Understand the Ramifications of Putting Farmland Into Permanent Easements

Dan Crummett, Contributor

Pat Zeeb has become accustomed to the traffic noise from nearby Interstate 69 and U.S. Hwy 127, but complains the headlights are annoying during planting and harvest. As a seventh-generation farmer, the Zeeb family has been farming here in central Michigan since 1836. "My dad, Robert, and his father built the farm into what it is today, a 50/50 corn and soybean rotation," Zeeb proudly says.

Zeeb Farms consists of nearly 1,000 acres and is located between the two major thoroughfares in sight of the state capitol dome in Lansing. As urban sprawl continued to expand its footprint toward his operation, Zeeb could see potential future problems for the farm and his desire to remain in agriculture. He began looking for ways to protect their land from development.

His solution was selling "purchased agricultural conservation easements" to conservation arms of public-funded government entities. The so-called PACE (Purchase of Agricultural Conservation Easement) programs and their easements use government and foundation/trust funding in the name of farmland preservation and are becoming increasingly popular tools for families wanting to lock in assurance their land remains in agriculture.

PAVING OVER FARMLAND

From 2001 to 2016, American Farmland Trust (AFT) estimates 11 million acres of farm and ranch land were paved over, converted out of agriculture or fragmented by real estate development. Of that land, the nonprofit group working for farmland preservation says nearly 4.5 million acres were classified as "nationally significant" -- the best land for food and crop production.

To counter the seemingly endless appetite for farmland by developers and infrastructure planners, AFT recently released its "Farms Under Threat: The State of the States" report, which tallied the acreage losses to development and offered ways to protect lands likely to be converted in the future. (Visit https://farmland.org/… for more information.)

Announcing the report, AFT president and CEO John Piotti said, "The threat to farmland is real, and the report emphasizes the answer to the problem is getting farming right before it's too late. He says the AFT favors extending crop rotations, the adoption of no-till or conservation tillage, and planting cover crops to improve soil health -- thereby improving the value, productivity and resilience of the land.

DEVELOPMENT-FREE ZONE

In a 2022 survey, AFT reported state PACE programs in 30 states had invested more than $5 billion in state funds to acquire nearly 18,500 easements and permanently protect 3.4 million acres by paying property owners to keep their land available for agriculture. The survey showed Delaware, Maryland, Massachusetts, New Jersey and Pennsylvania led the nation in easements acquired, while California, Colorado, Maryland, New Jersey and Pennsylvania led in acres protected.

Additional partners in the programs include local governments, USDA Natural Resources Conservation Service and other federal agencies and foundations, along with landowners. These entities have spent an added $3 billion on the projects.

AFT recently announced goals to further protect farmland and deter urban sprawl, primarily from low-density development, through its information and advisory function -- educating landowners and encouraging access to public conservation monies along with funds from trusts and foundations.

Piotti says the group will act to double the acreage of permanently protected farmland by 2040 and reduce the rate of conversion by 50% by 2030 and by a total of 75% by 2040. To meet those goals, AFT has established the National Agricultural Land Network, a consortium of land trusts and government entities focused on protecting farmland from development.

Progressive Farmer spoke to three landowners to learn their reasons for signing permanent easements and to share their experience with the programs.

Zeeb Farms
Lansing, Michigan

Programs such as PACE were not unfamiliar to the Zeeb family. "Both of my parents were in politics," Pat Zeeb explains, "and were aware of regulations concerning farm easements."

He says when the original process to enter a PACE program was made available, administrators compared the value of farmland based on agricultural use with an estimate of commercial development value, and a bid price was set from those criteria (a process quite similar to that found in other states even today). If it was suitable to the landowner, the land could enter the program.

"The first year the program was authorized to purchase the development rights, Dad didn't make the cut, but the second year he got in," Zeeb explains. "That protected 700 contiguous acres, which made up the core of our farm."

Today, Zeeb, with the help of his daughter and sister, farms the land with an eye toward someday receiving a Bicentennial Farm plaque to go with his father's 150-year Heritage Farm plaque. The operation includes an additional 300 acres of adjoining purchased land in an area not readily convertible to commercial purposes.

The easement assures Zeeb Farms land will remain green, which has not been a problem since Zeeb's generation shared in the desire for it to remain in agriculture. As in all PACE program easements, the land can be sold, but not for development.

"We get along, and everyone knows how the land is protected," Zeeb explains. "I'm not overly concerned about my future with the land, but the next generation involves my father's eight grandchildren, so the transfer and estate planning could become a problem for them. Keeping everyone happy will be a challenge."

Pleasant Lane Farms LLC
Latrobe, Pennsylvania

Jason Frye's family has been in the dairy business since 1976, when they began leasing land 35 miles southeast of Pittsburgh from golf legend Arnold Palmer. The enterprise remained a traditional dairy until two years before Palmer died in 2016, when he sold the 185 acres to the Frye family with a "gentleman's agreement" the land would be put in a farmland preservation.

"We knew we wanted to continue operating the farm forever, and a year after the sale closed, 180 acres of the land entered the PACE program, which helped us significantly from a financial standpoint," Frye explains. "It was always my dad's (Ralph) vision to see the land preserved for farming ever since he and my mom founded the operation in 1976. Our family has been in the ag business in western Pennsylvania since 1795, and we are the sixth-, seventh- and eighth-generation farmers here."

The PACE payment allowed the family to pay off the mortgage on the land and use the equity to drive an expansion into a retail creamery fed by a "smart barn" and robotic milking system.

Today, with eyes on consumer markets in the nearby urban Pittsburgh area, Pleasant Lane Farms LLC milks 55 to 65 cows, primarily Holstein with a few Ayrshire, Guernsey and Brown Swiss included for added fat content for cheese production. The current generation of Fryes, including Jason and his wife, Dorothy, brother Todd Frye and lifelong friend Craig Deuel are principals in the operation, along with the help of extended family and continued guidance of their parents, Ann and Ralph.

"Before the expansion, we were maintaining a herd average of about 65 pounds production milking twice a day in the tie-in stalls," Jason Frye explains. "At the last good look at our numbers, the rolling herd 14-day average is now 86 pounds per cow on 3.3 milkings per day."

Jason Frye, who is the head cheesemaker and in charge of the creamery operation, says Todd Frye tends to herd management and milking.

"We're working with nutritionists and veterinarians to keep our herd in top shape and develop the right mix of milk for our creamery business," he explains. "We also crop an additional 180 to 200 acres in support of the dairy."

Jason Frye says the farm is "landlocked" with a golf course on one side, Pittsburgh coming from the other direction and an airport a nearby neighbor. "There's little available farmland in our area we could have purchased to expand to accommodate our family's desire to remain on the land as farmers."

Also, by designating the land as "agricultural use only," the property continues being taxed at a traditionally lower category use rate than surrounding lands subject to commercial development.

"Without the ag easement, the upgrades and the new business model would have never been possible," he says.

Seidel Maple Lawn Farm LLC
Greenwich, Ohio

Rob Seidel says watching his parents' financial struggles to maintain their Huron County farm during the 1980s was the driving force for his family to pursue placing more than 350 acres in a permanent agricultural easement with the Ohio Department of Agriculture.

He says protecting the land from development through the PACE program was a key ingredient in planning the 2005 partnership now made up of himself, his two sisters and a brother.

"All of us were involved in that decision, and we've also placed two additional protection agreements (not financial) with the Western Reserve Land Conservancy to improve land stewardship and natural resource conservation.

"I'm old enough to remember what Mom and Dad went through the in the '80s to save this farm, so our planning is aimed at protecting it for future generations," Seidel explains. "I have four boys interested in continuing in agriculture and two granddaughters also interested in preserving it."

The no-till corn/soybean farm consists of 1,500 acres that are also home to two broiler barns, an 80-head cow/calf and feedlot operation, and wheat and hay production. The family is involved in the H2Ohio program, which includes the use of cover crops and manure utilization each fall to protect the soil and reduce runoff into the nearby Vermilion River, which drains into Lake Erie.

Seidel says the financial benefits of the PACE program easements allowed the family to build the broiler barns and add additional acres to their operation.

A CAVEAT OF PERMANENCE

The three farmers are quick to agree the agricultural conservation easements have been positive arrangements for their families. Still, they point out as families grow and disperse, "permanent" easements can present challenges of transfer.

Zeeb sees it coming with numerous grandchildren and the likelihood some individuals may not be interested in the farm yet share in it as heirs.

Frye explains it this way: "The first generation does it. The second generation is aware of the arrangement. And, the third will have forgotten why the easement was sold, and it is constrained by contracts that keep the land in agriculture."

Seidel says diligent planning and familiarity with all regulations of the easement are necessary when selling developmental rights.

"For instance, if you have several children, many of these agreements limit only one house lot per easement," he explains. "In that case, you may want to maintain some land outside the easement to provide for family member homes in the future."

All three agree PACE program easements need to be studied carefully to ensure they meet the present and future needs of landowners considering such arrangements.

A PACE PRIMER

The American Farmland Trust offers these explanations of PACE programs highlights:

WHAT ARE PACE PROGRAMS?

Purchase of Agricultural Conservation Easement programs compensate property owners for keeping their land available for agriculture. Typically, these programs consider soil quality, threat of development and future agricultural viability when selecting farms for protection. Such programs are usually administered by state or local governments, but also may be operated by private conservation organizations.

RIGHTS AND RESTRICTIONS

Agricultural Conservation Easements (ACEs) are deed restrictions that prohibit activities that could interfere with farming but may require a conservation plan. Landowners retain all other rights, including the right to limit public access, sell, rent or bequeath the land. Easements remain with the land, binding all future owners.

COMPENSATION

Programs generally pay landowners the difference between the value of the land as restricted and the value of the land for its "highest and best use," which could be residential or commercial development. The easement price is determined by appraisals or a local easement valuation point system.

TAX CONSIDERATIONS

An easement is a capital asset -- property expected to increase in value over time. The sale of an easement may be subject to federal and state capital gains taxes. Landowners have used the like-kind exchange provision in the federal tax code to defer capital gains taxes, applying proceeds from the sale of an easement to acquire additional land.

Landowners who sell ACEs for less than their appraised value may qualify for tax incentives and can deduct the value of donations that meet IRS Code section 170(h) criteria up to 50% of their adjusted gross income in the year of the gift. Donors can apply excess easement donation value toward federal income taxes for the next 15 years, subject to percentage limitations.

In addition to the federal income tax incentives for donors, most states' income tax laws also provide for a charitable deduction of conservation easements.

To the extent the restricted value of farmland is lower than fair market value, the estate will be subject to a lower tax. In some cases, an easement can reduce the value of an estate below the level that is taxable, effectively eliminating any estate tax liability.

OVERALL PACE EFFECTS

PACE provides landowners with liquid capital (access to equity) that can enhance economic viability through debt reduction, expansion or modernization, settling estates or investing for retirement.

PACE gives communities a way to share the costs of protecting farmland with landowners. Non-farmers have a stake in agriculture because of their local access to food production, as well as maintenance of scenic and historic landscapes, watersheds and wildlife habitat.

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-- For more information on the PACE Program and the states involved, visit https://farmlandinfo.org/…

-- Visit American Farmland Trust at https://farmland.org/…

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