Think Like an Endowment
While many investors (and their advisors) still think about investment portfolios in terms of cash, stocks, and bonds, a growing number of investors and advisors have expanded their investment universe to include non-traditional investments, often called “alternatives”. The primary benefit of using non-traditional investments in a portfolio is to augment the risk-adjusted returns provided by a common stock-bond portfolio. This strategy is commonly referred to as taking an “endowment approach” because the endowments of large universities were early adopters of non-traditional investments.
As an example, as of June 30, 2015, Harvard University’s Endowment was valued at $37.6 billion, making it the single largest university endowment. Below outlines Harvard’s asset allocation shifts over the years:
As can be seen in the table above, the percentage allocation to non-traditional investments increased from 25% in 1995 to almost 57% by 2014.
Harvard University Endowment’s annualized performance over the last 10- and 20-year periods ending June 30, 2015 was 7.6% and 11.8%, respectively, as compared to a standard 60% stock / 40% bond portfolio (using the S&P 500 Index and the Barclays Aggregate Bond Index), which provided 6.8% and 7.9% average annualized returns over those same time periods.
 Source: Harvard Management Company Annual Report 2015.
 Source: Harvard 2014 Annual Report.
TAX MITIGATION INVESTMENT SOLUTIONS
What is a Conservation Easement?
A Conservation Easement is a restriction placed on a piece of property to protect its associated resources. The easement is either voluntarily donated or sold by the landowner and constitutes a legally binding agreement that limits certain types of uses or prevents development from taking place on the land in perpetuity while the land remains in private hands.
Conservation Easements protect land for future generations while allowing owners to retain many private property rights and to live on and use their land, at the same time potentially providing them with tax benefits for their contribution.
In a Conservation Easement, a landowner voluntarily agrees to sell or donate certain rights associated with his or her property – often the right to subdivide or develop – and a private organization or public agency agrees to hold the right to enforce the landowner's promise not to exercise those rights. In essence, the rights are forfeited and no longer exist.
An easement selectively targets only those rights necessary to protect specific conservation values, such as water quality or migration routes, and is individually tailored to meet a landowner's needs. Because the land remains in private ownership, with the remainder of the rights intact, an easement property continues to provide economic benefits for the area in the form of jobs, economic activity, and property taxes.
A conservation easement is legally binding, whether the property is sold or passed on to heirs. Because use is permanently restricted, land subject to a conservation easement is typically worth less on the open market than comparable unrestricted and developable parcels. Sometimes conservation easements will enable the landowner to qualify for tax benefits in compliance with Internal Revenue Service rules.
Federal Income Tax benefits are provided by the Code are found in Sections 170(a) and (h). Federal Estate Tax rules are found in Sections 2031(c) and 2055(f)
What is a “Syndicated” Conservation Easement?
A Syndicated Conservation Easement begins when a group of investors chooses to pool their funds in order to purchase a real asset, such as a large tract of land. Those investors, seeking to achieve the highest and best possible use for this land, may consider multiple development options. Additionally, they may consider to protect this land through the Conservation Easement process and receive the tax deduction.
What is the objective of a Syndicated Conservation Easement?
To provide accredited investors a strategy to invest in syndicated offerings that are properly setup to invest in real estate that, if decided, qualifies for significant charitable deductions from donating a conservation easement to the property.
What is a "Qualifying Organization"?
A qualifying organization is the entity that ultimately receives, and potentially manages, the donated real property. The qualifying organization has to meet certain criteria for the donor to receive the deduction:
Must be either a 501(c) (3) or governmental entity
Must have commitment to protect the conservation purposes of the donation
Must have the resources to enforce the terms of the easement in perpetuity
What is a "Qualifying Purpose"?
To be deductible donation, the conservation easement must comply with at least one of the following conversation purposes:
Preservation of land areas for outdoor recreation or education of the general public
Protection of a relatively natural habitat of fish, wildlife, plants, or ecosystem
Preservation of open space
Protection of historically important land or certified historical structures
How is a Conservation Easement valued?
Valuation is the fair-market value of the perpetual restriction at time of the contribution. In general, fair-market value should be the highest and best use of the property’s potential use and based on the sales price of comparable easements. If no market sales price is available, the fair-market value is equal to the difference between the fair market value of the property it encumbers before the granting of the restrictions and the fair market value of the encumbered property after granting the restrictions
How does investing in a Syndicated Conservation Easement work?
A Syndicated Conservation Easement generally follows these four steps:
Step 1: Sponsor identifies property. An experienced sponsor may assess 10+ potential projects before selecting a single property that is approved by a qualified land trust or government agency for accepting potential donation.
Step 2: Sponsor forms various investment LLCs. The current landowner may sell or donate property, which then enters into a Property LLC. An Investor LLC is formed and purchases membership interest in Property LLC. At this time, the sponsor will engage a qualified appraiser to determine the highest and best use before and after easement.
Step 3: Sponsor offers accredited investors the opportunity to invest into Investor LLC. Once the Investor LLC is closed to new investors, members of Investor LLC will vote to pursue the project’s highest and best use, hold the project, or donate the project to an easement.
Step 4: If members of Investor LLC elect to donate, they will share in the tax deduction resulting from the charitable contribution. The ratio of deduction to investment will vary depending on the project, but may range between 4:1 to 6:1.
An example of a Syndicated Conservation Easement
A rancher with land near a growing city decides to monetize her property. She works with a Conservation Easement Sponsor, which creates “Ranch LLC”, hires a qualified appraiser, creates an offering PPM, and introduces this project to financial intermediaries who have relationships with accredited investors.
In this example, the highest and best use appraisal for the ranch is $50,000,000. With a Conservation Easement in place, the appraised value is diminished to $5,000,000. Therefore, the value of the easement is $45,000,000 ($50,000,000 minus $5,000,000).
The easement will qualify for a charitable deduction if all rules are followed.
In this example, the ratio of Conservation Easement value to offering value was 4.5:1, resulting in a $10,000,000 offering.
An accredited investor makes a $100,000 investment, and the LLC chooses to donate the ranch to a Conservation Easement. To each investor, the resulting charitable deduction is $450,000.
Effective Tax Rate: 50%
Tax Savings: $225,000
At an assumed combined federal and state tax rate of 50%, a total of $225,000 in tax savings is created, and the investor nets $125,000 on top of the original $100,000 investment.
A word of caution
In an effort to address perceived abuses from the syndication of conservation easements marketed by unscrupulous promoters, the IRS issued Notice 2017-10 on December 23, 2016, designating these tax strategies as “listed transactions”. This means that these types of transactions will receive intense IRS scrutiny and investors should be aware of the strong likelihood of an IRS examination.
There can be no assurance the investment objectives of a Syndicated Conservation Easement will be achieved. Investors may lose all or part of their investment and distributions are not guaranteed. Syndicated Conservation Easements are subject to substantial risks. These include:
Appraisal / Valuation Risk – Appraisals are subjective by nature and that the valuation of conservation easements may be considered especially problematic and highly speculative because of the lack of comparable sales data to support such valuations.
Tax Risks / Audit Risk – If the Conservation Proposal is elected by members, the Internal Revenue Service may challenge the entire Conservation Easement, the Appraised Valuation, and/or any part of the Offering. Investors should be aware this offering is subject to the risk of audit either on the Company or the individual member.
Tax Laws Subject To Change – Tax laws are subject to change, and there can be no assurance that the tax code or existing Treasury regulations there-under will not be amended in such a manner that would adversely affect a Conservation Easement.
Investment in Real Estate – Investments in Real Estate are speculative and subject to various risks including, but not limited to market risk, interest rate risk, credit risk, and the inherent cyclical nature of real estate investments.
Lack of Operating History – In general, Conservation Easements have no operating history.
Lack of Liquidity / No Secondary Market – Prospective investors should realize investments into a Conservation Easement are not liquid and have limited transferability. Generally, it is anticipated that no secondary market will ever exist.
Market Risk - Diversification of an investor’s portfolio does not assure against loss in a declining market.
Atomi Financial Group does not provide tax, business, or legal advice. Prospective investors should not construe the information provided above as such. You should consult your attorney, tax, or business advisor as to the legal, business, tax, and related matters.
The information provided above does not constitute an offer to buy or sell securities. Such offers may only be made to qualified accredited investors via Confidential Private Placement Memorandum (PPM). Investments in units and real estate should be considered highly speculative and involve a degree of risk. Prospective investors must read the PPM in its entirety and pay particular attention to the cost projections, performance assumptions, and the “Risk Factors” to fully understand the risks and costs involved. Conservation Easements are illiquid in nature and those seeking to dispose of their interest prior to maturity of the program may not be able to do so.
Section 1031 Exchanges
Atomi Financial Group specializes in IRC Section 1031 Exchanges to help you build and preserve wealth, increase current income, and defer taxes.
We’re here to help coordinate every facet of a 1031 Exchange. We begin with an initial exchange benefit analysis to determine if trading up is in your best interest. If so, we will coordinate with your realtor and qualified intermediary as your property is sold. Finally, we complete the most critical part of the exchange, locating and securing high quality replacement options.
Don't risk losing your tax deferred status
It is often difficult in the short 45-day time frame to locate a replacement property that has the right purchase price, debt ratio, and closing schedule to meet the Section 1031 Exchange requirements, and still have enough time to arrange the necessary financing.
Missing your 45-day identification and 180-day exchange deadlines will disqualify the entire exchange. Reputable qualified intermediaries will not act on back-dated or late identifications. It is paramount that you not miss your deadlines, by even a day.
If you’re worried you may not be able to complete your exchange up leg in time, a Fractional Ownership Real Estate (FORE) investment opportunity may be an ideal “safety net”.
Create a 1031 Safety Net
Let Atomi Financial Group help create your personal 1031 Safety Net. Your 1031 Safety Net will typically include two to three suitable replacement FORE investments that are organized as a Delaware Statutory Trust (DST). You’ll also know your exact deadline to participate in any of these FOREs, so you’ll know whether to continue with your current plan of action or execute your safety net plan.
There is no cost or obligation in working with Atomi Financial Group on creating your personal 1031 Safety Net. Not having one, however, may cost you thousands of dollars.