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Originally published on Forbes.com.

It was only a matter of time before the scandal over conservation easements finally landed on our President. The Washington Post has – Trump got a $21 million tax break for saving the forest outside his New York mansion. Now the deal is under investigation by Joshua Partlow, Jonathan O’Connell and David A. Farenthold.

The Wilds Of Westchester

The forest in question surrounds the Trump Organization’s Seven Springs Retreat. The whole smash is 230 acres which is really not that much of a forest in most of the country but the town of Bedford NY is in Westchester County.

According to google maps the drive from Trump Tower to Seven Springs is about an hour. Less realistically, according to google maps, if the President got started at break of day from Trump Tower he could walk to Seven Springs by supper time.

According to the Post story a conservation easement foreclosing development of 150 acres of the forest was donated to the North American Land Trust in 2015. They have obtained a copy of the appraisal prepared by Cushman & WakefieldCWK and several experts have found the appraisal to be sketchy. Trump and North American Land Trust and the appraisal turns out to be sketchy. Shocking!

Easement Valuation

The fundamental problem with the donation of conservation easements is valuation. Since there is not a lot of buying and selling of easements, they generally have to be valued indirectly. The value of the easement is the value of the property before the easement is placed on it less the value of the property after the easement is placed on it.

According to the Washington Post story the valuation came in at $56.5 million with no after value. I will have more on the after value later.

The before value, though, is usually where most of the trouble is. The before value is based on the highest and best use i.e. whatever it is that will bring you the most money. The CW appraisal makes that out to be dividing the property up into 24 five plus acre lots for mansions.

From a demand viewpoint given the location that strikes me as pretty reasonable. The problem is that it seems to ignore Tump’s history with the property which involves long struggles with the involved towns frustrating his development plans. He purchased the property in 1995 for $7.5 million planning to create a luxury golf resort. There were other proposed developments over the years. All ran afoul of concerns of the affected towns.

North American Land Trust

NALT is a familiar name. They appear in:

Did Andie MacDowell’s Mountain Hideaway Require Tax Incentives?

Tax Court Denies Millions In Easement Deductions

Venus Flytraps And Elusive Gator On Golf Course Not Worth Millions In Tax Deductions

The general position of land trusts is that valuation is not their department. There does seem to be good conservation purposes on this deal, so there might be nothing to criticize there. Unlike some easements such as those on historic structures in protected neighborhoods, this one has to be worth something.

The Related Scandal And How It Connects

Conservation easement deductions have been a tool for developers like President Trump for quite a while. Here we see it being used as a sort of bailout on a project that proved infeasible. He bought the property for $7.5 million with plans to make possibly tens of millions. It did not work out and now tax deductions allow him to own the property for free with a modest profit.

The problem with the deduction is that often people who own land to which fantasy valuations might be attached don’t have the income to use all those deductions. People with high income and not much in the way of wealth are also cut out of the game.

Innovators based mainly around Rome GA and Atlanta started syndicating deals where they bought property conceived of a plan that made the property worth a large multiple of what they paid for it and brought in investors who would get deductions on roughly a five to one basis essentially allowed them to pay part of their tax liability for fifty cents on the dollar.

That got the Senate Finance Committee excited and it investigated and there is now bipartisan legislation introduced to end that abuse. I covered that here last week.

What About The Little Guy?

One of the critics of my coverage of that scandal, who has not identified himself, remarked to me several times about the hypocrisy involved in attacking the syndications. He wrote me:

I’m astounded that you never share any information on how Conservation Easements Partnerships are not abusive. If as you say in every article they are ridiculously inflated how come the transaction is not considered a crime and every single one is determined to have a zero value. How can 90% of all millionaires make their money from exploiting Real Estate but when the tax code is used by more than the upper .005% it is a fraud? How can the likes of Ted Turner and John Malone use the code but when a group of 30 people does its a fraud?

How can one landowner who could never even get close to using a small 8 million dollar deduction be left to only selling their land to a developer or just giving away something with no incentive unless they have an income?

I believe that the syndications are necessarily based on flawed appraisals.

Deals like Seven Springs are different. The easement there is pretty clearly worth something. To their credit the Post reporters cited someone who thought the appraisal was hunky-dory.

A third person who reviewed the appraisal, Timothy Lindstrom, a Virginia attorney and conservation easement expert, cited some areas where the document might be “vulnerable” but found fewer problems with it.

“While there are no appraisals that are immune from IRS quibbling, my overall reaction to this appraisal was that it was competently done and provided realistic values supported by proper analysis and data,” he said.

Just Politics ?

The Post has all this coming out of of an investigation by the New York Attorney General. It does end up looking a bit like the investigation of the Trump Foundation, which proved that the Trump Foundation was run in a way that you would expect Donald Trump to run a foundation.

Ignoring or assuming away zoning and other regulatory issues is a common flaw in conservation easement appraisals. There are some who argue, wrongly, that the highest and best use standard when valuing for an easement is different than for other purposes.

The Post’s Named Expert

I reached out to Timothy Lindstrom, who is the only expert the Post identified. Mr. Lindstorm is a lawyer who has published quite a bit about conservation easements. If I had clients who were thinking about doing easements, I would encourage them to engage someone like Mr. Lindstrom. He will draft or review the easement to make sure it does not violate one of the nit picky requirements that the IRS will us to blow up deductions.

He will make sure that the easement is properly recorded and is to a legitimate land trust. He will then review the appraisal from a technical viewpoint. And prepare the Form 8283 that will become part of the tax return. He will also make sure the land trust has done a proper acknowledgment.

If he does not spare the clients sleepless nights, he at least makes things more restful for the other tax advisers when they read another Tax Court decision about an easement deduction being blown up over a foot fault.

Mr. Lindstrom told me that the appraisal did, in fact, address the after value, but it was done in an oblique confusing manner. He would have urged CW to revise it to make it clearer.

I also heard from one of my off-the record sources who says he knows the other Post experts and that the CW appraisal was very low quality. On the other hand:

Placing a CE on this likely did have a $$$$ effect long-term and the property is worth preserving.

Conclusion

We elected a billionaire very aggressive real estate developer showman to be our President. His tax returns are apparently under continuous audit, so given his general attitude it is likely that on any contentious issue the return is more in the nature of a first offer.

The Seven Springs easement is real and it is on a property that he owned a long time. The New York AG probably is politically motivated in pursuing this. The Post has done some really good work here and they weren’t afraid to report a competing narrative, so they deserve a lot of credit. Other than that. Not much to see here, folks.

Want More

If you are interested in finding out more about conservation easement deductions, here is a roundup of my decade’s worth of coverage.