In this post, I’m going to present an overview of a recently published paper on the relationship between farmland conservation easements and farm investment. Before I dive into the paper, I first want to provide a brief overview of how conservation easements work.
Farmland conservation easements
Conservation easements provide a way for private landowners to permanently prevent their land from being developed. Under an easement, landowners voluntarily forego the right to put their land to certain uses (typically development for housing and similar uses) in exchange for compensation. An easement represents property rights that are permanently given up by the landowner. Once the easement is put in place, the surrendered property rights are usually held by a land trust. The details vary, but easements on farmland typically allow the land to continue to be used for agricultural production.
The value of the easement determines how much landowners are compensated for giving up their development rights. The easement value is determined by an outside appraiser, who will compare recent sales of similarly productive land parcels that are subject to different degrees of urban influence (or parcels that already have conservation easements). This can be thought of as the hypothetical difference in sale price for the same parcel with and without the easement. Essentially, the easement value is the price associated with the right to develop the land if that could be sold separately from the land itself.
Landowner compensation generally takes one of two forms. First, the easement can be purchased outright, with landowners receiving full cash compensation for permanently relinquishing their development rights. In acquiring an easement this way, land trusts can sometimes leverage matching funds from the U.S. Department of Agriculture’s Agricultural Land Easement (ALE) program. However, acquiring easements this way is not always feasible because most land trusts are relatively small entities constrained by limited budgets.
For most landowners, an outright purchase is the preferred form of compensation. The main alternative comes from the US income tax code. As a result of rules passed in 1976, conservation easements are considered charitable donations, meaning that the value of an easement can be deducted from the landowner’s federal income taxes. A more recent tweak to this rule in 2006 allows qualifying farm producers to deduct up to 100% of the easement value over a carryover period of 15 years. For example, if the easement is worth $1.5 million and the landowner earns $100,000 per year, they will effectively pay no federal income tax for 15 years. In addition, some states offer additional incentives through state income tax deductions (e.g., Oregon) or credits (e.g., Colorado).
Why would landowners put an easement on their land?
There are different motivations landowners might have for using easements. One reason is that they may simply want to prevent their land from being developed in the future. Easements provide a permanent guarantee that this type of land-use conversion won’t happen. Farm succession planning can also come into play, especially concerning estate taxes levied by state governments, as the easement reduces the property’s market value and hence the tax responsibilities of any heirs. The same generally doesn’t apply to federal estate taxes because of rules that limit estate taxes on land that will remain in agricultural production.
In a recently published paper (ungated version), Conner McCollum (a former graduate student I worked with at Montana State) and I explore a third potential motivation. Specifically, we study if easements might be used to finance farm-related investments. The underlying premise of our analysis revolves around the way that modern agricultural lending institutions operate.
Producers often use their land as collateral to obtain loans for farm-related investments. However, land collateral is generally not appraised at its full market value. Due to concerns about default risk, lenders typically exclude the land’s non-agricultural (e.g., development) value from appraisals. If this weren’t the case, using an easement to finance farm investments would be harder to justify from an investment standpoint. Why would a landowner permanently give up a property right through an easement when they could just borrow against its value to make the same investment? In this sense, future development returns that are capitalized into the value of farmland are not “liquid” because the only way they can be accessed by the landowner is if they sell the land. Importantly, the idea that easements are used to finance farm investment has been found in a number of smaller-scale surveys but had not been borne out with observational data.
In the paper, we first document a negative county-level correlation between the fraction of agricultural market value borrowed against and different measures of development pressure (past land conversion and population density). This means that landowners in areas where future development is more likely borrow less, relative to the market value of their land, than those in more rural areas.
We then turn to our main objective of measuring the county-level correlation between past easement activity and current farm investment. In line with the survey work referenced above, we document precise statistical relationships between easement activity and:
- an increase in land ownership by producers, alongside a decrease in total land rent expenses,
- greater use of machinery (tractors), and
- a weaker but positive association with increased labor use.
These relationships hold up under a variety of tweaks to our research design (e.g., removing potential outliers and controlling for different factors that might affect investment).
Of course, the paper has its limitations. First, we rely on imperfect observational data sources (including the Census of Agriculture and the National Conservation Easement Database). We also cannot attach causality to the relationships we estimate. That is, we can’t say with certainty that the easements themselves are the reason why counties with more easements see greater investment.
Policy implications
When it comes to conservation easements, Oregon tends to lag behind other states. This is generally chalked up to our state’s strong system of land use regulations that potentially limit how future development potential is priced into land outside of urban growth boundaries. However, that is not to say that development outside of UGBs doesn’t happen. Recent efforts to promote easements in Oregon have been bolstered by the Oregon Agricultural Heritage Program (OAHP), which provides state funds that can be used to leverage matching funds from the USDA’s ALE program. The first two rounds of the program funded 9 easements covering 12,252 acres of farmland across the state. Although the $2 million in OAHP funding recently approved by the legislature falls well short of the $17.3 million requested, the program seems to be growing in popularity and has broad statewide support.
I think this line of research is important because it highlights how conservation policy can be a win-win for both environmental conservation organizations and farming advocates, two groups that are not always on the same page. Environmental groups are often concerned with long-term land conservation goals. Farm advocates, on the other hand, are often concerned with property rights being stripped away without just compensation. If agricultural conservation easements actually promote farm investment, they have the dual benefits of conserving land and improving the resilience and vitality of farming communities in urbanizing areas.