Inside the Two Shoes debate
August 8, 2010
The Two Shoes land exchange has recently re-entered the public debate with the publication of a letter sent to the Colorado congressional delegation in support of the land exchange. Once again, Pitkin County received a tongue-lashing for not being a team player.
I feel compelled to share with the public some of the details of the big issue with which Pitkin County has been wrestling: Is the public receiving equal value for this exchange? This question has prompted debate over whether the federal appraisal processes really do provide equality in these exchanges. An examination of the federal processes appraising land exchanges has suggested that not only do the existing standards shortchange the public, but the federal government is possibly subsidizing these exchanges.
When evaluating parcels proposed for exchange, land-management agencies rely on a set of appraisal standards embodied in a document known as “The Yellow Book”; this document owes its existence to Uncle Sam’s power of eminent domain, or its ability to condemn private property for public benefit. In an eminent-domain situation, a low value is desirable so that the government spends the least amount of money possible when compensating landowners. In a land exchange, the same Yellow Book process is used, but the tables are turned; the landowner pays the least amount of money possible to compensate the government.
Moreover, the Yellow Book prohibits any consideration of the surrounding parcels in the appraisal, even if an adjacent parcel could provide something which increases its value after the exchange, such as access or control. Not only is the public receiving the lowest compensation value for the parcel to be privatized, but the regulations prohibit consideration of the premiums that consolidation with the neighboring parcels might bestow upon it.
The land-management agency will use the low-boy Yellow Book appraisal to determine if the parcels are of equal value. If the agency determines a value inequity, one of two things happens. If the appraisal shows that the public parcel is worth more, the private entity will make a “cash-equalization” payment to the federal government. If the private parcel is worth more, the private entity will make a “cash donation” to the federal government based on the private parcel’s extra value. Two bills proposing land exchanges in central Colorado (Two Shoes and the Bear Ranch in Gunnison County) include special language allowing for special treatment of these “cash donations” as tax benefits, despite the quid pro quo which would normally disqualify them for such benefits.
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The proposed legislative language specifies that the new owners of these previously public lands place their new acquisitions under conservation easements. Now, a new set of appraisal standards applies, the IRS standards which govern conservation easement tax benefits. In considering the value of the conservation easement, the Treasury requires the appraisal to consider the parcel in view of the surrounding, contiguous ownership, even though the Yellow Book standards prohibited this same consideration during the land exchange valuation process. The new owners will benefit from the increased value conferred on their new parcels from consolidating them with their old ones and will be able to take a bigger conservation easement deduction. And, because tax returns are confidential, the public will never know the amount of these tax deductions.
So, the public helps to finance the privatization of public lands three times. The first time is in the process determining fair compensation, during which the land-management agency followed the legal and procedural guidelines resulting in the lowest value for which the private beneficiary had to compensate the public. The second is when the proponents take tax deductions for the difference in the value of the exchange parcels. And the third time is when the IRS permits tax deductions for the now greater values donated in the conservation easements.
Based on the process outlined here, a very rough scenario of the proponents’ original proposal to Pitkin County shows the potential for a large eight-figure benefit to the proponents before they even took their conservation easement tax deduction. Since we know some of the figures the open space program has paid for conservation easements in the neighborhood, it’s safe to assume a figure of a few million more for this tax deduction. Subsequent proposals have certainly reduced these figures; but, absent the appraisal Pitkin County was discussing, we can only speculate as to how much more equal the last proposal was.
The debate surrounding these exchanges must include a process that carefully illuminates how value is being determined on both ends. This is the only way to ensure fair exchanges. Without this type of examination, it is too easy to whittle away at the public lands, making it almost impossible to protect the commons for future generations.