By Kevin Simpson
Denver Post Staff Writer

Post / Karl Gehring Landowner Joseph Proctor has donated a 35-acre conservation easement in return for tax credits, hoping "it can save the farm."

ARKANSAS VALLEY - Amid weak crop prices, choking drought and cash-strapped neighbors selling precious water rights to outside interests, Joseph Proctor has clung to farm life in this beleaguered valley.

So when locals extolled the virtues of conservation easements as a means to preserve the region's water and agricultural roots - while also putting a little cash in his pocket - Proctor put his 35 acres between La Junta and Rocky Ford into the cause.

At last, relief: a way to cash in without selling out.

"It will help us play catch-up, absolve a little bit of short-term debt and establish a cash flow," says Proctor, who has donated a conservation easement to receive tax credits that he hopes to sell. "It can save the farm."

But salvation has hit a snag.

A dust-up over the true value of these conservation easements has raised questions about whether some could cost Colorado taxpayers more than they should to preserve open space and protect farm and ranch land from development.

And it has left some Arkansas Valley residents wondering whether their deals might have been a little too good to be true - or if the current controversy hints at an urban effort to discourage easements and ultimately siphon water from the region.

On a statewide scale, the dispute underscores wider concerns that the tax-credit program may be ripe for abuse by those attracted less by conservation potential than by some of the most generous financial enticements in the nation.

Properties offering scenic vistas or wildlife habitat that are coveted for development often are eyed for conservation easements by national organizations and more than three dozen land trusts in Colorado. Farm and ranch land with far less development pressure also has been targeted in an effort to preserve wildlife habitat and rural economies.

Profitable possibilities

In 2000, Colorado began allowing landowners to donate conservation easements for tax credits, then became the first state in the country to make the credits transferrable. That allows landowners to sell the credits and realize cash from their donations.

The deal got even sweeter last year, when changes to the law bumped the easements' tax benefits from a dollar-for-dollar credit up to $100,000 of appraised value to an additional 40 percent of the next $400,000.

That means a landowner can max out at a $260,000 tax credit and then sell it, often through brokers at about 80 cents on the dollar, to individuals or corporations who buy it at a discount to help relieve a large tax burden. More than $24 million in tax credits were brokered last year.

The program has been widely praised by conservationists and agricultural interests as a boon to open-space preservation. In 2003, the tax credits triggered what may turn out to be the state's biggest year yet in conservation easements, pushing the lands protected from about 700,000 to 800,000 acres statewide, according to an estimate from the Colorado Conservation Trust.

But the process hinges on accurate appraisals to ensure that it efficiently applies millions in taxpayer dollars toward legitimate goals.

And that's where controversy has flared.

In December, concerns over appraisals prompted Great Outdoors Colorado, a state trust fund that uses lottery proceeds to preserve open space, to reject six conservation easement applications lined up as part of a $1 million GOCO grant in Otero County. Weeks later, the appraisals were resubmitted - and rejected again.

About the same time, the Lower Arkansas Valley Water Conservancy District, a year-old nonprofit organization, launched a review of 16 easement appraisals that it felt did not meet Internal Revenue Service standards.

Price calculations

The basic formula to determine the worth of a conservation easement involves figuring the difference between the market value of the property before and after imposing conservation restrictions. Many easements in the Arkansas Valley differ somewhat because the resource being protected is irrigation water.

Review appraisers for the GOCO and Lower Arkansas Valley cases rejected numbers that they say valued easements based on nonexistent development potential, says the original appraiser, John Stroh II.

Stroh, the managing broker and appraiser for the Southern Colorado Land and Livestock Co. in Walsenburg, says the reviewers rejected his development-based approach and told him to focus on the pressure from outside interests to buy up water rights.

Although he maintains that some development potential does exist in the economically depressed area, he allows that his model was "a bit of a stretch."

A revised model that Stroh plans to submit to the land trusts this week comes in at about 40 percent less than the original appraisal, although Stroh says the numbers could change - "and I'm not sure in which direction."

"Do I believe there's development pressure? Yes," Stroh says. "As imminent as in Boulder? No, it's not. So in essence I do disagree with them, but this is not the time to argue but to get something done to preserve the water and get on with it."

Stroh says he'll continue to work to bring appraisals in both the GOCO and Lower Arkansas Valley cases to acceptable standards.

Mark Weston, a Greenwood Village-based appraiser and nationally respected authority on conservation easements, reviewed the GOCO easements and the Lower Arkansas Valley Water Conservancy District's appraisals as well. He has provided information to Stroh on appraisal techniques but says he's also concerned about easement appraisals that may already have gone through other land trusts with flawed methodology.

"I hope that what's happening is that there are some growing pains, some consultants and certainly appraisers who perhaps haven't taken time to dig in and figure out what they're doing," Weston says, "and that they'll take that time to correct the problems they helped perpetrate."

Will Shafroth, executive director of the Colorado Conservation Trust and one of the architects of the transferrable tax credits as a former director of GOCO, says the use of conservation easements to preserve water in the Arkansas Valley breaks new ground.

"The thing that concerns me as a taxpayer, and as someone who supported the development of GOCO, is that we get the best bang for the buck," Shafroth says. "The real issue is appraisals. That's where there's the most vulnerability in the system."

State House Speaker Lola Spradley, R-Beulah, says the Arkansas Valley controversy actually illustrates how there are several opportunities in the process for "unusual situations" to arise and be dealt with in a tax-credit program she shepherded into law.

She adds that she's not aware of any similar issues around the state.

"If there are others, I'd be happy to hear about them," Spradley says. "But my understanding is that we had a situation, and the system worked. With all programs, there's a learning process. That's what's happening here."

Potential abuses

But the Arkansas Valley may not be alone in the appraisal controversy.

The Colorado Coalition of Land Trusts warned in a document released last spring that some planned transactions brought to its attention appeared to be "potentially abusive" and could jeopardize support for the program in tough budgetary times.

The Colorado Department of Revenue says it has fielded complaints regarding conservation easements from around the state, prompting heightened awareness of potentially bad appraisals.

"We're sensitive to the issue because we know it's a crucial element in claiming the credit," says Bruce Nelson, the department's manager of tax policy. "There's a lot of money involved, not just at the state level, but the federal level. When you have something like this (controversy), word travels fast."

The department routinely reviews all conservation easement claims on tax returns, he says.

Pueblo appraiser Ivor Hill calls some appraisal methods he has seen "outrageous" - and adds they are becoming widespread in Colorado.

"It should anger every taxpayer in the state," Hill says. "I believe this is abuse of taxpayer money - not the conservation easements, but the way some appraisals are done, generating overstated value."

He says he has been approached about doing easement appraisals all across southern Colorado, and one firm inquired about doing 200 this year alone. After researching the IRS requirements and consulting experts, Hill says, he felt the firm's approach to maximizing landowners' tax credits wouldn't follow proper procedure - and declined.

But he says he believes such projects will go forward because of the potential for huge financial gain.

Weston agrees that in some areas, landowners with "adequately conspiring consultants" may focus more on achieving a $500,000 easement value to maximize the tax credit than truly meeting criteria for conservation purposes.

"We classify these as rogue land trusts," explains Weston, noting that the issues involved are different from the current Arkansas Valley controversy. "And I do not think, as with the appraisal valuation issue, that it's widespread. But it doesn't take much behavior of this kind to catch the attention of media, the legislature and the public. It's the 'one bad apple' theory."

There's no government oversight of conservation easements beyond the looming possibility of tax audits, which means that landowners who cashed in on easements might not learn of any errors until after the fact - if at all.

In the Arkansas Valley, Stroh estimates he has done appraisals for about 20 landowners whose conservation easement deals were accepted by other land trusts and have long since closed.

Now, those folks hope that the tax credits they claimed - and, in some cases, the cash from their resale - arose from accurate appraisals.

On his 70 acres near Swink, Joe Rocha alternates land-rejuvenating hay crops with the area's renowned melons on land he once plowed with his father behind a mule.

Now he finds himself straddling the controversy with two chunks of land.

He divided his spread into two 35-acre parcels and took a $141,050 tax credit through the Otero County Land Trust by donating a conservation easement, appraised by Stroh, on that parcel. The 75-year-old Rocha, who says he's seen prices dip to 1930s levels on some crops, intends to sell the tax credit to finance his retirement - and tie water to the land he'll pass on to his sons.

But he's waiting to see how the current appraisal flap shakes out before moving ahead with an easement on the second parcel.

"The thing that worries me," he says, "is what happens if I sell the credits and then have to pay it back. Say I get $141,000, and then all of a sudden they tell me I owe the government $40,000? That's a no-no for me."

Ready for resolution

If appraisals are found to be flawed, IRS or Colorado audits could result in corrections, repayment and, in a worst-case scenario, penalties.

Stroh says he still believes the appraisals that already have gone through the pipeline should hold up to scrutiny.

But some clients already have run into problems converting the tax credits to cash.

Proctor, 38, donated his easement to the Otero County Land Trust in exchange for tax credits. And while he professes faith in both Stroh and his appraisal - if anything, he says, water rights have been undervalued in the valley - he's already had his tax credit rejected by one broker who balked when he learned Stroh had done the appraisal.

Kevin Tanabe, 33, is another of Stroh's clients hanging on the viability of a conservation easement. Not only has he already reaped a tax credit, but he's also sold it and used the cash to pay down personal debt.

He bought his 70 acres south of Rocky Ford in 1999 to raise hay and grass and bring up two children in a healthy rural environment. The drought had moved him to the brink of bankruptcy before he became one of the first farmers, in late 2002, to have a conservation easement accepted by the Otero County Land Trust.

Now, he's hoping the whole deal doesn't backfire.

"You lie awake at night thinking - you really do," he says. "For me to sit here and say it's all fine, I can't do that. There's a lot of concern about how this will shake out. You hope and pray it's for the best down here."