In a typical syndicated deal, the investor partnership has acquired the property within the past year or two, presumably from a seller determined to get what it’s worth. How, then, can an appraiser conclude its value has suddenly multiplied eight or 10 times from what the partnership paid for it?
Under federal regulations, an appraisal must offer an opinion on the land’s fair market value — the price a knowledgeable buyer would pay a knowledgeable seller when neither is desperate to make a deal. But when it comes to conservation easements, syndication appraisers typically claim there are no comparable area sales. So they use a more subjective approach (albeit one that often includes reams of complex projections and reports): They try to estimate what the land would be worth if put to its most profitable legal use — as, say, a development of resort homes. Under tax court rulings, this transformation is supposed to be “reasonably probable” to occur in the “reasonably near future” and not rely on “mere speculation and conjecture.”
Based on a skeletal development plan, consulting studies commissioned by the promoter, and an array of optimistic assumptions, the appraiser then projects the development costs and profits for the imagined business. On syndicated deals this invariably results in a sky-high valuation — a calculation of what the investors are giving up and can thus claim as a deduction — that makes everyone a hefty profit.
