After Hurricane Sandy devastated Long Beach and its boardwalk in 2012, officials sought to reconstruct the city’s iconic esplanade. As part of the rebuild, the Long Beach City Council determined to award contracts for the construction of comfort stations along the wooden promenade, including a comfort station at Lincoln Boulevard which would be installed as a “bump-out,” extending northwardly approximately 23 feet from the boardwalk into the street’s dead-end. However, boardwalk residents living in the adjacent condominium complex were dissatisfied with the proposal and opposed construction. Their opposition culminated in the Article 78 litigation captioned Shapiro v. Torres__ A.D.3d __, Docket No. 2015-09420 (2d Dep’t 2017).

The condominium residents, as Plaintiffs-Petitioners, commenced a hybrid proceeding/action seeking review of the Council’s March 2015 determination and a judgment declaring construction of the comfort stations is a prohibited use of a public street, together with related injunctive relief. In their lawsuit, Petitioners-Plaintiffs alleged the Council violated the State Environmental Quality Review Act (SEQRA) and the Long Beach City Charter and that the comfort station at Lincoln Boulevard would interfere with their easement of light, air and access.

The Supreme Court, Nassau County, denied Plaintiffs-Petitioners’ motion for a preliminary injunction, effectively determined that the construction of the structure is not a prohibited use of a public street, denied the petition and dismissed the hybrid proceeding/action. On appeal, the Appellate Division affirmed and modified. In its decision, the Second Department analyzed two distinct issues: (1) whether the Petitioners-Plaintiffs had standing to proffer their SEQRA challenge and (2) whether the construction of the comfort station was a permissible use of Lincoln Boulevard.

With respect to SEQRA standing, the Second Department reasoned that the alleged environmental injuries were too “speculative and conjectural to demonstrate an actual and specific injury-in-fact.” The Petitioners-Plaintiffs failed to show an environmental injury different from that of the public at-large and that the alleged injury fell within the zone of interests protected by SEQRA. The Court noted “[c]lose proximity alone is insufficient to confer standing where there are no zoning issues involved, and general environmental concerns will not suffice.” Moreover, a party must also demonstrate it will suffer an injury that is environmental and not solely economic in nature.

With respect to the permissible use of Lincoln Boulevard, the Court treated this issue vis-à-vis Petitioners-Plaintiffs’ claims of an interference with their easement of light, air and access.   An owner of land abutting a highway or street has such an easement incident to ownership; however, when fee title of the roadway is transferred to the State, the State may use the roadway for any public purpose not inconsistent with or prejudicial to its use as a roadway. The mere disturbance of light, air and access to abutting owners by imposition of a new use consistent with roadway purposes must be tolerated and does not necessarily create a cause of action for interference with use and enjoyment of the premises.

At the Lincoln Boulevard site, the comfort station “bump-out” will not completely block Petitioners-Plaintiffs ocean view, will not prevent use of the public street, will not substantially affect the turn-around area in the dead-end and does not impact access to the condominium complex. The mere fact that the construction area is proximate to the Petitioners-Plaintiffs’ condominium complex does not signify that an easement of light, air and access creates a cause of action.

Accordingly, the Appellate Division affirmed the Supreme Court, with a minor modification to sufficiently address and resolve the declaratory judgment action.

voidable-contractsAlso known as negative easements, restrictive covenants can wreak havoc on the ability to develop property. Recently, in our real estate practice at Farrell Fritz, we have seen two alarming examples.

In both cases, the restrictive covenant combined with applying municipal zoning requirements precluded the development of the property. Fortunately, we had inserted language into the contracts that allowed the client to cancel the contract with no negative financial consequences.

Restrictive Covenants and Land Use Regulations

One such instance involved a waterfront parcel on Shinnecock Bay in the Town of Southampton. This property was subject to the Town’s wetland law, which regulates the setback of structures in relation to the location of the wetlands on site. Through a title search, we found out that the property was also burdened by a private covenant that also restricted the location of structures.

This covenant contained specific language which required that a structure constructed on the site be setback at least 85 feet from the street. From the opposite side of the property, the Town’s wetland regulations required that a principal structure be at least 125 feet from the wetlands.

Applying both the wetland setback and covenant setback resulted in a negative building envelope.

Since this covenant was included as part of the subdivision process, all 26 owners of lots in the subdivision had to sign off on a waiver of the covenant requirements.

Another similar circumstance occurred where a covenant in a deed for a lakefront property required that any structure constructed on the premises be situated 60 feet from the street. This property was also subject to the same 125-foot wetland setback as the previous example. Again, application of both setbacks rendered the lot unbuildable.

In this instance, the covenant was unusual. It only benefitted the sellers of the lot, who also owned other properties in the area. The sellers specifically retained the right to modify the restrictions imposed by the covenant.

If applied to their fullest extent, both restrictions result in a lot that cannot be developed.

Relief From Restrictive Covenants

Obviously, a property owner could apply for relief to the municipal agency having authority over wetland regulations. However, these municipal boards are under increasing pressure to preserve wetlands which protect water bodies, so relief from these restrictions is difficult to obtain. Extinguishment of the covenant is the only other option. There are three ways to extinguish a covenant:  (1) an agreement between the interested parties to the covenants; (2) a merger of ownership or (3) a final decision by a court of law.

All three paths are challenging.

To obtain an agreement to extinguish the covenant in my first example would require consent from the other 25 property owners in the subdivision.

Because of the vague nature of the language that created the covenant in the lakefront example, extinguishment involves a difficult title challenge. There, a prospective developer must research title ownership of the nearby properties to determine those owned by the persons that created the covenant. After that research, a perspective purchaser must then obtain an agreement of all current property owners in the chain of title of the affected properties to amend the covenant.

Second, to merge ownership would require the purchase of the properties that benefit from the covenant. A purchase of the necessary lots in both examples above would be cost prohibitive.

Finally, a party looking to extinguish a covenant can commence a litigation under §1500 of the Real Property Actions and Proceedings Law. There are too many causes of action under §1500 to list here; but extinguishing a well written covenant through the court system would be a difficult, time consuming, and expensive task.

The obvious advice here is to authorize a title company to provide any covenants and easements that could affect the development of a property under consideration for purchase prior to entering into contract of sale.

aid157119-728px-Install-Posts-in-the-Water-for-a-Dock-or-Pier-Step-1  In New York, as a general rule, the touchstone of riparian rights has been the ownership of land touching a navigable waterway. See Bromberg v. Morton 64 AD2d 684 [2d Dept 1978].  As a result, unless expressly reserved by deed, if a waterfront lot is partitioned, any resulting lot that no longer physically touches the water  becomes non-waterfront property and loses its riparian rights.  Durham v. Ingrassia, 105 Misc2d 191 [Sup Ct., Nassau County 1980].

However, there is a developing line of case law in the Second and Third Departments holding that an easement that provides access to a navigable waterway provides the beneficiary of the easement with the riparian right to construct a dock equal to that of the actual waterfront owner.  See Briggs v. Donna, 176 AD2d 1105 [3d Dept 1991].

In Briggs v. Donna, the Third Department held that although there is no language in any of the plaintiffs’ deeds expressly granting a right to construct a dock, the plaintiffs’ dock at the foot of an easement was a “reasonable use” of the easement and incidental to plaintiffs’ access rights under the easement.  In short, the easement holder, a non-waterfront landowner, possessed the same riparian rights as the actual waterfront landowner to build a dock to navigable water.

Relying on this reasoning, the Second Department, in Monohan v. Hampton Point, 264 AD2d 764 [2d Dept 1999], reinforced the position that riparian rights extend from an easement to access navigable water.  In that case, the court held that, as a matter of law, the easement to access the water was sufficient to create the riparian right of wharfing out, and the subject dock located at the end of an easement leading to a navigational portion of the waterway was a reasonable and incidental use of the easement.  See also, Hush v. Taylor 84 AD3d 1532 [3d Dept 2011] Installation of a dock at the end of an easement of this type “is a reasonable use incidental to the purpose of the easement” and is, therefore, permissible).

Under the right circumstances, Courts have reasoned that the existence of an easement to the water’s edge would have been “without purpose” if it did not provide for the construction of a dock or pier to provide access to the waterway.

As a result, this line of case law seems to remove the need for landowners to actually own waterfront land in order to exert their riparian right of access by a dock or pier. Instead, an easement running to the shoreline includes the right to construct a pier or dock to obtain access to navigable water.

On at least three occasions, in 1961, 1966 and 1972, the parties to  a shared driveway easement confirmed its existence in writings contained in deeds and a stand-alone written agreement.

Despite this fact,  in a recent Kings County Supreme Court decision, plaintiffs Braunsteins, neighbors to the widow of famed baseball player Gil Hodges, were denied an injunction and effectively lost their rights to use the shared driveway to access their garage before they even purchased the property. Was this decision the right call or not?  Well, let’s review the play!

Court’s Reasoning

In deciding this case, the Court held that even before the Braunsteins purchased their property in 2002, Mrs. Hodges had acquired all rights to the easement by adverse possession based on the fact that the prior owners, the Golds, parked their vehicles on the street, not on the driveway.  Further, testimony in the form  of a non-party affidavit was submitted alleging that the Golds used the garage for storage and acknowledged that “t[he] driveway belongs to the Hodges family.”

In adopting these facts, the Court rejected Braunsteins’ uncontroverted evidence that between 2002 and 2013, the Braunsteins “were renovating their property and had workers using the driveway to finish construction and gain access to their garage.”  In fact, during the construction period, lasting almost 13 years, non-party Falco stated that Mrs. Hodges “always complied with the requests of Braunstein’s workers and/or agents’ requests to have her car moved from the driveway.  She either gave her car keys to the workers ‘for them to back the car out and then, after the delivery of the building materials, to park the car back onto the driveway or just moving it herself.’ “

According to the facts, at no time did Mrs. Hodges advise the construction workers or the Braunsteins that moving her car was merely a convenience.  This would have confirmed her contention that the easement which the Braunsteins believed they possessed, and was conveyed to them when they purchased the property 13 years prior, had been acquired years before their purchase by adverse possession as a result of the Golds’ non-use.

Flawed Reasoning?

This case could be analyzed for hours, and the facts supporting it are ripe for a re-play.   Here, the Court conclusively determined, by dismissing Braunsteins’ claims, that Mrs. Hodges established adverse possession by “clear and convincing credible evidence.”  This statement is simply not supported by the facts.  If the relief granted was merely to deny the injunctive relief request, and not to dismiss Braunsteins’ claims, then maybe a “foul” call would not be ripe.  In this case, however, the Court determined the ultimate relief based on contradictory evidence, such as the statement of Mrs. Hodges that she never moved her car.  This is clearly contradicted by the Affidavit of Ms. Falco, which states that Mrs. Hodges did move her car.

Likewise, having spent many years in the title insurance industry and upon reading this case,  questions instantly arose in my mind as to whether the easement in question was insured.  If it was, did the Golds sign an Affidavit or notify the Braunsteins that, despite three writings to the contrary, the Golds abandoned their absolute right to use the easement?  Would the Braunsteins have purchased the property if they knew that they had no access to their garage, and that the written easement was extinguished?

Implications of Decision

Further, what certainty do title insurers, sellers, purchasers and their attorneys have when more than 13 years later, a neighbor can successfully extinguish an easement, which has been established by 1) no less than three writings, 2) existing for nearly 52 years and 3) being in active use by the Braunsteins during their renovation project, as evidenced by their use of the easement, without objection, for more than 13 years.

Is this dispute in the first or the last inning?  Tune into Farrell Fritz’s regularly scheduled Monday blog posts to find out who the winning team is!

 

By Lou Vlahos, Tax Partner at Farrell Fritz, P. C.

Even a cursory review of IRS enforcement efforts over the last few years would reveal that the government has dedicated substantial resources to auditing charitable conservation easements.  Rarely does a week go by without one of the information services, to which many tax professionals subscribe, reporting at least one court decision involving a charitable income tax deduction claimed by a taxpayer in respect of a conservation easement.

In many instances, the IRS vigilance in this area has been warranted since there have been many abuses over the years.  These range from aggressive valuation by inexperienced or disreputable appraisers, to misrepresentations by taxpayers of the public benefit purportedly generated by the conservation easement.  In fact, concerns over these issues led the Obama administration to propose as part of the 2014 budget, limitations on deductions for certain conservation easements.

This should not come as a surprise to taxpayers or their advisers.  The IRS announced in 2004 that it would be taking stricter enforcement action as to improper charitable contribution deductions based upon conservation easements.  Most recently, this tougher attitude was manifested in the government’s motion seeking to permanently prohibit a particular appraisal firm from preparing appraisal reports for any purposes relating to federal taxes, claiming that the firm had consistently overvalued conservation easements by applying erroneous appraisal methods.

In light of the IRS’s increased scrutiny of conversation easements, it would behoove any taxpayer who is contemplating the granting of such easement to understand its basic requirements and to become familiar with the related reporting obligations.

Requirements and Reporting Guidelines

According to the Internal Revenue Code, an income tax deduction may be allowed for the fair market value of a “qualified conservation contribution”, provided certain requirements are satisfied.  A qualified conservation contribution is the contribution of a “qualified real property interest” to a “qualified organization,” which is made exclusively for conservation purposes (though some incidental benefit inuring to the donor may be allowed).  A similar deduction will be allowed for gift tax purposes, which effectively eliminates the gift tax exposure that otherwise would result from the contribution of the easement.

The contribution cannot be part of a quid pro quo exchange; for example, where the easement is granted to a county in exchange for a zoning change or exemption.

A qualified real property interest includes, among other things, a “restriction (granted in perpetuity) on the use which may be made of real property”.  Any interest in the property retained by the donor must be subject to legally enforceable restrictions that will prevent uses that are inconsistent with the conservation purpose of the donation.

A qualified organization is a publicly supported charity that is dedicated to promoting conservation purposes and that has the resources to enforce the easement.  Toward this end, the donation must give the charity the right to inspect the property and to enforce the easement by appropriate legal proceedings.

Acceptable Conservation Purposes

There are several “conservation purposes” for which the contribution may be made; for example, preservation of land areas for recreation by, or for the education of, the general public; the protection of a relatively natural habitat of fish, wildlife or plants, or similar ecosystem; the preservation of open space (including farmland and forest land) for the scenic enjoyment of the general public, or pursuant to a clearly delineated federal, state or local governmental conservation policy, which will yield a significant public benefit; or the preservation of an historically important land area or a “certified historic structure.”  A taxpayer’s stated conservation purpose will be closely examined by the IRS to ensure the presence of a real public benefit.

Calculating theValue of a Conservation Easement

The amount of the donation, and of the related tax deduction (subject to various limits), is the fair market value of the easement as of the date that it is donated.  A deduction is permitted only if the easement diminishes the value of the property it encumbers.

As a general rule, the fair market value of a conservation easement is equal to the difference between (a) the fair market value of the to-be-encumbered property before the easement is granted and (b) the fair market value of the property after the easement is granted.  If the granting of the easement has the effect of increasing the value of any other property owned by the taxpayer or a related person, the amount of the deduction for the easement must be reduced by the amount of the increase in value of the other property, whether or not it is contiguous to the encumbered property.  If the taxpayer or a related person can reasonably expect to receive, as a result of the donation, an economic benefit greater than that which will inure to the general public, no deduction is allowable.

In order to determine a property’s fair market value, one must first determine its “highest and best use.”  This is not necessarily its current use.  Rather, it is the highest and most profitable use for which the property is adaptable and needed or likely to be needed in the reasonably near future.  Generally speaking, this use must be physically possible upon the property, legally permissible and financially feasible.  Of the possible uses, the most profitable is the highest and best.  This analysis is very detailed and fact-intensive.  It is also “near and dear” to the IRS since it provides the starting point for valuing the conservation easement and is often a point of contention in an audit.

Once the highest and best use is determined, a number of valuation methods may be applied (for example, sales comparison, replacement cost, income capitalization) in arriving at the property’s fair market value.

A taxpayer must substantiate the value of the conservation easement by submitting with its federal tax return a “qualified appraisal” of the value for the easement prepared by a “qualified appraiser”.

Obtaining Qualified Appraisals

A qualified appraiser is someone who:  “(I) has earned an appraisal designation from a recognized professional appraiser organization or has otherwise met minimum education and experience requirements . . ., (II) regularly performs appraisals for which the individual receives compensation, and (III) meets such other requirements as may be prescribed [by the IRS] ….”

A qualified appraisal is an appraisal of property which is conducted by a qualified appraiser in accordance with “generally accepted appraisal standards” . . ., and must include (i) a description of the property that is sufficiently detailed for an unfamiliar reader to ascertain that the property that was appraised is the property that was contributed, (ii) a description of the physical condition of the property, (iii) the terms of any restriction on the use of the property, once donated, (iv) the appraised fair market value of the property on the date of the contribution, (v) the method of valuation used to determine the fair market value, and (vi) the specific basis for the valuation.

Reporting Requirements

In addition to the normal reporting requirements for charitable contributions, the taxpayer should file a federal gift tax return on IRS Form 709.  The taxpayer must also prepare and file IRS Form 8283, Noncash Charitable Contributions.  The appraiser and the charitable organization are required to complete portions of this form.  The charitable organization must also report on its annual tax return, on IRS Form 990, that it received and holds conservation easements and, on Schedule D thereto, it must set forth, among other things, more specific information as to the purposes of such easements and its enforcement thereof.

Conclusion

The granting of a conservation easement for the purpose of generating a charitable contribution deduction should not be undertaken lightly.  As the foregoing discussion demonstrates, the applicable rules are complicated and the necessary substantiation may be painstakingly detailed.  As a result of the various reporting requirements, coupled with the IRS’s increased enforcement activity with respect to such easements, a taxpayer can find himself in a messy situation if he is not careful.  Indeed, if the taxpayer is not careful, he may end up with permanently encumbered property (which cannot be developed) for which no income tax deduction was allowed.  He may even become liable for federal gift taxes.