By: Marisa Halm
A façade easement allows a person or business to use the surface, or façade, of an adjoining building. In recent years, the façade easement has been adapted for use between businesses. This post will explore the business potential of the façade easement, as it can create tax breaks, build ambiance, and build positive publicity for the business. This post will also explain why drafting a written façade easement should be standard practice and give some general contract recommendations to consider.
Historical Façade
Façade easements are traditionally used to promote the preservation of historically significant graffiti, historic murals, or historic advertisements. The “historic significance” of a place depends on the “location, design, setting, materials, workmanship, feeling and association [that] adds to the district’s sense of time and place and historical development.”
Even though the Tax Court held in Harbor Lofts Assoc.s v. Comm’r that only the owner of the building may obtain a tax deduction, it could still be worth mentioning to your neighbor if their historic façade adds value to your business; you both could benefit from its preservation!
The tax deduction amount is based on the value of the easement, which is determined by the difference in the property’s appraised fair market value before the easement exists and the property’s appraised fair market value after the easement exists. This fair market value can depend on many different factors, including the amount of local historic preservation ordinances already in effect and potential development restrictions. Unfortunately, the Tax Court has a few inconsistent rulings that can make declaring a federal tax deduction rather complicated. For instance, in most cases, a retained easement must be given to a historical non-profit organization in order to be tax deductible. Yet, as seen in Big River Development LP et al. v. Comm’r, if the building has depreciated to such an extent that a tax break would attribute a negative value to the building, then a deduction is not awarded. Rulings like this create a very specific set of guidelines and circumstances for tax deductions, and a talk with a tax attorney will help determine what options are available at both state and federal levels.
Ambiance and positive publicity
Historic conservation can also contribute to the ambiance of the business. In Wilmington, DE, the Trolley Square Oyster House is embracing this practice.
This restaurant is located next to railroad tracks, which might seem like a disadvantage if trying to attract guests to sit outside and mingle. However, the Oyster House’s rooftop dining space is bordered by an old building with a huge historic advertisement that portrays a train and promotes an old brand of beer. This advertisement adds historic value to the building it lies on and creates a fun nod to both the beer and railroad industries of the area. By preserving the historic advertisement, the business transforms a weakness in the space into a full dining experience.
If done right, this ambiance can be a large part of what makes your business successful. For instance, in Philadelphia, PA, the Graffiti Bar has become a social media hotspot. It is a shabby-chic rooftop bar that showcases graffiti and honors the art form, as it is widely prevalent throughout the city. It has both commissioned murals and authentic graffiti throughout the interior, all of which attracts a crowd that is constantly taking pictures, posting and tagging the business, and promoting it on social media. This form of marketing is crowd-sourced and, best of all, free. There is also a large mural on the building next to the bar that can be seen from the street and has been tagged in so many posts that it now acts as an unofficial sign for the Graffiti Bar. Though the business does not receive tax breaks because they hired the artist, the mural beckons curious passersby into the space and creates a recognizable establishment in the Philadelphia nightlife scene.
The Façade easement itself
If your neighbors own the building, they can grant a façade easement. When negotiating a façade easement, you should always have a written legal document drawn up to reflect the terms and conditions of the easement. As with all legal documents, it is best practice to hire an attorney to assist with drafting and negotiations to account for business considerations that are specific to your industry and situation. Generally, it is prudent to include the following:
- The Duration: The façade easement should ideally be granted in perpetuity, or as long as your business remains open next door.
- The Parties: State the name(s) of the property’s owner(s) who is/are granting the easement and your business’ name. This way if you end up selling your business, the easement is attached to your business, not you as an individual.
- Additional Terms: This would include any additional terms and conditions that either party would wish to impose. For instance, this could be permission to use the façade as long as there are no offensive images on it, or the agreement to maintain the historic integrity of the façade and the wall of the building.
- Full Disclosure: Though it is not required, it would be wise to ensure that the property owner(s) understand that the written easement does transfer to future owners of the property. The property owners will then know to inform prospective buyers of the easement and may help you coexist with future neighbors.
If the new neighbors do not approve of the usage of their building and you have a written façade easement, you will likely have a strong case if you choose to go to court. It is important to evaluate whether you have the means to finance the court costs and legal fees. It is a good idea to hire an attorney to assist you, as he or she will be able to find relevant historical conservation statutes and case law that may prohibit alterations to the wall.
Explore your options, be creative, and think outside the walls of your business; think façade easements!
This post was originally posted here on March 31, 2019, and has been reproduced with Marisa’s permission.
Sources
The National Historic Preservation Act, 36 C.F.R. § 67.2(a)(1).
Harbor Lofts Assoc.s v. Comm’r, 2018 U.S. Tax Court LEXIS 46 (2018).
Big River Development LP et al. v. Comm’r, T.C. Memo 2017-166 (2017).
https://www.law360.com/articles/958457/tax-court-calls-developer-s-7m-facade-easement-a-donation?copied=1Ambiance
https://www.irs.gov/businesses/small-businesses-self-employed/tax-aspects-of-the-historic-preservation-tax-incentives-faqs
https://www.nps.gov/tps/tax-incentives/taxdocs/easements-historic-properties.pdf
Image Sources
Trolley Square Oyster House, Yelp.com, uploaded by Renee D.
Graffiti Bar interior, Yelp.com, uploaded by Amber L.
Graffiti Bar mural, photo taken by Christian Carollo.
Marisa Halm, at the time of this post, is a rising third-year law student at Penn State’s Dickinson Law. She is from a small town near Greensboro, North Carolina, and went to Allegheny College before coming to Dickinson. Marisa has taken several different business law-related courses. Her interests in this area likely stem from having entrepreneurial parents. You can find out more about Marisa here.
