email: rdennen@freelancestar.com