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So who makes up for the lost revenue ?
Tax-Break Gold in Donated Hills
* Development: The Irvine Co. may get a huge IRS break in its transfer of 11,000 acres to O.C. Site may be valued at $500 million.


Irvine Co. Chairman Donald L. Bren's gift of 11,000 acres of open space to the people of Orange County could also reap the company hundreds of millions of dollars in tax deductions, in what appears to be the largest tax break of its kind.

Using "conservation easements"--an increasingly popular method of preserving land--the company is signing over development rights on the land while retaining ownership for 10 years.

That will yield not just hefty tax breaks but also the ability to design and control public access as the company sees fit. By writing off thousands of acres of steep, nearly unbuildable terrain prone to landslides, along with prime smaller pieces slated for development, the company also could maximize value on land that is worth as little as 3 cents a square foot on the latest tax rolls.

Bren's gift, announced in November, has been widely praised by company critics and admirers alike. The subject of tax breaks for the company has drawn speculation but no criticism.

"It's a tax benefit, all of it is legal, all of it's correct," said Theresa Sears, an Orange resident who has fought Irvine Co. developments in east Orange, including some on lands that will now be preserved.

"The people benefited, and Bren, a smart man, will benefit too. It's a win-win for everybody. So none of us over here that got our gift have to be beholden to the Irvine Co. down the road, because Don Bren got a gift too."

Craig Atkins, partner at O'Donnell Atkins Co., California's largest land broker, said the tax breaks are part of the beauty of the package.

"It's a fantastic deal for everyone," Atkins said. "You can't pave over everything. If you're a neighbor living in Orange County, it's great, and if you're [Bren's] banker, it's also great.... That's Don Bren. He's got it wired.... The guy is brilliant."

Bren is sole owner of the Irvine Co. Company officials declined to be interviewed about the tax ramifications.

"We don't discuss finances," said spokesman Rich Elbaum.

Monica Florian, group senior vice president of corporate affairs, said: "Whatever charitable contribution would be permitted under law is what would be applicable here."

She said she was not familiar with the details but "ultimately, that is decided by the IRS."

An IRS spokesman confirmed the legal structure of conservation easements but said no information about specific cases could be released by the agency.

Conservation easements allow a donor who signs away development rights to deduct the difference between what the land would have sold for if it could be developed and what it would sell for without such rights.

Income-tax records and land appraisals are private, but several land-sales professionals, including Atkins, said that in the red-hot Southern California real estate market, the total acreage with development rights would sell for at least $500 million.

Without the potential for development, the land would be worth as little as $88 million, those same experts said. The tax deduction under this scenario would be $412 million--the value of the lost development rights.

Experts interviewed emphasized that those figures probably understate the value of the property and the ensuing deduction.

"There's a lack of supply of housing and a glut of demand in Orange County," which drives up the worth of land that can be developed, said Bob Holman, a certified general appraiser at CB Commercial in Orange County. "Appraisal is an art as much as a science, and there's always a range of potential values.... [$500 million] is a conservative figure," he said.

Whatever the amount of the deduction, "it will absolutely be the largest" of its kind, said Stephen Small, who wrote the original IRS code on conservation easements and has written four books on land ownership and taxes. Small, now a Boston-based private attorney, has prepared hundreds of conservation easements and said the most substantial yielded tax benefits of $10 million to $50 million.

The Land Trust Alliance, a national nonprofit that tracks open land, said the number of conservation easements is "skyrocketing."

Usually they are used to preserve smaller, prized pieces in resort areas like Jackson Hole, Wyo.; Martha's Vineyard in Massachusetts; or Aspen, Colo.; or large rural lands. In the largest acreage conservation easement to date, the Pingree timber family signed over development rights to 750,000 acres of Maine woods and was paid $30 million. Because the family was paid, it did not receive income-tax deductions.

But because of its size and location in fast-growing, wealthy Orange County, "there is no land like Bren's anywhere else in the U.S.," said Atkins, the California land broker.

Conservation easements can be tailored to the landowner's wishes as long as they do not irrevocably destroy ecological values.

Bren and the Irvine Co. are dividing the 11,000-acre gift into seven conservation easements to be signed over to the Nature Conservancy by the end of June.

Only one has been recorded so far. Records on the so-called Laguna Laurel easement, 173 acres in Irvine near Laguna Canyon Road, show the Irvine Co. has reserved the right to send urban runoff from an adjacent new development across the preserved land.

A similar tactic led to costly delays a few years ago for the company on its upscale Newport Coast development, after the state Coastal Commission questioned rights the company had retained to drain runoff across Crystal Cove state park when it sold the parkland to the state.

Although there are no immediate plans to put in utility lines and roads, the company also has reserved rights to do so, and even conduct "slant" drilling under the site from adjoining lands.

Company and Nature Conservancy officials said the impact and size of any such construction would be extremely limited and would require approval by appropriate government agencies.

Small called the runoff, roads and other rights "novel."

He said the "first line of defense" in monitoring a landowner's compliance with conservation values is the designated environmental group that is the recipient of the easement.

In this case, that group is the Nature Conservancy, which is being paid $20 million by the Irvine Co. to manage all its open space.

Longtime activist Sherry Meddick said possible roads through the open space in east Orange, along with other new roads and development nearby, will destroy essential wildlife corridors.

"The mountain lions are going to need a road map and crossing guards," she said.

Trish Smith, senior biologist in Orange County for The Nature Conservancy, is overseeing the gift land. She expressed concern over roads that might be built in easement areas. But she said the proposed development nearby would not block wildlife corridors.

She said studies had shown mountain lions and other animals primarily move through the lands that are being set aside.

"If I'd been asked a year and a half ago what was needed [for wildlife corridors], these are exactly the lands I would have selected," she said.

Florian said the Irvine Co. does not necessarily think new roads needed to be built on the gift lands. But, because of concern by some local officials about increasing traffic, she said, the company didn't want to rule out the possibility of building any previously planned roads.

Whatever the final language and tax deductions of the easements, the company will finally find a use for some swaths of land that, on the books, are worth as little as $1,300 an acre. It would probably cost hundreds of millions of dollars to even prepare the tangled virgin wilderness in steep, narrow canyons for construction.

"It's mostly 'hilly-to-waste' category land. It goes straight up," said the Orange County tax assessor's managing appraiser Steve Grimm, of 900 acres known as Fremont Canyon that are part of the land being set aside. "It's almost impossible to build on."

Although the property may not be worth much on the books, the inability to bulldoze or otherwise touch it has left a treasure trove of wildlife. From golden eagles and mountain lions to spadefoot toads, newts and seven species of bat, the land is full of rare and endangered species.

Nature Conservancy of California director Graham Chisholm said that, whatever the tax ramifications might be, the gift brings an important additional layer of protection.

"The fact that there is now a conservation plan is a huge plus," he said. "You can sleep better at night."