This approach is consistent with the Treasury Regulations, which provide that if there is no substantial record of marketplace sales of comparable easements, then the fair market value of the perpetual conservation easement is equal to the difference between the fair market value of the property before and after the granting of the restriction, which is referred to as the before and after valuation.

Code §1.170A-14(h)(3)(ii) provides that if the “before and after” valuation is used, the fair market value of the property before the contribution must take into account not only its current use but also an objective assessment of the likelihood that the property would be developed without the restriction, as well as any effect from zoning, conservation or historic preservation laws that already restrict the property’s potential highest and best use.

As a result, there may be instances in which the grant of the conservation restriction will have no material effect on the property’s value. Furthermore, in a Chief Counsel Advice dated Aug. 9, 2007, the Office of the Chief Counsel, Internal Revenue Service stated that:

the Internal Revenue Service will not accept an appraisal to substantiate the fair market value of a façade easement if the appraisal merely values the entire fee before the donation and then applies a percentage thereto, . . . Certain tax advisors and charitable organizations are misinforming the public about the valuation of contributed façade easements by indicating that the Service allows tax deductions of approximately 10-15% of the fair market value of the underlying property.


The valuation analysis utilized by the IRS could significantly restrict the tax deduction available to properties that are already subject to laws limiting or precluding changes to the building’s façade. A local landmark preservation law, such as the one in effect in New York City, precludes alterations to the façade of a building designated as a landmark and, as a result, the IRS could take the position that a façade easement of a landmark building should provide the owner with little or no income tax deduction because the façade cannot be altered and, therefore, the façade easement changes nothing.

Properties Subject to Mortgages

One other stumbling block contained in the Treasury Regulations has to do with mortgages. In the event that the property being made subject to the conservation easement is subject to a mortgage, no deduction will be permitted unless the mortgagee subordinates its rights in the property to the right of the qualified organization to enforce the conservation purposes of the gift in perpetuity.

One would assume that most mortgagees would object to this requirement, which would preclude them from changing the use of the property, demolishing it and being able to take other steps because of objections from the historical society to which the façade has been donated. Moreover, since the façade will have to be maintained by the property owner in a manner that is satisfactory to the historical society, it is likely that the mortgagee will be concerned about the costs that will be incurred in the event that repairs are required.

An interesting possibility is that a property’s value could be diminished, from the mortgagee’s perspective, by the granting of a façade easement even though the owner’s tax deduction is limited. This could occur if an appraiser determines that the property had little development value because of the restrictions that were already on it by reason of local zoning or land use restrictions or landmark protection limitations. In such a situation, as discussed above, the actual available tax deduction as determined by the IRS could be minimal. Nonetheless, the mortgagee would be subject to the façade easement’s restrictions.

Stuart M. Saft is a partner with Dewey & LeBoeuf.