Important Court Decision Regarding Colorado Conservation Easement Tax Credits

On March 15, 2012, the Colorado Court of Appeals announced its decision in Kowalchik v. Brohl.  The Court’s opinion in Kowalchik includes two key findings that will significantly impact the rights of Colorado taxpayers who purchased state conservation easement income tax credits from conservation easement donors.  First, the Court found that a conservation tax credit transferee (or buyer) is not required to be joined as a party in litigation concerning the underlying tax credit between the tax credit transferor (or seller) and the Colorado Department of Revenue (the “Department”).  In holding that the buyer’s interests are sufficiently aligned with the seller’s interests, and that the Colorado tax credit statute establishes that tax credit sellers are designated tax matters representatives of their buyers, the Court rejected the argument that failure to require the joinder of a tax credit buyer denies the buyer due process rights before the Department.  Second, the Court held that tax credit buyers are “taxpayers” under the tax credit statute, and are therefore subject to liability for deficiencies, penalties and interest under the statute.  We do not know whether either party plans to appeal the decision.  One consequence of this decision is that tax credit buyers will be bound by the results of litigation pursued by the Department against their tax credit sellers, without the buyers having been joined as a party to the litigation.  Legislation passed in 2011 to clarify the rights of tax credit sellers and buyers expressly gives tax credit buyers the right to intervene in litigation concerning tax credits they have purchased.  The circumstances of each case vary in determining whether tax credit buyers should pursue intervention as an appropriate legal strategy.

Fate of Enhanced Federal Tax Incentives for Conservation Easements Remains Uncertain

The enhanced federal income tax incentives for charitable contributions of conservation easements, which were passed as a part of the Pension Protection Act of 2006, expired on December 31, 2011.  These enhanced incentives raised the threshold amount of permissible income tax deductions from 30% of adjusted gross income (“AGI”) to 50%, expanded the permitted carry-forward period for the deduction from five to fifteen years, and made other important improvements benefitting farmers, ranchers, and forest landowners.  The expiration of the enhanced incentives saw the federal tax benefits of conservation contributions return to their previous levels.  Due to the contentious political battles surrounding the payroll tax cut and debt ceiling increase, the national conservation community was unable to get Congress to extend the enhanced incentives in 2011.  Currently, bills to reinstate the enhanced incentives and make them permanent have the sponsorship of a majority of the members of both the House of Representatives and the Senate.  However, the extension of the enhanced conservation incentives faces a unique political climate in 2012, with the presidential election and the expiration of several other major tax provisions.  Landowners considering donating all or part of the value of a conservation easement over their property should pay close attention to this important tax benefit.  We will provide updates regarding the status of the enhanced conservation incentives as they occur. 

Please contact Doug Becker or Chris Jensen with inquiries regarding Colorado conservation easement income tax credits.  Photo credit Chris Jensen.

Photo by vxla (Flicker)

Last week I attended the 20th annual Rocky Mountain Land Land Use Institute conference at the University of Denver Sturm College of Law.  Nicola Villa with Cisco was the Keynote Speaker on Friday morning.  Mr. Villa works with the Connected Urban Development ("CUD") program across the world in cities like Amsterdam, San Francisco and Seoul.

Launched in 2006, CUD was born out of the the Clinton Global initiative intended to help lower carbon emissions across the world.  CUD's goal of reduced carbon emission is achieved through high connectivity - broadband, wireless and "smart urban structures."  CUD works by changing how cities deliver services, how residents work and commute and how real estate resources are used and managed.

CUD continues to evolve.  Last year, the next phase of the CUD was announced at the Shanghai World Expo.  It's called SMART 2020: Cities and Regions.  The program is administered by a non-governmental organization and seeks to help cities collaborate with each other and the business community to develop a global industry platform for information technology in the sustainable city.

At least 12 successful pilot projects in participating cities have demonstrated CUD's potential.  One important pilot project that could have far reaching implications for urban development is called the Smart Work Center ("SWC").  SWCs are structures located in residential areas that offer a highly connected professional work environment.  These centers are equipped with networking technology and collaboration tools, which allow users to connect to colleagues and customers.  Users from many different organizations share the SWC's resources.  This type of office sharing arrangement could reduce the need for centralized offices and other development in the heart of downtown areas in participating CUD cities.

Sometimes when we are working on acquisitions or financings of raw land, we encounter roads that follow the section lines, usually 30 feet on either side of the line.  There is often no deed, easement or dedication for these roads, and the question comes up as to whether there is some statutory basis for these roads.  If there is no statutory basis, then we need inquire about whether there is a prescriptive easement for these roads.  (See the note below on prescriptive easements.)

So, is there statutory authority for those roads?  There isn’t now, but there used to be. 

In 1885, the Colorado General Assembly passed a law [PDF] that allowed commissioners of a county, by an order at a regular meeting, to declare any section or township line “on the public domain” to be a public highway.  As pointed out by H. Keith Corey of Grand Junction (see part (3) of his paper), this statute was repealed in 1953, but its repeal did not remove any roads that were in place prior to repeal.  Before repeal, El Paso, Weld and Mesa Counties passed resolutions pursuant to this statute.  See Book 571, Page 55[PDF] of the El Paso County real property records and Book 86, Page 273 [PDF] of the Weld County real property records.

If you are looking at land that has one of these roads located on a section line, and the county passed a resolution pursuant to the 1885 statute before 1953, then you should assume that there is a public highway for the first 30 feet inside the section line.

Thanks to Ian Cortez of Ulteig Engineers, who brought this up at a surveying seminar, and to David Knapp at Land Title for sharing his experience on this issue.

NOTE:  Generally, a prescriptive easement arises when a party adversely uses property in the same manner as if it had an easement, and such use is continuous and uninterrupted for the period of prescription.  Almost every element of a presciptive easement is loaded with specific, and sometimes controversial, meaning, so the analysis needs to handled carefully.  Note that a prescriptive easement (and its cousin, adverse possession) usually cannot be established by private parties against governmental entities, so you probably can't make one of these public highways go away without the county's consent.

Photo by goingslo (flickr)

One issue: marijuana stinks.  It has a very strong odor, even before it is smoked. 

Odor emanating from medical marijuana businesses has led to complaints from neighbors, who are typically other businesses.  These businesses and their customers may find the strong marijuana smell that periodically permeates their neighborhoods offensive, or simply overwhelming.  The question then becomes how to deal with the problem.

Colorado’s Medical Marijuana Code, C.R.S. § 12-43.3-101 et seq. (the “Code”) does not directly address or regulate odors coming from medical marijuana businesses, and it does not appear that the proposed state regulations to implement Code will address odors either. 

Accordingly, if neighbors have complaints about odors emanating from medical marijuana businesses, they will either have to hope that local regulation addresses the issue, or be resigned to remedies under the law of nuisance. 

The Boulder Daily Camera recently ran an article addressing the City of Boulder’s regulation of odors from medical marijuana businesses. There have apparently been a number of complaints of wafting smells of marijuana, and the City is investigating.

Under Boulder’s medical marijuana regulations, “[a] medical marijuana business shall be properly ventilated to filter the odor from marijuana so that the odor cannot be detected by a person with a normal sense of smell at the exterior of the medical marijuana business or at any adjoining use or property.”  Boulder Municipal Code, § 6-14-8(h).  Violations can result in a loss of a license, and/or a fine of up to $1,000 per violation. 

According to the Daily Camera, it is difficult for medical marijuana businesses to comply with the requirement, and expensive equipment is needed to mitigate odors.  Medical marijuana businesses have also complained that the requirement is unfair, given that a great many other businesses are allowed to let odors leave their properties without consequence.  (Walking past a pizza parlor, you can often smell the umistakable mix of baking bread and garlic).  However, it appears that the City is intent on trying to enforce its requirement.  As indicated, businesses have a strong incentive to comply, as they risk having their businesses shut down if they do not.

Given Boulder’s odor regulation, neighbors of medical marijuana businesses in Boulder are probably far better off than those in other local jurisdictions that do not have similar requirements.  Without a code provision addressing odors, complaining neighbors would likely only have remedies in the law of nuisance.  While a nuisance suit could result in an injunction, thus cutting off the problem, bringing such a suit would be quite expensive and time consuming for the complaining neighbor.  In contrast, pursuing relief through local code enforcement would likely solve the problem more quickly, and would be carried out primarily at the expense of the local government. 

Colorado’s new licensing scheme for medical marijuana businesses under the Code goes into effect on July 1, 2011.  Local jurisdictions throughout Colorado are still in the process of updating their regulations to conform to this dual state/local licensing system.  As they do, it will be interesting to see if other jurisdictions will attempt to regulate odors as Boulder has.    

Of course, as this DenverUrbanism.com blog post suggests, as time goes on and Millennials start having their own children, their desires may change.

It will be interesting to see how this generation’s preferences impact urban and suburban residential markets.

Following a trial in November of 2008, the jury found that the county treated the church unfairly in the land use process compared to a similarly situated secular school, imposed a substantial burden on the church’s exercise of religion, and unreasonably limited the ability of churches to locate within the county.  Based upon the verdicts, the district court then entered an injunction directing the county to approve the church’s 2004 application to expand its Niwot facility which is used both as a church and a school.

The Tenth Circuit upheld the jury verdicts and injunction in July of 2010.  The Supreme Court denied the county’s petition for certiorari, meaning it will not review the Tenth Circuit’s decision.  In two separate decisions, the church has also been awarded approximately $1,450,000 for attorneys’ fees incurred by its trial counsel, Otten, Johnson, Robinson, Neff & Ragonetti, P.C. of Denver, and The Becket Fund for Religious Liberty, a Washington D.C. based law firm, as well as its lead appellate counsel, Williams & Connolly LLP of Washington, D.C.

Alan Ahlgrim, Lead Pastor of the church, said “We’re grateful that the legal process is now done and we have been vindicated by yet a third court.”  He noted that during the application process the church had spent countless hours and great sums of money trying to comply with the county’s requirements and to address concerns of the church’s neighbors.  “The expanded facility will be a benefit both for the congregation and the entire Niwot community,” he said.

Kevin Baine of Williams & Connolly said he was not surprised by the Supreme Court’s decision not to review the case because “both lower courts had upheld the jury’s finding that the church had been treated less favorably than a secular school in the same position.”  According to Tom Macdonald of the Otten Johnson firm, the jury heard extensive evidence comparing the county’s treatment of the applications filed by the church and the Alexander Dawson School, which was also located on land with the same zoning and comprehensive plan designations as the church’s property and which received approval of an expansion similar in size to total project size sought by the church and that included a gymnasium of roughly the same size as the church requested.

Macdonald said the unreasonable limitation verdict was based upon evidence that the county made it more difficult for churches to operate in the county, had effectively left few sites for church construction and had told a synagogue it could have only 100 seats because the county did not want any more mega churches.  The substantial burden claim was based upon evidence that space constraints had inhibited the church’s growth and outreach to new members in a number of ways, he said.

RLUIPA was passed unanimously by both houses of Congress and signed into law by President Clinton in 2000.  “This case demonstrates the ongoing need for civil rights laws like RLUIPA that protect people of all faiths,” according to Eric Rassbach of the Becket Fund.  “It is also a testimony to the American commitment to religious freedom for all,” he said.

For additional information contact Tom Macdonald (303-575-7520; mac@ottenjohnson.com); Kevin Baine, (202-434-5010; kbaine@wc.com); or Eric Rassbach (202-349-7214; erassbach@becketfund.org).

A client recently raised concerns regarding a potential change in property tax assessment methodology that may be upcoming in the next Colorado state legislative session.  With revenues continuing to decline, local governments are seeking opportunities to capture property taxes from new sources.  The issue concerns residential property owners claiming an agricultural tax classification without having a bona fide agricultural operation on their land.

Colorado assessors classify real estate for property tax assessment purposes based on use, regardless of the underlying zoning designation.  Often, an agricultural classification results in a lower tax bill, because the actual value of agricultural land is based on its agricultural productive capacity.  A low productive capacity results in a low tax bill.    

HB10-1293, which became law last year, established the Land Assessment and Classification Task Force (the "Task Force").  The Task Force's nine members were charged with studying and evaluating assessment methodology for agricultural and residential properties and proposing statutory amendments to ensure that property is taxed in accordance with its actual use.  Under existing law, a residence on agricultural land is classified as residential, but the land is classified as agricultural.  

In October of this year, the Task Force released its Final Report.  In the Final Report, the Task Force agreed to focus its attention on a mixed residential/agricultural classification that would more accurately reflect the land's use.  The Task Force proposed four recommendations as follows:

1. For any parcel that is more than 2 acres in size, assess a maximum of 2 acres as residential, when the residence is not an integral part of the agricultural operation.

2. For any parcel that is less than 2 acres in size, assess that portion of the land not used for agricultural operations as residential.

3. Require the division of taxation to establish guidance on the definition of "integral to agricultural operations" with certain guiding principles.

4. Require members of the Task Force to include recommendations 1 through 3 on any legislation carried
forward by Task Force Members. 

Because any changes to the historical tax classification methodology could have significant long-range consequences, it will be important to monitor the legislature's interest and activity in this area.  I understand legislation on this matter supported by a number of Colorado counties has already been drafted.  Newspapers in Denver and Vail are already weighing in. 

In addition to the solar farm, the PrairieStar development includes many additional green touches including a community garden, an irrigation system using nonpotable water and an energy center for recharging electric cars.

In negotiations between developers and local municipalities, this type of sustainable (and sustainably marketed) project is likely to shed a different light on the developer.  Not only does it appear that sustainable developments like PrairieStar are particularly marketable to the end user, but in the current green climate they should be appealing to the local jurisdiction for entitlement approval.

Photo by Foreign and Commonwealth Office (Flickr)

Urban renewal laws have been on the books for more many years, and the authorities created under the laws have successfully implemented numerous urban renewal projects across Colorado. The Denver Urban Renewal Authority is just one such example.  Urban renewal laws grant urban renewal authorities the power to issue bonds to pay for qualifying elements of an urban renewal project, which typically consists of public streets, drainage improvements, sewer lines and other public infrastructure, but in any event, improvements that are intended to eliminate blight.  The urban renewal authority captures the incremental property and sales tax generated on redeveloped property (for a maximum period of 20 years), calculated as the difference of such taxes before and after developing the property.

Urban renewal projects are permitted, as an initial matter, only within areas where an urban renewal plan has been adopted by the municipality containing the urban renewal authority.  To establish an urban renewal plan for a particular area, the municipality must first determine that the area is "blighted."  It is this determination of "blight" where residents often run into issues. 

I believe the residents of Castle Pines didn't like their community being labeled as blighted, as most people don't like to have their property labeled as blighted.  Unfortunately, the urban renewal law requires a finding of "blight", based on a number of indicia as a prerequisite to establishing an urban renewal authority, notwithstanding that many of the indicia don't fall into the category of conditions most people associate with blight - like faulty lot layout, defective title conditions, unusual topography and inadequate street layout.  

Also, I believe the residents of Castle Pines thought the incremental tax dollars captured by the urban renewal authority amounted to a tax increase.  With or without an urban renewal authority, the incremental taxes generated by development are collected by the government.  But, the rationale behind the urban renewal law is that such increment would not be available if the development did not occur.  In other words, the development enabled by public financing of a portion of the public improvements would not have occurred, and therefore the increment would not be available, but for the urban renewal's ability to capture the increment.  In sum, the urban renewal authority is not responsible for tax increases, it merely uses the increased taxes collected by virtue of development to encourage development.  

Finally, I believe the residents may have thought "urban renewal" should be relegated exclusively to urban areas.

The real debate here should not be focused on whether a community contains indicia of blight or if the development is located in an urban area, but instead on specifically when and where it is appropriate to use tax increment financing to stimulate development, if at all.  If the debate does not focus on these issues, the public will continue to get lost in the meaningless distinction between the practical and legal interpretations of "blight" and "urban" under the urban renewal law.  Urban renewal laws could be easily reconstituted to address specifically when and where tax increment financing is appropriate, and I think they should be.

Although obtaining entitlements now may be “early” (end users or the ultimate land plan may be unknown), jurisdictions have been recognizing such circumstances and the need for flexible zoning that will allow for diverse development opportunities.  Planned Unit Development (PUD) or similar zoning can provide for standards that differ from the jurisdiction’s generally applicable zoning or technical standards to accommodate a variety of users.

Because there are fewer development applications being submitted today, applications may be processed in an abbreviated period of time.  And, as it traditionally may take years to process and obtain final approval of complete land use entitlements, there is no better time than the present to initiate that process.

[A]ppear adverse to liquidity, affordability and stability in the housing finance market and to financially safe and sound investments. 

Interested parties may submit comments on the proposed guidance directly to FHFA on or before October 15, 2010, via e-mail at regcomments@fhfa.gov  Include "Private Transfer Fee Covenants, (No. 2010-N-11)" in the subject line.  

This is coming at a time when the retail and industrial market is seeing high vacancy rates, thus making medical marijuana tenants a potentially appealing way for landlords to turn empty space into a rent-producing revenue stream. 

However, much confusion and ambiguity remains surrounding Colorado’s medical marijuana laws.  This is true both with respect to the ever-looming issue that marijuana remains illegal for any purpose under federal law, but also with respect to Colorado’s requirements themselves. 

As described in the Daily Camera, the City of Boulder’s efforts to get medical marijuana businesses within its borders to comply with its regulations is a telling example of the latter problem.    

Landlords dealing with medical marijuana tenants should always keep the federal prohibition on marijuana in mind in deciding whether to enter into leases with such tenants, and in structuring their relationships with such tenants if they do.  Under current Department of Justice policy, federal authorities should not focus their prosecution resources on “individuals whose actions are in clear and unambiguous compliance with existing state laws providing for the medical use of marijuana.”  Unfortunately, given the confusion at the state and local level, it may be some time before anyone knows what “clear and unambiguous compliance” with Colorado’s medical marijuana laws even means.

The ambiguities and confusion suggest that it would be prudent for landlord to be vigilant to ensure that they obtain timely information from their medical marijuana tenants.  Particularly in this field, it is important for landlords to have early notice if problems arise with respect to the licensing or legal status of their tenants.

Photo by eggrole (flickr).