A conservation easement didn't stop construction of one of the largest houses in the county on a preservation property at Turner Mountain in Ivy.
Hunter Craig and Coran Capshaw understand the advantages of tax credits, but they aren't talking about them.
What if Biscuit Run were the tip of the iceberg, just the latest and largest in a litany of public payments to private citizens? What if the state gave away vast sums– some measuring in the millions of dollars– to induce millionaires to "conserve" luxurious estates that they may have had no intention of developing anyway? And what if Virginia, which forces the humblest homeowners to place their real estate transactions in public view, created a special law allowing the millionaires to shroud such deals– currently measured at $106.8 million a year in taxpayer money?
Welcome to Virginia, where "conservation" makes it all possible.
Virginia boasts that its land preservation incentives are the "most generous" in the country. Indeed, the state budgets over $100 million a year to pay people not to develop their land.
While the amount that any individual landowner receives is kept secret from the public, a Hook investigation reveals a veritable who's who from the Charlottesville business, entertainment, government, and environmental worlds taking advantage.
Such entertainment magnates as Dave Matthews, John Grisham, and Coran Capshaw join business titans Hunter Craig, Wick McNeely, and Jim Murray. Local leaders Ann Mallek from the Albemarle Supervisors and waterworks chair Michael Gaffney use the program. So do big names from the environmental world such as Nature Conservancy board member Michael Bills, Southern Environmental Law Center director Rick Middleton, and avid eco-donor Tony Vanderwarker.
All these people have partnered with green groups to receive compensation for keeping some land unspoiled. What could possibly be wrong about that?
"It's socialized capitalism for the rich," says former Albemarle teacher Mark Crockett. "People who buy big estates don't plan to develop them. Why turn and give them a tax credit?"
It all started without the financial component. In 1966, the same year as the founding of the Virginia Outdoors Foundation, Virginia passed the Open Space Land Act to let property owners donate easements to nonprofit groups that would, in turn, ensure that the land remained undeveloped. Another key preservation player, the Piedmont Environmental Council was founded in 1972.
The word "donation" took what might now seem an ironic turn in 1999, when the state began issuing tax credits for such easements. State Senator Creigh Deeds, then a delegate, carried the bill that created an industry. And it's not a cottage industry.
"One guy said, you're a working class guy," Deeds recalls. "Why are you introducing a program that's going to benefit rich guys?"
His response: "In a generation, no one will care about tax credits."
That was before Biscuit Run.
A little over a year ago, Albemarle developer Hunter Craig and a team of fellow speculators unloaded a long-planned but money-hemorrhaging subdivision for a state park. The deal was touted by its top backer– outgoing governor Tim Kaine– as a coup for taxpayers, who were supposedly getting 1,200 acres for $9.8 million, less than a quarter of what the speculators had paid four years earlier.
As it turned out, however, the sale price was only part of the cost. The Virginia Department of Taxation agreed to issue the owners over $11 million more in conservation tax credits, a kind of cash the public might never have known about had not an anonymous tipster leaked documents to the Hook and other media.
Even more startling, the documents showed that the saved-by-the-governor speculators had attempted to grab over $31 million in credits by finding an appraiser, now under investigation, who claimed that the property– bought at the peak of the housing bubble– had somehow doubled in value from $46.2 million to $87.7 million.
Why does the appraisal matter? In the world of conservation tax credits, the appraisal is everything. It's the measure of how much is being "donated," so it determines the credits, which Virginia originally gave out as 50 percent of the donated value. In 2007, Virginia lowered the credit to 40 percent.
"The program," explains Senator Deeds, "was much more successful than we ever thought it would be."
It's easy to understand the appeal. Someone could buy a property for, say, $10 million, get it appraised for $25 million, and the state could issue $10 million in tax credits. Such a property would then, essentially, be free.
Has that ever happened? Because all the records are kept secret by state law, who knows?
A cascade of money
"It's a really great program that encourages people to make a gift they normally wouldn't be able to afford," says Jason McGarvey, spokesman for the Virginia Outdoors Foundation, which holds 80 percent of all easement acreage in Virginia. "They are giving away part of their 401K, and the state provides incentives."
Incentives indeed. According to a review of 10 years of records from the state tax department, Virginia has issued over $1.13 billion in conservation credits. And the giving doesn't stop there.
Virginia also offers easement donors a state income tax deduction– 5.75 percent for top earners– for their "charitable donation." There is also a federal income tax deduction: for 2011, 50 percent of one's adjusted gross income for 15 years, and for farmers, 100 percent. And the cascade of benefits still isn't over.
On the local level, most acreage under easement gets taxed at Use Value Taxation, a.k.a. "land use"– the super-low property tax rate which can lower land taxes by over 99 percent– that Albemarle offers owners who keep their large tracts from sprouting additional houses.
In 2010, land use cost the county $17.4 million. And some, like Crockett, aren't convinced that the landed gentry would be building– even without all these perks.
"If Donald Trump buys [Patricia] Kluge's estate and puts it in an easement, would he really develop that estate anyway, and could he with Albemarle's zoning?" asks Crockett. "No and no."
(Actually, Kluge, who lost Albemarle House in a February 15 foreclosure auction, had already extracted her tax credits from the vineyards surrounding the mansion.)
How it works
In reviewing county-by-county records released by the Virginia Outdoors Foundation, the Hook couldn't help but notice an unusual trend. The two places with the biggest bumper crop of conservation tax credits aren't places where agriculture, or even forestry, reigns supreme.
They're Fauquier County at #1 and Albemarle at #2. Both counties are home to horse farms and wineries. Both top the state median in income, and– curiously– they're both home to major easement-holding nonprofit organizations. The headquarters of the Piedmont Environmental Council lies in the Fauquier town of Warrenton, and a building on Albemarle's Emmet Street serves as the home for the Virginia headquarters of the Nature Conservancy.
While the PEC made a spokesperson available, the Conservancy– which recently and controversially convinced a majority of local leaders that they need a new reservoir (despite a downward trend in water use)– declined all comment.
"You need to understand the bigger picture," says the Virginia Outdoor Foundation's McGarvey. "The past four or five years, Rockbridge County has had the most– family farms, cattle, and dairy farms."
It's not just farms though. Two of Virginia's most luxurious resorts have seen extra land turn into extra cash.
In 2002, by letting the Nature Conservancy take charge of 9,250 acres adjacent to its new planned community at the Homestead, Celebration Associates reaped over $6 million. In 2009, Wintergreen Resort banked more than $3 million in tax credits by putting 1,442 acres around Crawford's Knob under easement via the Wintergreen Nature Foundation.
By contrast, the Greenbrier Resort– located in conservation credit-free West Virginia– declared bankruptcy in 2009.
The farmer on the dole?
Linda McRaven, who lives in Free Union, says the whole topic makes her angry.
"It's just a feel-good issue like Prius cars," says McRaven. "Can we say phony?"
She believes conservation easements are pushed by those who feel guilty about their wealth– but not too guilty to benefit from it.
"They can afford to be falsely generous," says McRaven. "It costs them nothing."
McRaven is not the only farm-owner seething at the prospect of paying people not to develop.
"Charity is something you do out of the goodness of your heart without compensation," says Clara Belle Wheeler. "I don't think there should be tax credits or tax relief or any compensation whatsoever. If you want to keep your land open, you shouldn't expect the taxpayers of Virginia to pay."
Virginia is so serious about paying, however, that in 2002 the law was changed to allow recipients of tax credits to sell them on the open market– typically for about 80 cents on the dollar.
"Before they were transferrable, you had to use them," says McGarvey, noting that few farmers would have the level of income needed to directly use a tax credit. "Now farmers can sell them and use them to reinvest in the farm."
Had the Hook investigated this issue three years ago, the newspaper might have secured, via the state's expansive open-government law, a list of properties and owners harvesting money from the program.
Already well-heeled property owners could hide behind limited liability companies, or LLCs. But 2008 was the year that Eastern Shore Delegate Lynwood Lewis sponsored the bill that made disclosure of donor information a Class 2 misdemeanor.
According to Gary Waugh, spokesperson for the Department of Conservation and Recreation, the bill cleared a loophole so the Department could examine tax credit information gathered by the Department of Taxation when acquiring state parks.
Lobbying against the change, the Virginia Coalition for Open Government, demanded that the state release the location of the property and the name of any person requesting the credit– before handing out any credits. The bill passed anyway.
"So much for transparency in the government process," said the Coalition's disgusted then-director, Jennifer Perkins.
"As a nation, we have a long history of allowing people who make charitable gifts to get tax benefits," says Rex Linville with Piedmont Environmental Council, which encourages and acquires easements.
Linville says he sees no problem keeping the value of all charitable gifts secret. He likens it to donating a painting to the Smithsonian.
"You would have no way of knowing what that donor claimed," Linville points out. "If you're going to write about secrecy, you should broaden that to the whole spectrum of charitable gifts."
It turns out that the secrecy bill was carried by a college classmate of Biscuit Run developer Hunter Craig. But Delegate Lewis says the Conservation Department sought confidentiality merely to avoid a "chilling effect" on easements.
And no, says Lewis, he didn't confer with his fellow member of the Hampden-Sydney College class of '84 about the law that would become so helpful– for a while, anyway– in concealing how much taxpayers would subsidize Craig and other Biscuit Run investors.
"I haven't talked to Hunter Craig since Hampden-Sydney 25 years ago," says lawmaker Lewis.
"That law needs to be changed," says Clara Belle Wheeler. "When you cross from personal finances to the Commonwealth of Virginia, the County of Albemarle, and the entire United States paying you out of taxpayer funds, you transferred out of the private into the public domain."
The Virginia Outdoors Foundation's McGarvey ... offers the analogy of giving a bag of clothes to Goodwill, with the taxman determining whether the claimed deduction is accurate.
"You put the value on it, and the IRS looks at it," says McGarvey.
There's a difference between a bag of clothes going to Goodwill, says retired teacher Crockett.
"That bag of clothes going to Goodwill is not going to be in the millions," says Crockett. "The bigger the money, the bigger the potential for abuse."
The Nature Conservancy provided some lessons in abuse. The world's richest environmental group, the Conservancy had a habit of selling scenic properties to employees and trustees to build homes and harvest large tax breaks, as revealed in a 2003 investigation by the Washington Post.
While the Conservancy wouldn't comment on those abuses or fulfill a request for the names of local easement donors, the group did report that it holds 6,047 acres under 22 easements in Albemarle. Court records show those donors include concrete magnate Wick McNeely's Chapel Springs Farm and a Coran Capshaw/Hunter Craig venture called Waterson Farm LLC.
Waterson Farm LLC evolved from the two men's purchase of a property bordering Farmington. Part of the place was subdivided into a gated subdivision in which Dave Matthews bought three lots, and the remaining 209 acres held by Waterson Farm LLC were put under easement.
In 2006, Waterson Farm LLC peeled off part of its land adjoining Craig's Farmington residence, Foxwood, to boost Craig's acreage to 45 acres, complete with walking trails. And in 2009, the LLC, which retained rights to subdivide into three parcels under its conservation easement, sold 107 acres for $3 million, according to county records. The Dave Matthews Band's lighting director bought one homesite. Other parcels remain listed for sale.
Capshaw, who also was a Biscuit Run investor, did not respond to written questions from the Hook, nor did Craig, who had a publicist return a reporter's call.
One person who agreed to be interviewed is Deke Bowen. He grew up on a farm on Owensville Road that his great-grandfather bought in 1850, and he went on to serve as the Charlottesville police chief. His daughter lives in the old manor house, and his son is across the street.
"My mother constantly talked about if you own land, you never sell it," recalls Bowen. "They aren't making any more."
When his father died, the farm was split between three children. Bowen, 76, used to raise horses and cattle on his approximately 70-acre parcel, but now he's down to one horse. Both Bowen, and his sister who resides on an adjoining 120-acre tract, put their land under conservation easement.
"I saw all this development creeping in," says Bowen. "I saw it on the corner of Ballard and Owensville." That land, where he used to hunt, is now dotted with large houses.
"That was the last thing I wanted to happen," says Bowen. "I talked to the kids and put it in trust."
Bowen knew there were more liberal appraisers than the one he chose, but he preferred the more conservative route for the number that would determine his tax credits.
When Bowen granted an easement to the Virginia Outdoors Foundation, he gave up five division rights and earned around $225,000 in tax credits.
"I'm not in financial shape to use them," he says. "I sold them and upgraded some things on the farm: a new tractor, a bushhog."
Another benefit of easements is that a lower land value means lower inheritance taxes. His easement specifically prohibits a cellphone tower, but he says he can log with a timbering plan from the Virginia Forestry Department.
Right now, he's more concerned about a couple of loblolly pines that might fall on the house, and says he'd let the Virginia Outdoors Foundation know before he took them down.
Bowen says his children endorsed the easement even though it means a grandchild can't build a house on the property. "It's going to affect their pocketbooks down the line.
And even without the tax benefits, if his kids had agreed, "I would have done it anyway, for the love of the land,"
Bowen says he understands the plight of a land-rich, cash-poor farmer.
"He's wondering, what acreage can I sell off to keep going," says Bowen, whose farm is now largely surrounded by the proverbial small-tract McMansions.
"I can't believe anyone would build a million-dollar house in the county where you've got to commute, and then you come home and look across the street at another house," he says.
"My desire was to preserve the land and farm as I've always known it," he says. "What I'm looking at outside now is the way it will always be."
'An interest in knowing'
Albemarle Supervisor Dennis Rooker, who blasted the removal of Biscuit Run from the county's long-planned southern growth area, says that until now he hasn't been asked about the secrecy, but he points to the county's similar ACE program–- Acquisition of Conservation Easements–- which, unlike the state program, has a donor income cap of $55,000.
"We have a very rigorous standard for that," says Rooker. "We advertise the amount of money we have for the year, and the information is very public. I don't have any pause about the ACE program."
Because the county program is so open, Rooker wonders, "I don't know why the state's isn't. I think it ought to be."
Rooker returns to a sore point: "In the Biscuit Run purchase, I felt like that should have been an open process. Citizens have an interest in knowing what was acquired and how it's paid."
This year, with the state giving its schools $3.4 million less than the previous year, the ACE program is dormant, with zero funding in the new county budget now on its way to the Board of Supervisors.
Donating easements doesn't halt all activity upon land. Consider Verulam on Bloomfield Road, a farm bordering Interstate 64 near Ivy. Once a nearly 1,100-acre tract owned by the Ewald family, parts of the estate were carved off to become high-end subdivisions, including Blue Springs and the Rocks.
By 2001, Verulam was just 551 acres when a consortium including Craig, McNeely, and now-struggling internet titan Halsey Minor planned to turn the property into an exclusive golf club with founding memberships priced at $150,000. While the plan fell through after the terrorist attacks of 9/11, the Verulam Farm Conservation Group LLC donated an easement to the Nature Conservancy in 2003.
The property could have been divided into 30 lots, and the easement deed notes that "development would degrade the forest that provides a buffer for Ragged Mountain Reservoir, cause excessive erosion and pollution, degrading Ivy Creek's water quality."
Verulam's conservation easement forbids the use of bug zappers, but does allow predator control, such as the removal of beavers. And the owner retains the right to build a tenant house, a cell phone tower, and to cut down trees under an approved forest management plan.
Historic Castle Hill was Albemarle's biggest land deal when buyers John D. Carr and Raymond E. Humiston III, trading as Route 231 LLC, paid the full asking price of $24 million in 2005. They reaped an untold sum for putting the 1,200-acre property into a conservation easement with the Nature Conservancy that same year, reducing the division rights from 90 lots to a maximum of five parcels. Last year, 601 acres of the historic estate were back on the market for $14.5 million.
Stewardship that slipped
"The actual protection comes with stewardship of the easement and monitoring that," says the Outdoor Foundation's McGarvey. "We defend ourselves, but if we have to, we go to the attorney general."
Such stewardship fell short of expectations in one Ivy-area subdivision. On Turner Mountain, Richard Selden says he thought he was honoring the dearest wish of his first wife to preserve the land when he put 47 acres into one of Albemarle's earliest conservation easements in 1993.
Selden's faith in that process was seriously shaken 10 years later when a subsequent owner announced plans to build a mansion on a tract that already had a 1990s-era brick house measuring a seemingly ample 4,200 square feet.
John and Amy Harris claimed they were told when buying the land in 2006 that they could construct a 19,000-square-foot house and call the exisiting dwelling a "guest house" by removing the stove– an accepted practice in some zoning circles, including the Albemarle County Office Building.
"It's an example of how lawyers can twist restrictions around to satisfy the wishes of their clients," says Selden.
The Public Recreational Facilities Authority disagreed with the county's ruling and hired its own attorney. Three years later, the megahouse has been built, but the county and the Harrises still haven't reached an agreement on whether the first house stays or gets torn down. John Harris, former CFO for the high-rolling Carlyle Group, declined to comment for this article.
"I'm a little wary about lending support to tax credits," says Selden. "I resist secrecy when goodies are handed out."
Selden donated his conservation easements without the incentive of tax credits. He still believes in easements, but says, "I am cynical that you really can protect them."
How does Virginia compare?
Thirteen other states offer tax credits or other tax incentives for conservation easements, according to the Land Trust Alliance, a D.C.-based group that promotes land conservation nationally. Only Colorado offers a greater percentage of credit than Virginia, 50 percent vs. 40 percent. But Colorado caps its credit at $375,000; Virginia has no cap.
Another thing Colorado does is provide a list– at least up through 2008– of all the tax credits sought and on how much acreage, although the Rocky Mountain state doesn't provide the donor names.
Russ Shay, the Alliance's public policy director, says that Virginia should have confidence in its appraisal process because the Department of Taxation is "very picky" when reviewing credits.
"I'm very impressed with Virginia," says Shay. "There will always be controversies over the value of land. Appraisals are very time dependent."
The Biscuit Run scandal has reverberated throughout the land preservation community, and the Piedmont Environmental Council– which spent $120,000 on lobbying in 2009– has expressed some semblance of outrage by noting this attempt to "exploit the program for financial gain" on its website.
Someone who must be truly shaken by the Biscuit Run affair is the original tax credit booster, State Senator Creigh Deeds. He's carrying a bill that would allow the Tax Commissioner to get a second appraisal on any tax credit deal.
"We had to figure out a way to protect the integrity of the program," says Deeds. "I wanted to make sure the tax department had the tools it needs."
The original bill also required the use of a licensed transfer agent to move tax credits to a taxpayer who is not an individual, for example, such as Biscuit Run's Forest Lodge LLC, whose investors beyond Craig and Capshaw still remain shrouded in secrecy, and a transfer agent who repeatedly transfers tax credits later disallowed faces fines and the loss of license. The section addressing transfer agents did not make it to the final version of the bill.
Deeds notes that even a second appraisal could kill a deal– at least for that year– because the applicant would lose their place in line to obtain some of Virginia's trove of credit cash.
"That gives every incentive to get a good appraisal," says Deeds.
How big a factor was Biscuit Run in the bill? "It was an absolute reaction to Biscuit Run," says Deeds, who says he's "infuriated" by the $87 million appraisal.
The bill has passed both the Senate and the House of Delegates, and goes to Governor Bob McDonnell.
This year, the program has grown to $108,424,000 in available credits, but one thing Deeds isn't taking on is the program's secrecy.
"Maybe all tax credits and tax deductions should be public," says Deeds, "but that's not this discussion."
Correction 3/3/11: During editing, Jason McGarvey was made to appear to oppose changing the secrecy law with the words "wouldn't want that" (now removed from the passage before his bag of clothes analogy. He says he has no opinion on that issue.
Corrections and clarifications 3/9/11:
- Piedmont Environmental Council was founded in 1972, not 1966.
- Piedmont Environmental Council does not spend half a million dollars annually on lobbying. The organization is allowed to spend up to $525,000 ias a 501(c)(3), according to its 2009 IRS form 990, but its actual expenditures that year were $120,467.
- The Land Trust Alliance does not accredit land trusts, as the story stated, but established an independent nonprofit, the Land Trust Accreditation Commission, to do so.
- The original version of the tax credit reform legislation in the General Assembly called for licensing the transfer agents who handle the tax credits. That part of the bill was not in the final version that passed the House and Senate, but the bill does allow the Department of Taxation to get a second appraisal before issuing tax credits.
- The amount of the federal tax deduction for conservation easements was incorrectly characterized as 35 percent for top income brackets. The federal deduction in 2011 is actually a potentially more generous 50 percent of adjusted gross income– 100 percent of gross income for farmers and ranchers– for up to 15 years.
- 3/15/11: The date and order of Richard Selden's Turner Mountain conservation easement were incorrect. The easement was recorded January 11, 1993, and it was not the first in Virginia, but it was one of the earliest in Albemarle County.
Updated 3/4/11: Want to see properties held under conservation easement in Albemarle County? Click on the link below.