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A landowner may agree to an arrangement that requires the owner or successive owners of an eased property to make payments to the conservation easement holder to support stewardship of the land. The arrangement may be customized to fit the stewardship demands created by the particular easement and the financial circumstances and wishes of the owner.
When landowners grant a conservation easement, they empower the easement holder to uphold the easement’s conservation objectives. The holder’s exercise of this power—the property monitoring, reviews, enforcement actions, and other stewardship activities in support of the objectives—requires money.
To finance stewardship, most land trusts collect from the owners a single contribution at the time the conservation easement is granted. The contribution is invested, with the returns used to fund the land trust’s routine stewardship activities; the principal is typically left untouched unless needed to fund enforcement actions.
A contribution of sufficient size to cover the holder’s long-term stewardship costs, if required in its entirety at the time of easement acceptance, is not affordable for many prospective donors. However, bringing the contribution down to an affordable level will leave a funding shortfall, impairing the holder’s ability to effectively provide stewardship in the long run. The key to achieving both affordability for the owners and adequacy for the holder is to spread payments in support of stewardship over time. A variety of stewardship funding arrangements are available for this purpose.
This guide, together with the guide Legal Considerations for Stewardship Funding Arrangements (“Legal Considerations”), the guide Placing Transfer Fees in Grants of Conservation Easement, and the Model Stewardship Funding Covenant with Commentary, will help the reader understand the opportunities, implementation pathways, strengths, and limitations of the various stewardship funding arrangements and their role in enabling holders to meet their stewardship obligations over time.
Land trusts partner with landowners to conserve the farmland, forest, and other green spaces that people love. Most often they use a conservation easement, a tool that limits certain uses on a property for conservation purposes while keeping the property in the owner’s ownership and control. The conservation easement is a powerful, dynamic, and flexible conservation tool. However, it places a tremendous obligation on land trusts—the responsibility to regularly monitor eased properties, maintain relationships with owners, review proposals that can potentially impact a property’s conservation values and, ultimately, enforce the easement’s terms by whatever means necessary.
In the short term, a land trust may be able to adequately monitor and manage its conservation easement holdings without dedicated stewardship money, thanks to highly committed volunteers, donations, and grants. However, conservation is all about the long term—the treatment of the land over decades and centuries. A land trust cannot responsibly assume that volunteers and ephemeral donations and grants will always be available to satisfy its substantial and perpetual stewardship obligations.
Adequate stewardship funding is a must for the long-term viability of a conservation easement. But how much is “adequate”? Easement holders generally consider multiple factors when determining how much funding to request for stewardship of a particular easement.
A holder may look at its past experience or that of a wide variety of easement holders to estimate an average amount of stewardship funding needed per easement per year. (See the guide Costs of Conservation Easement Stewardship for a discussion of holder experiences.) Past experience, however, does not present a complete picture of future needs. Holders have little experience with easements created more than two or three decades ago. Some costs may increase (or decrease) on a time scale greater than the present age of most easements. For example, as the owners who negotiated and signed easement documents give way to new owners less committed to the easement’s objectives, the number of violations—major and minor—may be expected to rise. Also, an individual easement may have particular characteristics that make it more or less expensive to steward over time.
Several factors may differentiate the stewardship costs of one easement from another, including the following examples:
Many holders factor in these items and other characteristics of an easement in projecting stewardship funding needs for the specific easement.
When calculating stewardship funding needs, holders often first determine an estimated average stewardship cost per year for the specific easement. Holders then seek to determine what amount, when prudently invested, will generate an annual income stream that is at least equal to the estimated average cost.
The holder may look at earnings on its own investment portfolio, but a better approach is to look to the annual rates of return achieved and the policies adopted by other non-profit organizations engaged in prudently managing endowment funds. The “prudent investor” approach may not only be a good idea—it is legally required if the stewardship funds are held by the organization as trustee or fiduciary. (See Pennsylvania’s “Prudent investor rule,” 20 Pa. Cons. Stat. § 7203.)
To arrive at the amount that the holder would need to prudently invest to generate an annual income stream adequate to cover the annual cost estimate, divide the annual income figure by the expected rate of return on prudent investments. For example:
The holder determines that it needs $1,200 each year on average to ensure responsible stewardship of a conservation easement. ($1,200 may seem high, but keep in mind that a holder could spend tens of thousands of dollars in just one year to address a single violation.)
The holder reviews its own investment experience over the last 10 years plus online sources discussing prudent investments and, using this information, its governing board adopts four (4%) percent per year as its anticipated earnings rate for its long-term investments.
Calculation: $1,200 divided by 4% equals $30,000.
$30,000 would have to be prudently invested to achieve an adequate annual income stream.
Land trusts seek funding from an array of sources to meet stewardship obligations. This sometimes results in gifts from foundations and individuals in support of stewardship. However, the most practical and reliable source of stewardship funding is to be found with the people who choose to conserve their land and their successors in land ownership.
Most land trusts ask the landowners who are conveying a conservation easement for a cash contribution to support stewardship of the easement and collect a single payment from the owners at the time the conservation easement is granted. (The contribution is invested, with the returns used to fund the land trust’s routine stewardship activities; the principal typically is left untouched except if needed to fund enforcement.)
The merit of the single-payment approach is the immediacy of payment, which eliminates the risk of future non-payment. However, the approach may not be viable because:
Compounding the affordability problem, holders may face the challenge of obtaining funding to cover increased stewardship demands that may never materialize. For example, owners sometimes wish to retain the right to subdivide the conserved property into two or more lots to provide for potential future family housing needs or to ensure the ability to generate cash from the property if personal finances become challenging. This right to subdivide may never be exercised. Family members may ultimately decide that they don’t want to build on the land and finances may stay on a solid footing.
Whether or not such a subdivision right is ever exercised has strong bearing on a holder’s finances. A subdivision of a conserved property into two lots, for instance, can nearly double a holder’s long-term expenses. However, many owners will not want to double their upfront stewardship contributions to cover the potential of future subdivision—a subdivision that may not ever take place.
As compared to a strictly upfront cash payment, arrangements that allow owners to spread a financial commitment over time and extend the commitment to future owners of the conserved land are more likely to generate funding sufficient to cover the holder’s stewardship costs in the years and decades following establishment of the easement.
In judging affordability for the owners and focusing requests for stewardship funding on a one-time, lump-sum contribution, a land trust may ask: what can the easement grantor afford to pay on (or soon after) the date the easement is granted? But that is not how affordability is measured generally. Houses, cars, and consumer items all become affordable when payments are spread out over time. This guide, together with the Model Stewardship Funding Covenant, is intended to help land trusts and owners constructively discuss how to make the funding of stewardship affordable:
In the past, the holder’s communications to the easement grantors regarding stewardship funding might resemble this:
The land trust needs $30,000 to fund its long-term obligations. If you can’t afford this, can you afford $20,000 at closing? If not $20,000, can you contribute $10,000 at closing? If not $10,000, can you contribute $5,000? If not $5,000, can you contribute $2,500? And so on.
Or the holder might dispose of referencing the land trust’s full need altogether, instead focusing on a number it identifies as likely to be well received by the owners.
By reframing the view of affordability to encompass a much longer time span, the holder may instead present questions to the owners that squarely address the holder’s need for adequacy and respect the affordability concerns of the owners:
The hypothetical questions above illustrate that a variety of options are available to owners and holders once they adopt new ways of thinking about stewardship funding arrangements. These arrangements may be organized into three categories:
These stewardship funding arrangements are not mutually exclusive and may be used in any number of combinations to meet the goals and needs of owners and holders.
With deferred payment arrangements, the holder and owners reach agreement as to a fixed amount of money that the owners will ultimately pay to meet the holder’s financial needs for stewardship (and perhaps to reimburse the holder for expenses incurred during the establishment of the easement). They then reach agreement as to the timing, frequency, and number of payments as well as the amount due with each payment.
Perhaps the owners in the above example can afford a $10,000 contribution at the time of the easement donation. They may propose deferring the $20,000 balance until an anticipated cash flow event occurs:
A deferred single payment option may be a good fit for these and similar situations. While the payment date may be tied to the probable occurrence of a tax refund, sale, or other event, the payment is due whether or not the event occurs. If the intention is that no payment is due unless the event occurs, a conditional payment arrangement (described later in the guide) is the appropriate choice.
A series of installment payments may better match the owners’ financial situation. The frequency, number and timing of payments may be tailored in any number of ways. Together with a $10,000 contribution at the time of the easement donation, owners and holder could agree that the remaining $20,000 would be paid in any number of ways:
Payments do not have to commence immediately. Take, for example, a scenario where the owners recently purchased the farm to be conserved and need to direct all of their available cash into capital repairs and equipment purchases for the first five years. An acceptable solution may be to have annual payments start on the fifth anniversary of the easement date instead of the first anniversary.
If the owners want the payments to be $1,000 annually but the holder doesn’t want payments to extend out more than 20 years from the easement closing date, owners and holder could agree to 14 annual payments of $1,000 followed by a fifteenth and final payment of $6,000.
Since the first known use in 1990, a growing number of land trusts have begun using private transfer fees (or simply “transfer fees” or “transfer payments”) to support their conservation work. The most typical variety may be a percentage-based payment due on upon transfer. The commitment might state that holder must be paid 1% or some other percentage of the fair market value of the property each time the property changes ownership. Alternatively, payments can be fixed in amount (likely with adjustment for inflation). This is a powerful approach with distinct advantages for both holders and landowners. For example:
Anecdotal evidence suggests that this approach has been hugely successful in generating stewardship funds for land trusts that have adopted it.
Each change in ownership brings costs for an easement holder—inspecting the property to confirm easement compliance prior to transfer, explaining the easement to real estate brokers and banks, interpreting the easement to apply it to use scenarios proposed by prospective purchasers, and orienting the new owners to living with conserved land. These costs may be recovered by arranging for a payment to the holder to come due at each transfer of the property. This type of arrangement may be used independently, or in conjunction with other arrangements.
To establish certainty regarding the payment amount and to avoid the need for the holder to separately track transfer related expenses for reimbursement, the owners and holder may agree that owners will make a fixed sum payment amount. If a fixed sum approach is adopted, care should be taken in calculating the amount to ensure that it represents a reasonable approximation of the costs that the holder will incur. A purpose-limited payment should never be calculated as a percentage of the property value, as doing so virtually guarantees that there will be no rational relationship between the payment amount and its stated purpose. Legal Considerations explains the importance of documenting the nexus between a payment amount and the benefit to the eased property—specifically for payment obligations that will be enforced against successive owners.
Neither state nor federal regulation appears to present an obstacle to use of transfer payments for funding conservation easement stewardship in Pennsylvania. Nevertheless, users of transfer payments should be aware of the tool’s regulatory landscape. The following is offered for context. Deeper analysis and detail are offered in Legal Considerations.
Private transfer fees have been used in a wide variety of real estate transactions. In 2007, controversy erupted surrounding the practice, driven primarily by its use by developers as a way of generating ongoing streams of personal income. State and federal regulators were concerned with the effect of these practices on consumers, home sale and finance transactions, and the housing market more broadly. A slew of regulatory action ensued, resulting in a patchwork of state laws and federal regulation.
At the time of this writing, 43 states including Pennsylvania have regulated or prohibited some uses of private transfer fees. Pennsylvania generally prohibits private transfer fees but makes a number of exceptions including transfer fees payable to nonprofit land trusts in connection with agricultural or conservation easements.
In 2012, a Federal Housing Finance Agency regulatory process resulted in a final rule restricting Fannie Mae, Freddie Mac and Federal Home Loan Banks from investing in mortgages on residential real estate subject to certain private transfer fee covenants. The FHFA regulation does not affect high-value mortgages, or privately-held mortgages not backed by the regulated entities, and does not prohibit certain fees that fund benefits (including conservation) that are specific to the property they affect.
If the holder needs $1,200 per year to adequately fund stewardship, why not simply agree to establish an annual payment of $1,200 that continues for the life of the conservation easement? Or, if the holder is concerned about the administrative burden of collecting annual sums, what about a payment of $6,000 every five years?
This approach has some logical appeal, but involves vexing drafting and operational issues, particularly when the commitment is applied to successive landowners. Drafters of the funding commitment must account for pro-rating annual payments to the date of transfer, and potentially complicated calculations of inflation-adjustments and interest. (Holders may want to deliver to the owners a periodic statement showing the amount owed to avoid misunderstandings when the holder ultimately seeks to collect.)
Given the disadvantages, the Model Stewardship Funding Covenant does not include a provision for ongoing regular payments in the main model, though a sample is included in the commentary.
If payment is to come due upon a transfer of all or a portion of a property, the owners may want the stewardship funding arrangement to provide that certain transfers are excluded, for example a transfer to a close family member or a family trust. The Model Stewardship Funding Covenant provides a mechanism for addressing these exceptional transfers without undermining the integrity of the stewardship funding arrangement.
The value of the dollar changes with time. Any stewardship funding arrangement that stretches payments out over all but the shortest time periods is best designed to account for inflation (or deflation). Otherwise, the holder may receive payments of far less value than originally anticipated. For example, a 2023 dollar is only worth $0.45 in terms of 1991 dollars (calculation based on the Consumer Price Index).
Rather than attempt to predict the future value of the U.S. dollar when establishing the stewardship funding arrangement, the holder and owners may agree on an approach for calculating the actual change in value at the time that payment is due. The commentary to the Model Stewardship Funding Covenant discusses approaches to accounting for changes in the buying power of the U.S. dollar.
If you purchase an item for $100 and defer payment for a year, you can expect to pay perhaps $105 or more to compensate the seller for: first, the detriment of not having $100 to invest in an income-earning account for the year; and second, for the seller’s risk of not being able to collect the $100 after parting with the merchandise. The same is true with deferred payments and regular payments not made as and when due. The holder doesn't have the stewardship funds available for investment during the intervening period and, once the conservation easement has been accepted, has all of the burdens of stewardship with the risk of not being able to collect the balance outstanding on the stewardship funding arrangement.
As such, it is appropriate for interest to be charged on the deferred balance of a stewardship funding arrangement and on amounts due but unpaid to the holder such as uncollected regular payments.
The owners, whether planning to or not, may sell their eased property prior to completing their installment payments or before a single deferred payment comes due. The parties may address this possibility in the stewardship funding arrangement by either:
Owners sometimes fail to notify the holder that they are selling their property. A conveyance payment stewardship funding arrangement may serve as a backup notice to the holder that the eased property has changed or is changing hands. In its title investigation, the title company is likely to note a conspicuously placed payment requirement and is then able to collect the amount due for delivery to the holder. Since educating new owners as early as possible reduces the likelihood of violations, a payment due on transfer may be as desirable to the holder for its notification function as for the revenue. Thus, if the payment amount is an obstacle in owner-holder negotiations, there is value in negotiating a small or even nominal payment, if only for the purpose of receiving notifications of transfer in the future.
Arrangements for payments due on transfer also provide backup notice to the new owners. Real estate buyers (particularly those without legal counsel) are not always in the practice of carefully reviewing the title commitment but are much more likely to notice payable line items at closing. If they were not already aware of the conservation easement (and perhaps other stewardship funding arrangements), the inclusion of an easement-related payment on the settlement statement is likely to garner attention.
Some items included in a stewardship funding request are to cover costs that may not occur for some time, if at all. For example, the holder’s stewardship burden will increase dramatically if an eased property is subdivided and lots are transferred to separate owners. Other events, such as a timber harvest, construction of a new residence, or drilling for natural gas, may also place new and pressing demands on the holder. The holder faces challenges in obtaining the funding necessary to address these events at the time an easement is established for a number of reasons:
A stewardship funding arrangement may be more affordable if payments associated with these events come due only upon the occurrence of a triggering event. For example:
Conditional payments may be used to address any future activity or occurrence permitted under a particular conservation easement that the holder anticipates will increase the time and money it will need to expend to properly steward the property. The costs may include engaging professional support to review plans or monitor the activity for conformance with the terms of the conservation easement and best management practices.
A funding commitment that is enforceable against the donor who made the promise is relatively easy to create (see the guide Donation Agreements). Ensuring that the conservation organization can collect payments from future owners who did not themselves promise to make payment, presents a greater challenge. Three approaches can be used independently, or in combination, to improve the chances that the conservation organization will successfully collect on a stewardship funding arrangement obligation. The guide Legal Considerations discusses these approaches at length:
In many if not most cases, it is highly desirable to use multiple approaches to better ensure that a stewardship funding arrangement will be enforceable over time. The Model Stewardship Funding Covenant provides users with a vehicle for implementing any or all of these approaches.
Consolidating conservation and funding covenants in one document—namely, the conservation easement—may serve to downplay the money aspect of the transaction relative to the conservation objectives to be achieved, and owners may be happier signing one rather than two documents. However, documenting a stewardship funding arrangement in a freestanding covenant provides substantial advantages over incorporating it into a conservation easement document: For starters, separate documents guard against changes in the funding covenant inadvertently damaging the integrity of the easement; for example, any release filed in the public records with respect to the funding covenant will never be mistaken as a release of the conservation easement. Other benefits are listed in the table.
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Placing Stewardship Funding Covenant Within Grant of Conservation Easement Versus Using Separate Documents |
Single Doument |
Separate Documents |
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Arrangement bundles key aspects of transaction |
✔ |
|
|
Arrangement minimizes attention to money matters |
✔ |
|
|
Document can secure the promise of payment with a mortgage on the eased property (or other collateral) |
|
✔ |
|
Funding covenant can be subordinated without running afoul of IRS regulations for charitable deductions |
|
✔ |
|
Funding covenant can be released from all or a portion of the property if and when the obligation has been fulfilled with the public records clearly showing that the obligation has been satisfied and without risk of mistakenly releasing the easement |
|
✔ |
|
Funding covenant can be amended without the potential complications arising from easement amendments |
|
✔ |
WeConservePA developed the Model Stewardship Funding Covenant to assist owners and holders in documenting stewardship funding arrangements in a free-standing legal instrument.
WeConservePA’s companion publication, Placing Transfer Fees in Grants of Conservation Easement, offers best practices for easement holders desiring to place funding covenants within the grant of easement, notwithstanding the drawbacks.
Stewardship funding arrangements do not have to be established contemporaneously with the conservation easement. Land trusts may approach owners who previously granted easements to inquire whether the owners would be willing to build on their generosity by entering into a stewardship funding arrangement. Also, stewardship funding arrangements may be created to bring stewardship funding in line with easement stewardship demands when owners request an otherwise acceptable change to an easement document.
While most conservation easements are donated by owners, land trusts in certain circumstances purchase easements at a bargain price or fair market value. These purchased easements require as much stewardship, if not more, than donated easements. It is perfectly reasonable for land trusts to introduce the need for a stewardship funding arrangement into negotiations for purchase.
Payments required by a stewardship funding arrangement and made by the owners who established the arrangement have the potential to be deductible as charitable contributions for federal tax purposes. Payments made by subsequent owners are not deductible. See the guides Donation Agreements and Legal Considerations for more information.
Focusing on a single cash contribution for stewardship—paid by the owner at the easement closing—generally produces suboptimal results as compared to spreading stewardship payments over time, the latter approach being both less burdensome to the easement grantor and more likely to generate sufficient funds for the holder to steward the easement in perpetuity.
Nevertheless, for the holder’s staff and volunteers, there is comfort in simply asking for a single cash contribution to be made with the easement donation. People have learned to make this ask and, with the examples of others, practice, and refined outreach materials, the ask may seem reasonable and without controversy. In contrast, requesting a series of payments to be made over time on its face is more complicated. It does not provide the closure of a one-and-done contribution, and far fewer people have practice and experiences to share in implementing this approach.
These same challenges faced those who started asking easement donors for single stewardship contributions in the 1990s. It was awkward to ask someone who was giving up so much land value to lay down cash too. It was worrying that the owner might be offended and withdraw the easement offer.
But staff and volunteers overcame their discomfort and discovered that a request firmly grounded in the advancement of the conservation project and delivered with care and forethought was generally not an affront to owners. This is not to say that owners always welcome or honor the request. But the request itself doesn’t have to be a deal breaker, and typically isn’t.
Likewise, the request for owners to entertain one or more stewardship funding arrangements to ensure conservation in perpetuity need not spoil a transaction or relationship. To the contrary, it can show that the land trust takes great care to ensure that it can faithfully address its stewardship commitment and that the land trust is attentive to owner concerns and preferences in seeking to shape a viable funding solution.
WeConservePA publishes the two-page Funding Conservation Easement Stewardship: Your Role as the Land’s Owner and Conservation Champion to directly educate landowners and assist land trusts in landowner outreach. The piece is specifically addressed to landowners and explains the need to establish stewardship funding arrangements.
WeConservePA also offers a brochure prototype to land trusts to illustrate how an organization might choose to communicate with owners concerning stewardship funding arrangements.
If a conservation easement holder does not have the financial means to fulfill its stewardship obligations in perpetuity, including the enforcement of the terms of the easement in court if necessary, then its conservation successes may prove illusory in the long-term. While it may be reasonable for an organization to take an occasional leap of faith that a gap in stewardship funding for a particular project will be filled at a later date—some way, somehow—it is not prudent to take many such risks. One can always hope that a generous benefactor someday will make a substantial gift to fill the gaps in the organization’s stewardship funding, but a responsible and sustainable conservation program cannot be built on such hope.
Stewardship funding arrangements are a key strategy for ensuring full funding of easement stewardship obligations. While gifts from foundations and individuals to build a stewardship endowment are important, the most practical and reliable source of stewardship funding is to be found in the land being conserved and the people who choose to own the land. Enabling easement donors (and sellers) to spread payments over time (and ownerships) is key to achieving funding commitments commensurate with the holder’s stewardship obligations.
Land trusts are successfully implementing stewardship funding arrangements and see that their future stewardship fund balances are healthier for it. The sooner that most land trusts seize the opportunities that stewardship funding arrangements present, the better for the conservation of the farms, forests, and other green spaces that people love.
