In an effort to preserve agricultural and forest land, Pennsylvania passed The Pennsylvania Farmland and Forest Land Assessment Act of 1974, also known as Clean and Green. Clean and Green provides qualified parcels of land with preferential assessment values, resulting in lower property taxes for the landowner. A Clean and Green qualified parcel generally must be more than 10 acres in size and devoted to agricultural use, agricultural reserve (i.e. open spaces used for outdoor recreation), or forest reserve. Rather than appraising the parcel based off of its Fair Market Value, Clean and Green allows the Department of Agriculture (DOA) to value parcels based on their use. The DOA provides county assessment offices with a list of use values annually. Each county’s assessment office is allowed to provide for lower assessment values for Clean and Green qualified parcels, but may not assess a parcel higher than the use values provided by the DOA. Currently, Pennsylvania has more than 9.3 million of its total 29 million (~32%) acres of land enrolled in Clean and Green.
While Clean and Green assists many Pennsylvania farmers that may otherwise face financial struggles, the program also disincentivizes those landowners from changing the use of their land or selling it for non-agricultural purposes. In the event a landowner violates the Clean and Green covenants or elects to remove the parcel from the program, the landowner is subject to up to seven years of rollback taxes at a 6 % interest rate per year (or, if the parcel was enrolled in Clean and Green for less than seven years, rollback taxes for the number of years the parcel was enrolled). Rollback taxes generally means the amount of taxes that would have been paid had the parcel not been enrolled in Clean and Green, less the taxes due by virtue of the program. In the event the parcel is sold to a third party, rollback taxes will not become automatically due because of the sale itself. If, however, a third party purchases the parcel and changes its use, the parcel—thus, the third-party purchaser—can become subject to the rollback tax penalty.
Developers are eager to purchase and develop vacant land, particularly larger parcels in areas experiencing population growth. That said, because of their size and location, these types of parcels are generally assessed at higher values than rural lands in areas with less growth and fewer people. As a result, qualifying landowners in highly assessed areas almost invariably enroll in Clean and Green. While the preferential assessment enjoyed by these landowners can be substantial, the costs incurred by removing parcels from Clean and Green can be equal to or even outweigh the tax benefit.
Because of the foregoing, developers must keep a sharp eye for parcels enrolled in Clean and Green. This includes not only the primary development site, but any adjacent properties that will be subdivided or subject to improvements under a recorded plan, regardless of how minor the subdivision or improvements may be. Indeed, any use of an enrolled tract of land that is not expressly authorized under Clean and Green regulations will trigger rollback taxes for the entire enrolled property.
Ultimately, the cost of settling rollback taxes for enrolled properties is a deal point that should be negotiated and incorporated into a sales contract. In the event a transaction occurs without prior negotiation of the Clean and Green terms, a developer may incur the full brunt of the seven years of rollback taxes, plus interest, due as a penalty for violating Clean and Green covenants. The most cost-effective method to avoid this pitfall is to get in front of it. Developers interested in purchasing and developing rural land should have skilled land use and transactional attorneys involved in reviewing applicable property records to assess potential Clean and Green implications, as well as the drafting of a sales agreement in a manner that avoids incurring any rollback penalties involved for a breach of the Clean and Green covenants.
If you have any questions about this post or Clean and Green issues generally, please feel free to contact any member of the McNees Wallace & Nurick Real Estate Group for assistance.