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    Market Value Appraisal of a Conservation Easement Donation, Colorado

    In 2009, EIS was contracted by a family to reappraise the fair market value of the donated development rights of their 96 acre tract of agricultural land in southeast Colorado. The rights had been donated a few years before as a perpetual conservation easement to an appropriately recognized land trust. The value determined in the appraisal was to used in income tax filings, requiring the appraiser to be educated in Internal Revenue Service (IRS) rules specific to valuation of such donated property rights. The Certified General Appraiser who had previously appraised the donation value had been forced to relinquish his appraiser license. Mr. Ellis completed a one-week conservation easement appraisal course by the Appraisal Institute in Wisconsin.

    The property was located a mile outside of major rural town, on a fertile alluvial flood plain. At the date of the donation, the owner had leased the property to a regional farming enterprise that was using it to grow irrigated crops and for grazing. EIS determined that the farmer was using its own water rights for the irrigation. Prior to the family acquiring the property, associated water rights had been separated from the property.

    Between the acquisition and donation dates, a geological engineering consulting company dug test holes in the family’s and neighboring properties to study the distribution of a gravel deposit. The engineering consultants delineated an Indicated Resource of 11 million tons of gravel within the property, suitable for production of construction grade crushed stone.

    Investigations by EIS of the status of gravel producing properties in the region and gravel property deals being negotiated near to the subject property, found that interest in buying or leasing the property for gravel mining and subsequent water storage would have been quite strong at the donation date. The recent successful permitting of an immediately adjacent gravel mine demonstrated that a mining permit and truck highway access would likely be relatively easy to obtain.

    Gravel from the region was being sold to markets at much greater distances than conventional wisdom might indicate. Trucks hauling feed to nearby cattle feedlots were taking gravel on backhauls to remote areas of north-east Colorado and western Nebraska. A nearby mainline freight rail track was being used to haul gravel to consumers in western and central Kansas, including for Kansas Department of Transportation highway projects. EIS confirmed that the operator of a mine on the property would have access to possibly utilize a recently constructed rail siding which is less than a mile from the property.

    EIS found that after mining exhausted the gravel resource, the residual pit would have substantial value as a water storage. Interviews by Mr. Ellis of the participants in a recent transaction on an adjacent property, demonstrated that water storage rights were being actively sought at premium prices, even if the storage would not be available for many years. This was for storage of water deriving from water rights being acquired to supply major population centers of Colorado.

    The highest and best use of the property before donation was found to be for sand and gravel mining, with an interim use of leased dry grazing land. The sales comparison approach and the royalty method of the income approach were used to estimate the value of the property immediately before the donation. A PhD mining engineer modeled the gravel mine and possible water storage for EIS. The highest and best use of the property after donation of the development rights in the conservation easement was found to be leasing of the land for farming or grazing. The sales comparison approach and the rural cost (land mix) method of the cost approach were used to estimate the value of the property immediately after the donation. The sales comparison approach and rural cost method of the cost approach were also used to determine the before and after value of a related tract, as required by the IRS rules, to assess any benefit from the donation on that tract. The rural cost method was used to extract the contribution value of the various land components of the two tracts from a matrix of 57 transactions.

    Subsequent to the 322-page appraisal report being filed with the Colorado Department of Revenue, Mr. Ellis was called to testify about this appraisal to the Colorado State House Finance Committee. The purpose of this was to educate the legislators about conservation easement appraisal pertaining to gravel properties in rural settings.

    View client testimonial [Karl Nyquist, C&A Companies].