BY Hemmy So
Among the thousands of obscure tax code provisions, one has recently come to the attention of many New York City and Washington D.C. residents thanks to aggressive marketing strategies by certain non-profits groups: tax breaks for facade easements. These tax breaks often create windfalls for property owners of historical buildings, a situation recently examined by the Washington Post and lambasted by Sen. Chuck Grassley (R-IA).
Grassley, chairperson of the Senate Finance Committee, plans to more severely punish promoters, taxpayers and appraisers who participate in the donation of significantly overvalued facade easements.
“It’s very discouraging to find yet another example of snake oil salesmen misusing tax-exempt status and abusing the tax laws intended to encourage charitable giving, all for the purpose of making a fast buck,” he said in a statement. “Unfortunately the snake oil salesman are conning many well-intentioned homeowners into this newest scam.”
Facade easements specify legal restrictions on the maintenance of building exteriors. Because these easements contain a bundle of rights that relate to changing or maintaining building facades, they hold value. Therefore, under the tax code, building owners who donated such easements to non-profit preservation groups willing to maintain those facades suffered diminution in property value. To help property owners recoup that loss, the tax code allows a tax deduction for the easement value. According to a recently retracted Internal Revenue Code memorandum, the value of facade easements ranged from 10 to 15 percent of the building’s value.
Rising property values in trendy and historical areas such as Tribeca and the West Village mean valuable easements. For every $1 million in fair market value of a building, for example, the owner will receive a $110,000 tax deduction based on an 11 percent easement valuation.
Owners may also claim another deduction for their charitable contributions to the non-profit organization that accepts the easement. Most organizations ask for a donation from the building owner for its work in navigating the bureaucracy involved in establishing a facade easement. That donation is typically based on a percentage of the easement value. National Architecture Trust, based in Washington, D.C., asks for a donation equaling ten percent of the easement value. A new Tribeca group, Historic Neighborhood Trust, offers to do the work on a sliding scale of eight percent for the first million and five percent for easements over $1 million.
While donating facade easements and enjoying the resulting significant tax deduction are both perfectly legal actions, Senator Grassley has decided to crack down on overvalued appraisals of such easements.
While appraisers generally adhered to the 10 to 15 percent guideline suggested by the disavowed I.R.S. memo, many believe that easements do not actually hurt property values. Because properties located within historic districts are usually subject to strict regulations set forth by city preservation laws, property owners may suffer little consequence from giving up their rights to change building facades.
Jon Chodosh, co-founder of Historic Neighborhood Trust, said that abuses of the facade easement tax deduction program stem partly from automatic assignment of easement appraisal values. “I think it’s an abuse to say that every building which is appraised has an automatic reduction in its value of 11 percent. There’s no logic, there’s no formal practice and there’s no basic principal of appraisal that would ever lead you to presume that every building that has a facade easement would have a reduction of 11 percent,” he said.
Eric Haimes, senior vice president of appraisal company Jerome Haimes Realty, stressed the importance of I.R.S. case law on the subject, which supports a determination that a facade easement is worth about 10 percent of a property’s value. But Haimes also supported an easement-specific approach. “I think the case law should probably be your support, but I think you should look at [easements] on a case-by-case basis. What is this person giving up? Look at the façade, how much façade, how ornate, lots of maintenance?” he said.
While the Senate Finance Committee continues working on proposed legislation to more harshly punish those who engage in perpetrating the donation of overvalued facade easements, the I.R.S. has already begun investigating abuses of the system. The Washington Post recently reported that the I.R.S. has visited Washington D.C.’s historic preservation office to inquire about policies. The New York City Landmarks Preservation Commission has not received any such inquiries.
Spokespersons for Senators Chuck Schumer and Hillary Rodham Clinton of New York did not return phone calls for comment on the issue.
Trust organizations and appraisers say the recently publicity has affected property owners.
“It has scared some people. I’ve gotten phone calls where people [are] asking me, ‘what’s going on?’ It may help or it may hurt, I don’t know. It’s too early too tell,” Haimes said about Sen. Grassley’s efforts.
Chodosh said at least two of his clients have suspended their efforts after Historic Neighborhood Trust informed them about the current situation regarding facade easements. “It’s all noise right now, but it’s effective noise. It’s stopped a lot of people dead in their tracks,” he said.
Bud Perrone, a spokesperson for National Architecture Trust, and Chodosh said they have stopped soliciting new customers.
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