FEATURE
ARTICLE- May
30, 2005
CORRECTION AND CLARIFICATION:
We make these corrections and clarifications to a story on conservation
easements, headlined, "Write-off on the Range," in our
May 30 issue:
We reported that using a conservation easement to limit subdivision
on ranch land can appear to increase the land’s value, in
areas where land prices are soaring, because wealthy buyers prefer
big pieces of land. We should have made clear that such easements
don’t cause an increase in the land’s value; they merely
don’t inhibit the soaring prices.
The story did not intend to imply that Reid Rosenthal has done
anything illegal.
Mr. Rosenthal took HCN editor in the field Ray Ring on a tour of
three of his ranch projects, and drove past a fourth. The story
said we went by a fifth project, but we didn’t. The quotes
and other information from Mr. Rosenthal were drawn from several
phone interviews, and court documents, as well as the talk during
the tour.
The story reported that on each project, a few homesites have been
created, and in particular, that in the Ruby Lake Ranch project,
the investors plan to create four homesites. But two of the projects
have resulted in only one house each, Mr. Rosenthal says, and on
Ruby Lake Ranch, the plans are not yet set.
In the Three Creeks project, the initial conservation easement
covered more than 20 tracts, including old patented mining claims,
which could have been homesites without going through county subdivision
approval. That easement alone, preserving about 600 acres of wildlife
habitat, generated more than $1 million in tax benefits for the
investors, according to court records.
With respect to his bankruptcy, Mr. Rosenthal says he resigned
as chief executive officer of several Colorado development firms;
the firms faltered after his departure; and he was sued for his
guarantee of bank loans to the firms. His bankruptcy filing, in
1996, listed about $1.9 million in unresolved debts, he says; the
creditors voted unanimously for his plan of reorganization, and
the reorganization was resolved within eight months.
While Mr. Rosenthal, or his businesses or partners, have been involved
in more than 30 legal actions in Montana, he says most stem from
"four or five core disputes."
The story reported that Madison County filed a misdemeanor criminal
charge -- stalking -- against Mr. Rosenthal, that a jury found him
not guilty, and that he sued the county for malicious prosecution.
But in fact, in that misdemeanor case, the Madison County Attorney
turned the files over to the Montana Attorney General’s office,
and the Attorney General’s office filed two misdemeanor charges
-- stalking and trespassing -- against Mr. Rosenthal in 2003. Some
of that case had to do with a dispute over water rights and irrigation
practices. The state’s prosecutor eventually dropped the trespassing
charge, and took the stalking charge to the jury; then the jury
acquitted Mr. Rosenthal.
The county made a different attempt to prosecute Mr. Rosenthal,
in 2002, on a misdemeanor charge of violating Ruby Valley Conservation
District regulations, and that case was also thrown out. Those cases
led to Mr. Rosenthal’s filing a lawsuit against the county
attorney and the state, charging malicious prosecution and defamation.
That lawsuit is still active.
We reported that many people say Mr. Rosenthal’s projects
have made it harder for the public to access private land and the
Ruby River, for hunting and fishing. It should be noted that Mr.
Rosenthal put together a plan in 1995 for landowners to provide
access for fishing, with strict limits to be set by the landowners.
The Montana Department of Fish, Wildlife and Parks rejected it,
because the agency did not want to allow the landowners such authority.
Mr. Rosenthal has also arranged to run some ads in the Madisonian
newspaper, publicizing the procedures for people to get permission
to go on some of the private land.
Write-off on the Range
by Ray Ring
Wielding conservation’s most powerful
tool, Reid Rosenthal walks a fine line between helping the land
and serving his wealthy clients.
SHERIDAN, Montana — On a cloudy,
unsettled day in early May, Reid Rosenthal wheels his huge pickup
truck along an unpaved backroad in Madison County, northwest of Yellowstone
National Park. He passes through patches of sunlight, then patches
of drizzle. When he gooses the throttle on the Ford Super Duty one-ton
king-cab, the big diesel engine rattles. The stiff suspension hops
on every bump. The landscape sweeps from the Ruby River up to the snowcapped Ruby
and Tobacco Root mountain ranges. Touches of green show on the lower
ground, where winter’s grip has relaxed. The surface water
sparkles.
Rosenthal turns onto a paved road that isn’t much better
than dirt, then off the pavement again. He’s leading a tour
of five developments that he has helped mastermind, luxury estates
carved out of former ranchland. His license plate says RRANCH, and
he looks the part of the modern cowboy. A straw cowboy hat hides
his bald spot, and he’s wearing wire-rimmed sunglasses, tight
jeans, and a silver-studded belt. He’s 52, and burly from
weightlifting.
"I’m proud of what we do," Rosenthal says. He’s
talking about how these developments fly the banner of conservation.
Since the late 1980s, he’s worked with investors from Florida,
New Jersey, Maine and other places, as they’ve purchased more
than 18,000 acres here. They’ve assembled choice parcels to
form Ruby Oxbow Ranch, Ruby Canyon Ranch, Ruby Canyon Overlook Ranch,
Ruby Lake Ranch and Three Creeks Ranch; in each ranch, they make
improvements to the land, then sell it off as a few homesites and
big ranchettes. And they’ve made sure that development will
be forever limited on about 10,000 acres of the land, by donating
conservation easements to a nonprofit land trust.
Rosenthal invested in some of the developments himself and typically
serves as ranch manager. He says much of the land was "sadly
degraded" by poorly managed cattle grazing in the past, which
made it ripe for conservation-minded developers.
He points out faint tracks in the grass, where his workers have
closed unnecessary roads; then to miles of fences they’ve
modified to accommodate wildlife, protect the streambanks, and manage
grazing; extensive irrigation systems for new hayfields; and new
ponds for wildlife and cattle.
He offers his binoculars for spotting dozens of elk, deer and antelope.
The wildlife populations have increased dramatically, he says, and
so has the production of hay and cattle.
He also points out three substantial, earth-tone, wooden houses,
built in the folds of the land. These houses are not "skylined"
on ridgetops, the way trophy homes are in less sensitive developments,
he says. Instead, the view is mostly preserved.
The conservation easements, he explains, have been an essential
component in the investors’ "business plans." By
donating the easements to the land trust, the investors have likely
reaped millions of dollars in tax breaks, along with profits from
selling high-priced lots.
Similar weddings of conservation and business plans can be found
throughout Madison County. One-fifth of the private land here is
protected by conservation easements, a total of about 200,000 acres;
the county may lead the West in that regard.
Madison County remains rural, with only about 7,000 residents.
But the landowners doing easement deals here include Atlanta-based
billionaire Ted Turner; a billionaire Wal-Mart heiress and her husband,
the owner of the Denver Nuggets; the CEO of the $100 billion AIM
mutual funds; the founder of the $150 billion Oppenheimer mutual
funds; the CEO of the Cox Enterprises multinational media empire;
the family that built the Arm & Hammer Baking Soda conglomerate;
a multimillionaire Silicon Valley entrepreneur; and the owners of
several exclusive ski-resort developments.
As in much of the scenic West, land conservation here has become
largely a rich man’s game. And the conservation easement system
serves upscale landowners to such a degree that a growing number
of people think it’s unfair.
Rosenthal has raised the hackles of other Montanans, in fact, with
his easement deals and other actions. "I’m controversial,"
he says, "because I represent the interests of my partners
aggressively. I try to do what’s right, and we don’t
back down ... some people just don’t like that. That’s
tough."
Conservation developers like Rosenthal, and some who are even more
aggressive, have drawn attention to a number of flaws in the easement
system. Even as easements have become the most popular tool for
private-land conservation, keeping millions of acres from becoming
dense subdivisions, people have begun to realize that the system
is surprisingly loose, and easy to abuse. Congress, conservationists,
the Internal Revenue Service, academics and think tanks have jumped
on board a movement to reform it.
Proposals for improving the system range from gentle to drastic.
But there’s a widespread view that since conservation easements
became popular 20 years ago, they’ve been enjoying a Wild
West era. A look at Rosenthal’s operations shows how the easement
system works, for better or worse.
"Don’t lose sight of the end goal: conservation of land.
And there’s an economic equation to that." — Reid
Rosenthal
For the whole six-hour ranch tour, Rosenthal keeps himself going
on a diet of unfiltered cigarettes, many cups of caffeinated coffee,
and handfuls of chocolate drops. He’s a high-energy guy.
He moved to Montana in the 1980s, around the time his career as
a Colorado developer went down the tubes. In that state, he controlled
$75 million in real estate, including shopping malls. But he "lost
it all in the collapse of Colorado’s oil boom economy"
and defaulted on millions in loans, according to the Rocky Mountain
News.
His move coincided with the beginning of the conservation-easement
rush. Since the mid-1980s, the numbers of easements, acres protected
by easements, and land trusts have soared.
But each easement is merely a deal between two parties: the landowner,
and either a land trust or a government agency that acquires the
easement and monitors the land over time, making sure the terms
are carried out.
And every easement is unique, depending on the land’s condition,
the local ecosystem, the landowner’s financial situation,
and countless other variables. Landowners can design easements so
they can keep on ranching, farming or logging. They can use herbicides
and pesticides, sell lots, build houses, or create ski runs, as
long as they don’t exceed the maximum development set out
by the easement agreement. The IRS regulations merely sketch a list
of conservation goals. Open space is the easiest goal, which explains
why so many easements are dedicated to that.
Landowners doing easements are typically motivated by their concern
for the land, but as in any other business deal, they’re also
interested in the bottom line. They may sell easements to an agency
or a land trust, but it’s often difficult to find a buyer,
because the budgets of land trusts and government agencies don’t
stretch far. More often, the landowners donate the easement, while
still gaining a financial return through tax breaks.
The tax breaks set off the easement rush: "Conservation easements
are entirely a creature of the tax code," says Steve Small,
a Boston lawyer who wrote the bedrock tax code on easements when
he worked for the IRS in the early 1980s. The rules have been merely
tuned a bit since then.
The tax breaks are based on the claim that the owner has lowered
the value of the land by voluntarily restricting its development.
They include a reduction in the inheritance tax when the land passes
to heirs, and in some states, a reduction in the annual property
tax. Donated easements can also be claimed as charitable contributions
on federal income tax returns. To maximize the income tax break,
landowners can spread the deduction over six years. According to
the IRS formula, the larger their income, the more they benefit.
A typical rural subdivision in Madison County. Ray Ring
The tax breaks make it easier for wealthy New Westerners to buy
and hold land. "When all the smoke clears, they’ve bought
(the land) for 60 percent of the selling price," says Lane
Adamson, project director of the Madison Valley Ranchlands Group,
which coordinates local ranchers’ conservation efforts.
But easement economics don’t work that well for the cash-poor,
Old West ranch families struggling to hang onto their land. The
inheritance-tax break helps some, but they often don’t have
enough income to take full advantage of the income tax break. Working
ranchers are just "hoping for a year with some black ink, instead
of red ink," Adamson says. So they’re far less likely
to put easements on their land. (Some innovations are aimed at making
easements a better deal for ranchers.)
Montana’s leading land trust sees the same pattern. Montana
Land Reliance has been in business since 1978, specializing in donated
easements. It now holds 593 easements covering more than 570,000
acres, and has a reputation for making deals with working ranchers
— but only one-third of its easements are with that kind of
rancher. The rest are with the wealthy, New West landowners, says
Rock Ringling, a managing director for Montana Land Reliance.
And in today’s superheated market for ranch real estate,
the easements can actually produce additional income for investors.
Often "the ranch’s value actually increases," Adamson
says, because of the uninterrupted views and other conservation
amenities. "The larger the ranch, the more it’s worth
per acre now. It’s just a matter of whose checkbook shows
up." That means landowners in hot markets can double-dip the
system, getting land-sales profits as well as tax breaks.
Rosenthal has learned to use conservation easements to market real
estate. For example, a sales pitch on one of his Web sites, seeking
a buyer for 320 riverside acres, says, "The very significant
tax benefits of a conservation easement are still available (hint,
hint)."
Rosenthal declines to discuss his investors’ tax breaks.
But investors in one of his developments, the 2,250-acre Three Creeks
Ranch, went through several phases of subdividing lots with the
county planning office. Then they put most of the lots into easements,
reaping tax benefits worth more than $1 million, court records indicate.
Now, most of that land is for sale as three big ranchettes, for
a total asking price of more than $5 million.
When developers go through a subdivision process, then donate easements
on the lots, "in some cases, it seems like they’re just
jacking up the value of their property, in order to turn around
and get an income tax benefit, or to pass that benefit on to a future
buyer, who might buy 10 lots only planning to build on one,"
says Madison County Planner Doris Fischer. "Part of the marketing
strategy is to tell buyers, ’You can give up development rights
on nine lots and get a wonderful tax deduction.’ "
Rosenthal cites a different reason for scaling back the Three Creeks
subdivision plans. He says a legal battle soured the whole project:
A Florida couple who bought two of the lots wound up suing him and
the other investors. The couple’s lawsuit, which is still
pending, contains many arguments about land-management practices.
It also alleges that Rosenthal improperly tried to put a conservation
easement on the two lots after the sale. Rosenthal says he acted
properly, but admits he’s having a hard time making that particular
easement stick, although easements cover the rest of the Three Creeks
land. And it was a costly adjustment: The lawsuit indicates the
Three Creeks investors would have gained another $160,000 in tax
benefits from putting an easement on those 54 acres.
Still, Rosenthal says, Three Creeks is preserving the landscape.
As he drives around, he points to several lower-priced rural subdivisions
popping up nearby. The small lots have more concentrated environmental
impacts than do his widely spaced building sites, he says. Per acre,
there are more fences that carve up habitat, more dogs and cats
that prey on small mammals and birds, and more wells that tap groundwater.
"If we hadn’t bought Three Creeks," Rosenthal says,
"that’s what it would look like."
"I’ve always had an adept feel for the energy of the
land, what it’s going to take to make it right, to bring it
back to signature status. ... I always get labeled a developer.
It drives me crazy. I was a developer in another life, I know what
a developer is. We are ranch operators and ranch preservationists."
— Reid Rosenthal
Rosenthal talks a good game, but it’s difficult to weigh all
the pros and cons of his conservation easements, or for that matter,
of anyone else’s.
The basic easement documents, describing which activities are allowed
on each piece of land and which are not, are tucked away in the
files of the landowners, land trusts, county recorders’ offices,
and many other government offices.
County and state agencies in Montana have computerized records
and mapping, but no one has a complete list or map of all the Montana
easements. The state’s Natural Resource Information System
makes an effort to collect easement information from other government
offices and land trusts. But the land trusts report only voluntarily,
and the government records are so scattered, "My guess is that
we probably have 90 to 95 percent of the (easement) acres, and maybe
75 percent of the number of easements," says Allan Cox, who
runs the agency’s mapping program.
The same goes in other states. And nationwide, the periodic surveys
of land trusts by the Land Trust Alliance, a Washington, D.C.-based
umbrella group, are similarly incomplete. The Alliance totals only
the acres that the trusts choose to report, and hundreds of trusts
don’t even respond to its surveys. The federal government
doesn’t know how many acres of easements its agencies oversee,
either.
And the tax breaks are known only by the landowners, their accountants,
the IRS, and sometimes, state revenue departments.
The lack of public information, and of strict rules in the system,
has created an opportunity for abuse and led to calls for reform.
"I’ve traveled around the country, meeting with land
trust people in almost every state, and they are good people who
want to do the right thing," says Small, a lawyer who now works
on easement deals around the country. "Ninety-five percent
of what’s been done (with conservation easements) has been
from excellent to good, or medium good. Maybe 5 percent has been
bad."
Rosenthal probably fits in the "medium good" category.
Unlike some landowners who are interested in simply preserving land,
he employs easements in conjunction with development. His projects
also demonstrate how the looseness in the system serves investors,
and how land trusts sometimes have to deal with landowners who may
not be popular in their communities.
For this story, Rosenthal provided letters from some traditional
ranchers in the area, praising his work as a ranch manager and consultant.
"Mr. Rosenthal was very aggressive on our behalf and negotiated
superbly (with bankers). He saved us from litigation, bankruptcy,
and from losing our ranch which we have owned for over 40 years,"
says one rancher’s letter. Rosenthal’s Web sites also
have quotes of praise from satisfied clients.
On the other hand, Rosenthal is notorious for getting into battles.
He, or his businesses or partners, have been involved in more than
30 lawsuits in Montana courts, mostly over the terms of various
business deals. "He uses lawsuits as a business tool,"
says one opposing lawyer.
In their lawsuit, the couple from Florida who moved into the Three
Creeks development complained that Rosenthal was harassing them.
County lawmen investigated, and filed a misdemeanor criminal charge
— stalking — against Rosenthal. After a trial in a local
court, the jury found him not guilty. Then he sued the county government
for malicious prosecution; that case is still active.
Grass grows tall on the banks of the Ruby River, the result of better
management and easements, Rosenthal says. Ray Ring
The biggest complaint about Rosenthal, voiced by numerous Madison
County residents as well as county and state officials, is that
his developments have shut down traditional public access. The new
perimeter fences, locked gates, no-trespassing signs and security
guards make it much harder for anglers to reach the Ruby River,
they say, and for hunters or anyone else to set foot on the land.
It’s a common complaint about wealthy newcomers around the
West, and about conservation easements, which typically don’t
allow for public access. But Rosenthal seems to be in a special
league. "He throws his weight around, scares people, he and
his hired goons," says Tony Schoonen, a longtime fishing guide
who runs the grassroots Public Land/Water Access Association, based
in Butte. "He tells his buyers, the water is all private,"
despite a Montana law that guarantees public access to navigable
waters.
In an editorial on one of his Web sites, Rosenthal says some people
"despise" him because they have a "provincial notion"
that all change is bad. Apparently referring to the disputes over
public access, he writes, "Perhaps we could have been a bit
less aggressive or assertive. ... Perhaps not."
Rosenthal’s determination showed in the course of setting
up the Three Creeks easements. First he hired geologist Debbie Hanneman
to evaluate whether mining might someday ruin the land. It’s
a crucial step for "split estate" lands, where the mineral
rights are owned by a third party not involved in the easement.
This corner of Madison County has been a historical hotspot for
mining, and Three Creeks bears scars from old prospecting. Hanneman
says she told Rosenthal it’s possible that a mining company
could someday dig into more than half the Three Creeks land, so
no easements could be placed on that portion. "He came unglued,"
she says.
Then Rosenthal hired another geologist, who found little risk of
future mining on Three Creeks. Rosenthal used that report instead
for his Three Creeks easements. Hanneman "only did a draft
report," and the second geologist took a more thorough look,
Rosenthal says. "It was like getting a second doctor’s
opinion."
And despite Rosenthal’s claims about the conservation benefits,
his developments are a mixed bag in that regard too. On part of
the land he manages, he has restored patches of native sagebrush
and encouraged vegetation on riverbanks, by managing the cattle
more carefully than did the previous owners.
But in other places, Rosenthal has cleared sagebrush, harming many
species of birds, small mammals, and small plants that depend on
sagebrush for cover, says Jim DeBoer, a state wildlife agent for
the area. And Rosenthal’s plantings of alfalfa and crested
wheatgrass (an exotic grass), a common practice by local ranchers,
really benefit cattle more than wildlife, several experts say.
DeBoer also rejects Rosenthal’s claims that his land management
has caused antelope, elk and deer populations to increase. The land
improvements and water tanks have attracted the animals, but not
increased their numbers, DeBoer says: "They’ve just been
redistributed."
Montana Land Reliance has worked with Rosenthal on nine easement
deals, totaling about 10,000 acres, but it did so reluctantly, says
managing director Ringling. Ringling believes that new mining on
the Three Creeks easements is unlikely, and that overall, the public
benefits outweighed the drawbacks on all the easements. If no land
trust had accepted the easements, any future owner of the land could
"slam houses along the riverbanks," Ringling says. "From
our standpoint, did we get long-term land conservation? Yes."
But Ringling adds, "Reid is a royal pain in the ass to deal
with."
Hanneman has been doing minerals reports on easements for about
20 years, and says that since her brush with Rosenthal, she won’t
work on any more easements for gated developments. "I started
running into (people) who wanted to do gated communities, do conservation
easements, get their tax benefits, and then just lock it off. I
got pretty fed up with that."
"The buyers (who get the few houses in the ranch developments)
come from everywhere. A lot of these folks, they’re not movie
stars, but they’ve built up wealth over their careers, they
have their retirement accounts, and very good equity in their properties
in California, Florida, Texas, or wherever. They’re looking
for a place to spend a portion of their time." — Reid
Rosenthal
The movement to reform the easements system might affect Rosenthal’s
operations. His easement deals might have to place more emphasis
on conservation goals, make more of the basic information publicly
accessible, and possibly even guarantee public access to the land.
Rosenthal says he thinks the system needs some tuning, to make it
harder for blatant scam artists, but he is leery of drastic reforms
that might discourage many beneficial easements in the future.
Rosenthal concludes the tour at his newest development, the Ruby
Lake Ranch. The ranch includes three miles of the shore of beautiful
Ruby River Reservoir, which is formed by a dam in the river’s
headwaters. From the shore, Ruby Lake Ranch rises up Garden Creek
to a grazing lease for 2,000 acres of federal land, including portions
of two wilderness-study areas.
A cultural as well as economic struggle played out here. The Garden
Creek Grazing Association, mostly old-time local ranchers who pooled
their money, owned this land for many years and used it for summer
pasture. A batch of conservation investors bought a 30 percent interest
in the association about 14 years ago, and began trying to improve
the management, Rosenthal says. The effort turned into another huge
lawsuit, pitting the investors against the ranchers who didn’t
want to accept their advice, and even turning some ranchers against
others. Finally, in a settlement in May, the investors won this
5,600-acre portion of the association’s total holdings.
"The deed is being delivered today," Rosenthal says.
He points out how this land, too, bears the scars of poor management
by the previous owners. Too many dirt roads shoot off in too many
directions. Cattle have grazed the grass nearly to bare ground in
places. Generations of teenagers have partied beside a pond that’s
fed by warm springs, and they’ve left lawn chairs, sleeping
bags and trash. ATV ruts go right up the bed of the warm creek.
Already the investors have begun to install their new fences and
locked gates. As usual, they plan new pivot irrigation for hay pastures,
excavation for new ponds, a lot of seeding and resting of the land.
They’ll carve out four homesites, instead of the dozens that
could be created, Rosenthal says. And they’ll donate conservation
easements covering most of the land, getting the tax breaks. When
they’re done, only multimillionaires will be able to buy in.
"A developer could rape it, pave it, and smile all the way
to the bank," Rosenthal says. "I’m very much looking
forward to this work here. It’s going to be good stuff."
Ray Ring is High Country News editor in the field.
This story is funded by the generous donors to the "Who
Will Take Over the Ranch" project, a series of stories on the
plight of the West’s private lands.
CONTACT: For advice on how to examine conservation easements in your
area, check a page on HCN’s Web site, www.hcn.org/easementinfo.jsp
Land Trust Alliance in Washington, D.C., 202-638-4725 or www.lta.org
Lincoln Institute of Land Policy, Cambridge, Mass., 617-661-3016
or www.lincolninst.edu
Sen. Max Baucus Washington, D.C. office, 202-224-2651
Sen. Charles Grassley Washington, D.C. office, 202-224-3744
