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Sunday, December 12, 2004

Law - Washington Post questions historic fa�ade easements

The Washington Post has a front-page Sunday story today, part 1 of 2, titled: "RICH WITH HISTORY: Preservation Creates Tax Windfall - Loophole Pays Off On Upscale Buildings." Some quotes from a very long story:

After closing on the house, the Weisses signed papers promising that they would not alter its outward appearance without first obtaining permission. They "donated" that pledge, known as a historic facade easement, to a nonprofit preservation trust. That allowed the Weisses to seek a federal income tax write-off for the estimated cash value of the gift.

Easement donors in D.C. usually write off about 11 percent of the value of their homes. That means owners of a $1.5 million mansion can claim tax breaks of $165,000 or more.

Such tax deductions are increasingly common although the District already bars unapproved and historically inaccurate changes in the facades of homes in the city's many historic districts. As a result, easement donors largely are agreeing not to change something that they cannot change anyway.

"It really is money from the taxpayer for nothing," said lawyer John D. Echeverria, director of the Georgetown Environmental Law and Policy Institute. "People are absolutely delighted -- and astounded -- that the federal government would send them $50,000 and more for doing nothing."

The Weisses are among hundreds of affluent Washingtonians who have taken part in the once obscure but rapidly growing program, created by Congress 28 years ago with the goal of preventing developers from ravaging historic streetscapes across the nation. * * *

The tax deductions are supposed to represent the decrease in value of the property caused by the easement restrictions. Increasingly, though, the easements have become a way for owners of expensive houses to reap a windfall.

An analysis by The Washington Post of federal and local government data identified about 900 residential facade easements in Washington covering a total of 1,400 homes and condo units. Nationwide, the number of easement donations has been increasing rapidly, hitting about 700 last year.

Today, the average assessed value of residential structures covered by facade easements in the District is more than $1 million, the analysis showed.

The homes tend to be clustered in affluent neighborhoods in Capitol Hill, Dupont Circle and Georgetown. Most display brass plaques, many of them round and bearing a star, identifying the trust that holds the easement.

Homes enrolled in the program need not be architecturally striking. The houses also need not be especially antique -- homes built as recently as 1950 may qualify. And many preservationists say the easements may increase a building's value -- making the tax breaks unwarranted.

"They are giving up absolutely nothing," said former Treasury official Daniel Halperin, now a nonprofit tax specialist at Harvard Law School. J. Peter Byrne, a historic preservation specialist at Georgetown University Law Center, called the donations "bogus gifts" that have been supplying homeowners with "free money."

The increase in easements has been driven by the emergence of for-profit "facilitators" -- businesses that market the program and process the paperwork for homeowners, making the procedure quick and painless. In recent years, such companies and the nonprofit preservation groups that hold the easements have taken in millions of dollars for processing paperwork and monitoring the easements.

Today's Post story is accompanied by several sidebars. "Local Laws Already Bar Alterations: Intervention by Trusts Is Rare for Preservation" is available here; "Why One Building Lost Its Character While Another Didn't," is available here.

This graphic shows how rapidly use of the write-off is growing, not only in D.C. and New York, but in Illinois, which ranks third on the chart.

This very cool map shows the location of historic fascade easements in Washington DC.

And what about Indiana? There are at least two NFP organizations in Indiana to which one can donate an easement and receive a tax federal income tax deduction, as well as a potential estate tax deduction and lower property taxes.

Undoubtedly there will be follow-ups and responses to this Post story, as there were to its series of stories about the Nature Conservancy last year; I will try to post them here.

[Updated 12/13/04] "Tax Break Turns Into Big Business" is the headline to the second part of the Post's two-part series on façade easements, published today. As explained in the story today:

Historic preservation was a sleepy little field until seven years ago, when financial adviser James M. Kearns began inviting property owners into his Dupont Circle home to learn about an obscure federal program.

Kearns and a friend, Steven McClain, advised homeowners that they could use the program to claim sizable income tax write-offs -- tax breaks that generally totaled 11 percent of their house's market value. To obtain that windfall, though, homeowners first had to engage in a complicated process ending in a facade easement donation.

Kearns and McClain offered a pain-free alternative in fliers for their business partnership: "For a fee, the Capitol Preservation Alliance will prepare and process the easement donations for you."

That user-friendly pitch proved a hit. Brass plaques identifying houses in the program began popping up like crocuses, first in Washington, then in New York and other cities.

Not only the homeowners benefited. Millions of dollars also flowed to the for-profit companies that promoted the program and to the nonprofit trusts that held the easements and monitored the facades.

One such nonprofit is the National Architectural Trust, founded by Kearns and McClain. In less than four years in business, the nonprofit trust says it has reaped nearly $17.5 million in what it describes as contributions -- fees paid by easement donors to underwrite the cost of processing paperwork and monitoring facade restrictions. Although the Washington-based trust used some of the cash to build an endowment, it also paid more than $5.5 million in 2003 alone to a for-profit company owned by Kearns and McClain, records and interviews show.

The Post today also has a box titled
"How Facade Easements Work," with this explanation:
Income tax breaks are available to owners of many buildings in designated historic districts or listed on the National Register of Historic Places. Owners sign a property easement in which they promise not to change the building's outward appearance without approval. They donate the easement to a nonprofit trust and then estimate how much the restrictions have lowered the building's value. They write off that amount as a charitable contribution. The buildings often bear plaques, such as the one above, which identify the trust.
Finally today, the Post has this story, headlined "As Word Spreads, Clamor to Donate Grows." Some quotes from this amazing recount:
Two years ago, the doorbell rang at Jennifer Litwin's $3 million French Renaissance townhouse, just steps from Lake Michigan on Chicago's Gold Coast. On the stoop was Andrew Fisher, an executive from the nonprofit Landmarks Preservation Council of Illinois.

Fisher offered to show Litwin how she and others in the neighborhood could save a small fortune, she recalled, and she offered to hear him out.

"None of my neighbors did it because they were suspicious," Litwin said. "My husband thought I had just lost my mind."

Eventually, Litwin and her husband agreed to give the council $30,000, she said. They also gave the council a historic facade easement on their home, in which they promised not to change the outward appearance of their townhouse without first seeking approval from the council.

That, Litwin said, allowed the couple to claim a federal income tax write-off totaling $300,000.

News of the donation helped set off a land rush in Illinois, one that continues to this day and which mirrors a boom in easement donations that began in Washington and New York. Between 1997 and 2001, no one from Illinois applied to the National Park Service seeking to certify a home as historic for a charitable donation. That changed in 2002, when 118 Illinois property owners received certification, followed by 155 last year, according to federal data analyzed by The Washington Post.

Posted by Marcia Oddi on December 12, 2004 12:22 PM
Posted to General Law Related