History of Heritage’s easement program
What is a Preservation Easement?
Why Donate a Preservation Easement?
Application Process
Recent IRS and Tax Court Decisions

History of Heritage’s Easements Program

Gibb-Sanborn Warehouse (1885), donated in 1997

In 1974, San Francisco Heritage (Heritage) accepted its first preservation easement: the “Nightingale House” at 201 Buchanan Street. Since that time, Heritage has received donations of over 60 permanent preservation easements, creating one of the largest preservation easement programs in the West. Some notable donations include the Gibb-Sanborn Warehouse (1885, left), which is one of a handful of structures surviving from the Gold Rush era, and the Vollmer House (1885, below), which barely escaped the 1906 fire. To this day, Heritage is the only local organization in San Francisco with a program to receive, administer, and enforce preservation easements. In this capacity, Heritage is committed to exercise a long-term stewardship role for easement donors and their historic properties. Heritage is part of the National Trust for Historic Preservation’s Statewide and Local Partners network, an association of over 100 high-performing nonprofit preservation organizations from across the country, which provides us with access to best practices for easement administration and enforcement nationwide.

For further information on preservation easements and historic preservation, read architectural historian Anthony Robbins’ articleThe Case for Preservation Easements: When Municipalities Fail to Protect Historic Properties.

What is a Preservation Easement?

A preservation easement is a legal agreement between a property owner and Heritage to preserve and protect the building’s character-defining features in perpetuity. This legal instrument ensures the protection of architecturally and historically significant structures by limiting the owner’s right to demolish the building or to make destructive alterations. The basic premise of the preservation easement agreement requires the owner to seek pre-approval from Heritage for any significant change to features protected under its terms. When Heritage accepts a preservation easement, it receives the legal right to review and approve the design of proposed changes to the portions of the structure covered by the easement. All other rights and obligations of ownership, such as the right to sell or lease the property as well as the responsibility for maintenance, remain vested in the owner. To bind future owners of the property, a preservation easement runs with the title to the property.

For additional information on preservation easements, please see the National Trust Easement Resources webpage or contact Woody LaBounty at 415-441-3000 x20.

Why Donate a Preservation Easement?

Vollmer House (1885), donated in 1988

The principal benefit of donating a preservation easement is the guaranteed, permanent protection of historically and architecturally significant buildings. Because each preservation easement is tailored to meet the needs of the property owner, it acts as flexible tool to preserve the property for future generations. Donors also enjoy substantial Federal income tax benefits for qualifying donations by treating the value of the easement as a charitable contribution under Internal Revenue Tax Code Section 170(h). The donation value is deductible from Federal income taxes in the same manner as other non-cash charitable contributions.

For additional information on historic preservation tax benefits, please follow the link to the U.S. Department of the Interior’s Historic Preservation Tax Incentives webpage.

Application Process

The Bayview Opera House (1888), donated in 2011. Photo by Barbara Ockel.

In order for a property owner to receive the Federal income tax deduction, the easement donation must meet certain requirements established by the Internal Revenue Service. This guide will describe the sequence of steps necessary to complete the donation process.

Should the property owner wish to pursue the Federal income tax deduction for the present calendar year, the donation process should begin well in advance of the end of the year. This process assumes that the structure is already listed in the National Register of Historic Places, either individually or as part of a historic district. Heritage requires the property owner to submit the following:

(1) Application. Start by filling out two application forms, the Preservation Easement Fact Sheet and Building Information File.

(2) Photographic documentation of the subject property. Please photograph all sides (elevations) of the property as well as the grounds and garage, if applicable. Photos should show the entire sides of structure from ground to roof level. Digital photos can be emailed to info@sfheritage.org.

(3) Subordination agreement. In order to qualify for the income tax deduction, IRS regulations require that if a mortgage and/or home equity loan exists on the subject property, the lending institution must agree to and sign the lender acknowledgment (subordination) agreement contained in the legal document. If no loan exists, such subordination is not an issue.

(4) Appraisal. IRS regulations require that the property owner hire an appraiser experienced in easement valuations to determine the value of the preservation easement donation. The appraised value of the easement will determine the amount of the deduction. Heritage can provide a list of appraisers that have been used for previous easement donations.

(5) A copy of the National Register Nomination.

(6) Application Fee ($250 residential, $500 commercial).

Heritage will contact the applicant and make an appointment to inspect the property. Based on staff’s recommendation, the potential easement donation will be presented to the Heritage Board of Directors for their approval to proceed. Heritage will then work with the owner’s representative to draft the easement contract. The donor will cover the cost of the appraisal and any legal services in connection with the donation.

A donation fee will be due when the signed easement contract is transmitted to Heritage. The donation fee will be 10% of the value of the easement, as determined by the appraisal accompanying the application. The amount of the donation fee may be subject to negotiation by the Executive Director and the Board of Directors.

For questions about the Heritage Easement Program, Woody LaBounty at 415-441-3000 x20.

Recent IRS and Tax Court Decisions

In 2005, the IRS began a series of changes to easement law in an attempt to verify the validity of preservation and conservation easement donations. The following three court decisions highlight some recent developments in IRS easement tax law:

Bruzewicz v. U.S. (March 2009): In a case involving a residential easement donation to the Landmarks Preservation Council of Illinois, the District Court ruled the taxpayer failed to obtain the necessary charitable substantiation gift letter. As a result, the court found that the deduction was appropriately denied by the IRS. The decision also addressed concerns raised about the quality and methodology of the valuation appraisal.

Kaufman v. Commissioner (April 2010): The IRS recently challenged an easement donation on technical grounds for failing to meet a Treasury regulation that requires easements to be perpetual. Under Treasury regulations, the benefit created by the donation of an easement must survive in the rare event of extinguishment, meaning that the easement-holding organization must be entitled to receive its share of any future proceeds from the sale or exchange of the property. If the property is subject to a mortgage, a subordination agreement is required when making an easement donation to ensure that the bank agrees to the restrictions under the terms of the easement, and that in the event of a foreclosure, the easement will not be stripped away from the property. In Kaufman, the IRS successfully argued that an easement donation failed to meet the perpetuity requirement because the mortgage holder retained priority for receiving proceeds following extinguishment, thereby allowing the bank’s monetary interest to consume all the proceeds and leaving the easement holder empty handed. This decision is currently under appeal.

Whitehouse Hotel Limited Partnership v. Commissioner (August 2010): A recent U.S. Court of Appeals decision involving a commercial easement donated by Whitehouse Hotels sharply criticized IRS appraisal methods and its frequent assertion that conservation easements have no value. The Tax Court must now review and rewrite its original ruling, which held that the donors of a New Orleans façade easement on the Maison Blanche building overstated its value by 75 percent. The Fifth Circuit noted that the zero valuation by the IRS expert was “rather extraordinary,” citing prior cases where the court took a common sense approach that any reasonable buyer would consider the restrictions in making a purchase offer.

Heritage has been closely following this recent case, and has incorporated the findings into our current easement contract template. For more information about recent IRS scrutiny of preservation easement donations, see the National Trust Easement Resources webpage.