FINANCE Compiled Guidance - Land Trust Alliance...1 · Land Trust Alliance · Land Trust Standards and Practices · Practice 2C1a. Federal Tax Exemption Accreditation indicator element

FINANCE

Compiled Guidance

ABOUT THIS DOCUMENT

This document compiles the Land Trust Alliance’s guidance for the accreditation indicator elements

in the Finance category. With background information on and explanations for each practice

element, these narratives provide guidance to help land trusts implement the practices and

understand the requirements for accreditation.

1 · Land Trust Alliance · Land Trust Standards and Practices · Practice 2C1a. Federal Tax Exemption Accreditation indicator element and Terrafirma enrollment prerequisite ( )

Last revised December 16, 2019

STANDARD 2. COMPLIANCE WITH LAWS

C. Federal Tax Exemption 1. Maintain status as a tax exempt organization under section 501(c)(3) of

the Internal Revenue Code (IRC)

a. File a complete and accurate annual information return (Form 990 or equivalent) with the Internal Revenue Service

Accreditation indicator elements located at www.landtrustaccreditation.org

INTRODUCTION

The IRS requires most tax-exempt organizations, including land trusts, to file an annual return

officially called “Return of Organization Exempt From Income Tax” (IRS Form 990) in one of its three

versions. In addition to being required by the IRS, some state agencies that regulate charitable solicitations also require charities to file the Form 990 as part of their annual report. Unlike

personal income tax returns, returns are due by the 15th day of the fifth month after the close of an

organization’s tax year. For example, if a land trust’s tax year closes on December 31, its 990 is due

by the following May 15.

Which form a land trust must file generally depends on its financial activity:

• Organizations with annual gross receipts greater than or equal to $200,000 or total assets

greater than or equal to $500,000 must file the full Form 990

• Organizations with gross receipts of less than $200,000 and total assets less than $500,000

may file Form 990-EZ

• Organizations with annual gross receipts normally less than or equal to $50,000 may file

the e-Postcard (also called the Form 990-N)

http://www.landtrustaccreditation.org/

http://www.irs.gov/pub/irs-pdf/f990.pdf

http://www.irs.gov/pub/irs-pdf/f990ez.pdf

2 Land Trust Alliance · Land Trust Standards and Practices · Practice 2C1a. Federal Tax Exemption Accreditation indicator element and Terrafirma enrollment prerequisite ( )


All land trusts filing a Form 990 should read the current instructions to the form very carefully and

consult with a knowledgeable attorney or financial advisor.

THE CORE FORM

The Form 990, schedules and instructions consist of a 12-page core form and 16 related schedules.

The core Form 990 provides summary information about an organization’s mission, finances and

fundraising expenses. Trigger questions on the core form direct organizations to fill out more

detailed schedules. The complete instructions for the Form 990 can be found here.

Land trusts should take special note of the following parts of the core form:

Part I – Summary

The first page of the form – the first item any reader will see – allows organizations to provide a

succinct statement of their mission or most significant activities. In addition, land trusts will need to

indicate the total number of:

• Voting board members (not advisory members who do not vote)

• Independent voting board members (those who are not employees or contractors of the

organization or a related party)

• Employees

• Volunteers (a reasonable estimate is adequate)

Part II – Signature Block

The return must be signed by the current president, vice president, treasurer, assistant treasurer,

chief accounting officer or other corporate officer (such as a tax officer) who is authorized to sign as

of the date the return is filed.

Part III – Statement of Program Service Accomplishments

This section requires reporting regarding an organization’s program services and exempt purpose

achievements. Land trusts should be prepared to describe any new, significant program services or

program services that have changed since they last filed their Form 990 and to describe their three

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largest program services based on expenses. For most, but not all, land trusts, this section will be

limited to their land protection activities.

Part IV – Checklist of Required Schedules

This section guides the organization to particular schedules it must complete (see below). Note

particularly line 7 regarding conservation easements and line 29 regarding non-cash contributions

(which include gifts of land in fee). Line 11 asks several more detailed financial questions affecting Schedule D.

Part V – Statements Regarding Other IRS Filings and Tax Compliance

This section provides a useful guide to the other tax forms a land trust may need to complete, as

well as specific tax compliance questions regarding notification of donors who received goods or

services in exchange for their contributions, unrelated business income and the filing of Form 8282.

Part VI – Governance, Management, and Disclosure

The IRS is highly focused on governance issues for exempt organizations as an indicator of overall

compliance with the Code. All organizations filing the core form must complete Part VI. It is divided

into three sections requiring information on an organization’s governing body and management,

governance policies and disclosure practices. While many of the questions address policies and

practices that are not required by law, the IRS considers such policies and procedures “generally to

improve tax compliance” and most are included in Land Trust Standards and Practices. According to

the IRS, “the absence of appropriate policies and procedures can lead to opportunities for excess benefit transactions, inurement, operation for non-exempt purposes, or other activities

inconsistent with exempt status.”

Section A – Governing Body and Management

Organizations must report:

• The number of independent voting members of their governing board

• Whether any officer, director, trustee or key employee has a family or business relationship

with another officer, director, trustee or key employee

The IRS defines a key employee as one who meets all three of the following tests:



1. Is compensated more than $150,000

2. Has responsibilities or influence similar to those of the board; manages a discrete segment

of the organization that represents 10 percent or more of the “activities, assets, income, or

expenses of the organization;” or has authority to determine 10 percent or more of the

organization’s capital expenditures, operating budget or employee compensation

3. Is one of the 20 employees that meet 1 and 2 with the highest reportable compensation

• Whether the organization kept minutes of meetings or of written actions taken by the

board or committees authorized to act on behalf of the board (such as the executive

committee). In line 8, contemporaneous means within 60 days of the meeting or action or by the time of the next meeting of the board or committee, whichever is later.

Section B – Policies

In this section, land trusts must report:

• If the organization has chapters or affiliates, whether it has written policies and procedures

governing its activities.

• Whether the organization provided a copy of its Form 990 to its governing board before it

was filed. If so, the organization must explain in Schedule O the review process or state that

no review was conducted (see below).

Organizations are also required to disclose whether or not they have certain policies, but they are

not required by the IRS. These policies include:

• Conflict of interest policy (Practice 4A1)

• Whistleblower policy (Practice 1A2)

• Document retention and destruction policy (Practice 9G1)

• Process for determining compensation of the organization’s executive director or top

management official (related to Practice 7E5)

An organization must also describe on Schedule O its practices for monitoring and managing

conflicts of interest and its process for determining compensation for key employees.

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Section C – Disclosure

In this section, the organization must:

• List the states in which it is required to file a Form 990. Depending on state law, this may

include states in which the land trust is located, conducts business or raises funds.

• Indicate how it makes its Forms 990 and 1023 (Application for Recognition of Exemption)

available to the public. All tax-exempt organizations must make copies of its past three

returns available to anyone who asks.

• Describe on Schedule O whether and how it makes its governing documents, conflict of

interest policy and financial statements available to the public. Land trusts are not required

to make these items available, but many organizations have found it helpful to post these

documents on their websites as part of their efforts to be accountable to donors and the public.

Part VII – Compensation of Officers, Directors, Trustees, Key Employees, Highest Compensated Employees, and Independent Contractors

Part VII requires the listing of the organization’s current or former officers, directors, trustees, key

employees and highest compensated employees, and current independent contractors and reporting of certain compensation information relating to those people.

Part VIII – Statement of Revenue

Revenues are combined into a single section that is divided into three parts:

1. Contributions

2. Program service revenue

3. Other revenue

Form 990 separates contributions into these categories:

1. Contributions from the public received through federated campaigns

2. Membership dues

3. Fundraising events





4. Contributions from related organizations

5. Grants from governmental units

6. All other contributions

Any noncash contributions reported as part of the above must also be reported separately on line

1g and, if the total exceeds $25,000, the organization must complete Schedule M. Land trusts

should report gifts of land and conservation easements here if they do not use the zero-value

approach for conservation easements. See below for further discussion.

Part IX – Statement of Functional Expenses

Use your land trust’s normal accounting method to complete this section. Expenses are separated

into three categories:

1. Program services

2. Management and general

3. Fundraising expenses

For accreditation, a land trust must segregate its expenses for fundraising, program services

and management and general – it needs to track its expenses in these categories.

The instructions provide detailed information on the expenses that should be allocated to each

column. Areas that may be of particular interest to land trusts include:

• Advertising and promotional expenses (line 12) – includes amount for print and electronic

media advertising. Also includes Internet site link costs, signage costs and advertising costs

for an organization’s in-house fundraising campaigns.

• Office expenses (line 13) – this line includes office supplies, telephone and postage and

shipping, and is also to be used for bank fees and similar costs. Costs for printing items of a

general nature should be included here. Printing costs related to fundraising items should

be included with advertising (line 12).

• Information technology (line 14) – this line is to be used for hardware, software and

support services, and for infrastructure support, such as website design, virus protection

and other information security program and services.



Part X – Balance Sheet

The balance sheet is divided into assets, liabilities and net assets or fund balances. See below for a

discussion of how land trusts might treat conservation easements on their balance sheets.

Part XI – Reconciliation of Net Assets

This section summarizes and reconciles the organizations net assets for the year.

Part XII – Financial Statements and Reporting

This section asks for the type of accounting method used to prepare the Form 990, whether the

organization’s financial statements were compiled, reviewed or audited by an independent

accountant and, if so, whether the organization has a committee that is responsible for oversight of

the audit or review and selection of an independent accountant. The section also asks whether the

financial statements were issued on a consolidated basis, a separate basis or both.

For accreditation, the Form 990 statement of revenue, statement of functional expenses and

balance sheet need to generally reconcile with the land trust’s audited, reviewed or compiled

financial statements (see Practice 6C1) for the same time period.

RELATED SCHEDULES

Most land trusts completing the core form will also be required to complete:

• Schedule A – Public Charity Status and Public Support

• Schedule B – Schedule of Contributors

Other schedules that a land trust may be required to complete based on its activities include:

• Schedule C – Political Campaign and Lobbying Activities

If the land trust conducts lobbying or advocacy activities, it must complete this schedule. The

instructions provide a very thorough description of lobbying, advocacy and political activities. For

more information, see Practice 2C1c.

• Schedule D – Supplemental Financial Statements

This schedule must be completed by land trusts that have conservation easements or endowment

funds.




Schedule D – Part II – Conservation Easements

Part II includes nine questions on conservation easements. In addition to easements, land trusts

must also report on other real property interests that have “attributes similar to an easement and

are established for the purpose of conservation and preservation (for example, certain restrictive

covenants and equitable servitudes).”

Line 1. Purposes of conservation easements held by the organization.

Lines 2a-d. Total number and acreage of easements, number of easements on historic structures

and the number of those acquired after July 25, 2006.

Line 3. Number of conservation easements modified, transferred, released, extinguished or

terminated during the year. An easement is modified when its terms are amended or altered in any

manner. An easement is transferred when the land trust assigns, sells, releases, quitclaims or

otherwise disposes of the easement with or without consideration. An easement is released, extinguished or terminated when it is condemned, extinguished by court order, transferred to the

landowner or in any way rendered void and unenforceable, in whole or in part. For more

information on easement amendments, condemnation and extinguishment, see Practices 11H, 11I

and 11J.

Line 4. Number of states where property subject to conservation easement is located.

Line 5. Whether the organization has a written policy regarding the periodic monitoring, inspection,

handling of violations and enforcement of the easements it holds. If the land trust answers yes to

this question, it must summarize its policies in Part XIII (Supplemental Information). Monitoring

means that the land trust investigates the use or condition of the easement property to determine

if the landowner is adhering to the restrictions imposed by the terms of the easement to ensure that the conservation purpose of the easement is being achieved. Inspection means an onsite visit

to observe the property to carry out a monitoring purpose. Enforcement of an easement means

action taken by the land trust after it discovers a violation to compel a property owner to adhere to

the terms of the easement, including communications with the landowner to explain their

obligations with respect to the easement, arbitration or litigation. For more information on

easement monitoring and enforcement, see Practices 11C and 11E.

Line 6. Staff and volunteer hours devoted to monitoring, inspecting and enforcing easements

during the year.

Line 7. Amount of expenses incurred in monitoring, inspecting and enforcing easements during the

year.

http://www.irs.gov/pub/irs-pdf/f990sa.pdf

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Line 8. Whether façade easements acquired after July 25, 2006 satisfy the special rules with respect

to buildings in registered historic districts [see 170(h)(4)(B)(i) and170(h)(4)(B)(ii)].

Line 9. How the organization reports conservation easements in its revenue and expense statement

and balance sheet (see below).

Schedule D – Part V – Endowment Funds

This section asks organizations to provide the estimated percentage of their year-end balances that

were held as board-designated or quasi-endowment, permanent endowment or temporarily

restricted endowment. Organizations need to report current year and prior years’ information through a four-year look-back period. Land trusts must also report on endowments held by other

organizations on behalf of the land trust.

Schedule G – Supplemental Information Regarding Fundraising or Gaming Activities

This schedule must be completed by land trusts that received $15,000 or more in gross income

(including contributions) from fundraising events or paid more than $15,000 to outside professional

fundraisers. Organizations must provide detailed information on fundraising activities conducted by

outside individuals and firms and fundraising events, including food and beverage and

entertainment expenses for fundraising events. Land trusts must also list all states in which they are

registered or licensed to solicit contributions (see Practice 5A1).

Schedule J – Compensation Information

The land trust must complete Schedule J if it listed any former officer, director, trustee, key

employee or highest compensated employee on Part VII (see above); if any individual received

reportable and other (non-taxable) compensation greater than $150,000; or if any listed person received or accrued compensation from an unrelated organization for services rendered to the

organization.

Schedule L – Transactions with Interested Persons

This schedule must be completed if the organization engaged in any of the following transactions

with an officer, director, trustee, key employee or substantial contributor or a family member of

one of those individuals (all of whom are known as interested persons):

https://tlc.lta.org/practice11h

https://tlc.lta.org/practice11i

https://tlc.lta.org/practice11j

https://tlc.lta.org/practice11c

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1. Excess benefit transactions (in which the compensation exceeded the fair market value of

the service or product provided)

2. Loans, grants or other assistance

3. Business transactions (such as the purchase or sale of goods and services, including land or

conservation easements) with interested persons or their companies

Any land trust that may engage in such transactions with interested persons should read the

instructions to Schedule L carefully before completing the Form 990. See also Standard 4,

particularly Practice 4C, Transactions with Insiders.

Schedule M – Noncash Contributions

This schedule must be completed by land trusts that reported more than $25,000 of aggregate

noncash contributions or that received gifts of land or conservation easements, regardless of

whether it reported any revenues for such contributions on the core form. The schedule asks organizations to indicate the number of contributions, revenues reported and the method for

determining revenues for 24 specific types of noncash contributions. In addition, the schedule asks

several questions related to contributions of property that must be held for at least three years,

whether the organization has a gift acceptance policy and whether the organization uses third

parties or related organizations to solicit, process or sell noncash contributions.

Schedule N – Liquidation, Termination, Dissolution, or Significant Disposition of Assets

This schedule is used to report going out of business or disposing of more than 25 percent of an

organization’s assets through sale, exchange or other disposition.

Schedule O – Supplemental Information to Form 990 or 990-EZ

Land trusts should use this schedule to provide the IRS with narrative information required for

responses to specific questions on Form 990 or 990-EZ and to explain the organization’s operations

or responses to various questions.

For accreditation, a land trust’s Form 990 needs to be substantially complete, accurately report

its activities and have all relevant schedules, including those below.

o Schedule A: The land trust demonstrates it meets the public support test.

http://www.irs.gov/pub/irs-pdf/f990sg.pdf


http://www.irs.gov/pub/irs-pdf/f990sj.pdf

http://www.irs.gov/pub/irs-pdf/f990sl.pdf


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It is sometimes challenging for a land trust that relies exclusively on mitigation fees to

have the IRS classify it as a public charity. Even though a mitigation land trust's Form

990 may indicate that all of its income counts toward “public support,” the land trust may be required to retain an independent certified public accountant that specializes in

tax-exempt accounting to closely examine the sources of income and recalculate its

public support. If a land trust does not have sufficient public support for the IRS to

classify it as a public charity, it is not eligible for accreditation.

o Schedule D: The land trust reports required information on its conservation easements

and fee properties.

o Schedule L: The land trust reports required financial transactions or arrangements with

conflicted parties.

o Schedule M: The land trust reports all noncash contributions, including any conservation

easement or fee property donations, as required.

o Schedule O: The land trust provides the necessary supplemental information.

HOW SHOULD A LAND TRUST ACCOUNT FOR ITS CONSERVATION EASEMENTS?

The question of how land trusts should value their easements for purposes of Form 990 reporting is

not an easy one to answer. In general, land trusts use two overall approaches:

1. Zero valuation. Most land trusts value their easements at zero or assign a nominal value

ranging from $1 to $50. They reason that a typical conservation easement provides the land

trust with no affirmative rights except to monitor and enforce the easement and thus

constitutes a liability. Some accountants also believe that donated conservation easements

meet the definition of a collection under FASB 116 and, therefore, it is proper to not recognize their contribution as revenue. For a land trust that attracts substantial easements

but little cash, this approach is helpful because meeting the IRS requirements for adequate

public support may be difficult otherwise. In one case of a land trust using this approach,

the IRS examining agent’s report simply states that “it was further determined that

conservation easements donated to the organization have no market value in the hands of

the organization and will not be considered as support.”

2. Fair market value. Some land trusts record their easements at their appraised value. Land

trusts that use this approach often book them as both income and expenses in the same year, but how easements are then shown on the balance sheet varies widely. Some

http://www.irs.gov/pub/irs-pdf/f990sm.pdf

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maintain them as assets at their original value (or cost, if purchased), some write down the

value greatly and assign a nominal or zero value and others carry them as liabilities.

A land trust should work with an accountant well versed in nonprofit issues to establish the best

method for the organization to value its easements. Once a method is chosen, the land trust should

generally stay with that approach.

While there is no formal IRS guidance on this issue, in February 3, 2012 remarks at the annual Joint

Meeting of Area TE/GE Counsels, the IRS Form 990 project manager concurred with the Alliance’s longstanding position:

We clarify in Part VIII that qualified conservation contributions and contributions of

conservation easements must be reported consistently with the value the

organization reports from such contributions in its books, records and financial

statements. So we’re not telling filers how they need to report conservation

easements. We’re just telling them that they need to be consistent with their books

and records and across the 990. They should not report the value of conservation

easements differently in their Statement of Revenue, Schedule A, Schedule B, Schedule D or Schedule M. It should be consistent across the board.

HELP PREPARING YOUR 990

All Form 990s are available for public inspection through several different websites (such as the

Foundation Center and Guidestar), which include Form 990s filed in earlier years. Most foundations

and many larger donors know that they can learn a great deal about any nonprofit charitable

organization by simply downloading the organization’s Form 990. On the Form 990, they will see a

brief description about your mission and activities and a great deal of information about your

finances. Because the Form 990 is so easily available to potential supporters, even those you don’t

know are interested in your organization, it is important that it not only present clear and accurate information, but it also presents your land trust in the best possible light.

Submitting a complete, accurate and informative Form 990 is no easy task. If your land trust has

been audited or reviewed, your audit or review report probably has most, but not all, the

information needed to complete the Form 990. But how you describe your activities may be as

important to readers as seeing your statement of financial position (assets, liabilities and net

assets) or statement of activities (revenues and expenses). So you will want to have your Form 990

completed by someone who not only understands the IRS requirements and your financial



information, but also understands how to communicate effectively with potential donors. Similar

skills will be required to prepare any state charity reports you are required to submit.

Unless your land trust is very fortunate, it is unlikely that you will find a fully qualified volunteer

prepared to complete your Form 990 and your state charity reports. Most land trusts conclude that

the cost of professional preparation of the Form 990 and the state reports is well worth the investment. You can ask your auditor or reviewer to estimate the cost of adding the preparation of

the Form 990 and state reports to an audit or review engagement. In almost all situations, it will be

less costly and more effective to have the same firm handle both your audit or review and your

Form 990 preparation. If you have not had an audit or review, your Form 990 preparer will need to

examine the accounting records, board minutes and other organizational documentation to ensure

that all required disclosures are included in the filings. Most preparers are happy to meet with the board to discuss any issues that come to their attention.

BOARD REVIEW OF THE FORM 990

Part VI of the IRS Form 990, Section B, 11a asks: “Has the organization provided a complete copy of

this Form 990 to all members of its governing body before filing the form?” And 11b: “Describe in

Schedule O the process, if any, used by the organization to review this Form 990.” While federal tax

law neither mandates nor provides instructions regarding the board's duty to receive a Form 990 or

to have a Form 990 review policy, disclosures on the Form 990 indicating that board members do

not receive the Form 990 before filing or do not review the form at any time may be perceived as a

significant weakness of the organization. With today's increased demands for transparency and accountability in the nonprofit sector, land trusts and their boards cannot underestimate the value

in proactively and properly addressing these questions.

Providing a Copy to the Board Prior to Filing

The Form 990 first asks if a copy of the final version of the Form 990 was provided to each board

member before it was filed. While an affirmative response may not provide much assurance that

the board is active in its oversight (as this question does not ask whether any board member who

received a copy actually reviewed the form either before or after filing), a negative response may

be perceived as an indicator of weak board oversight. Thus, although board members may fear that

a requirement for the board to receive the final Form 990 prior to filing may result in increased

personal exposure (especially if the form contains a misrepresentation or evidences the organization's failure to comply with applicable laws), they should be more concerned about the

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potential claims or appearance of poor governance associated with choosing to forgo the receipt of

this critically important and widely available public document.

Developing a Form 990 Review Policy

The Form 990 next asks for a description of the process, if any, the organization uses to review its

Form 990. Given the increasing importance of the Form 990 to authorities, stakeholders and media,

land trusts are strongly encouraged to develop a policy to help ensure the Form 990 becomes an asset, not a hindrance, to the organization.

Initially, the board should identify areas that deserve extra scrutiny, such as those related to the

land trust's mission and significant activities, financial health, executive compensation, insider

transactions, types of expenses (for example, administrative, fundraising, programmatic), unrelated

business activity, relationships among board members and officers, lobbying and electioneering

activity and conservation easement amendments.

Next, the board should strategically identify the various individuals or groups who will be

responsible for reviewing the Form 990. While all board members may want to generally review the

organization's Form 990, in part as evidence of meeting their fiduciary duty of care, it may be

advantageous to have a more manageable-sized board committee tasked with a critical review. This committee, if carefully chosen and sufficiently prepared, may provide important feedback in the

final preparation of the Form 990 and relay pertinent information back to the full board. It's not

uncommon for boards to delegate these duties to the audit committee. But the Form 990 is much

more than a financial report. Accordingly, the extensive narratives, particularly of program service

accomplishments and changes in activities, are some of the key areas that should be reviewed by

those individuals who are most familiar with the land trust's programs and have experience with fundraising, marketing and public relations.

Finally, boards should remember third parties can easily scrutinize the Form 990, and criticism can

spread quickly regardless of its validity. Therefore, it may be helpful to charge one or more persons

on the reviewing body to look specifically for weak points in the Form 990 prior to filing. Such weak

points may be mitigated by, among other things, providing additional context or an explanation of

the steps the land trust has since taken to address those weaknesses. If there are items in the 990

that cannot be effectively mitigated, the land trust should have a communications plan in place to

deal with press or community inquiries.

Although the Form 990 can be intimidating at first blush, its coverage of financials, programmatic

achievements, executive compensation and governance policies should be familiar territory for a

1 · Land Trust Alliance · Land Trust Standards and Practices · Standard 3A2a Board Responsibility

Accreditation indicator element Last revised May 11, 2018

STANDARD 3 BOARD ACCOUNTABILITY

A. Board Responsibility 2. The board provides oversight of the land trust’s finances and operations

by:

a. Reviewing and approving an annual budget


BOARD ROLE IN FINANCIAL AND OPERATIONAL OVERSIGHT

The board has the ultimate management and fiscal responsibility for the nonprofit corporation.

Board responsibilities include oversight of finances and fundraising, operations, programs, long-

range planning, staff and volunteer conduct and public relations. The board of an all-volunteer land

trust takes on many of the day-to-day program and operational tasks. The board of a large staffed

organization will focus on setting overall policies and management oversight. Regardless of size, a

board that understands and meets its basic responsibilities provides a firm foundation for the land

trust, builds public confidence, paves the way for financial success and allows the land trust to

focus its energies on creative, effective ways to accomplish its land conservation mission. A strong

and informed board leads to a strong and effective organization.

BOARD REVIEW AND APPROVAL OF THE BUDGET

The full board is ultimately responsible for the budget. Regardless of who prepares the budget, the

entire board should be fully informed of the assumptions and implications of the budget and should

review it, revise it if necessary and approve it. When board members approve the budget, they are

accepting the responsibility to raise the funds and oversee the expenditures during the next year. If

staff or a committee has prepared the work plan and budget, board members should ask questions

regarding the assumptions used in preparation and any items they do not understand and


2 Land Trust Alliance · Land Trust Standards and Practices · Standard 3A2a Board Responsibility


challenge any approaches or assumptions they are uncomfortable with. Any additions to the

budget made at the final review stage must be balanced by cuts in other items; the income side of

the budget should be increased only if the land trust can realistically expect to raise the additional

funds.

The Board’s Special Role in Budgeting

Your board’s approval of the annual budget constitutes authority for staff and volunteers to incur

expenses and secure income according to the plan embodied in the budget. However, the board’s

role goes far beyond authorizing revenues and expenses. The board’s discussion of the proposed

annual budget is an important opportunity to reflect on a land trust’s goals and strategies. The

discussion should allow board members to explore areas in which they may disagree, as well as

areas of agreement.

Great board discussions of budget priorities don’t just happen. Your choices about the format for

presenting the annual budget, the level of detail, the clarity with which you describe the different

programs, management and fundraising activities and the funds that support them will influence

the tenor of the board’s budget discussion.

Most boards include individuals who have widely varying backgrounds and levels of comfort with

financial information. For some board members, your land trust’s annual budget document may be

the first comprehensive organizational financial plan that they have ever seen. Other board

members will have managed large and small businesses or be sophisticated investors skilled in

analyzing financial projections. Even those with substantial business and government experience

may find some aspects of your nonprofit land trust’s budget puzzling. Even board members with

extensive previous experience on boards of other types of nonprofits may be perplexed by some

aspects of land trust budgeting and accounting.

Many organizations find that the best way to build meaningful budget and financial oversight

discussions at the board level is to establish a board finance committee to evaluate the many

budget choices before the full board begins its discussion of the proposed annual budget. The

board finance committee works with the person who leads the preparation of the budget

document. In large land trusts, a chief financial officer may play this role. In midsized land trusts,

this task is often shared between the executive director and the fiscal manager or accountant. In

the smallest land trusts functioning without paid staff or with only part-time program staff, the

board treasurer often acts as a volunteer fiscal manager to handle the technical side of budget

preparation. Whatever the system, it is important to understand that the process of creating the

budget requires multiple points of view, not decision-making by a single individual. Developing the

3 Land Trust Alliance · Land Trust Standards and Practices · Standard 3A2a Board Responsibility


annual proposed budget for board discussion requires identifying all the information needed to

project income and expenses, which means soliciting input from different parties.

One common pitfall of board discussions of annual budgets is over-emphasis on discussion of minor

details while failing to discuss the most important choices. Your board chair and finance committee

can help your board have a meaningful discussion of the budget by providing some key discussion

questions. You may also be able to focus your board’s discussion of the budget by asking board

members to share their views about whether the proposed budget:

• Reflects the goals and priorities of the strategic plan

• Includes realistic projections of contribution and special event income

• Includes enough resources to ensure effective management of the organization

• Includes enough resources to move toward longer term funding goals

• Reflects the board’s commitment to build reserves

• Includes compensation levels for staff that will allow the land trust to attract and retain

qualified individuals

You can help your board members have a much more meaningful budget discussion if you prepare

your budget proposal in the functional format discussed in Practice 6A1. This format will allow

board members to see the income and costs associated with each of your programs and projects,

as well as your administrative functions and the cost of fundraising.

For accreditation, a land trust needs to provide the minutes from the board meeting at which

the board approved the annual budget along with a copy of the budget. The board must also

review periodic financial reports showing revenue and expenses for the reporting period as

compared to the budget (see more in Practice 3A2c).

https://tlc.lta.org/practice6a


1 · Land Trust Alliance · Land Trust Standards and Practices · Standard 3A2b Board Responsibility

Accreditation indicator element ( ) and Terrafirma enrollment prerequisite Last revised May 11, 2018



by:

b. Working to ensure that sufficient financial resources are available












BOARD ROLE IN ENSURING THE AVAILABILITY OF RESOURCES

Ensuring the availability of the resources needed to accomplish your land trust’s mission is a key

board responsibility. Like other board responsibilities, there are multiple approaches that boards

use to address this challenge.


2 Land Trust Alliance · Land Trust Standards and Practices · Standard 3A2b Board Responsibility


In small land trusts, board members are often the primary, or sometimes only, fundraisers,

soliciting donations from individuals, foundations and governmental sources, as well as

implementing any other fundraising strategies they can think of. As land trusts grow and acquire

their first executive director, boards frequently prioritize fundraising in the job description, often

without a great deal of clarity about either the strategies they anticipate the new director will

pursue or the extent to which the board is prepared to play an active role in resource development.

Interestingly, some of that same lack of clarity may still exist in larger land trusts, even those with

multiple staff positions, including at least one fund development position. So, it may help to step

back and think through what approach will really work best for your land trust board. Because

boards hold the ultimate authority for the direction and sustainability of the land trust, they must

also take final responsibility for determining the most effective way for their organization to obtain

the resources needed to achieve the mission.

Land trusts pursue a remarkable array of income-generating strategies (see Practice 6A3 for an

overview of the variety of income streams that support land trust operations and the acquisition of

fee land and conservation easements). While your land trust’s annual budget process will provide

an opportunity to evaluate your current income streams, your strategic planning process can

provide an opportunity to discuss longer term goals for diversifying your support and ensuring

sustainability.

As noted in Practice 6A3, board determination of the most effective strategies for obtaining

resources will require careful analysis of both the opportunities available to your land trust and the

investments that will be needed to seize those opportunities and develop them into cost-effective

income streams. Ultimately, the board will need to identify the mix of income streams it believes

will be most effective and sustainable and select strategies to develop each of those streams.





Fulfilling the board’s responsibility for ensuring the availability of resources will involve a series of

challenging decisions, including:

Setting long-term targets for the proportion of operating income that will be obtained from

individual donors, foundations, governmental sources, fees for services, investment income

and other significant sources

Identifying the staff, board and other resources that will need to be invested to achieve the

targets the board has established

Determining priorities for the use of staff and board time and energy

Identifying progress indicators to monitor success (or failures)

Evaluating progress and fine-tuning strategies to ensure your land trust obtains the

resources needed to fulfill its mission

A common truism in securing financial resources is that there is no free lunch. Success in

developing individual donor support requires building relationships and asking for continuing

support. Foundation support requires relationship building, strategic proposal development and

systems for tracking and reporting on how money is spent and what has been accomplished.

Governmental funding requires the existence of governmental funding sources, relationship

building and demonstrated capacity to manage government funds. Fee-for-service income requires

identifying services or products for which there are customers willing and able to pay a reasonable

fee, as well as developing communications plans for current and potential customers. Investment

income requires effective management of funds, the existence of which is dependent on your land

trust’s success in building the income streams described above to a level at which generation of

surplus for investment is possible or donors are sufficiently dedicated to the land trust to provide

large endowment contributions.

And, of course, success in all of the income streams is incredibly dependent on achieving the

mission of the land trust and spreading the good news of your accomplishments (and the troubling

news of the work yet to be done to all those who care about the land you are working to conserve.



Beyond the selection of the major strategies your land trust will use to generate the resources

needed to fulfill your mission, your board will confront two incredibly significant decisions:

What are your priorities for the use of staff time to generate income?

What roles will board members play in generating income?

Successful fundraising requires active board involvement, starting with clear expectations that each

board member will be a donor and will play some role in helping the land trust build the

relationships needed to expand its donor relationships. There is no one right way to engage the

board in fundraising, but there is one clear reality: Boards who are not engaged in helping the land

trust build relationships with supporters and who are not supporters themselves seldom succeed.

In fact, board engagement in fundraising is so central to the success of most land trusts that

rethinking your board’s expectations regarding board financial contributions and relationship

building may be one of the most important discussions your board will have each year. Even land

trusts with written board policies on fundraising and board contributions find it helpful to revisit

expectations on a regular basis as board membership changes and the level of staff support for

board engagement in fundraising shifts.

Beyond revisiting the board’s own role in resource development, boards of staffed land trusts must

make critical decisions about the use of staff time for income generation. As a starting point for this

discussion, your board will need to ask staff how they are currently spending their time and energy

in relation to each major income stream that currently supports your land trust. Determining the

right mix of funding streams and the right amount of staff time devoted to fundraising to achieve

the land trust’s objectives will require some long-term thinking, as well as evaluation of immediate

results.



Many of the major income streams that support land trust work are developed over time, growing

through deepening relationships with donors, foundations and governmental entities. Emphasizing

only short-term outcomes – what use of time will produce the largest income in the current year --

may slow or damage the process of building the longer term relationships that are needed to

yielder larger results. On the other hand, the board must ensure that the land trust has the cash it

needs to pay its bills today and throughout the year. So, short-term results do matter. Ultimately

the tough board decision is finding the right balance between the organization’s efforts to yield

current year income and those that are focused on expansion of longer term relationships.

Of course boards want both short-term and long-term results. But identifying and implementing

strategies that will ensure that both goals are met can be very difficult. A common example of the

difficulty of balancing efforts toward longer and shorter term goals is the issue of focusing time on

seeking foundation grants versus expanding cultivation of individual donors. For land trusts that

currently receive relatively small portions of their total income from individual contributions, the

short-term results of foundation grant-seeking often will exceed the results that can be achieved in

a single year of focus on individual donors. But continuing a pattern of investing the most time in

seeking and managing foundation funding and relatively little time in building new donor

relationships and deepening existing ones will almost certainly ensure that support from individual

donors remains only a small portion of the land trust’s income.

Of course the board’s responsibility for ensuring the availability of resources extends beyond

setting goals and establishing strategies. The board must monitor results, comparing funds

generated to targets and determining whether course corrections are needed. Because the board

seeks long-term as well as short-term outcomes from its income-generating strategies, it is

particularly important to identify progress indicators that the board can use to determine whether

longer term strategies are moving forward appropriately, even when the desired financial results

will not be achieved immediately.

For accreditation, a land trust must show its board provides oversight of the organization’s

finances and operations. In addition to working to ensure that financial resources are available,

the accreditation requirements also address the board’s role in making sure deficit spending is

not a trend, debt or lease payment obligations can generally be met, a concentrated or sole

source of funding is not overly relied on and operating reserve needs are met.



BUILDING LEADERSHIP TO SUPPORT FUNDRAISING

There are a number of ways a land trust can build the leadership of the organization to support

fundraising.

Create clear expectations about the board’s role in fundraising. To say the board is

responsible for fundraising is not enough and probably is not entirely accurate. More

specifically, board members should be asked to support those aspects of fundraising that

take full benefit of the unique roles that board members can fill. These roles include

building relationships with potential and current donors, connecting the land trust to

foundations and corporations and organizing events, including “getting to know you”

meetings in their homes or businesses. Expectations of board performance should be

clearly stated in recruiting and orientation materials, including board member job

descriptions.

Land trusts should be clear that all board members should make donations to the organization as

appropriate to their individual circumstances.

Establish and empower a board development committee to focus on building the board of

directors, committees and any other supporting structures. Successful board development

never happens by accident. It requires intentional and strategic thinking to ensure the right

people are recruited and trained to support the needs of the organization.

Use a profile grid or matrix to define the mix of skills and talents, connections and

demographics desired within the organization. Use a grid to ensure that the recruiting

process focuses on building diversity into the land trust’s leadership composition. In

addition, some groups use the simple rule that their board needs to be constructed of

equal parts of the “three Ws” — workers, wealth and wisdom — as a way to ensure it has

enough of the right people to be successful.

Consider alternative roles for potential fundraisers who are not board members. Many land

trusts recruit leaders to be active on committees as advisors or as non-governance trustees.

These fundraising roles can be great ways to identify and test the relationship of the leader

and the organization before they makes the major commitment of joining the board. It can

also be a great way to retain board members who are leaving the board, but who may be

willing to stay involved in more limited, strategic ways.



Clarify the role of board and staff members in the fundraising process. Define these roles to

reflect the current and potential strengths that board and staff members bring to the

organization. When hiring staff to support or lead fundraising efforts, make sure their job

expectations and their talents are closely aligned.

ADDITIONAL RESOURCES

How to Ask for Major Gifts: Maximizing Your Fundraising Team’s Impact, by Andy

Robinson, 2014. Express Learning Kit available at www.lta.org/expresskits.


1 · Land Trust Alliance · Land Trust Standards and Practices · Practice 3A2c. Board Responsibility

Accreditation indicator element Last revised April 18, 2019

STANDARD 3. BOARD ACCOUNTABILITY

A. Board Responsibility 2. The board provides oversight of the land trust’s finances and operations by:

c. Receiving and reviewing financial reports and statements in a form and with a frequency appropriate for the scale of the land trust’s financial activity






trust takes on many of the day-to-day program and operational tasks. The board of a large staffed organization will focus on setting overall policies and management oversight. Regardless of size, a





BOARD REVIEW OF FINANCIAL STATEMENTS

While the board may delegate responsibility for in-depth review of the financial statements to the

finance committee, the full board retains responsibility for ensuring the financial health of the land

trust. All board members should have access to the complete internal financial statements.

Whether the board or the finance committee takes responsibility for the in-depth review of the internal financial statements, all board members should receive and review a complete balance


2 Land Trust Alliance · Land Trust Standards and Practices · Practice 3A2c. Board Responsibility


sheet (statement of financial position) and organization-wide income statement (statement of

activities) periodically throughout the year.

For accreditation, a land trust needs to provide its board with periodic financial reports that

show the following information so that the board can provide oversight of the organization’s

finances and operations.

o Unrestricted, board-designated and restricted net assets (such as a statement of financial

position or balance sheet)

o Actual expenses, revenue (unrestricted and restricted) and any revenue released from

restrictions as compared to budget (such as a statement of activities or budget-to-actual report)

The accreditation application needs to include the most recent financial reports provided to the

board, along with the minutes from the board meeting at which the board discussed the

reports.

Your board and finance committee must determine how frequently internal financial statements

should be produced and reviewed. Staffed land trusts will almost certainly want to produce

monthly financial reports, while all-volunteer land trusts should produce financial reports at least

quarterly. Some boards will prefer having the finance committee review the monthly statements

while presenting quarterly statements to the full board. This approach assumes that the finance

committee will alert board leaders if monthly financial reports reveal significant issues that the full board should discuss before the planned quarterly presentation of financial information. Many

boards of larger land trusts believe review of monthly financial reports is a critical board oversight

function.

Key Issues in Board Review of Financial Statements

Board members’ review of financial reports should focus on preparing them to answer eight basic

questions about the financial health and management of their land trust:

1. How financially strong is our land trust? Review of the balance sheet or statement of financial

position is the starting point for answering this question. The balance sheet presents the assets,

liabilities and net assets of the organization on a specific date. It may also present a comparison

of assets, liabilities and net assets at two different dates, for example, the end of the last fiscal

year and the end of the most recently completed month. As a starting point for effective review



of the financial reports, board members will need to be clear about the method of accounting

used by their land trust (see Practice 6B for a discussion of accounting methods).

In land trusts following Generally Accepted Accounting Principles (GAAP), board members

should look first at the total net assets line. Net assets represent the net worth of the

organization at the date specified on the statement. It’s helpful to think of net worth as what would be left if the organization gathered in everything it owns of value (cash, investments,

land, buildings and so forth), collected all that is owed to it (receivables) and then paid off

everything it owes to others (wages, payroll taxes, payables, mortgages and so forth). Net

assets are roughly equivalent to owner’s equity in business financial statements. The net assets

provide a cushion to fall back on in hard times and can give your organization the reserves it

needs to be able to take risks in undertaking new activities.

If the net assets amount is shown in <brackets>, the organization has a negative net worth,

owing more than it owns. If it’s not shown in brackets, the organization has a positive net worth—at least on paper. Like businesses, nonprofits report their land, building and equipment

at the amount they cost when purchased (or their fair market value if received as gifts), less

accumulated depreciation. This book value can be far from market value, that is, what the land,

building or equipment could be sold for today. If the market value is much higher than the book

value, the net assets will understate your organization’s actual net worth. If the market value is

much lower than the book value, the net assets will overstate your actual net worth.

2. Can the organization meet its obligations on time? Simply having a positive net worth (net

assets) doesn’t guarantee that your organization can pay its employees, its payroll taxes and its vendors on time. Paying obligations depends upon the land trust’s cash position or liquidity and

the extent to which its funds have a restricted purpose. Look again at the balance sheet

(statement of financial position). Create a subtotal of all the cash accounts and any receivables

or investments that can readily be turned into cash. Next, look at the liabilities. Create a

subtotal for those liabilities, such as accrued wages, taxes and other accounts payable that the

land trust must pay within 12 months—this subtotal constitutes your current liabilities. Then compare your cash and cash equivalents subtotal to your current liabilities subtotal.

Does your organization have at least as much or more cash or items that it can readily turn into

cash than current liabilities? If so, it will probably be able to meet its obligations on time. If not,

it will have difficulty doing so. If it has significantly more cash than is required to meet current

liabilities, it is in a good position to take on additional obligations through expansion or taking

reasonable risks. Or, it may be time to invest some excess cash in longer term investments or

operating reserves.

https://tlc.lta.org/practice6b



If the balance sheet (statement of financial position) provides information about two points in

time—the end of the current month and the end of the previous month or previous fiscal

year—you can evaluate whether the cash position (that is, your cash available to meet obligations or invest) is improving or worsening. Compare the cash balances, the accounts

receivable and the accounts payable. If the accounts receivable are increasing, find out why.

Does the increase simply reflect a higher volume of service and higher amounts being billed,

more pledges for contributions being recorded or does the increase reflect difficulty collecting

what is owed to the organization? If the accounts payable are increasing, ask for an aging (a list

that shows which of the amounts have been owed for 30, 60, 90 or more days). Then determine why payments have not been made and what will be the consequence of further

delays.

The current ratio, calculated by dividing total assets that can readily be turned into cash by

current liabilities, is a measure of the adequacy of your cash position but it is limited to a point

in time. Some lenders require a minimum current ratio of 1.25, meaning that you have $1.25 in

assets available to cover each $1 in liabilities. A better tool for making sure that your land trust

will be able to meet its obligations on time is the cash flow projection. This projection helps you

predict how much cash will be available and how much cash you will need to meet obligations for each of the next 12 months. If your cash flow projections shows that the land trust will not

have enough cash to meet its obligations in future months, you will need to develop a plan to

increase the cash that will be available or reduce the amount of cash that the land trust needs.

3. Are there limitations on what the land trust can do with its resources? While having a positive

net worth is clearly better than having a negative net worth, simply noting that the net assets

line on the balance sheet is positive doesn’t tell the whole story. Board members will need to

ask a few more questions.

Are there restrictions on any portion of your nonprofit’s assets? Your net assets should be

summarized into two categories: net assets without donor restrictions and net assets with

donor restrictions. You must distinguish between the net assets over which the board has complete discretion from those that must be used in compliance with donor restrictions.

The term restricted refers to a limitation placed on the use of a gift by a donor or funding

source. For example, a donor may say “use my contribution only for an outreach program,” or a

foundation award may state that the funds may be used only “to meet the costs of restoring a

specific streambed” described in your proposal to the foundation. For some gifts, the donor

intends that the organization will invest the funds and use the income generated through

investment either for specific purposes or for general support of the organization’s activities.



Such gifts are frequently referred to as endowment gifts. No matter the purposes of the gifts,

the land trust must track the portion of your net assets that are subject to each type of donor

restriction. This tracking includes the purpose for which the funds may be used or the timing for their use, as well as any restrictions making the gift an endowment or restrictions that land or

other assets be held permanently for specific purposes.

As you think about the land trust’s overall sustainability, the net assets with and without donor

restrictions represent different types of financial strengths. The net assets without donor

restrictions comprise a cushion that your board has full authority to direct. Parts of it may be

immediately available, while other parts are invested in fixed assets or have been designated by

the board to function as reserves.

Your net assets with donor restrictions comprise resources that will be available for use in

future periods, but donor restrictions will limit how or when your organization may use them.

In most cases, donors that restrict the use of their gifts to specific projects or activities or use in specific time periods give with the intention that the land trust will spend their gift. In contrast,

the portion of your net assets that donors have restricted to function as an endowment will not

generally be available for the land trust to spend. Instead, the donor’s restriction expresses

their intention that the land trust will invest their gift and only the income generated through

that investment will be available, either with or without further restriction from the donor. Net

assets subject to this type of donor restriction do contribute to overall financial strength by representing a future source of investment income to support your work.

If your internal financial statements do not separate net assets into assets with and without

donor restrictions, you will need to ask whether a portion of the net assets is subject to donor

restrictions. You will also want to learn what portion of your net assets without donor

restrictions the board has designated for specific purposes, such as stewardship or an operating

reserve. You may want to consider getting help to modify your internal statements so that the

donor-restricted and board-designated portions of the net assets are presented clearly.

To fully understand your land trust’s financial health, you will also need to understand both the

extent to which your board has full or limited ability to direct the use of the net assets. If the

net assets are not donor-restricted, the board has full authority to direct their use. If the net assets are subject to donor restrictions, the board may direct their use only in accord with the

restrictions. If the donor restrictions are permanent, the board must focus on its responsibility

to invest the resources or care for the restricted assets wisely with the understanding that the

restrictions are intended to continue in perpetuity.



Once you are clear about this major distinction between net assets without donor restrictions

and net assets with donor restrictions, you will want to focus your attention on the net assets

without donor restrictions to consider the extent to which they are available to meet the land trust’s operating costs.

Not all of your net assets without donor restrictions will be readily available to support your

operations. The land trust will have invested some of these net assets in land, buildings and

equipment (fixed assets). The board may have designated another portion of these net assets

to function as reserves – for stewardship, for operations or for other purposes. To understand

what portion of your net assets without donor restrictions is available to meet operating needs,

you will need to subtract the portion of your total net assets that have been invested in land,

buildings and equipment (fixed assets) and also subtract the portion of the net assets without restrictions that the board has designated for specific purposes, such as stewardship reserves

or operating reserves. The remaining net assets without donor restrictions are available for

operations.

The portion of the net assets invested in fixed assets will not be immediately available to

support operations. The land trust would have to sell its fixed assets or borrow against them in

order to obtain cash for operations use. As you look at the land trust’s investment in fixed

assets, think about how essential these assets are to the organization’s ability to conduct its

operations.

Many land trusts show the portion of the net assets invested in property, plant and equipment

(sometimes listed as fixed assets or capital assets) on a separate line in the net assets without donor restrictions section on their balance sheet. If your statements do not show this line, you

can still determine the portion of the land trust’s net assets that represent investment in fixed

assets by finding all the asset accounts (land, buildings, equipment, leasehold improvements

and so forth) and finding all the liability accounts related to these fixed assets (mortgages

payable used to finance the purchase of property and buildings or notes payable associated

with major equipment purchases). To compute the portion of total net assets invested in fixed assets, subtract the liabilities you identified from the assets.

Next, consider whether the board has set aside any portion of the net assets without donor

restrictions for specific purposes. Many land trust boards also designate a portion of the net

assets without donor restrictions to function as a stewardship or a legal defense reserve. The

combination of the board-designated net assets for stewardship and any net assets with donor

restrictions for stewardship is an important component of your financial health because, taken

together, they indicate the extent to which the land trust has financial capacity to withstand



stewardship challenges and maintain its commitment to ensuring the protection of the land in

perpetuity.

Some boards decide to set aside a specific portion of these net assets to function very much

like an endowment. The board wants to invest these funds so that investment earnings may be

used to support ongoing operations or, in some cases, specific programs or costs. Such funds are described as board-designated long-term reserves. In the past, some boards referred to

these funds as board-designated quasi-endowment funds, but this terminology often creates

confusion because the appropriate use of the term endowment is for donor-restricted gifts.

Because the board has created the quasi-endowment fund through its action, board action may

change the fund’s use. This contrasts sharply with the endowment funds with donor

restrictions, which the board cannot change.

If your board has designated a portion of the net assets without donor restrictions as a board

designated quasi-endowment, these funds will not be immediately available for operations. Instead, your board will need to give very serious consideration to changing the designation

and using these resources for current operations.

If your board is considering designating any portion of the net assets without donor restrictions

for any purpose, it is important to remember that no board can tie the hands of a future board.

What the board has designated can be undesignated by future board actions. Board

designation of some portion of the net assets without donor restrictions can be very helpful as

a way to document the board’s intention to set aside reserves for specific purposes, such as

stewardship or special initiatives. If your board is considering creating such a designation, you will want to be sure that your board minutes record the exact nature of the designation,

including the circumstances in which the funds may be used and any special board action that

will be required to release funds from the board-designated reserves.

4. Is our land trust complying with donor restrictions? In some land trusts, a substantial part of the

gifts and grants received carry restrictions attached by donors or grant funders. The restrictions

may be either fairly general (use this gift only for the outreach program) or very specific (use

this money only to buy trail guides for the outreach program). The statement of activities

(income statement) should show when the donor has established restrictions and when the land trust has fulfilled some of those restrictions by incurring the costs that the gift was

restricted to cover.

If your land trust uses the standard GAAP reporting format, you will see a distinction between

gifts with and without donor restrictions and grants on the statement reporting income and

expenses. The gifts or grants that your organization received with donor restrictions will be



presented in a column titled gifts with donor restrictions or in a separate section of the

statement, clearly labeled as gifts or grants with restrictions. In both approaches, you’ll also see

a line at the bottom of the income section that reports on amounts “released” from restrictions and added to unrestricted income. This line indicates that you have complied with the donors’

restrictions and used their funds according to their wishes.

Some land trusts choose not to use the GAAP format for their internal financial reports. If your

land trust is not using the GAAP format, you should still be able to see evidence that you are

tracking donor restrictions by looking at the balance sheet. There you will see a line item

labeled deferred revenue—grants and restricted gifts received in advance in the liabilities

section. This line item reports on funds that the nonprofit has received with restrictions that it

has not yet used for the restricted purposes. When the land trust does use the funds for the purposes directed by the donor or grantor, the deferred revenue line item in the liabilities

section will be reduced and the grant income line item on the statement of activities (income

statement) will be increased by the same amount. This entry reflects the fact that the land trust

has earned the right to use the restricted funds by incurring costs that meet the donor’s

restrictions.

Understanding how nonprofits report on receiving and using restricted funds can be

challenging, in part because different nonprofits use different methods for presenting this

information. If you are not clear how you can see the receipt and use of funds with donor restrictions on your land trust’s financial statements, it will be worthwhile asking an accountant

to explain your current system and help you think through whether a different method would

work better for your organization.

5. Is the organization breaking even? To answer this question, you’ll have to see the statement of

activities (income statement). This statement reports on revenues and expenses over a period

of time—a month, a quarter or a year. Expect to see both revenues and expenses broken down

into separate line item categories describing the type of revenue (grants, contributions, fees,

interest and so forth) and the types of expenses (salaries, taxes, rent, supplies and so forth).

There are two important ways to look at this information. First, look at the bottom line—the

net income, which may also be called the excess (deficit) of revenues over expenses or the increase (decrease) in net assets. If revenues exceed expenses, the net income will be positive.

If expenses exceed revenues, the net income will be negative and shown in brackets. This

positive or negative net income for the period you are looking at is really the explanation of

whether the net worth (net assets) of the organization has grown or shrunk. A positive net



income will result in an increase in the net assets (net worth). A negative net income will result

in a decrease in the net assets (net worth).

Another important way to look at revenue and expense information is in comparison to the

land trust’s budget for the time period. Hopefully, the land trust has a complete annual budget

that shows all the planned sources of income and all the planned types of expenses (see Practice 6A1). You will want to compare the actual revenues and expenses reported on the

statement of activity (income statement) to the planned revenues and expenses presented in

the budget. Your questions will be, “Are things going as we had planned? Are we generating the

income we thought we would? Are we controlling costs within the limits set in the budget?”

You will also want to look at your revenues and expenses in comparison to those you had in

prior years. This can be particularly helpful when you have some revenues or expenses

categories that do not occur evenly throughout the year. For example, if you have major

fundraising activities every year in December, simply comparing your fundraising income and expense to your annual budget in October won’t really tell you if you’re on track. It will be more

helpful to compare your current year to past years and especially helpful to think about what

percentage of fundraising income was generated by October in previous years, compared to

the percentage of your annual budget for fundraising income that has been generated by

October this year.

Another useful approach for dealing with revenue and expense items that do not occur evenly

throughout the year is to break your annual budget into monthly or quarterly segments. You

can then compare your year-to-date income and expenses to your budget plan for this point in your fiscal year.

6. Is our land trust using its resources wisely? This is perhaps the most important question of all.

To answer it, you must be clear about your mission and the strategies you have agreed upon to

achieve it, and the financial statements must give you enough information to be able tell the

purpose of the expenses, as well as their descriptive character. For example, looking at a report

that shows that the land trust spent x dollars in salaries for the year tells us the character of the

expenses (that is, salaries) but doesn’t tell us the purpose (that is, were the salaries spent for

working on acquisitions, stewardship, outreach, fundraising or for administrative functions?). We can get some information about the purpose of expenses through a functional presentation

on the statement of activities or through a separate statement of functional expenses. The

functional presentation will distinguish expenses for program, administrative and fundraising

purposes and, if the organization has several different programs, distinguish the costs

associated with each.



With functional expense data you can consider whether the land trust seems to be spending its

resources in accordance with its mission and the priorities you established in your strategic

plan. If you have prepared your budget in the functional format, distinguishing the purpose (fundraising, management, acquisition, outreach and so forth) for which you will expend funds,

you will want to see financial reports that compare the actual expenses for each of these

functions to budgeted expenses for each function.

You may want to ask to have some supplemental information included on your financial reports

to help you monitor key indicators of both program and financial performance. For example,

you may ask to see the information about the progress of various acquisition projects as they

move through the pipeline from initial exploration to technical evaluation to price negotiation

to fundraising and, finally, to closing. Alternatively, you may want to monitor the number of donors or the percentage of members who renew their membership. Or, you may want to track

the number of easements monitored in comparison to your goals for the year or in comparison

to prior years.

The concept of combining some key financial information with some other key program or

fundraising indicators is frequently referred to as a dashboard. To develop a useful dashboard,

you will have to identify the variables that make the most difference in your financial

outcomes. For many land trusts, these will include the number of donors, donor retention rate

and average gift size as key indicators for fundraising and number of easements monitored or acquisition deals initiated and closed as indicators of program success. To be effective,

dashboard designers must carefully pick the information to be included to avoid distracting

readers with too many variables.

7. Should we rely on the accuracy of our internal financial reports? While most readers of financial

statements will have to rely on someone with greater accounting knowledge to evaluate the

quality of the accounting provided by the organization, there is one simple test to spot obvious

problems with your land trust’s accounting.

To do the test, you must have the financial statements for two consecutive periods (January

and February, for example). Take the total net assets from the first of the two periods and add

the net income (change in net assets) reported for the second period. The answer should be the same number as shown for the total net assets at the end of the second of the two periods.

If it’s not, seek help from someone knowledgeable about accounting because your books may

not be in balance.




Key Balance Sheet Information for Review

The most effective review of the items described below will require that the balance sheet be

presented in comparative format with the balances of all accounts at the end of the prior

month being presented in comparison to the balances in those accounts at the end of the

current month.

• Cash. Determine whether the cash-on-hand balance has increased or decreased compared

to the prior month. Ask for a translation of both cash balances into a days of cash estimate

to facilitate determining whether the cash balance is adequate to meet the land trust’s needs. Ask for an identification of the minimum cash balance required to meet the need for

cash in a typical month. If the cash balance or the days of cash on hand have declined

significantly, inquire why this is happening and when the land trust will reverse the trend.

Ask to review the cash flow projection to be sure it is consistent with what you are told.

• Contracts receivable. Compare the current contracts receivable balance to that of the prior

month. If the contracts receivable balance has gone up significantly, ask for a schedule of

the specific contracts included in the receivables balance and request that the balances at

both dates be presented in the aged format, which shows what portion of the receivable is 30 days from current, 60 days, 90 days and more than 90 days. Be aware that in many

cases, funder delays in paying land trust reimbursement requests are related to problems

with the invoices that have been submitted. Ask if the funder has requested revised

invoices or provided any other feedback on the cause of the delay in making payment.

• Accounts payable. Notice whether accounts payable have increased in comparison to the

prior month. If so, ask for a schedule that displays the largest amounts payable by vendor.

Ask that the schedule show whether each payment is overdue and, if so, by how many days

(30, 60, 90 and more than 90 days). Investigate why the land trust is not paying its bills on time. Pay particular attention to any outstanding payable amounts to health insurance

providers or retirement plans. Be aware that there may be legal consequences for failure to

pay these bills on time.

• Payroll taxes payable. While it is unusual today to see land trusts fail to pay payroll taxes on

time, including the portion withheld from the employee’s paycheck and the portion that is

the employers’ share, it does still happen. This is an extremely serious situation because

payroll tax authorities can impose harsh penalties, and board members may, in certain

circumstances, be held personally responsible for unpaid amounts. Ask for a certification that no payroll tax payments are overdue.



• Net assets without donor restrictions. Compare the net assets without donor restrictions at

the end of the prior month to those at the end of the current month. Notice whether the

balance increased or decreased. An increase in net assets without donor restrictions means that the land trust had unrestricted income greater than expenses during the month. A

decrease in this category of assets means that the land trust had expenses greater than

income in that month. Compare the change in net assets without donor restrictions

calculated from the balance sheet numbers with that reported on the income statement

(statement of activities). The two numbers should be identical. If not, it may indicate an

error in the preparation of the statements. Ask for an explanation of any differences. If your land trust has experienced an overall loss from the year-to-date activity – year-to-date

income has fallen short of year-to-date expenses – ask for a year-end projection that shows

a plan for managing the finances to avoid a year-end loss.

More Questions for Boards of Smaller Land Trusts

Beyond the financial health questions discussed above, boards of smaller land trusts that rely

heavily on a single volunteer or staff member without formal bookkeeping training to handle

almost all financial functions will need to examine the financial reports in much greater detail. You

will want to assign specific board members responsibilities for performing each of the monitoring steps discussed below. In addition, you will need to be sure all who take on parts of these

responsibilities are communicating regularly with each other and that one person has ultimate

responsibility for resolving any identified problems.

Steps to Be Sure the Reports Are Accurate

• Verify that bank reconciliations have been completed for all cash accounts each month and

that the balances shown on the financial statements agree with the reconciled balances.

• If you have accounts payable and accounts receivable, be certain that there are lists of all

the individual amounts owed or owing that add up to the totals shown on the financial

statements.

• If you have acquired equipment, land or buildings, be sure the assets section of your

balance sheet reflects these items.

• Perform the test of the connection between the statement of activities and the balance

sheet described in the previous section. The change in net assets (net income) shown on

the statement of activities should be the same as the change in net assets computed by



comparing the net assets at the beginning and end of the period reported on the statement

of financial position (balance sheet).

• Review the revenue and expense line items carefully. First, compare them to the budget

and be sure any significant differences between the actual revenues and expenses and the

budget make sense to you. If they don’t, ask the person doing the books to show you the detailed listing of transactions posted to the accounts that have unexpected balances.

Review the transactions to see if something has been listed in an improper category.

Review the revenue and expense line items to be sure that expenses have been correctly

categorized in relation to different projects or funding sources

How Will the Board Recognize Whether Action is Needed to Protect the Land Trust’s Financial Health?

If your financial reports show a series of losses or if you are aware that the land trust lacks cash

when needed to meet payroll and pay bills on time or if you are concerned that you may not be

tracking donor restrictions properly, you may want to take your review a bit further, including the

following steps:

• Review the revenue line items that have fallen short of the planned level shown in the

budget. Consider if the land trust can realistically make up the shortfall in the remaining portions of the year. Avoid wishful thinking! Base your evaluation on specific plans with

specific estimates.

• If part of your funding is dependent upon the number of trees planted or acres inspected or

on the number of people participating in a program, check the numbers in these areas

carefully. If you are not achieving your targets, figure out why.

• Review all significant expense items that are significantly greater than the projected level.

Determine whether your annual budget estimate will still prove correct (for example, you

have just expended amounts in this category at a more rapid rate than planned, but the

annual estimate is correct). Don’t waste time worrying amount small expense items like

office supplies because, in most cases, the only way to have a significant impact on total expenses is by reducing personnel or professional service expenses.

• Based on your analysis, consider whether you will need to pursue additional strategies to

generate the revenue you need or whether you should make reductions in your spending

level.



• Review all financial reports you are preparing for funders that have provided restricted

grants with great care. Be sure they are based on the numbers in your general ledger and

those numbers are correct.

• Be sure you are familiar with the requirements of your agreements with restricted funders.

Do you have to obtain their permission to move amounts from one line item to another? If so, your analysis of the reports should focus on identifying any requests for changes you

will need to submit to the funder.

• Are any of your grants or contracts “use it or lose it” agreements where your land trust

won’t receive funds unless you expend them on specified items? In a “use it or lose it”

contract, reducing costs so that you underspend the contract is not helpful to your

organization. Instead, if it appears that you are underspending, consider what additional

resources the project needs or whether you can make a case to include more of your

overall operating costs into the contract budget. Once you have developed a strategy, then you will have to seek approval from the funder.

• Write down your major assumptions regarding the financial statements. Compare these

assumptions to your next month’s financial statements. This will provide rapid feedback

about how realistic you are being.

• Consider preparing a year-end projection of revenues and expenses. Create the projection

by starting with your year-to-date revenue and expenses in each line item and then

estimating what additional income will be generated and what expenses will be incurred

during the remaining months in the fiscal year. Combine the actual year-to-date

information in each line item with your best estimate of what will happen in the remaining

months of the fiscal year to create the total year-end projection.

Remember, the longer you wait to make revisions in your plan, the more dramatic the revisions

may need to be because you will have less time to benefit from their effect.

1 · Land Trust Alliance · Land Trust Standards and Practices · Standard 3A2d Board Responsibility




by

d. Reviewing the externally prepared financial audit review or compilation












BOARD REVIEW OF LAND TRUST AUDIT, REVIEW OR COMPILATION

Practice 6C1 will help a land trust board decide whether to engage a CPA to provide an audit,

review or compilation. It also covers the purpose and value of each of those different types of

engagement.



2 Land Trust Alliance · Land Trust Standards and Practices · Standard 3A2d Board Responsibility


Once the board has made the audit/review/compilation decision and selected the CPA, your land

trust will engage and communicate regularly with the CPA during the engagement. The next step

will be making sure your board truly benefits from the CPA’s work. Some land trust boards establish

an audit committee to take the lead in selecting the CPA and handling communications during the

audit. Other land trusts assign these responsibilities to the finance or executive committee.

Regardless of who takes the lead, the full board should be aware of the engagement process,

receive the audit/review/compilation report and have the opportunity to meet with the CPA at the

conclusion of the engagement to discuss the results.

For accreditation, a land trust needs to provide the minutes from the board meeting at

which the results of the most recent audited, reviewed or compiled financial statements

were presented, showing that the board reviewed the statements.

You should expect the CPA to explain the report, to answer your questions about both the reported

financial information and the notes to the financial statements and to talk frankly about any

difficulties they may have encountered as they prepared the report. You should organize your

meeting with the CPA in two parts. The first part should include both board members and your

executive director and the staff member or contractor who does the bookkeeping work for your

land trust. The CPA’s main presentation of the report should occur during this portion of the

meeting. Ask both the CPA and your staff to discuss any problems encountered during the

engagement or any suggestions for improving the land trust’s systems.

The second portion of the meeting should include only the CPA and the board and finance/audit

committee members. In this discussion, board members should be free to ask the CPA for their

observations about both the performance of the staff or accounting contractor and the usefulness

of land trust’s financial management systems. The CPA may alert you to important limitations in

your system or in the expertise of your staff. The discussion will provide an opportunity for board

members to deepen their understanding of the challenges your organization faces in handling the

complex accounting required by land trusts. You could also seek feedback from the CPA about

possible strategies to improve your systems. In order to ensure open communication with your

CPA, the board will want to make it clear that they understand that they are ultimately responsible

for making all financial management decisions for the land trust and, consequently, they are not

asking the CPA to step out of their independent role to make management decisions for the

organization.



The American Institute of CPAs (AICPA) has an excellent toolkit for not-for-profit audit committees.

Portions of the toolkit may be helpful to all board members in building understanding of the audit

process and the types of assurance an audit does and does not provide. You may purchase the

toolkit from AICPA, or your CPA may be able to provide the board with a free copy of the resource.

If the land trust decides to have a review or compilation rather than an audit, you will still want to

give board members the opportunity to meet with the CPA who performed the engagement. In

setting up this meeting, you will want to acknowledge to the CPA that you understand that the

engagement was not an audit and that, consequently, the CPA has not issued an opinion on

whether the financial statements present the land trust’s financial conditions and activities fairly.

Once the board understands the nature of the CPA’s work, you can ask the CPA to explain the

information in the report, including the financial statements and the notes to the statements. You

can also ask whether they encountered any difficulties in completing the engagement or if they

have observations about how your systems could be improved. As in discussions with an auditor,

you will want to acknowledge that the board understands its responsibility for all financial

management decisions.

For accreditation, the requirements set specific thresholds for securing an audit, review or

compilation, based on the land trust’s total annual support and revenue. The board needs to be

aware of these requirements when determining which level of financial review to obtain. See

Practice 6C1 for more details.

BOARD RESPONSE TO THE AUDIT OR REVIEW REPORT

Beyond the discussion with the auditor, board members will want to talk with each other about the

questions that the audit or review report has raised for them. As a starting point, board members

should reflect on the extent to which the financial results presented in the reviewed or audited

financial statements are significantly different from the information in the internal financial

statements. Some useful points of comparison between the audited or reviewed statements and

the internal statements include:

http://www.aicpastore.com/AuditAttest/AuditPreprationandPlanning/the-aicpa-audit-committee-toolkit--not-for-profit-/PRDOVR~PC-991004/PC-991004.jsp




Total net assets (reported on the statement of financial position). Is there a material

difference between the total net assets reported on the audited statements and the

internal statements? Because total net assets represent the equity of the land trust, it’s an

extremely important number. If there is a significant variance, either higher or lower,

between the audited and internal statements, it means the board has been making

decisions without a clear understanding of the land trust’s financial strength. A significant

difference is also a strong indication of problems in the accounting system or a need for

additional training and support for the person handling the internal accounting.

Contributions. If there are significant differences between your internal statements and the

audited or reviewed statements in the total amount of new contributions with and without

donor restrictions, your board has been making decisions without a complete picture of

your income. Significant differences may indicate that the accounting system has not been

set up to properly track the receipt of contributions with donor restrictions. Another

possible cause is failure to properly record the receipt of grants that were transferred

directly into the closing process for purchase of land or easements (that is, they never

passed through the land trust’s bank accounts). Such grants are income and should be

reflected in the internal financial statements. Still another potential source of difference

between the audited and internal statements could be failure to correctly record multi-year

grants and pledges in the internal statements. Resolution of all of these underlying

problems may require assistance in redesigning the underlying accounting system and

providing additional training and support to the accountant preparing the internal

statements.

Cash and investments. These accounts, listed in the statement of financial position, should

be reconciled to bank and investment statements every month. Significant differences

between the amounts reported on the internal statements and in the audited statements

should raise questions about whether the reconciliations have been prepared properly.

These reconciliations are an essential internal control. If there has been a breakdown in this

area, board members will need to ask the executive director or treasurer to investigate and

do whatever necessary to make improvements.



Schedules of net assets with and without donor restrictions. The audit or review report will

include detailed listings of the ending balances for net assets with and without donor

restrictions, as well as for each type of board-designated net asset (for example, board-

designated stewardship funds). The board should first ask staff to provide a detailed

comparison between the balances reported in the audit and the balances that are recorded

in your internal systems. Your board may want to request that a schedule of the balances of

each type of net assets with donor restrictions and each type of board-designated net

assets without donor restrictions be included with every set of internal financial

statements. You may find it helpful to review Practice 5B3 to help board members

understand the importance of demonstrating your accountability for board-designated

funds and assets with donor restrictions through careful tracking of the different

components of your net assets.

These are examples of potentially misleading information that could be provided to the board

through the internal financial statements. The board should work with the executive director or

treasurer to determine the best way to resolve the underlying problems in the internal systems

that generated misleading information. One particularly important control is found in independent

review of the bank and investment account reconciliations. Someone other than the person who

makes deposits and prepares checks or the person who authorizes transfers and withdrawals from

bank and investment accounts should review monthly reconciliations of every cash and investment

account. This is critical protection for both the land trust and the person doing the actual

accounting functions. If there is no board member who is willing or able to perform the

independent reconciliation function, the board may need to consider hiring an independent

accountant (not the auditor) to do monthly reconciliations. The cost of such a service is generally

low and the positive impact on controls quite high.

Beyond the numbers on the financial statements, board members will also want to consider the

auditor’s comments about the strengths and limitations of the land trust’s financial systems.

Auditor comments about weak internal controls should be given particular attention. Internal

controls protect your organization from both error and fraud. See Practice 6D1 for more on internal

controls.

For accreditation, if the management letter or correspondence that accompanied the most

recent audit, review or compilation indicated significant changes should be made to a land

trust’s financial procedures, the land trust will need to provide a statement describing the

actions it has taken to address the recommended changes.





While it is difficult to establish strong controls in a small organization, it is not impossible. Key

internal controls include:

Board monitoring of the executive director’s performance (for staffed land trusts)

Compliance with established policies and procedures by all staff and volunteers

Careful board review of the financial reports to identify unexpected items


Audit Committee Toolkit, American Institute of CPA’s

http://www.aicpastore.com/AST/Main/CPA2BIZ_Primary/AuditAttest/AuditPreprationandPlanning/PRDOVR~PC-991004/PC-991004.jsp

1 · Land Trust Alliance · Land Trust Standards and Practices · Standard 5B2 Accountability to Donors


STANDARD 5 FUNDRAISING

B. Accountability to Donors 2. Provide timely written acknowledgment of all gifts, including land and

conservation easements, in keeping with IRS charitable contribution

substantiation requirements


IMPORTANCE OF ACKNOWLEDGING GIFTS

Strong relationships with donors are crucial to the land trust’s fundraising success. One of the

cornerstones of good donor relationships is making sure that you provide them with what they

need to meet IRS regulations for their donations. By law, donors must have contemporaneous

written substantiation of any single contribution of $250 or more in order to qualify for a charitable

deduction. While the IRS places this requirement on the donor, as a practical matter, land trusts

should provide donors with written documentation of their gifts and should inform them that they

must retain this documentation to qualify for a deduction. If your recordkeeping systems are in

good order, you should have little problem providing a timely acknowledgment. After all, you do

not want to be the reason a donor is audited or loses their deduction.

Contents of an Acknowledgment

When acknowledging a donor’s gift, including land and conservation easements, land trusts should

include the following information:

Name of the organization.

Donor’s name and address.

Date of the donation.


2 Land Trust Alliance · Land Trust Standards and Practices · Standard 5B2 Accountability to Donors


o For conservation easements, the date of donation is the date the easement is

recorded in the public land records, ensuring it meets the perpetuity requirements.

o For fee properties, the date of donation is when the delivery of the gift is effective

under state law.

Amount of any cash contribution.

For noncash gifts, including land and conservation easements, a description of the gift (such

as number of acres, its location and so forth). No estimate of value is required (or even

advised, in the absence of an appraisal).

A statement that no goods or services (other than certain token items and membership

benefits) were provided by the land trust in return for the contribution, if that was the

case; or

o A description and good faith estimate of the value of goods or services, if any, that the

organization provided in return for the contribution.

o The statement may indicate that the amount of the contribution that is deductible for

federal income tax purposes is limited to the portion of the gift contributed by the

donor that is in excess of the value of goods or services provided by the land trust.

If the transaction was a bargain sale, then the bargain sale amount paid by the land trust

(or a partner or funder) needs to be reported because that amount is not deductible.

Letters, postcards or computer-generated forms with the above information are acceptable. The

land trust can provide either a paper copy of the acknowledgment to the donor or it can provide

the acknowledgment electronically, such as via an email addressed to the donor.

Land trusts can provide a separate acknowledgment for each single contribution of $250 or more or

one acknowledgment, such as an annual summary, may be used to substantiate several single

contributions of $250 or more. There are no legal penalties on the donee for failure to issue such an

acknowledgment. However, a charitable organization that knowingly provides false written

substantiation is subject to penalties for aiding and abetting an understatement of tax liability.



What is Timely?

The IRS considers an acknowledgment to be contemporaneous if the donor obtains the

acknowledgment on or before the date on which they file a return for the taxable year of the

contribution or the due date, including extensions, for filing the return. Fundraising experts have a

different standard. They advise nonprofits to mail an acknowledgment within 48 hours of receiving

a gift. If that timeframe means your acknowledgment is relatively impersonal, it is still important to

send because:

It immediately reinforces the donor’s giving decision

It communicates that the organization received the gift

Additional personal communications can easily follow as warranted

In this respect, the concept of acknowledgment should be distinguished from the concept of

expressing gratitude. A simple, professional, mechanically produced acknowledgment sent the

same day the gift is received is better donor stewardship than a more personalized effort delivered

two weeks later.

For accreditation, a land trust must provide the donor with a written acknowledgement for any

gift greater than $250. This includes gifts of cash, land or conservation easements (including

bargain sales) – even if the donor indicates they may not take a deduction because the donor

may change their mind. The accreditation application requires examples of gift

acknowledgements, as well as the solicitation materials for certain gifts of cash.

HOW MUCH IS DEDUCTIBLE?

A charitable gift can only be considered a deductible contribution when it is given with no

anticipation of receiving—or commitment to receive—something of substantial value in return. It

must be, in fact, a gift.

The IRS and Congress have been concerned that 501(c)(3) organizations are not adequately

informing their donors about the portion of the donation that can be legally deducted. As a result,

taxpayers have taken deductions in excess of what the law allows. To remedy that problem, the IRS

requires that 501(c)(3) organizations establish the fair market value of those benefits (except those

considered to be of insubstantial value, discussed below) and advise potential donors about the

extent of a gift’s deductibility in their fundraising materials or solicitations.



Many organizations previously used phrases such as “fully deductible to the extent permitted by

law” to notify donors that the full amount of their contribution might not be deductible. The IRS

does not consider such phrases to be adequate.

If a donor makes a quid pro quo contribution (a contribution made by a donor in exchange for

goods or services), the donor can only deduct that portion of the contribution that exceeds the fair

market value (FMV) of a premium or other substantial benefit received (see below).

Examples of common goods or services that a land trust might provide to a land or easement donor

include bargain sale payments, payment for the donor’s legal fees and, less frequently, payment for

the appraisal to substantiate the donor’s tax deduction. Baseline documentation reports, surveys

and similar items or services directly related to the protection of the land and necessary for the

land trust to steward the property or easement are not considered goods or services.

Defining Fair Market Value

Fair market value is the amount the item would be worth if it were sold to the general public; fair

market value is not the cost to the charity to obtain that item. For example:

Membership dues. Membership dues are deductible to the extent that they exceed the fair

market value of any substantial membership benefits. If a land trust charged an annual $30

membership fee—but provided members with a glossy, color nature calendar that is

available to nonmembers for $10—only $20 of the membership fee would be deductible.

Dinner dances. If a land trust hosts a dinner dance as a fundraising event, and the space,

flowers, food, printing and music are all donated, the FMV is not zero. The FMV is

estimated at how much that evening would cost someone if attendees were to go out and

purchase a similar evening of dinner and dancing at a commercial establishment.

Auctions. Auctions are tricky. If the land trust produces a catalog or list of items and

distributes it to potential bidders before the auction, and the catalog or list includes the

organization’s estimates of FMV, then the purchaser may deduct as a charitable

contribution the amount paid above the stated FMV of the items. However, if there is no

prior notice or estimate of the item’s value, the IRS may assume that the FMV of the item is

what was paid for it, and none of the payment will be considered as a gift.



Goods or services not commercially available. Examples in this category include personal

services performed for the donor or their family, an open bar at a golf outing and so forth.

To assess the FMV in those cases, make a good faith estimate using closely comparable

items for guidance.

Celebrity appearances. The key question here is whether the celebrity is actually doing

what they are primarily famous for. For example, if a famous musician gives a concert to

benefit the land trust, then the FMV of the ticket is what a concert ticket would ordinarily

cost to see that performer, and the donor may only deduct the portion of the purchase

price that exceeds that FMV. However, if the same celebrity is merely appearing to sign

autographs and is not performing, there is no FMV associated with the celebrity’s

appearance, and thus, any contribution would be fully deductible.

Raffle tickets. Many land trusts do not realize that payments that provide the donor just an

opportunity to acquire something of value are not gifts. No part of any payment for raffles,

lotteries, bingo game admissions or auction tickets, or admission tickets that make the

donor eligible for a door prize, is deductible, whether the donor wins or not. However, if

the price of the individual ticket exceeds the FMV of the item, the excess may be

deductible. Donors making such contributions that carry a chance to acquire something of

value—the opportunity to win a prize—are presumed by the IRS to have received full

market value for their payments.

Exceptions for Insubstantial Benefits

The IRS considers certain benefits to be of insubstantial value. These do not have to be described in

the acknowledgment, nor do they reduce the donor’s allowable deduction. Goods and services are

considered to be insubstantial if the payment occurs in the context of a fundraising campaign in

which the organization informs the donor of the amount of the contribution that is a deductible. In

addition, one of the following criteria must be met:

Basic maximums. The FMV of the benefits received does not exceed two percent of the

payment or $106 (in 2016; this figure is adjusted annually by the IRS to account for

inflation), whichever is less.

Low-cost articles. The payment is $53 (in 2016) or more, the only benefits provided are

token items that bear the organization’s logo (bookmarks, calendars, mugs, posters, t-shirts

and so forth) and the cost of these items is less than $10.60 (in 2016). Note that in this

case, the IRS allows the charity to use the cost to it of the item, not its fair market value.



In addition, the IRS disregards certain membership benefits provided in return for an annual

payment of $75 or less. These benefits may include free or discounted admission to the

organization’s facilities or events, free or discounted parking, preferred access to goods or services

and discounts on the purchase of goods or services. Noncommercial newsletters are also

considered to be insubstantial benefits. Commercial quality is determined by such tests as whether

a publication pays for articles, accepts paid advertising, appears on newsstands and so forth.

Disclosure for Quid Pro Quo Contributions

The law requires land trusts and other charitable organizations to provide a disclosure statement to

donors who make a donation in excess of $75 partly as a contribution and partly for goods and

services provided by the organization (a quid pro quo contribution). Bargain sales of land and

conservation easements would fall under this category. To comply with this requirement, land

trusts must:

Inform the donor that the deductible amount of the contribution is limited to the amount

of the payment (or the fair market value of the land or conservation easement) that

exceeds the value of the goods or services provided.

Provide a good faith estimate of the value of those goods or services. This estimate should

be based on an estimate of the fair market value of the goods or services, not the land

trust’s cost of providing them.

Make the disclosure in a manner that is reasonably likely to come to the attention of the

donor. Statements in very small print might not meet the requirement.

The statement may be provided in connection with soliciting the gift or upon its receipt. However,

for gifts of $250 or more, the statement must be included with the written substantiation of the

gift.

A charity that fails to comply can be fined $10 per contribution, with a cap of $5,000 per fundraising

mailing or event.

Unreimbursed Expenses

A person who incurs out-of-pocket expenses of $250 or more while serving as a land trust volunteer

and wishes to take a federal tax deduction must obtain a contemporaneous written

acknowledgment from the land trust stating whether or not any goods or services were provided to

the volunteer in exchange for those expenses.



The volunteer and not the land trust should be responsible for tracking expenses and presenting

those expenses to the land trust. All expenses submitted should be itemized and clearly

documented as solely for the benefit of the land trust. The land trust should officially designate an

appropriate party to receive the documentation from volunteers, such as the board treasurer (if no

staff) or the appropriate staff member, who would then visually verify the documentation has no

obvious errors and issue the contemporaneous written acknowledgment letter.


Charitable Contributions: Substantiation and Disclosure Requirements, Internal Revenue

Service Publication 1771, revised March 2016

Contemporaneous Written Gift Acknowledgment Letter, Sample 1: Bargain Sale

Contemporaneous Written Gift Acknowledgment Letter, Sample 2: Easement Donation

Sample Acknowledgement Letter for Volunteer Expenses

https://www.irs.gov/pub/irs-pdf/p1771.pdf




1 · Land Trust Alliance · Land Trust Standards and Practices · Standard 5B3 Accountability to Donors


STANDARD 5 FUNDRAISING

B. Accountability to Donors 3. Maintain financial and other systems to document and comply with any

donor restrictions on gifts


INTRODUCTION

Your land trust’s ability to accomplish its mission is highly dependent upon developing effective

systems to ensure complete accountability for all donor gifts with restrictions. Failure to establish

and maintain accountability for donor restrictions poses enormous legal, reputational and financial

risks. Individuals who make charitable contributions to land trusts enter into a relationship that can

succeed only if that relationship is built upon a foundation of trust. People voluntarily make their

contributions because they believe the land trust will use their contributions in a specific way to

make a difference. If the land trust is successful in achieving its mission, the donor will likely

continue their support. This relationship is a delicate one that can easily be fractured by poor

practices — or perceived poor practices. A land trust that breaks faith with its donors will find that

trust incredibly difficult to repair. Donors follow the adage “once burned, twice shy.” When faced

with a breach of trust, long-standing and generous supporters may suspend their support

immediately and, in many cases, indefinitely.

There may be a number of policies, procedures, systems and controls your land trust should have in

place to manage the risks involved in accepting charitable donations. Effective donor accountability

systems include multiple components:

Implementation of a board-approved, clear gift acceptance policy to avoid accepting gifts

with restrictions that will be difficult to fulfill, including restrictions that impose

unreasonable costs or distract from your efforts to achieve your mission




Complying with state laws and regulations on donor accountability, including specific

requirements pertaining to endowments

Consistent identification and documentation of restrictions imposed by the donor when the

gift is made (internal documentation)

Correct recording of all donor-restricted gifts in the accounting records (for external

reporting)

Clear reporting of the receipt of donor-restricted gifts on financial statements

Clear, complete and consistent documentation of the use of donor restricted gifts,

including explanation of the basis for the determination that the use of the funds was

consistent with the donor’s restrictions

Clear reporting of the use of gifts with donor restrictions

Regular reconciliation of records of all gifts with donor restrictions received, all uses made

of them and the resulting remaining balances of funds with donor restrictions, including the

nature of the restrictions that pertain to each component of the remaining balances

These components are essential for accountability of gifts from individuals, businesses, foundations

and trusts. Restricted grants and awards from governmental entities involve additional challenges

and require some additional system elements.

For accreditation, a land trust must document it has a business process system for determining

restrictions on gifts and grants and for tracking their receipt, use and acknowledgement. A land

trust’s accounting manual might fully cover this system, or a land trust could document this

system with separate policies or procedures that address:

o Soliciting and accepting restricted gifts and grants

o Determining restrictions on gifts and grants

o Documenting donor restrictions

o Tracking receipt of and expenditures from restricted grants to comply with donor

restrictions



GIFT ACCEPTANCE POLICY

Land trusts should adopt gift acceptance policies to clarify the types of gifts they will and will not

accept. A well-crafted gift acceptance policy supports effective donor relationship building by

making it clear to all potential donors what types of gifts and types of restrictions your land trust is

prepared to take. Establishing these clear distinctions in advance of the offer of any specific gift can

help your land trust avoid offending donors by a decision to refuse a proposed gift (do you want to

be in the position of saying no to a major donor without a policy to point to?). It can also help board

and staff members avoid misleading donors about the acceptability of proposed gifts.

Why would a land trust ever refuse a gift? Some gifts impose unacceptable risks. Others require

procedures and investments that are simply too expensive to be justified in relationship to the

value of the gift to the land trust. Donor restrictions on the use of the gift or on the management or

investment of the gift may be impractical and costly.

For example, many land trusts now have policies with regard to accepting gifts for stewardship.

While they welcome gifts to cover stewardship costs and methodically track the receipt and use of

these gifts, most do not welcome gifts that are narrowly restricted to a specific easement,

recognizing that the tracking of multiple restricted gifts can be costly and time consuming. Some

policies, however, provide exceptions for unusually large gifts restricted to stewardship on

extremely large or significant easements.

Similarly, many gift acceptance policies do not permit acceptance of gifts in which the donor wishes

to restrict how the funds they contribute will be invested – for example, gifts that require that gifts

of stock in particular companies be retained or that gifts of gold bars be kept as gold bars. Such

restrictions would place board members in potential conflict with their duties to ensure that land

trust’s assets are managed wisely.

LEGAL REQUIREMENTS FOR DONOR ACCOUNTABILITY

Virtually all states require that nonprofit corporations honor donor restrictions, including correctly

documenting the restriction at the time of the gift, tracking the use of the gift in accord with the

donor’s restrictions and correctly reporting the remaining balance of funds subject to each donor’s

restrictions.



In most states, any donor who believes that a nonprofit is not honoring the restrictions attached to

their gift may seek help from their state attorney general or other state agency responsible for

regulating charities, essentially requesting that the state compel the charity to honor the

restrictions. While such actions by donors are rare, they are extremely damaging to the reputations

of the nonprofits alleged to have violated the donor’s restrictions.

But long before an unhappy donor or their heirs would ever approach the state with a request for

help enforcing the restrictions attached to a gift, word of mouth within the donor community will

have significantly damaged the organization’s reputation and ability to raise funds.

Beyond this general reputational damage, some institutional donors may be able to force

repayment of restricted donations when their restrictions have not been honored. Foundations and

some corporations regularly require nonprofit recipients to sign grant agreements that state the

donor’s restrictions on the gift and explicitly state that failure to follow the restrictions will result in

the obligation to repay the funds. As a practical matter, most foundation and corporate donors do

not actually want to reclaim funds they have awarded (it creates tax and accounting problems for

them), so their most frequent response is to simply refuse to fund the organization again and to

share that decision with others in the philanthropic community.

MAJOR TYPES OF DONOR RESTRICTIONS

The first step in understanding the restriction(s) that a donor has established for the use of their

gift is to determine if the donor intends that the gift be permanently restricted. Donors establishing

permanent restrictions on their gifts intend that the corpus of the gift be invested, with the income

from the investment of the corpus made available to the land trust either for general purposes or

for specified purposes. In some cases, donors will require that a gift of land be permanently

restricted, meaning that the land trust may never sell or transfer the land and that it must be used

exclusively for donor-specified purposes.

In contrast to such permanent restrictions, donors may establish restrictions on the purpose(s) or

time period for which their gift may be used. Such restrictions are referred to as temporary,

reflecting the reality that the donor intends for the gift to be expended and understands that once

done so in accordance with the restrictions, the restriction will have been fulfilled.



Standard accounting policies and procedures and internal control structure require land trust to

document:

The receipt of a donor-restricted gift

The permissible uses of gifts with donor restrictions that are temporary in nature

The income generated through the investment of permanently restricted gifts (and some

temporarily restricted gifts)

The resulting net assets that remain subject to donor restrictions

Your land trust may need to hire a professional accountant to establish systems and procedures to

meet these requirements. The following sections highlight some of the challenges you will face in

setting up these systems.

Identifying and Documenting Donor Restrictions

Your land trust will need to establish clear procedures to determine whether each contribution you

record has been restricted by the donor or has been given as a gift without restriction

(unrestricted). Ideally, the donor will have made their intentions clear in writing. If the donor has

provided written directions, the person responsible for recording the gift will need to determine if

the donor’s directions are clear or if follow-up communication will be required to establish a clear

record of the restrictions the donor has established for their gift.

When processing gifts that are clearly being given in response to written communication from your

land trust, such as funds to buy a particular parcel of land or contributions to a permanent

stewardship fund, you will need to review the request as it was presented in writing. Work with

your development team beforehand to ensure these letters are appropriately drafted. You can help

make the process of discerning the donor’s intention easier by including gift remittance forms in

your solicitations or by enclosing return envelopes with special coding for each gift campaign. Of

course, not all donors will complete the gift remittance form or use the special envelope, so your

procedures will need to include alerting the person responsible for processing gifts to special

campaigns and requiring them to make a reasonable attempt to discover if the donor intends for

their gift to be restricted in accordance with a current campaign or is willing to consider the gift to

be unrestricted.



More significant gifts are often the result of a series of conversations between a donor and your

land trust staff or board members. All of your representatives who talk with donors must take

notes about the conversations they have had and write a memo to document any restrictions that

the donor has imposed upon their gift. Incorporate a restatement of the donor’s restrictions in your

thank-you letter, acknowledging that the gift will be used according to the donor’s restrictions and

then stating those restrictions clearly. If a donor has imposed confusing restrictions, ask them to

confirm that the understanding you have expressed in your thank-you letter is correct.

Special care is needed to maintain documentation regarding gifts that are permanently restricted

or temporarily restricted gifts that will require multiple years to utilize. Your system should

establish a file for each such gift and be sure that all documentation of the donor’s restriction(s) is

maintained in the file, including correspondence and notes regarding conversations.

For accreditation, a land trust needs to show that it appropriately tracks and uses donor-

restricted moneys. This includes making sure that the land trust’s financial statements

reflect gifts or grants solicited using the term “endowment” (stewardship endowment

solicitations are a common example) or solicited for other specific purposes as donor-

restricted in accordance with the solicitation materials.

Recording Pledges, Promises to Give and Multi-year Foundation Grants

One of the great challenges in nonprofit accounting is a GAAP requirement that “promises to give in

the future” be recorded as contribution income in the period in which the promise to give is made.

This requirement is based on the understanding that when a donor makes a promise to give at a

future date, the donor is, in fact, making a temporarily restricted gift that includes a time

restriction. Donors establishing time restrictions for the use of their gifts are restricting the time

period in which the nonprofit may use the gift. Until the donor fulfills their promise to give by

actually transferring the gift to the land trust, the land trust is unable to use the gift (you can’t

spend cash you don’t have).

This same logic applies to multi-year foundation grants with a pay-out schedule established at the

time the grant award is announced. For example, a foundation may award a $600,000 grant to be

paid out over three years, with the first $300,000 to be paid in January of year 1, an additional

$200,000 to be paid in January of year 2 and the final $100,000 to be paid in January of year 3.

GAAP accounting will require that the entire $600,000 grant be recorded as a temporarily restricted

gift at the time of the award announcement, even if the award announcement is issued in the year

prior to the year in which the first payment will be received.



This requirement applies to situations in which the foundation is committing to make a series of

payments. It may not apply in situations in which the foundation has established conditions that

must be met before the payments will be made. The presence of such conditions can be quite

complicated to evaluate, so your land trust will need to seek help from a knowledgeable

accountant to be sure you are accounting for multi-year pledges correctly.

Documenting, Recording and Reporting the Use of Gifts with Donor Restrictions

Your accounting system needs to be designed to make it easy to track the use of grants and gifts

with donor restrictions so you are sure they are being used only for the purposes permitted by the

donor’s restrictions. While most uses of gifts with donor restrictions will be classified as expenses

(for example, paying an outreach coordinator), some gifts will be restricted to the purchase of

assets (for example, the purchase of fee land). The term expenditure, used here, covers both types

of uses.

The first step is to ensure that the person recording expenditures understands which ones meet

which gift’s restrictions. Once you recognize that an expenditure meets a donor restriction, you will

code it to the cost center used to track expenditures associated with that gift with donor

restrictions. Each month, your financial reports will show the total expenditures that have been

charged to each of your restricted sources.

Once the expenditures that meet each gift’s restrictions have been correctly recorded, your

accountant can calculate the remaining balance of that type of restricted net assets so that you will

understand how much of the gift with donor restrictions remains to be used for the restricted

purpose(s). If you don’t have a good digital backup system, consider printing out your accounting

system record of the expenditures attributed to each restricted source and filing it in your master

file record for each type of net assets with donor restrictions.

Reconciling the Balances of Gifts with Donor Restrictions

Each month, your land trust should reconcile the balances of each type of net assets with donor

restrictions. The reconciliation for each different type of net assets with donor restrictions will

begin by displaying the opening balance at the beginning of the month. The next column will list

any new gifts that have been recorded to increase this type of net assets with donor restrictions.

Next, the schedule will list the total expenditures (expenses or asset purchases) that used this type

of net assets, and finally, the schedule will compute the ending balance for this type of net assets

with donor restrictions.



If the donor requires that interest or other earnings generated by investing the gift must be treated

as restricted as well, your schedule will include another column to record the interest, dividends or

investment gains and losses that must be added to the month-end balance for this type of fund.

Figure 1-1: Schedule of Donor Restricted Net Assets Compared with Statement of Activities

Once the accountant has prepared the reconciliation schedule for your net assets with donor

restrictions, the next step will be to compare the total new gifts with donor restrictions shown as

additions to your net assets with donor restrictions to the total gifts with donor restrictions shown

as restricted contribution income on your income statement. The two numbers must match or an

error has been made. Similarly, the accountant will compare the total expenses or asset purchases

recorded on your schedule for all your net assets with donor restrictions to the total uses of net

assets with donor restrictions recorded on your income statement.

If your land trust has not prepared a reconciliation schedule in the past, use the audited or

reviewed financial statements from the previous year as the source for the opening net assets with

donor restrictions balances at the beginning of your fiscal year. Your reconciliation schedule at the

end of your fiscal year will be an extremely useful document for your auditor. Be sure to compare

the restricted net asset balances that are reported in your year-end audited or reviewed financial

statements to the numbers reported on your year-end reconciliation schedule. If the balances do

not agree, ask your auditor for an explanation and for help improving the accuracy of your tracking

of the receipt and use of restricted gifts.



Setting Up Bank or Investment Accounts

Do we need to set up separate bank or investment accounts for each type of funds with donor

restrictions that we are tracking? No! The true measure of your land trust’s ability to track and

honor donor restrictions is in the accuracy of your reporting of net assets with donor restrictions. If

you have established a segment of your net assets with donor restrictions for each restricted gift

and have tracked and recorded the use of restricted funds for their restricted purposes and

correctly computed the net assets with donor restrictions at the end of each month, you will be

able to demonstrate your accountability for funds with donor restrictions.

While land trusts with limited access to accounting expertise may find it helpful to use separate

bank accounts or separate funds within an investment account to track the receipt and use of

restricted funds, as land trusts become more complex, this approach tends to break down. Instead

of ensuring accountability, it ends up consuming time and creating frustration when funds kept in

multiple separate accounts must be transferred back and forth to track the receipt and use of funds

with donor restrictions. As your land trust obtains multiple gifts with donor restrictions, you should

secure help to set up your accounting system properly so that you can rely on your general ledger

records and the resulting balances in the net assets with donor restrictions.

This approach is more accurate and considerably easier to manage. It will give you an accurate

understanding of what portion of your net assets are unrestricted and what portion are subject to

donor restrictions. This information is important in preparing for a disclosure that all nonprofits are

required to make (as of 2018). This disclosure involves explaining the sources of cash that will be

available to your land trust to meet its operating expenses over the next 12 months. Your land trust

will be able to use the portion of its net assets without donor restrictions that is available for

operations plus any portion of net assets with restrictions that can be used to meet operating

expenses in the next 12 months. Your auditor can help you understand the GAAP concepts and

determine what sources will be available to meet your operating expenses.

Inability to Fulfill Donor Restrictions

Despite best efforts to craft clear gift acceptance policies and evaluate the feasibility of honoring

various types of donor restrictions before accepting gifts, there are situations in which it becomes

clear that a land trust cannot productively use funds or other gifts in ways that fulfill the donor’s

restrictions. If the donor is still living, the land trust may decide to approach them, explain the

situation and ask them to remove the restrictions they had placed on their original gift and either

allows the funds to be used for general purposes or for other specific purposes. If the donor agrees

to the change, the land trust should document the agreement in writing and have the donor sign



the agreement. If the amounts involved are significant to your land trust, you will want to record

the acceptance of the revised donor agreement in the board minutes and then make sure that the

change in restriction is properly recorded in the accounting system.

If the donor is unwilling to change the restriction or simply remove the restriction so that the funds

may be used for general purposes, the land trust can explore alternative strategies with the donor.

What may initially seem like a simple refund of the gift may not be simple for the donor who has

already reported the gift as a tax-deductible contribution. Another alternative may be to transfer

the gift to another nonprofit (with the donor’s written permission) and allow that nonprofit to carry

out the donor’s restrictions.

Of course not all donors are still alive when it becomes clear that the land trust cannot fulfill the

restriction the donor placed on the gift. In these circumstances, your land trust needs to seek legal

advice. In many states, the state attorney general may be able to approve removal of donor

restrictions in situations in which fulfillment of the restrictions is deemed impossible. These state

provisions may also be used to seek approval for consolidating multiple very small restricted funds

into a single fund with a purpose related to the various purposes of the individual funds.

Endowment Challenges

Donors who seek to provide for the long-term health of a nonprofit are often interested in making

an endowment gift. The term endowment has a specific legal meaning and, in most states,

nonprofits need to formally create an endowment. All states except Pennsylvania have adopted a

state law known as the Uniform Prudent Management of Institutional Funds Act (UPMIFA),

developed by the American Bar Association, which establishes the legal framework for the

management of endowment funds. UPMIFA is specifically designed to provide a framework for

dealing with endowment gifts when the donor has not provided detailed directions on how the

funds are to be managed. In most cases, a donor’s specific instructions for the management of their

gift, not UPMIFA, will determine how the funds are managed.

The legal framework for dealing with endowments has changed by the adoption of UPMIFA and,

more recently, with the GAAP accounting requirements for reporting on the earnings generated

through investing endowment funds. Endowment accounting can be quite complex. Most land

trusts will need professional assistance both to establish an endowment and to create appropriate

accounting policies and procedures to record and report on endowments. If your land trust already

has an endowment or is contemplating establishing one, be sure you have clear answers to these

fundamental questions:



What is the legal framework for the endowment? You will need a written record of the

board’s action to create an endowment. Even if you received the funds to place in the

endowment through a bequest or other gift that required you to have an endowment, the

board will still need to create the endowment and document the legal purposes for which it

can be used.

What are the permitted uses of interest and dividends? Clarify if there are any donor

restrictions on the uses of the interest and dividends generated through investment of the

endowment. Has the board communicated to future donors that the endowment structure

includes restrictions on the use of interest and dividends?

What are the permitted uses of gains and losses on investment of endowment funds? The

creating instrument should specify whether the donor has restricted the use of gains and

losses. Some donors have historically imposed a restriction that would require reinvesting

such gains in order to increase the total amount of funds invested in the endowment. The

board may have included such limitations in creating the instrument.

What is the annual “pay-out” rate? Many endowments include a provision through which

the board periodically establishes a percentage of fair market value of the endowment at a

certain point each year to transfer out of the endowment and made available to the

organization, either with or without restrictions on how that amount may be used.

In addition to the creating instrument for the endowment, your land trust will also need a board

approved investment policy to clarify how investment decisions will be made, the types of

investments permitted, the board’s tolerance for risk and other key policy decisions. See Practice

3A2e for more on investment policies.

Accurate reporting about your endowment on your financial statements is particularly important.

Readers of your statements need to be able to distinguish gifts restricted to endowment from other

types of contributions, as well as distinguish the portion of your net assets that have been

restricted by donors to function as endowment.

Remember, if your land trusts is soliciting for a stewardship endowment, it is telling donors who

respond to the solicitation that the funds will be used for an endowment. You must restrict the

funds accordingly.





Distinguishing Donor Restrictions from Board Designations

Only donors can create restrictions. Boards may choose to designate funds for specific purposes,

but board designations are not restrictions. This distinction is a source of substantial confusion for

many land trusts, in part because the way they build the necessary reserves for stewardship is

often through a combination of gifts with donor restrictions and board designations.

Boards are only free to designate the portion of the land trust’s net assets (equity) that lack donor

restrictions. The remaining portions of the land trust’s net assets (equity) are net assets with donor

restrictions. Those net assets with donor restrictions may include multiple distinct restricted funds,

including one or more endowment fund. The net assets with donor restrictions share the common

characteristic of being subject to direction from the donors.

In contrast, the net assets without donor restrictions are fully under the control of the land trust

board. The board may decide that a portion of the net assets without donor restrictions should be

set aside for a specific purpose (for example, stewardship or acquisition of new fee lands). The

board creates board-designated funds by adopting a resolution recorded in the board minutes. The

resolution should describe the purposes of and any limitations on the time period for which the

board-designated fund may be used. Most importantly, the resolution should describe the process

through which the board-designated funds may be used. Does the board have to approve each use

of the board-designated fund, or may the executive director, board chair or a committee authorize

the use of the funds with the requirement that the use be reported to the board and correctly

recorded in the accounting records and financial reports?

It is extremely important to understand that because the board has the power to designate a

portion of the net assets without donor restrictions for specific purposes, the board also has the

power to undesignate those funds or to change the purposes for which they are designated. This

situation is very different from the case of funds with donor restrictions. The board does not have

the authority to change a donor’s restrictions without the donor’s consent or, in the case of

deceased donors, obtaining permission from the state.

So, while board designated funds and funds with donor restrictions are very, very different from a

legal and accounting standpoint, many of the same types of systems and processes are necessary to

effectively manage each. Just as the land trust must always be able to account for the receipt, use

and balance of each gift with donor restrictions, it must also be able to account for the board’s

establishment of a designated fund, the use of that fund and the remaining balance.



While the tracking demands are similar, the accounting is actually quite different. GAAP requires

nonprofit organizations to disclose whether the board has designated any portion of the net assets

without donor restrictions for specific purposes. That disclosure can be made on the actual

statement of financial position by listing the components of the net assets without restrictions or in

the notes to the financial statements.

You may need to obtain help with the design of your accounting and reporting systems, especially if

you are using QuickBooks, in order to meet these requirements. Your board will not be able to

provide effective oversight or make fully informed decisions if you do not clearly distinguish

between gifts with restrictions and those without, and between net assets that have donor

restrictions and those that do not. For more on GAAP requirements, see Practice 6B1.

Managing Combined Funds

As noted above, if you keep good accounting records, you do not need to keep each fund in a

separate bank account. Similarly, your accounting records should be designed to provide a report

on all stewardship and defense funds – regardless of the restrictions on them. It is very common for

a land trust to have a mix of stewardship funds that may include board-designated moneys that can

be spent for stewardship and defense, donor-restricted money where the principal can be drawn

down for extraordinary stewardship or defense needs, as well as endowment funds where the

principal cannot be used. Tracking these various restrictions is essential for meeting the Standards

and your obligations to the donors.

Government Grants and Awards

Understanding the nature of governmental funding agreements and the resulting requirements for

accountability can be challenging for land trusts. You may need professional assistance to establish

the systems and procedures needed to ensure compliance with your governmental agreements.

Getting it right is extremely important because failure to comply with governmental award

accountability requirements can expose the land trust to both extreme financial risk and substantial

reputational risk. Unfortunately, when dealing with governmental awards, the term restricted has a

somewhat different meaning and some different implications from those associated with gifts with

donor restrictions. However, while the specific accounting and reporting requirements are different

from those commonly used for gifts with donor restrictions, there are some similarities in the

tracking and recordkeeping required to maintain accountability for government gifts and grants.

https://tlc.lta.org/practice6b



Virtually all governmental funding agreements are written, providing very specific descriptions of

both the funder’s restrictions on how the funds may be used and detailed requirements for

compliance with myriad governmental laws and regulations. So, the starting point for

accountability for governmental funding is reading the funding agreement or contract carefully,

focusing on what type of agreement you have and then what are the permissible uses. The type of

agreement determines the accounting treatment.

Equally important is understanding the process the governmental entity will use to determine when

your land trust will actually receive the funds and whether the agreement requires the government

to pay the nonprofit the full amount. Many governmental agreements are based on the concept of

cost reimbursement, meaning that you are not entitled to receive the funds unless you can

demonstrate that you have actually incurred an allowable cost. In most cases, accounting for this

type of governmental agreement will involve tracking expenses that meet the restrictions of the

agreement as you incur them, reporting the allowable expenses incurred to the governmental

entity and requesting reimbursement. The submission of the request for reimbursement will trigger

the need to record both a receivable (government contract receivable) and an income item

(government contract revenue).

The nature of such agreements is to restrict the uses of funds for which you may be reimbursed, so

your land trust must keep track of expenses that meet those restrictions in much the same way

that you track the use of funds that meet donor restrictions. But, a key difference in the treatment

of such governmental cost reimbursement agreements is that the existence of such an agreement

rarely results in the restriction of net assets. While the funding agreement or contract may state

the total maximum amount of allowable expenses that your land trust will be able to request for

reimbursement, you will not record that total amount as income when you receive the agreement.

Instead, you will record the grant or contract income as you “earn” it, by incurring allowable

expenses. Given that you can’t record the income until you incur allowable expenses, there is not

any net income that would cause an increase in net assets with donor restrictions.



Another common method for disbursing governmental funds to land trusts involves governmental

awards for the purchase of land or easements for which the government does not transfer the cash

directly to the land trust but instead sends it (via cash or electronic transfer) to the closing where it

is recorded as part of the payment to the seller. If your land trust is awarded governmental funds

for such a purchase, you will need to read the award agreement very carefully to determine

whether the governmental entity considers the land trust to be the recipient of the award. If the

land trust is identified as the award recipient, you need to record the amount transferred by the

government to the closing as grant income and record the amount paid out to the landowner as an

expense or as the purchase of an asset. This recording of both income and expense (or acquisition

of an asset) is required even if the cash never moves through your land trust’s bank or investment

accounts. Of course, in this type of agreement, the government will only disburse the funds for

allowable expenses, thus ensuring that its restrictions are fulfilled.

1 · Land Trust Alliance · Land Trust Standards and Practices · Standard 6A2 Fiscal Health


STANDARD 6 FINANCIAL OVERSIGHT

A. Fiscal Health 2. Develop and implement a strategy to address any deficit-spending trends


WHAT IS DEFICIT SPENDING

On the most basic level, deficit spending occurs when a land trust has expenses without donor

restrictions (unrestricted expenses) that exceed income without donor restrictions (unrestricted

income) over the course of a fiscal year, essentially a net loss. This is not a situation in which there

is a temporary deficit because a grant is received in one year and spent in the next. A deficit-

spending trend occurs when land trusts report a series of net losses over multiple fiscal years that

are not related to the timing of fundraising or special projects expenditures. A deficit-spending

trend could spell trouble for land trusts that have made commitments to conserve land in

perpetuity. If you promise to do something forever, organizational stability and sustainability are

essential. It’s critical, therefore, for land trusts to understand the causes of their deficit spending

and to develop strategies to alleviate it.

To really understand whether your land trust is engaged in deficit spending, either in a single year

or over a series of years, you’ll need to dig a bit deeper to better understand your financial

statements. If your land trust has an audit or a review of its financial statements (see Practice 6C1),

look at the statement of activities included in your audit or review report. If you have a compilation

or another formal presentation prepared by a qualified financial professional, use the statement of

activities that they have prepared for your year-end report.

Nonprofit accounting standards (GAAP) require that nonprofits distinguish gifts and grants received

with donor restrictions from those for which the donor has not attached restrictions. GAAP requires

that the statement of activities breaks your income and expenses into two distinct classes:



2 Land Trust Alliance · Land Trust Standards and Practices · Standard 6A2 Fiscal Health


• An unrestricted class that includes all income received without donor restrictions and all of

the expenses incurred during the year

• A separate restricted class that reports gifts with donor restrictions and grants awarded

during the year and releases from restrictions that are supported by the expenses incurred

in fulfilling donor restrictions (including both new gifts with donor restrictions you recorded

in the current year and restricted gifts received in previous years)

In 2017, GAAP for nonprofits changed some of the terminology that is used to describe restricted

gifts and grants, but the core concepts needed to understand deficit spending remains the same.

To understand whether you have experienced deficit spending, look for the line toward the bottom

of your statement of activities labeled increase [or (decrease)] in net assets without donor

restrictions (formerly known as unrestricted net assets). If the number reported on that line is in

brackets, it is a loss and indicates deficit spending. Next, look at the statement of activities for the

two previous years to see whether your land trust reported an increase or a decrease in net assets

without donor restrictions (unrestricted net assets). If your land trust reported a net decrease in

this type of net assets in your most recent year and in one of the two prior years, you will want to

explore further to see if this represents a deficit-spending trend.

The statement of activities can be presented in two different formats. The most commonly used

format presents the income without donor restrictions (unrestricted income) and expenses in the

first column and the income without donor restrictions (either temporarily or permanently

restricted income) in the second column. In the third column, the income without donor

restrictions and the income with donor restrictions columns are added together to report the total

income and expenses. If your statements were prepared before the 2017 change in GAAP for

nonprofits, you may see two different columns used to separate contributions with temporary

donor restrictions from contributions with permanent restrictions. In these statements, the total

column will combine all three columns of income and expense. While the total column provides a

clear picture of the results of all of your activities – gifts with and without restrictions – for

purposes of determining whether you have experienced deficit spending, focus your attention on

the income and expenses that do not have donor restrictions.

If you are looking at the balance sheet, instead of the statement of activities, you can easily see if

there is a deficit or a surplus by looking at whether unrestricted net assets, excluding land, property

and equipment, show an increase or decrease at the end of the fiscal year.

If you have reported an increase in unrestricted net assets, it’s important to take your analysis a bit

further. There are some GAAP accounting conventions that can cause the statement of activities to



report an increase in net assets without donor restrictions, the equivalent of a positive net income,

even in circumstances in which your operating expenses have actually exceeded your income

without donor restrictions that is available for operations. In such circumstances, you are, in fact,

experiencing deficit spending in your operations. The most common cause of this situation is the

impact of raising and spending funds to purchase land. For example, if your land trust has made a

significant land purchase during the year, you’ll want to conduct a few more steps to be sure you

have not experienced deficit spending. The core challenge in this situation is that the purchase of

land is not recorded as an expense within the accounting definition of expenses and, consequently,

will not be included in the expenses reported on your statement of activities. Instead, the purchase

of land is recorded as the acquisition of an asset and will be reported on your balance sheet

(statement of financial position).

In order to have the funds needed to make the land purchase, your land trust has probably sought

and received gifts for that purpose. Whether you received the gifts (or grants) in the year you made

the purchase or in prior years and recorded the gift as increasing net assets with donor restrictions

(or, as previously known, temporarily restricted net assets) and then released or used in the year

you made the purchase, the result will be the generation of what may look like a large profit or

increase in net assets without donor restrictions. The appearance of a large profit happens because

the cost of the land is not included in the total expenses and is instead reported in the assets

section of your balance sheet.

If this is your situation, you should determine whether the total increase in net assets without

donor restrictions (net income) reported on your statement of activities is greater than or less than

the total amount of gifts used for the purchase. If the total increase is less than the total amount of

gifts used for the purchase, then your actual net income from operations is a net loss and is

evidence of deficit spending.

For accreditation, a land trust’s financial reports need to show an operating surplus existed at

the end of the most recent fiscal year, unless there is a statement from a board officer

explaining the reasons for the operating deficit. [Operating surplus is when unrestricted net

assets, excluding land, property and equipment, show an increase at the end of the fiscal year.]

WHAT CAUSES DEFICIT SPENDING?

Most simply stated, deficit spending occurs when the total of all income sources without donor

restrictions combined with the total release of funds with donor restrictions (based on the

expenditures that fulfill donor restrictions) falls short of the total expenses incurred for the year.

You spend more than you earn. What causes such a shortfall to happen? The most common cause



occurs when a land trust has been overly optimistic about the amount gifts, grants and other

income it will be able to generate during the year and fails to achieve the income levels it had

projected achieving in its budget. The next most common cause occurs when an organization

encounters unexpected expenses or when budget projections for expenses have underestimated

the full cost of operations for the year.

As noted in Practice 6A1, the annual operating budget is a projection. It is your land trust’s best

estimate of the income you will generate and the expenses you will incur during the course of your

fiscal year. The process of developing your operating budget involves making detailed estimates of

each different type of income you are planning to obtain. In making these estimates, land trusts

consider their past experience in obtaining these funds. If they are estimating significant increases

in any of the categories, their budget notes should describe what they believe will cause those

changes to happen (for example, devoting more time to donor development, expanding a

successful fundraising event and so forth).

Similarly, with expenses, your budget process should include laying out detailed plans for all the

staff positions you will have, using current payroll tax and fringe benefit costs and identifying any

other changes in expenses that will result either from inflation or from increasing your investment

in various program activities or changes in overhead or other operating costs.

Despite all your attention to detailed analysis and thoughtful projection of both income and

expense, life is not totally predictable, and things happen that can prevent your estimates from

being realized. Consequently, it is extremely important that your land trust has monthly financial

reports that allow you to compare what actually happened year-to-date to your budget plan

projections. To be really useful, your financial reports will need to use the same format and

categories for defining income and expenses as you used in your budget so that you can compare

what actually happened to what you had planned. Some land trusts use a statement of activities

reporting format that is broken into three components: operations, investment activity and special

projects. Each are budgeted separately with an additional capital budget.

Once you have this comparison of what has actually happened to your budget plan, the next step is

to project what is going to happen for the remainder of your fiscal year. If your income is falling

short of your projections, will it be possible to increase or refocus your efforts so that by the end of

the year you will hit your targets? Or, are the shortfalls so significant or were you so over optimistic

that there is little chance that you will be able to achieve your overall income goals? If so, you need

to decide how to reduce expenses and implement your plan quickly or face the real possibility that

by the end of the year you will have a deficit, a net loss, which will erode your reserves and

potentially impair your sustainability.




An easy strategy for spotting revenue shortfalls before they become a crisis is to insert revenue

benchmarks into your budget reports. If you don’t reach a benchmark (x amount of money earned

by a certain date), your team should discuss how to adjust going forward to meet your revenue

goals or reduce expenses.

One reason some land trusts fail to take action to address deficit spending in time to prevent a

year-end net loss lies in inadequate accounting and financial reporting. Many land trusts have

difficulty establishing and maintaining accounting systems that can handle recording the receipt

and use of gifts with donor restrictions or grants. Accounting systems that combine gifts with donor

restrictions with income sources without restrictions as total income can produce misleading

internal reports in which it appears that income is exceeding expenses. However, when the audited

or reviewed financial statements correct these errors and accurately reflect the need to use certain

gifts only for the purposes specified by the donor, it becomes clear that the land trust has operated

at a loss.

Another potentially confusing contributing factor to operating deficits is the use or lack of use of

funds provided to cover stewardship expenses. To think this issue through, you need to understand

your land trust’s policy about accepting stewardship gifts with donor restrictions. If those gifts are

not further restricted (by the donor) to unusual or specific types of stewardship expenses (for

example, unusual stewardship costs or stewardship projects costing in excess of x dollars), then

GAAP accounting calls for you to use those restricted funds to meet ordinary stewardship expenses.

On a practical level, you need to figure out how much you are spending on stewardship expenses

and record a release from net assets with donor stewardship restrictions for that amount. If you

follow this practice, it will immediately increase the income available for meeting your operating

costs and reduce your apparent deficit.

What’s the catch? Well most land trusts are working very hard to build up their stewardship

reserves. Consequently, they would prefer to keep donor-restricted gifts for stewardship invested

and growing and not use them to meet routine stewardship expenses.

If your land trust has sufficient unrestricted operating income to meet all of its routine stewardship

expenses, you may want to consider establishing a board-designated stewardship fund that will be

part of your net assets without donor restrictions. Your board can direct that an amount equal to

any release from net assets with donor stewardship restrictions be added to the board-designated

stewardship fund. This approach will help build the essential stewardship reserves your land trust

needs to fulfill its promise of perpetual stewardship. The impact of releasing funds from your net

assets with donor stewardship restrictions will still be to increase the net assets without donor

restrictions and create an apparent operating surplus, but the increase in the board-designated



stewardship fund component of your net assets without donor restrictions will be consistent with

your board’s determination to build stewardship reserves. You will want to be very careful in your

reports to the board to show that a portion of the unrestricted net assets are actually board

designated for a specific use; otherwise, it may seems as if there is more cash available for other

purposes than there actually is. See Practice 6A5 for more information on stewardship and defense

funds.

Another potential challenge in understanding the financial results of your operations is the impact

of investment gains and losses. GAAP accounting requires that nonprofits record unrealized gains

and losses on investments, as well as realized gains and losses. This requirement means that your

accountant is posting an entry to record either the increase or decrease in the fair market value of

your investments in equities. It’s important to be able to distinguish the impact that these

unrealized gains and losses on investments have on your total net income. When the stock market

is going up, if you have added your unrealized gains into your operating income, they may be

masking an actual deficit. Similarly, when the market is going down, including the unrealized losses

in your net income may create net losses and give the appearance of deficit spending. While

unrealized gains can create the appearance of a positive net income, they may disappear with the

next change in the market, leaving you with a deficit-spending reality. To avoid this situation,

consider reporting gains and losses in a separate section at the bottom of your income statement

or statement of activities in a section often called other income. Adding this separate section allows

you to focus your attention on the separate calculation of ordinary net income, which appears right

below your ordinary expenses and represents a clearer picture of your operating activity. Your land

trust may want to format both its annual budget and its statement of activities in three segments –

operations, investment activity and special projects – to help readers make the useful comparison

between your budget plan and what has actually happened.

There are certain circumstances when the board of a land trust determines that a deficit budget

plan is justified (the operating budget will project income that is lower than the projected

expenses, resulting in a planned net loss). Boards can responsibly approve a deficit budget plan

only if the land trust has built substantial net assets without donor restrictions and has developed a

detailed plan for investing in building its capacity to achieve future goals. For example, some boards

have decided that in order to ensure the land trust’s sustainability over time, they must increase

their capacity to reach, motivate and retain individual donors. After agreeing on a detailed plan to

increase individual giving, including adding staff or using consultants, the board may agree to self-

fund this type of capacity building by allowing the use of reserves (part of the net assets without

donor restrictions) to meet these costs. Of course, monitoring progress will be extremely important

in such situations. As part of such a plan, the board will identify the progress indicators it will watch




throughout the year, including number of new donors, percentage of donors retained, average gift

size and so forth. If your board does approve a deficit budget, you’ll want to keep a record of the

reasoning behind their decision to refer to as the next fiscal year unfolds. This will be especially

helpful for accredited land trusts that will need this information for their renewal application.

WHY SHOULD YOU BE CONCERNED ABOUT DEFICIT SPENDING?

Because your land trust has committed to stewarding its land and conservation easements in

perpetuity, it is essential that your organization is financially sustainable. To ensure sustainability,

your land trust must build its net assets or equity. Net assets function as your cushion—the capital

that will make it possible for you to survive in hard times and give you the capacity to innovate,

take risks and invest in building your capacity.

Net assets are increased by having income exceed expenses (expressed in the nonprofit accounting

term as increase in net assets, which is equivalent to the term net income in business accounting).

Conversely, the net assets are reduced by experiencing net losses or decreases in net assets in

nonprofit terminology. You can also think of this as surplus (unrestricted net assets, excluding land,

property and equipment).

Deficit spending results in net losses, which reduce your net assets that, in turn, risk your

sustainability and, if severe, impair your ability to continue to operate.

Deficit spending also increases the likelihood that your land trust will end up improperly using

funds with donor restrictions for purposes other than those specified by the donor. In severe

deficit-spending situations, a land trust may not have cash available to meet urgent expenses

without tapping into resources it accepted with donor restrictions. Land trusts that experience net

losses in funds without donor restrictions must closely monitor those net assets to be certain that

the portion of the net assets that is available for operations (not tied up in land or other fixed

assets) has not become negative. Operating with negative net assets available for operations is a

red flag warning that the land trust may be using funds with donor restrictions for purposes other

than those specified by the donor.

STRATEGIES TO ADDRESS DEFICIT SPENDING TRENDS

Land trusts experiencing deficit spending—especially if the deficit spending continues for several

years or if in a single year it is so significant that it has eroded a substantial portion of their



unrestricted net assets—will need to consider both short-term and long-term strategies to reverse

the deficit-spending trend.

For accreditation, a land trust’s financial records must not show a substantial deficit-spending

trend. A land trust with substantial deficit spending will need to develop and implement a

strategy to address deficit spending before it becomes a trend. See also Practice 3A2 for the

board’s role in providing oversight of the land trust’s finances and operations.

All deficit reduction strategies involve either increasing income or reducing expenses or both.

Strategic thinking is essential before undertaking either or both efforts. Timing is a significant issue

in the evaluation of all potential deficit reduction strategies.

Here are some questions to help your land trust evaluate potential strategies to reduce or eliminate

deficit spending:

1. How significant is our deficit spending in comparison to our total budget? Compare the net

loss in funds without donor restrictions (decrease in net assets) on your statement of

activities to your net assets without donor restrictions (on the balance sheet). Focus on the

portion of the net assets without donor restrictions that is available for operations. What

percent of the net assets without donor restrictions available for operations does your

decrease comprise? A decrease or net loss that is greater than five percent of your net

assets without donor restrictions is cause for serious concern. But, even a smaller net loss

reflects the reality that you are making negative progress toward the goal of increasing

your sustainability.

2. How quickly do we need to see significant increases in income or reductions in expenses or

both? While the size of the deficit in comparison to your net assets without donor

restrictions (computed above) is a starting point for evaluating the urgency of taking action

quickly, you will also need to consider your cash position. If your deficit spending has

drained your cash, and you are having difficulty meeting payroll or other obligations, you

will need to act quickly.

3. Which income items have the greatest potential to produce meaningful increases in the

short term? First, determine which income items have fallen short of your budget

projections and, if possible, figure out why they have fallen short. If a portion of the cause

of the shortfall is delays in your solicitation of gifts, you may want to focus on following

through with the original plan.




If you are in an urgent situation, personal requests to donors who have the greatest

commitment to your land trust will probably produce the most immediate results. While

scheduling additional fundraising events or adding another mail appeal may accelerate

receipt of gifts, it may not actually increase the total gifts received from those who are less

committed or less able to increase their giving.

4. Which income items have the greatest potential to produce long-term increases? Hopefully,

you’ve discussed this question as part of your strategic planning. Most significant increases

in income require investment of both time and resources to achieve. One common

dilemma is striking the most productive balance between investing time and effort in

seeking foundation or government grants versus investing in building your base of

individual donors. Of course, ideally, you would work on both. But, in a deficit-spending

situation, you don’t have the resources to do both. So, you will need to decide about timing

your investments. Would it be more productive to accept a small operating loss this year in

order to focus on building your donor base, or should you delay working on increasing

individual donations until you have stabilized your income through obtaining more grants?

Another challenging issue for some land trusts is determining the effort to expend in

seeking contributions without donor restrictions for operations, as opposed to seeking gifts

with donor restrictions either for capital projects or for special programs. While new

donors are frequently attracted through special purpose requests, in the long term your

land trust will want to convert as many supporters as possible to providing operating

support without donor restrictions based on their confidence in your capacity to make the

best possible use of their gifts.

5. Which expense items can be reduced significantly in the short term? This is another urgency

question. If your losses are so large that they risk significantly reducing your net assets

without donor restrictions, or your cash position has deteriorated to the point where you

are having difficulty paying bills on time, you will have to act quickly to reduce expenses.

For most staffed land trusts, personnel costs are the largest operating expense item, so any

significant expense reduction will probably need to focus on personnel costs. Many efforts

to avoid cutting personnel (for example, reducing spending on supplies or travel) often fail

to save enough money to make a meaningful difference and have the unintended

consequence of limiting the effectiveness of staff efforts.



6. Which expense items can be reduced significantly from a long-term perspective? Again,

personnel costs are generally the largest operating expense for staffed land trusts. But,

serious consideration must be given to the impact of staff reductions, both in terms of

achieving your mission and in terms of improving your financial position. If staff reductions

result in placing an overwhelming workload on the executive director or other key staff, the

actual outcome may be reduced capacity to generate income and increased costs that arise

from turnover.

However, there are some longer-term questions that should be evaluated. Have earlier

efforts to do bare-bones staffing resulted in expecting staff to perform functions that they

are actually not well prepared to do? If so, reorganizing staff, increasing volunteer hours

from your supporters or considering contracting for professional services may provide

some cost-effective alternatives.

7. Will any of the proposed expense-reduction strategies have a negative impact on our ability

to generate income in the short term? This is a critical question. First, look for expenses that

are directly related to income generation (for example, staff positions and other expenses

funded through grants with donor restrictions). In most cases, reducing or eliminating the

expense will simply result in delaying or failing to fulfill the restriction. Less direct, but

perhaps more significant, some expense reductions will limit the ability of the land trust to

connect with donors effectively.

It may be possible to re-do your budget to allocate a fair share of some expenses that you

have previously considered to be general operating costs to restricted projects. For

example, if you have obtained funding with donor restrictions for a restoration project and

budgeted only the direct cost of employing staff and contractors to work on the project,

you may want to include a portion of your administrative costs (accounting, supervision of

the project by the executive director and so forth) as costs that meet the donor’s or

grantor’s restrictions. This approach could permit you to justify the use of the gifts with

donor restrictions and relieve your operating deficit.

8. Are there any proposed expense reduction strategies that will have negative impacts on our

ability to generate income in the long term? Choosing to focus efforts on grant funding,

which offers a larger return in the short term but doesn’t help move the land trust forward

with strengthening its individual giving program, is the classic example. Another example is



trying to save on financial management costs by working with an underprepared staff

member or contractor. Such a plan often results in a lack of timely, useful information for

decision-making and extensive demands on the executive director’s time to pull

information together in preparation for board meetings, financial reviews or audits.

9. Are there additional investments or expenses that could produce a net increase in income in

the short term? Whether its travel money to get the executive director to a gathering of

grant-makers or going forward with badly needed improvements in the website, there may

be relatively small expenses that could make big differences in the land trust’s ability to

generate income. In the fundraising realm, brief consultations to hone the major donor

campaign or improve the direct mail may have fairly immediate results. What’s tough is

evaluating what the actual net gain will be from any of these investments.

10. Are their additional investments or expenses that could produce a net increase in income in

the longer term? It may be somewhat easier to evaluate the potential impact of the longer-

term investments, in part because so many fund development strategies really do require

time to reach their full potential. Fortunately, it’s possible to learn from the experiences of

other land trusts and also from a variety of national studies of strategies that increase

return on investment in fundraising.

11. What are the donor relations and public relations implications of the financial strategies you

are considering? As the board considers any of the income enhancement or expense

reduction strategies, it’s important to try to view the resulting change from the perspective

of donors and community members. Perception does not always match reality, so donors

may not see the wisdom of even a very well-thought-out decision. Foundation grant

seeking is the classic example. Nonprofits that have experienced deficits may feel that their

commitment to thrift and spending as little as possible on operations is evidence of

commitment to tight management. But, foundation decision-makers often perceive

unreasonable expense cuts as counter-productive and evidence of poor planning. Cost

cutting in stewardship and community engagement may also result in negative perceptions

about the land trust’s capacity to steward and its interest in serving the community.

Developing Your Strategy to Address Deficit-Spending Trends

After you’ve worked through your analysis of the cause of your deficit spending and your options

for increasing income or reducing expense, the next step is to test the financial impact of

alternative approaches. Start with the strategies that seem most promising and clarify the timeline



you would use to implement them. Then, translate that timeline into a financial projection, first for

the impact in the current fiscal year and then for impact in the next two or three years. Beware of

trying to be overly detailed in your projections for two or three years from now. Focus instead on

the major changes your plan will bring and document the assumptions that you are making about

what the results will be. For example, if you are considering a new strategy to increase the total

number of donors and also a strategy to specifically increase retention of larger donors, it is worth

taking time to project your expenses and to document your specific targets (number of donors,

retention rate and so forth). Getting the details clear on these items will be much more important

than trying to predict exactly whether the utilities for your office will increase by 2 or 4 percent

over the next three years. For accredited land trusts, having this plan will be an important part of

your next renewal application.

As you work through your options, be particularly cautious about inadvertently using the “just try

harder” strategy – that is, the assumption that with no addition of staffing or other resources, the

same investment in staffing and other costs will produce better results. It might, but only if you

have redirected the resources from the patterns you have been following. Doing the same thing but

expecting different results is unlikely to produce the changes you are seeking!

Once your team has agreed upon your strategies to reduce deficit spending and, hopefully, to

increase net income without donor restrictions, the next step is to implement the plan and monitor

your progress carefully. One big challenge is that most individual giving occurs in the last quarter of

the calendar year, so waiting until the end of December to evaluate whether your new strategies

are working may well result in another year of deficit spending. Instead, you should identify the

progress indicators that will reveal if your new strategies are on track. Some examples of progress

indicators may be the number of grant applications submitted for support without donor

restrictions, the number of new contacts added to the database, the number of face-to-face

meeting with potential donors, the number of board members who introduce the land trust to a

friend, the number of attendees at community engagement activities, the number of mentions on

social media and so forth.

1 Land Trust Alliance · Land Trust Standards and Practices · Standard 6A3 Fiscal Health Accreditation indicator element Last revised May 16, 2018


A. Fiscal Health 3. Assess the nature and variability of revenue and seek to diversify funding sources


INTRODUCTION

Land trusts are in the business of perpetuity, which means they must be sustainable organizations.

One of the most important ways land trusts can ensure they will be around to keep their

commitments is to diversify their funding sources. Similar to the way that a well-diversified

investment portfolio helps investors and retirees, it can pay off to diversify your revenue streams. If

you rely heavily on one strategy, such as a large annual event, your land trust’s overall success and

growth becomes dependent on that single event and its outcome. A diverse funding stream will

also insulate a land trust from financial shock if a major donor or foundation shifts their giving

priorities or the stock market crashes.

While we can’t always eliminate risk, we can mitigate it. This is where your expanded revenue

portfolio steps in. By investing in different areas, a downturn in one wouldn’t likely impact other

components in your portfolio. Instead of breaking all the eggs in your basket, you’ve just dropped

one. The first step to creating a move diverse funding stream is to have a thorough understanding

of where your money comes from and the likelihood of it continuing at current levels. Once you

know what you have, you can take steps to diversify and expand your funding and set your land

trust on a sustainable path for the future.

If you’re currently using a limited number of strategies, you’re missing an opportunity to employ

other methods that can help expand your audience, increase revenue and protect the health of

your land trust in the event of a downturn.



UNDERSTANDING YOUR MIX OF INCOME SOURCES

Successful land trusts support their work by developing a variety of sources of income including

individual contributions, foundation grants, government awards, planned giving, investment

income and fees for services they provide. Of course, not all sources of income are available to

support all types of costs. Quite frequently, gifts and grants from individuals, foundations and

governmental entities must be used exclusively for acquisitions of fee land and easements. Even

gifts and grants that are available to meet operating expenses frequently are restricted to meet the

costs of specific programs or specific types of expenses.

Understanding your land trust’s current financial health and setting goals to ensure sustainability

will require understanding the make-up of your current mix of income sources. It may be helpful to

visualize the sources of income available to support your operations (including management,

fundraising, outreach and education, stewardship and so on) as a pie chart. What portion of your

operating income pie is provided by individual donors, foundations, governmental entities,

mitigation funds, fees for services, investment income and other significant sources? Next, look at

each slice of the pie and evaluate whether the revenue comes from a variety of sources (for

example, fees from the public) or if there is significant concentration (for example, a high

percentage of individual giving coming from a few donors).

Once you have the current mix of income streams clearly in mind, you can begin thinking about the

extent to which you expect that each of these sources will continue to provide support. While

individual donors frequently make gifts to the same nonprofit again and again, foundations often

make changes in their priorities or impose limits on repeat funding that may make multiple repeat

contributions less likely. Government awards may or may not be likely to provide repeat funding,

depending on the priorities of the funder and the extent to which the governmental entity is itself

re-funded or fully funded. Land trusts that provide fee-based restoration or environmental

education services often find that once a market for their services has been established, they can

sustain or increase fee income quite dependably. Investment income is of course dependent on the

amount that can be invested, the length of time it can remain invested, the investment policy of

the organization and the fluctuation of the market.

Part of understanding your income mix involves looking at how it may have changed over the past

three to five years. It’s often very helpful to create a graphic comparison of both the amount of

income each of your major sources has provided over the time period you selected and of the

percentage of your operating income provided by each major source over that same time period.


All of this analysis will prepare your board to talk through the important question of whether your

sources of income are sufficiently diverse to ensure your ability to continue operating even if one of

the larger sources reduces their support or declines to provide any ongoing support. There is no

one right mix of income sources for a land trust. Instead the path to financial strength and

sustainability requires building and sustaining a diverse mix of sources. The old adage “don’t put all

your eggs in one basket” provides the key to understanding why income diversification is

important. Land trusts that become strongly dependent on a single source of income are more

vulnerable to sudden funding reductions than those that have developed multiple income streams.

A Note on Funding Acquisitions

While you could try the same pie chart visualization of the income mix for your acquisition projects,

you may find each deal ends up relying upon a significantly different mix of income sources. Some

purchases can be accomplished almost entirely through a large governmental award, while others

require grants from multiple foundations and large donors. Some purchases involve the use of

borrowed funds, which while not a source of income, is a source of cash. While most land trusts are

always working to develop new potential sources of support for acquisitions and special projects, a

pattern of returning again and again to the same sources for capital projects does not pose the

same level of risk as the lack of diversity of income sources to support operating expenses.

Relationship between Diversity of Income Sources and Uncertainty

Land trusts, like most nonprofit organizations, live with a certain amount of uncertainty whenever

they try to project the income that will be available for their operations or to complete specific

projects. Diversifying the mix of income streams your land trust can access is a key strategy for

coping with this uncertainty. Land trusts that develop multiple significant streams of income reduce

the risk of being unable to generate sufficient resources to cover operating expenses or execute

important projects.

Individual Donors

Your land trust will want to evaluate the relative certainty with which you can project each of your

major income streams. Land trusts that have developed significant support from a broad base of

individual donors often find that they can be fairly accurate in projecting the total funds that will be

available from individual donor support (including all of the multiple ways that individuals give).

They can increase the accuracy of their projections by analyzing donor support in segments

reflecting both gift size and history of supporting operations or special projects or both.


Fundraising professionals have identified several key indicators that should be tracked for each

segment of donors, including the number of donors in the segment, the average gift size in that

segment and the retention rate – the percentage of donors who repeat their support in the

subsequent year. Analysis of key indicator trends permits relatively accurate projection of the funds

that will be available in the subsequent year and for specific types of special projects. It also

provides important baseline information for measuring progress achieved through individual giving

capacity-building efforts.

Individual Donors and Private and Community Foundations

Understanding the relative certainty or uncertainty of foundation support is made more complex

by the reality that some foundation gifts actually function as an extension of individual donor

support. In those situations, a donor chooses to make a portion of or their entire gift through the

private foundation they control or through a fund in a community foundation they advise. The

“certainty” of such donor-directed foundation gifts corresponds to the “certainty” of individual

gifts.

Foundations

In contrast to private and community foundations, some foundations work through a more formal

structure that includes identification of funding criteria and acceptance of applications that meet

those criteria. These foundations frequently have professional staff who play key roles in

establishing giving priorities and evaluating proposals for support. Frequently, positive relationships

among land trust leaders and foundation staff are instrumental in opening up access to foundation

support, but the continuity of an individual foundation’s support for a land trust may be strongly

influenced by other factors. Because these more formal foundations frequently review and revise

their giving priorities, or develop explicit limitations on how frequently they will fund an

organization, or change staff or board members, there is generally less certainty that a specific

foundation will continue to provide support at current levels going forward. Clearly, having

established relationships and positive track records with multiple foundations can mitigate the

overall uncertainty of foundation support but will probably not eliminate it.


Investment Income

Investment income is of course subject to fluctuations in the performance of equities, bonds and

other investment vehicles. While the volatility of investment income can be reduced through sound

investment policies and effective investment management (see Practice 3A2e), the normal

fluctuations of the market will still impact the actual results achieved. Land trusts that have

endowments can reduce the uncertainty of the availability of investment income through

investment policies that establish pay-out rates. Payout rates can be calculated as a percentage of

the fair market value of the endowment as of a specified date or follow formulas like the Yale

Model (also known as the endowment model), which calls for a weighted combination of a

percentage of the prior year spending and a percentage of the average portfolio value. Of course,

market fluctuations will eventually result in shifts in the market value of the endowment and

consequent shifts in the pay-out amount. Shifts in overall market performance will also impact

access to foundation grants because most foundations also have policies establishing pay-out rates

as percentages of the market value of their portfolios.

Other Income Streams

In addition to the major income streams, individual land trusts often obtain revenue from a variety

of other sources, including:

• Fee-for-service activities. Land trusts that provide restoration or other services under fee-

for-service contracts with governments or other entities may be able to negotiate such

agreements on a multi-year basis, thus reducing uncertainty in the short term. However,

agreements that tie payment to performance or achievement of specific targets may bring

more uncertainty to the funding picture if weather or delays by partners have the potential

to slow down the achievement of goals.

Some land trusts have developed income streams from their ability to play an intermediary

role in negotiating and, in some cases, completing acquisitions of land or easements that

will then be transferred to another entity (governmental or nonprofit) with provisions for

the land trust to be compensated for its work in putting the deals together.

• Project fees. Many land trusts require land or easement donors to pay fees to offset the

land trust’s costs in putting a project together. Of course, these income streams involve

uncertainty regarding whether and when a transaction will be completed, contributing to

overall uncertainty on the availability of resources to support operations.



• Mitigation funds. Land trusts that have been directly awarded mitigation funds or are

permitted to seek support for specific activities from mitigation funds managed by another

entity frequently have relative certainty on the availability of funding for a multi-year time

horizon.

As you reflect on the uncertainty inherent in each of the income streams your land trust will rely

upon, the value of developing multiple significant streams of income becomes clear. Diversity of

sources is essential to ensure that you will have the support you need even in years in which one of

your significant sources is significantly delayed, reduced or even disappears.

For accreditation, a land trust must not overly rely on a single source of income. A land trust

with a concentrated source of funding will need to diversity funding sources. See also Practice

3A2 for the board’s role in providing oversight of the land trust’s finances and operations.

STRATEGIES TO DIVERSIFY YOUR INCOME MIX

While probably almost every board would agree that having a diverse mix of income sources is an

important step toward financial health and sustainability, the question of how to actually diversify

your income mix is more complex. It is tempting to just step forward with arbitrary goals for shifting

your mix, envisioning a significantly different income source pie chart three or five years from now.

But before setting your income mix targets, conduct some in-depth analysis to identify the most

realistic opportunities for diversifying the income mix for your land trust.

You can begin your efforts by completing a SWOT (Strengths, Weaknesses, Opportunities and

Threats) analysis for each of your current income streams and for any additional income streams

you are considering. Like all SWOT analyses, your SWOT analysis for each income stream will begin

by reflecting on your current strengths and weaknesses in retaining and growing this income

source. Consider the percentage of your total operating income this source provides and the extent

to which your dependence on this source has increased or decreased over the past few years.

Consider also the investment your land trust has made to produce the income results from this

stream.

Your analysis of weaknesses associated with this income stream should include identifying the

barriers that have prevented your land trust from increasing the net results from this stream,

including potential lack of investment in needed staff or systems or limitations in your board’s

capacity or willingness to assist with opening doors.




Your analysis of opportunities should include an environmental scan that helps you understand the

potential for increasing support from this income stream. For example, in reflecting on more formal

foundation support (as opposed to foundation support that functions as a component of individual

giving), seek information about any anticipated changes in priorities, limitations on the period of

support and anticipated changes in foundation staff or board members for any of the foundations

providing significant support to your land trust.

Meaningful analysis of opportunities for growing individual donor support needs to be segmented

and reflect your understanding of the extent of your access to each segment. For example, if major

donor gifts are a significant segment of your support, look at your prospect lists and review donor

lists from other organizations with similar appeal to understand the potential for expanding this

segment.

Your analysis of the threats associated with each stream will mirror your opportunity analysis but

may include some specific threats that your land trust must overcome – for example, reputational

issues, relationship breakdowns, compliance issues and so forth. Understanding the age breakdown

of your individual donor base and prospect pool is also an important factor in predicting future

revenues. Quite often, major donors skew older, and you should have a plan in place to ensure

sufficient new donors are being cultivated to replace attrition.

Once you have completed your SWOT analysis of each of your current significant income streams,

you can begin evaluating other types of income that your land trust has not yet accessed. Use the

same SWOT analysis framework, focusing on your organization’s strengths and weaknesses in

relation to accessing, building and retaining each of the income streams.

With all of these analyses in hand, you will have much of the information you need to identify the

income streams that offer the most promising opportunities to diversify your land trust’s income

mix. In your review, look for both current income streams that could be expanded and new streams

that could be developed productively. For each of these promising streams, take a deeper look at

your land trust’s capacity to expand or develop the stream, focusing intently on staff and board

capacity and identifying additional investments that will need to be made. In almost all cases,

additional investment of time or money will be needed to significantly increase the resources

provided by any income stream.


Simply resolving to do better – whether it involves increasing the number of members or the

number of major donors – without making additional investment of time or money or redirecting

the use of existing resources – is unlikely to succeed. Consequently, you’ll want to develop a three

to five year financial projection for growing each of the income streams you’ve identified as

promising. To create this financial projection, lay out the steps that staff and board will need to

take and create a realistic timeline for when those steps can be completed. Also, identify the

resources needed to support completing those steps.

Next, think about how your land trust can pay for the additional costs involved in enhancing any of

the income streams. Some land trusts may be able to identify foundation funders or donors willing

to make special contributions to support such capacity-building efforts. Other land trusts may have

reserves, which the board is prepared to dedicate to meeting these costs. But many land trusts will

not have either of these sources available and will need to consider strategies for redirecting the

current use of resources (staff, board and volunteers). If you are considering redirecting your

current resources, be sure that your financial projections include the impact of the shift of efforts.

For example, if you decide to focus more resources on building major donor relationship and

reduce the amount of effort you direct to multiple fundraising events, you will need to anticipate

some reduction (or lack of growth) in the income your fundraising events will generate.

It’s important that you focus on two work products from this effort. First, your analysis should

identify income streams that you will focus your efforts to expand or develop. Second, you should

create a three- to five-year financial projection of both the income and the costs, supported by a

detailed work plan and timeline. With these financial projections and work plans in hand, you will

be able to establish reasonable targets for how your mix of income streams will shift over the

three- to five-year timeframe.

1 · Land Trust Alliance · Land Trust Standards and Practices · Practice 6A4. Fiscal Health

Accreditation indicator element Last revised November 15, 2019

STANDARD 6. FINANCIAL OVERSIGHT

A. Fiscal Health 4. Build and maintain sufficient operating reserves to sustain operations


WHAT ARE OPERATING RESERVES

There are two distinct ways to think about this question. For those focused on their land trust’s

long-term financial health and sustainability, the concept of operating reserves most closely

parallels the portion of the land trust’s total net assets that is available for operations. Those

confronting difficult challenges in having cash available when needed to meet payroll and other

operating expenses will probably focus more urgent attention on cash and very short-term

investment account balances and cash flow projections. Both perspectives are useful. While land trusts should establish dedicated or restricted funds for long-term stewardship and legal defense

costs (see Practice 6A5), operating reserves allow an organization to meet day-to-day obligations

during a period of financial distress.

For accreditation, operating reserves are defined as the land trust’s unrestricted net assets at

the end of the fiscal year, but excludes land, property and equipment and any funds designated

for specific purposes, such as stewardship and defense. Any restricted net assets or board-

designated funds specifically restricted or dedicated to an operating reserve are also included

as counting toward the operating reserve.

Why Do Land Trusts Need Operating Reserves?

It’s important to remember that the economy naturally goes through cycles of expansion and

contraction, which land trusts need to be prepared to take advantage of and to withstand. Land trusts with strong operating reserves were in a much better position to manage the Great

Recession of 2008 than those who failed to set aside adequate reserves. Apart from being prepared





for the inevitable downturns in the economy, there are a number of other reasons why your land

trust needs operating reserves:

• While you will do your best to make accurate projections of the amount of cash you will

receive from various sources during the year, your estimates may fall short.

• Bad things sometimes happen to good people and good organizations. Whether a major

weather event cancels your big fundraiser or a major donor experiences a sudden financial

reversal, you need a cushion to sustain your work despite adversity.

• You want to be sure to meet your payroll and to pay your bills on time.

• You don’t want staff or board members to be distracted from important work by dealing

with cash problems, trying last minute strategies to increase the availability of cash or

asking staff or creditors to wait for payment.

• You want to move forward with the work you outlined in your strategic plan and annual

budget and not suffer disruptions by cutting expenses to preserve cash.

• You want to be able to invest some of your cash in long-term investments, which will

generally yield a higher return. To make such investments and sustain them, you will need reserves sufficient to cover your operations when cash flows in more slowly than

anticipated or expenses significantly exceed your budget plan.

• You want to avoid the possibility that you will misuse donor-restricted funds. If you have

inadequate operating reserves in times of financial crisis, you may be tempted to spend

funds with donor restrictions for unrestricted purposes, putting the donor’s project or the

organization at risk.

Operating Reserves from a Financial Statement Viewpoint

To understand and evaluate your land trust’s operating reserves, you will need to focus attention

initially on the net assets without donor restrictions. Once you’ve completed your analysis of this

component of net assets, you may want to consider whether some portion of the net assets with

donor restrictions may be also be a component of your operating reserves.

Your land trust’s net assets without donor restrictions reflect the accumulation of positive net

income without donor restrictions (and the impact of any net losses) over the years of its existence. Each time your land trust’s income without donor restrictions exceeds its expenses, your net assets



without donor restrictions grow. And, each time your income without donor restrictions falls short

of your expenses, the unrestricted net assets are reduced.

Within the broad category of net assets without donor restrictions, there are several subcategories

that will be important in considering the question of operating reserves. Start by looking at your

audited or reviewed financial statements, focusing on the balance sheet (also known as the statement of financial position). If your land trust doesn’t have an audit or review, plan to share the

following discussion with the financial professional who is helping you prepare your financial

statements and ask that they make the following distinctions to aid your analysis.

To determine the ideal amount of operating reserves, begin by identifying the portion of your net

assets already available to function as operating reserves. This figure will be the portion of your net

assets without donor restrictions that is not invested in fixed assets nor is board designated for

other specific purposes, such as stewardship reserves. Once you know what operating reserves

your land trust already has, the board should determine your target for operating reserves, typically stated as a percentage of your annual operating budget.

TOTAL NET ASSETS WITHOUT RESTRICTIONS –

(PORTION OF NET ASSETS WITHOUT RESTRICTIONS INVESTED IN FIXED ASSETS + PORTION IN

BOARD-DESIGNATED FUNDS)

= ASSETS AVAILABLE TO MEET OPERATING EXPENSES

Your audited or reviewed statements or the year-end statements prepared by a financial

professional may or may not break down the net assets without restrictions into components on

the balance sheet itself. If your statements don’t show that breakdown, you may find them in the notes to the financial statements. (Starting with 2018 financial statements, however, board-

designated net assets must be disclosed, either in the notes to financial statements or on the

balance sheet.) If you don’t find the breakdown in the notes to the financial statements or your

land trust does not have an audit or review, you may need to work with a financial professional to

determine what portion of your net assets without donor restrictions is actually available for

operations.

For accreditation, a land trust’s annual audited, reviewed or compiled financial statements

must include the footnotes and disclosures and show unrestricted, board-designated and restricted net assets. These statements will help you calculate your operating reserve. See

more about financial statements in Practice 6C1.




Once you have determined the portion of your net assets without donor restrictions that are

available for operations, you will want to consider whether your analysis of operating reserves

should expand to include portions of your net assets with donor restrictions (see Practice 5B3 for examples). To do this analysis, you will need to consult your records of what specific restrictions

apply to each part of your net assets with donor restrictions. Your land trust should maintain a

schedule of this information to be sure that you are honoring donor restrictions properly. You may

also find the schedule displayed in the notes to financial statements included in your audit or

review report.

Review the list of restrictions on the components of your net assets with donor restrictions to sort

the total into two parts. What part of your total net assets with donor restrictions reflects funds

that may be used in future periods to meet ongoing operating expenses? Distinguish this part from the portion of your net assets with donor restrictions that require the funds be used for capital

purchases or unusual projects that would not be part of your normal ongoing operations, especially

if a component of the net assets with donor restrictions reflects grants you have accepted on behalf

of sponsored projects or other organizations.

The portion of your net assets with donor restrictions that will be available to meet regular

operating expenses (including funds that may be restricted to one of your ongoing operating

efforts, like community engagement or restoration), may be considered a part of your operating

reserve because it constitutes resources that you have already obtained that will be available for future use to continue your operations.

Bank or money market accounts explicitly labeled operating reserves are not necessary to

demonstrate that a land trust has operating reserves.

Operating Reserves for Small Land Trusts

Small land trusts may initially find it easier to think about operating reserves in terms of cash that

they have placed in specific bank or investment accounts to use as a rainy day fund. As land trusts

grow and begin to receive multiple restricted funding sources and engage in more complex

projects, this approach begins to provide inadequate information to support full understanding of

the land trust’s financial positon.

Signs that a land trust is outgrowing the bank account approach to tracking operating reserves

include:

• Making multiple transfers in and out of the reserves account to try to reimburse the main

account for certain expenditures




• Proliferation of multiple special accounts to attempt to track multiple board directions

regarding use of reserves

• Increasingly complex and time-consuming reconciliation procedures to try to attribute

interest or investment earning to the right account and to bring records of additions and

withdrawals into agreement with records of income and expenses

These signs are all indicators that a land trust needs to move its focus from managing multiple cash

and investment accounts to establishing an accounting system that can track and report the portion of the overall net assets that is actually available for future operations, as well as track the receipt

and use of restricted gifts and grants.

THE IMPORTANCE OF HAVING CASH AVAILABLE

Of course, it is essential that your land trust have cash available to meet its current operating

expenses. Several steps will help ensure that your land trust does have cash available when

needed:

• Prepare cash flow projections. Your monthly cash flow projection should predict the cash

that will flow in for operations and the cash that will need to flow out to meet operating

expenses. The cash flow projection will begin with the estimated cash you will have

available at the beginning of the next 12 months. Predict each month’s flows in and out,

and the resulting cash balance at the end of that month. Then, continue projecting the flows in and out throughout the next 12 months. The cash flow projection will predict the

total amount of cash you will need for operations over the next 12 months, essential

information for managing your cash effectively.

• Establish an investment policy (see Practice 3A2e) that clearly identifies what types of

deposits and investments will be permissible for cash and which may be required within

specified periods, short term, mid-term and long term. In general, investment policies

require depositing cash that must be available to meet short-term demands in bank

accounts or money market funds that permit rapid withdrawal without potential loss in value or penalty. Funds that can be held for mid-term and long-term uses may be placed in

longer-term investment vehicles.

• An investment policy that sets guidelines for short-term, mid-term and long-term

investments should make clear that not all operating reserves need to be held in the same

physical account. In fact, your short-term cash accounts may include both operating cash

reserves and cash that will be used in the short term for capital purposes or other special



short-term uses. And your mid-term accounts may include both portions of your operating

reserves and funds provided by donor-restricted gifts for purchases that will not be

executed within the current year.

• If you have structured your accounting system properly, you will always have clear records

of the components of your equity or net assets that show which parts are restricted, which parts have been designated by the board for special purposes and so forth. This type of

system will prove a more accurate and efficient way of tracking the different restrictions

and board designations, including board-designated operating reserves, than attempting to

use banks or investment firms as your tool for keeping it all straight.

DETERMINING THE LEVEL OF OPERATING RESERVES YOUR LAND TRUST NEEDS

Your board should establish a clear policy regarding the level of operating reserves your land trust

needs. Initially, this amount may be a target, a goal that you will work to achieve and that you will

consider each time you adopt your annual budget. Later, after you have built the operating

reserves to the desired level, clarity on your operating reserve needs will help you determine when your land trust should engage in longer-term investment strategies.

Clarity will also allow the board to determine whether your land trust has sufficient financial

strength to be able to invest in its own capacity building, using a portion of the net assets without

donor restrictions that exceed operating reserve needs to fund a new position or a special initiative

as part of a capacity-building effort.

In almost all cases, operating reserve targets should be set as a percentage of operating expenses,

rather than established as specific dollar amount. The level of operating reserves needed expands

as operating expenses grow; a dollar target that was adequate during the early days of the land

trust may be quite inadequate after expansion.

There is no clear agreement on the “right” level of operating reserves for every land trust. Within

the nonprofit sector, a traditional target is a minimum of three to six months of operating expenses

(25 to 50 percent of the annual operating budget). Clearly, organizations that operate in a volatile funding environment or with definite seasonality in cash flow (for example, receiving 75 percent of

all contributions in the fourth quarter of the year) will need higher reserve levels than those that

have essentially guaranteed income for operations. Factors to consider in evaluating the volatility

of your funding environment include:




• Substantial dependence on a single funder or very narrow group of funders. Whether an

individual donor, a foundation or a government agency: have you put all your eggs in one

basket? (See Practice 6A3 for more on the importance of diversifying your funding sources.)

• Leadership transition periods. You’ll need higher reserves to protect your land trust if many

donors and funding sources adopt a wait-and-see attitude when leadership on the board or staff changes significantly.

• Periods of rapid growth. Operating reserves must increase to reflect the growth of ongoing

operating costs after periods in which restricted funding has powered expansion.

• Fallow periods after periods of successful acquisition campaigns. Land trusts that have

completed major campaigns to acquire new properties often find that they need time to

absorb the new acquisitions and may experience drop-offs in operating support from

donors who shifted their focus to the capital campaign.

Boards that consider adopting operating reserve targets greater than 50 percent of their annual

operating budget often have specific concerns they are seeking to address (for example, the desire

to prepare for a leadership transition). In some circumstances, these concerns may be better

addressed by establishing board-designated net assets for a specific purpose, such as a leadership

transition or fundraising capacity building, rather than raising the target for operating reserves.

For accreditation, a land trust must show operating reserves at the close of its last fiscal

year that are sufficient to cover three months of operating expenses. If a land trust does not have at least three months of operating reserves, its application must include a report of the board’s evaluation of the land trust’s operating reserve needs and its plan for addressing those needs. (The board’s evaluation would take into consideration any unique circumstances, such as operating reserve funds held on the land trust’s behalf by a community foundation or specific operating reserve needs unique to the organization.) The plan to address needed operating reserves must be feasible and include specific funding targets and specific strategies with timelines for raising the amount identified in the evaluation. Starting with the 2018 financial statements, the Financial Accounting Standards Board requires a nonprofit’s financial reports to include information about the availability of financial assets to meet the organization’s cash needs for one year of general expenditures (the “liquidity disclosures”). This analysis counts all board-designated funds as being available for operations; as such, it is not equivalent to the calculation used to determine if an applicant for accreditation has an operating reserve to cover three months of operating




expenses. The calculation for accreditation excludes board-designated funds, such as for stewardship and defense, in recognition of the responsibilities land trusts have to uphold, steward and defend its conservation lands and conservation easements in perpetuity.

Strategies to Build and Maintain Operating Reserves

For many boards, there is little disagreement about the target level for operating reserves; the big

question is how to build them.

The first step in answering this question is to begin by identifying the portion of your net assets

already available to function as operating reserves (see the discussion above). Once you know the

difference between the level you have and the level the board desires as your operating reserve

target, you’re ready to consider the strategies you will use to close the gap.

Potential strategies include:

• Make sure that each annual operating budget the board approves includes plans for

operating income to exceed operating expenses, generating an operating surplus.

• Continuously monitor your actual income and expenses compared to your budget plan.

Take the need to generate the planned operating surplus as seriously as you take achieving

the income projected in the budget and controlling expenses so that they do not exceed

the budgeted level.

• Review your current fundraising strategies to determine whether you may be unnecessarily

encouraging donors to restrict their gifts to special programs and projects, rather than making a compelling case for general support.

• Review your budget and cost allocation practices. If you typically ask restricted or special

project funders to cover only the direct cost of providing a service, operating a program or

acquiring a new property, consider using cost allocation to determine the full cost of

delivering that service or program or acquiring that property and ask funders to cover the

full cost. For example, if you are seeking funding for a specific restoration project, include a

fair share of the cost of your management, office expenses and so forth, as well as the

direct costs for staff who will do the restoration work, supplies and transportation, for example. The truth is you couldn’t do that special project or complete that acquisition if

you didn’t have overall management, financial recordkeeping, a space to work in and other

shared costs. By securing restricted donors to cover the full cost of doing a project, you will

be generating dollars that can be used to cover core operating costs. This strategy will



mean that more of your contributions without donor restrictions may be available to create

an operating surplus.

• Make a special request to your closest donors (often board members or former board

members) to explain the need for building operating reserves and to ask them to make a

special contribution explicitly for that purpose.

• Establish a board policy to direct all bequests without donor restrictions below (or above) a

specified threshold to build operating reserves.

Once you achieve your target level of operating reserves, you’ll want to reevaluate their adequacy

each year as part of your budget process. If your operating expenses will increase in the coming year, clarify the strategy you will use to build the additional reserves needed to maintain your

target level as a percentage of operating expenses.

Maintaining operating reserves is also challenging, in part, because the whole point of building

operating reserves is to be able to withstand adversity. This means that when your income

generation falls short or unavoidable but unexpected expenses occur, you will use your operating

reserves to meet your needs and avoid disrupting your work. On your financial statements, you’ll

see this use of the operating reserves as a net decrease in net assets without donor restrictions (net

loss). If you used a formal board-designated operating reserve segment in your net assets without donor restrictions, you’ll see the amount in this segment drop to reflect that you have used up

some of the net assets you had set aside as operating reserves. While this outcome is frustrating

(especially if it’s been difficult to build your operating reserves) it’s important to remember that

this is actually the reason you established operating reserves. It is not necessarily a terrible thing to

see those reserves drop temporarily. Of course, you’ll want to rebuild the reserves as quickly as is

reasonable.

Important strategies to maintain operating reserves once you’ve achieved your target include:

• Budget for an operating surplus – even a small planned surplus will give you a cushion

against shortfalls and unexpected expenses.

• Monitor your actual revenues and expenses in comparison to your budget plan and treat

the operating surplus you’ve included in the budget as a significant commitment that must

be met if at all possible.

• Approach some of your closest donors who may be open to a “help us grow and be

sustainable” campaign that helps you continue to increase operating reserves in anticipation of overall growth. You may find that some of your long-term supporters are



deeply committed to ensuring your sustainability. Acknowledging their continuing role as

sustainers may help set the stage for future endowment gifts.


Accreditation indicator element and Terrafirma enrollment prerequisite Last revised November 16, 2018


A. Fiscal Health 5. Build and maintain dedicated or restricted funds sufficient to cover the long term costs of stewarding and defending the land trust’s land and conservation easements.

a. If funds are insufficient adopt a plan to secure these funds and a policy committing the funds to this purpose


INTRODUCTION

When a land trust accepts an easement or land, it promises the landowner, land trust members and

funders, the community, the IRS and the general public that it will uphold that easement and

conserve that land forever. Making such promises requires the land trust to prepare on many

levels, including financially. Before accepting each property or easement, a land trust must carefully

plan for how it will care for the land or defend the easement and pay for its stewardship — not just

this year but also in 5, 50 or 500 years.

In addition to upholding its commitments, land trusts have legal obligations to consider with regard

to easement stewardship. In section 1.170A-14(c) of the Treasury regulations, the IRS establishes

basic expectations for organizations that accept qualified, tax-deductible conservation easements:

To be considered an eligible donee under this section, an organization must be a qualified

organization, have a commitment to protect the conservation purposes of the donation,

and have the resources to enforce the restrictions. A conservation group organized or

operated primarily or substantially for one of the conservation purposes specified in

170(h)(4)(A) will be considered to have the commitment required by the preceding

sentence. A qualified organization need not set aside funds to enforce the restrictions that

are the subject of the contribution.




While this statement does not go into detail about specific stewardship activities, it does clearly

establish that an easement holder must have the commitment and resources to perform

stewardship. So, what does that mean? A conservation easement protects land only if the

easement holder monitors and enforces the easement. To fulfill this responsibility, a land trust

must have sufficient funding to pay for the costs of its ongoing easement stewardship program.

These costs include, for example, staff time, legal advice, expert consultants and other expenses

incurred during routine easement monitoring and defense activities.

With regard to financial preparedness, note that the IRS expects land trusts to have the resources

to defend their easements, but does not dictate that those resources be present in the form of an

endowment or dedicated fund. However, most land trusts have found a dedicated or restricted

stewardship fund the best tool to meet this requirement, and Practice 6A5 follows suit.

While the IRS has little to say about stewardship of land trust properties per se, land trusts are

bound by state laws governing charitable organizations. Most land trusts are chartered under state

law as charitable organizations and are required to follow their articles of agreement and bylaws.

Thus, a land trust is legally bound to uphold its land protection mission and commitments over

time, including defending its conservation easements and properties. By implication, a land trust

must be financially prepared to do so. Because state laws vary, land trusts must be particularly

aware of their individual state laws regarding charitable organizations (and easements if a land

trust holds them).

So what does upholding its land protection mission and commitments mean in terms of property

owned by a land trust? For each of its properties, a land trust needs to estimate the long-term land

management and defense costs and to secure funds to carry out its responsibilities over time. The

land trust should then secure these funds or ensure that it has a steady source of operating income

to cover these costs, along with an emergency fund it can tap when there is a significant problem

on the land.

If a land trust lacks financial capacity to uphold its stewardship responsibilities, it risks the integrity

of its conservation easements and stewardship program, the properties’ conservation values, the

land trust’s credibility in the community and, ultimately, its tax-exempt status. When a single land

trust ignores its stewardship responsibilities, it reflects badly on the greater land conservation

community and the use of conservation easements and fee ownerships as permanent land

protection tools.

To avoid this potentially dire situation, it is important for every land trust to establish a board-

approved, written policy regarding easement and fee land stewardship funding that the



organization follows for every acquisition. The policy also has a number of benefits for the

organization:

• The policy provides direction to volunteers, staff and board members on its

stewardship fund decisions

• It ensures continuity over time as individuals involved with stewardship funding enter

and leave the organization

• It explains the land trust’s stewardship fund expectations to donors, members and the

general public

• It demonstrates to easement donors that the land trust stands behind every easement

that it accepts

• It assures the land trust community, government entities (such as the IRS and the state

attorney general) and the media that a land trust will act responsibly to uphold its

conservation easements

In addition to the written stewardship policy designed mainly for internal use, some land trusts

develop short explanatory handouts regarding their stewardship funds. These can communicate, in

simple terms, the key concepts to give to external parties, such as landowners, potential donors

and the general public.

Developing a policy involves completing five key steps:

1. Estimating projected costs of stewardship and the amount required in a dedicated fund to

cover those costs

2. Securing funds for every transaction at the time of acquisition

3. Providing for exceptions to the expectation that funding must be secured at the time of

acquisition - when it is appropriate to create specific plans to achieve the stewardship

funding goal another way

4. Managing the funds

5. Clarifying who is responsible for seeing that the policy is met, periodically reviewed, revised

and adopted as necessary

DETERMINING STEWARDSHIP COSTS



Conservation Easements

A land trust’s conservation easement stewardship program should be tailored to the types of

easements it holds, the land resources it protects and the landowners with whom it works. All land

trusts must plan to fund four major stewardship activities:

1. Annual monitoring

2. Maintaining ongoing landowner relationships

3. Managing and documenting the exercise of reserved rights, approvals and interpretations

made by the land trust

4. Enforcement to address violations

The costs associated with conservation easement stewardship programs vary, depending on the

methods a land trust uses for monitoring, whether staff or volunteers are involved, the complexity

of easement provisions and the likelihood of violations.

To estimate your land trust’s costs for easement stewardship, you need to describe the scope and

intent of your easement stewardship program. For example, do you want to uphold easement

terms, resolve violations, maintain a strong working relationship with landowners, provide

educational information to landowners about best management practices, manage affirmative

rights, demonstrate sound easement stewardship to the community or other goals? To describe

your land trust’s desired easement stewardship program, consider the following questions:

1. How often do you monitor and by what method?

2. Who performs these tasks? Staff, volunteers or some combination of both?

a. If using volunteers today, would you ever need to hire staff or contractors to

monitor in the future?

3. How are easement stewards trained?

4. What is the board’s role in easement stewardship?

5. How does your organization handle affirmative obligations, reserved rights requiring review

and approval, new landowners, questions from neighbors and landowner advisors and

other “extras” beyond annual monitoring?

6. What are your practices with regard to easement violations?



7. What are your recordkeeping practices?

8. Are there additional best management practices in your easement stewardship program?

You should also consider any changes that may be needed to address inadequacies in your current

program, including any changes that you anticipate may be needed in the next five to twenty years.

For example: Will growth of your easement holdings and monitoring burden require adjustments in

how stewardship activities are performed and by whom? Would you ever need to transfer the

easement and the stewardship funding that goes with it to another holder or merge with another

organization that will require you to have stewardship funds? Will you need more resources when

managing successor landowners or if all the subdivision rights are exercised?

For more on estimating and tracking the costs of stewardship and enforcement for each easement,

see Practice 11A.

Determining the Adequacy of Easement Stewardship Funds

The surest way to meet ongoing stewardship costs is to set up a dedicated fund that is managed

separately from the land trust’s operating budget (see below for a description of such funds).

Ideally, this board-designated or donor-restricted fund should generate sufficient income to cover

between 75 and 100 percent of a land trust’s annual stewardship costs. At a minimum, a land trust

should have at least $3,500 per conservation easement of dedicated easement stewardship

funding.

For accreditation, a land trust needs to have at least $3,500 per conservation easement in

board-designated or restricted stewardship funding. For example, a land trust with 20

conservation easements will need $70,000 in board-designated or restricted funds for

conservation easement stewardship. If a first-time applicant does not yet have the full

amount, then it must have a feasible fundraising plan with specific funding targets and

timelines for raising the funds so that the land trust will have the required funds by the

time it applies for its first renewal. At the time of first renewal, a land trust needs to have

the full amount.

If a land trust has funds that are donor-restricted for use on a specific property, then these

funds are not counted toward the total amount available for conservation easement

stewardship. For example, the donors of the Jones conservation easement provided

$50,000 solely for the stewardship of this one conservation easement. A land trust cannot

count those moneys as available for the stewardship of its other conservation easements.




For accreditation, a land trust can count the number of conservation easements it has in

one of two ways. One way is to count each conservation easement document (regardless of

how many landowners are covered by the easement). The second way is to use the method

required by Terrafirma (see http://www.terrafirma.org/faq/counting for details).

It is preferable to have all of the stewardship funding in hand before an easement is signed and

recorded. However, there will be circumstances in which it is not possible to have the funds at

closing or total easement stewardship funding is insufficient. Flexibility is appropriate. Remember

that the amount of funding needed is a separate issue from the source of that funding. Sometimes

land trusts focus on obtaining the necessary stewardship funding exclusively from easement

donors, often limiting their vision of what is needed to build a stewardship fund appropriately. It is

best to base easement stewardship funding on realistic projected costs, and deal with the source of

funding separately. If a land trust has inadequate funds, it should have a solid plan for how they will

be obtained, ideally within five years, and a board policy committing the funds for this purpose. The

plan should include specific funding targets and timelines. Such plans may draw upon a variety of

techniques, for example:

• If the landowner is willing to pay but unable to pay the full amount up front, create a

pledge schedule, allowing the landowner to make payments over time.

• Create and implement a long-term plan to raise stewardship funds from other sources.

Some land trusts determine that, overall, only a portion of their easement stewardship

funding will come from landowners and acquisition-related fundraising at the time of the

easement conveyance. These organizations make a policy decision to raise the balance over

time from other sources. Fundraising from sources such as grants, bequests and operating

budget transfers can be implemented over a period of years, supplementing contributions

made at the time of easement acquisition and completing overall per-easement fundraising

goals. Many land trusts that have substantial stewardship funds have built them over time

using these alternative sources. In fact, most land trusts that are satisfied with the current

size of their stewardship fund have used major gifts as a significant part of reaching their

funding goals.

See the section below on raising stewardship funds for more specific strategies on raising funds.

LAND TRUST OWNED PROPERTIES

A land trust takes on many responsibilities when it acquires a property in fee. These responsibilities

vary depending on the mission of the land trust, the attributes of the property, the intent of the



donor and the needs of the community. Expectations will also vary depending on the regional

culture, the landscape and the ecological condition of and land trust goals for the property.

Because every property is unique and every community different, there is no one single definition

of stewardship that applies to all land trusts and every protected property.

Costs will also vary from land trust to land trust and property to property because stewardship will

involve different activities on different properties. Stewardship activities range from basic

monitoring to ensure that the property is secure and free of encroachments; to conducting detailed

inventories of natural resources and ecological attributes, along with extensive management

activities; to improving wildlife habitat, controlling invasive species or generating income from

agriculture, recreation or forestry. Further, the land trust must consider donor, neighbor and

community expectations when determining appropriate stewardship activities. If a land trust uses

public or foundation money to acquire a property, the grant agreements may have conditions

requiring certain stewardship activities designed to protect the investment of the funder and help

achieve its programmatic mission. Once a land trust determines its goals for a property and how to

achieve them, it can then begin to put together estimates of costs for current and future

stewardship activities.

Although land stewardship programs and responsibilities vary widely, at a minimum each land trust

needs to have a strong program of basic property management, making certain that essential

ownership obligations are being met. These obligations include:

• Marking and maintaining boundaries

• Monitoring the site regularly

• Paying taxes

• Carrying insurance

• Overseeing leases and other arrangements

• Protecting the important conservation attributes of the property

Based on the goals of each organization and the demands of each property, every land trust should

be able to determine the costs that will be incurred to acquire land and provide stewardship. A land

trust should develop a stewardship budget that takes into consideration all of the costs of taking

care of each property, along with any income that the properties could generate to help cover

those costs. Prior to acquiring the property, the land trust should analyze these items.

In general, land trusts must plan for four types of stewardship costs:



1. Start-up costs

2. Annual costs

3. Capital expenses and capital replacement costs

4. Special projects

For more on estimating and tracking costs for individual properties, see Practice 12A.

Determining the Adequacy of Land Stewardship Funds

The funding necessary to steward a fee land is not the same as for a conservation easement. There

are three points to keep in mind:

1. Smaller land trusts that own only a few properties typically use the property-specific

approach: develop a stewardship budget for each property and build a fund or establish a

formal endowment designed to generate enough income to cover that parcel’s costs. For

larger land trusts with multiple properties, it can be more efficient to have a general

stewardship budget, created in large part by adding individual property activities. Consider

the future and likely additional properties as you establish your funds for land stewardship.

Administering numerous separate endowments or dedicated funds, many of which could

be subject to specific donor restrictions and limits that must be carefully reviewed and

tracked before they can be spent, will be cumbersome. No matter what method you

choose, when obtaining a new property, consider raising additional stewardship funds,

based on the particular management plan for that property.

2. The desired stewardship funding for fee lands is often higher than for conservation

easements, because there are generally many more responsibilities associated with fee

land ownership than conservation easement stewardship.

3. Fee lands can provide income to the land trust that may offset some of the many expenses

associated with land ownership; the land may even provide a net income. For example, the

Society for the Protection of New Hampshire Forests’ Lost River property, a popular tourist

attraction, generates from its recreational lease a net revenue in excess of $150,000 per

year!

For accreditation, a land trust needs to have sufficient financial resources to cover

conservation property stewardship. These resources can include income from board-




designated or restricted funds, lease income, earned income or diverse and secure sources

of annual operating income.

For accreditation, a land trust can choose the way to count the number of conservation fee properties it holds. One way is to count the number of preserves. Preserves can be aggregates of various parcels; parcels do not need to be physically connected as long as they fall under a master management plan, and the landscape is relatively uniform and there are no significant threats on the intervening parcels. The second way is to use the method required by Terrafirma (see http://www.terrafirma.org/faq/counting for details).

RAISING STEWARDSHIP FUNDS AFTER ACQUISITION

It can be discouraging to realize that the income from an endowment or general stewardship fund

does not cover the annual costs of land or easement stewardship. However, this situation is

common. In these cases, the land trust is, in fact, subsidizing these activities through its operating

budget, and some land trusts have consciously decided that this is an appropriate way for them to

operate. For many older land trusts, early acquisitions did not come with any (or just minimal)

stewardship funding or, most commonly, the anticipated costs of stewardship were exceeded by

the actual expenses as time progressed and costs increased. As a result, they either continue to

subsidize stewardship or take steps to increase their endowment or dedicated fund.

When a land trust acknowledges that it has a shortfall between its endowment (or dedicated fund)

and its stewardship costs, it is time to develop a realistic plan to address it. This situation calls for a

serious fundraising plan (see Practice 5B3), which will take more than small sums of money to

address.

Each land trust should assess what model best suits the organization, create a financial plan using

the model and track costs and periodically consult with financial advisors to ensure that the

financial plan reflects actual stewardship costs and is scaled for the appropriate time horizon

(remember, planning for forever is much different than planning for retirement!).

Practices 11A and 12A require land trusts to estimate the cost of stewarding an easement or

property at the point of acquisition (it is also the easiest time to raise funds for stewardship). If

funding cannot be secured at the time of acquisition, the land trust should have a plan, including

specific funding targets and timelines, to obtain those funds within five years.

For accreditation, a land trust can have a plan to raise the additional necessary funds if it

does not yet fully meet the stewardship funding requirements at first-time application.

Similarly, if the land trust has half the defense funding requirements at either first-time or

renewal application, it can provide a plan to raise the remaining funds. The plan must have



specific funding targets and timelines for raising the funds so that the land trust will have

the required funds by the time it applies for its next renewal.

The following is a list of likely sources of funding for stewardship of easements and land trust

properties; the needs and sources may vary greatly between easements and fee-owned property so

the section below should be read in conjunction with the easement- and fee-specific information

later in this narrative.

Landowner Contributions

Many land trusts have relied on contributions from land and easement donors as the primary

source to build a stewardship fund, but this practice is changing. With experience, land trusts are

learning that stewardship activities can be more expensive than initially estimated and that

landowners are not the only source of funds. Many land trusts are also catching up their

stewardship funds to make up for insufficient growth in earlier years and cultivating other sources

to add significant amounts to the funds.

Most land trusts do ask their donors to consider making a contribution to the stewardship fund,

either as a one-time gift or as a contribution made over time. Some seek only part of the calculated

contribution from the owner and tap other sources to add the full amount required with each fee

property or conservation easement. If the landowner is willing to pay but unable to pay the full

amount up front, the land trust may want to consider creating a pledge schedule. The pledge

schedule might include phased payments over a period of years or payments tied to future income,

such as from a planned timber sale.

Note that a requested contribution and a required contribution have different federal income tax

implications for the landowner. If the landowner is responding to a request for funding and is not

obligated by contract to contribute the funds, their voluntary donation may be tax deductible, and

the land trust would provide a gift acknowledgement letter (see Practice 5B2). However, if the land

trust requires the contribution or indicates that it cannot accept the easement or fee property

unless it receives the contribution, the landowner’s stewardship contribution would likely not be

deductible as a charitable gift, and the land trust should not acknowledge it as such. Land trusts

should be clear about whether they are requesting or requiring stewardship contributions and

inform the landowner about the implication for tax deductibility. Some land trusts now refer to

these required contributions as transaction fees in order to clarify that providing these funds is not

optional and is not considered a charitable contribution.

Transfer Fees for Conservation Easements






Some organizations include provisions within their easements that require a transfer fee be paid

each time the property changes hands. Such a fee can be based on a percentage of the sales price

or on a fixed amount calculated to be the necessary stewardship fund contribution for that

particular easement. This technique acknowledges that many landowners cannot provide funding

for a conservation easement at the level needed to cover all the long-term costs at the time of

easement closing and that the perpetual costs of stewardship should be shared by future

landowners — all of whom will benefit from the easement and from the stewardship expertise of

the land trust.

There are different legal opinions about whether land trusts can or should embed a permanent fee

into a perpetual document. One alternative would be to cap the amount generated or the number

of transfers or years to which the fee may apply. Each land trust should check with its legal counsel

before using this approach. One advantage of the transfer fee is that it helps support the cost of

establishing a new landowner relationship. A transfer fee can also be tied to activation of an

easement’s subdivision rights, thus ensuring the financial capacity to manage additional landowner

relationship(s). As a side benefit, these fees also serve as an alert to upcoming land transfers

because a title insurer will pick up the fee requirement and contact the land trust.

Many transfer fee provisions have exemptions for interfamily transfers. Note that because these

are required fees, contained within the contract of the easement document, they cannot be

considered charitable gifts and are therefore not tax deductible as charitable gifts.

Other Delayed or Future Stewardship Contributions

It is also possible to require the landowner to pay fees when they exercise specific reserved rights

in an easement, such as building or subdivision. The costs associated with these actions are not

incurred by either the land trust or the landowner until the action occurs. The land trust should

consider how inflation will be addressed with this funding technique, because it is not often

possible to predict how many years may pass before a reserved right is activated.

Property Income Opportunities

If a land trust property has resources that can be sustainably harvested or used, revenue from the

management of the property will generate either annual income or periodic income that can be

used for general operations or dedicated to a stewardship fund. Other income opportunities might

include agricultural leases; community-supported agriculture (CSA), in which local people buy

shares in a farming operation; revenue-generating recreational activities, such as hunting and

fishing leases and memberships for trail usage; and income from special events, such as weddings

or family reunions.




Local Fundraising

Land trusts can seek stewardship funds from neighbors, municipalities and other project partners.

Some organizations create fundraising drives or events. When conservation easements or land are

purchased, land trusts commonly mount a campaign to raise acquisition funds, rolling transaction

costs and the stewardship contribution into overall fundraising goals.

Major Donors

Land trusts may cultivate major donors by educating them about the importance of stewardship

and the challenges of raising stewardship funds. Not every major donor can or wishes to participate

directly by donating an easement or piece of land, but some may wish to support an organization’s

land protection efforts by contributing to its stewardship program.

Grant Support

Certain public and private grant programs support stewardship funds. For purchased conservation

easements or properties, grants may be an excellent source of stewardship funds when the

stewardship fund contribution is presented as part of overall project costs.

Planned Giving

Numerous land trusts have significantly increased their stewardship funds by educating major

donors about stewardship funds and designing planned giving programs in support of stewardship.

Organizations may also include stewardship funding within a larger capital campaign or use other

marketing techniques to seek planned gifts from major donors. Such gifts can include bequests of

land for resale and money, gifts of cash and securities and noncash gifts that can be liquidated. This

technique has been used successfully by land trusts that are catching up their stewardship funds.

Transfers from the Organizational Operating Budget

Some land trusts have built their stewardship funds using occasional or routine transfers from the

operating budget. For example, some organizations have started their dedicated stewardship funds

with a significant transfer of funds from the operating budget or from surplus funds through

creating a board-designated stewardship fund. Others make an annual contribution based on a

percentage of the operating budget so that all the land trust’s members and financial supporters

share in long-term stewardship. These land trusts record the board’s decision to add this amount to

the board designated stewardship fund.



DEDICATED FUNDS: A TOOL TO SUPPORT STEWARDSHIP COSTS

There are three primary ways that land trusts receive and account for funds that will be used to

meet stewardship costs:

• Board designation

• Donor contributions with restrictions

• Donor contributions to endowment funds

Taken together, these three types of stewardship funds will provide the resources needed to meet

stewardship and legal defense costs. All three approaches are important. Understanding how they

differ legally and in terms of how your land trust accounts for them is also important.

For accreditation, a land trust submits information about the current amount of board-

designated or donor-restricted funds it holds for stewardship and defense. Whether the

funds need to be board-designated or donor-restricted depends on the source of the funds

and how the land trust solicited and/or acknowledged the funds. If the classifications

reported do not match the classifications shown in the audited, reviewed or compiled

financial statements and notes, the land trust will need to provide an explanation or

annotated balance sheet that reconciles the two sets of information.

Board-designated Stewardship Funds

Land trust boards can establish a board-designated stewardship fund by adopting a resolution to

designate a portion of the land trust’s net assets without donor restrictions. The net assets without

donor restrictions represent the portion of the land trust’s total equity over which the board has

full control. By adopting a resolution to designate a portion of those net assets without donor

restrictions as a stewardship fund, the board is expressing its intention to use those funds only for

stewardship.

The resolution should describe the purposes for which the funds may be used and the process that

will be required to authorize their use. Some boards require the executive director or chair of the

board’s stewardship committee to request the board’s permission to use funds from the board-

designated stewardship fund. Others authorize one of these individuals to make use of board-

designated stewardship funds for any of the purposes described in the authorizing resolution

without any further consultation. Your board’s resolution should clarify whether board permission

or notification is required before the board-designated stewardship funds may be used.



Because the board has established the board-designated stewardship fund by adopting a

resolution, the board also has the power to eliminate or change the designation or the procedures

for using funds that have been designated for stewardship.

Donor-restricted Stewardship Contributions

It is important to distinguish stewardship funds with donor restrictions from board-designated

stewardship funds. Only donors may establish restrictions or the land trust may set the

expectations for what the restrictions are in its solicitation materials. The solicitations or donor

restrictions may limit the use of a gift to certain purposes, such as stewardship, or to use for certain

time periods (for example, over the next two years). Donors may also restrict their gifts to be

treated as endowment, meaning that the gift is to be invested and only the earnings generated

through the investment may be used, either for a specific purpose or at the discretion of the board

of directors. You can learn more about board-designated and donor-restricted funds in Practice

5B3.

When a land trust solicits and accepts a donor gift with restrictions, the land trust is legally bound

to follow those restrictions. In order to use the funds for any other purpose, the land trust would

need to get the donor’s written permission to change the restriction. Or, in extreme cases in which

the donor is no longer able to act, the land trust may need to request permission from its state

attorney general (or other state charity regulator) to change the use of the funds from that stated

by the donor.

Land trusts must be careful to establish clear understandings with donors who wish to make gifts

with restrictions. Whenever donors propose restricting the use of their gift to stewardship, the land

trust will want to encourage (and some land trusts require) the donor to limit the restriction to the

general purpose of stewardship, rather than restricting the use of their gift to stewardship of a

particular easement or property. This distinction is important because accepting gifts restricted to

stewardship on specific properties will limit the land trust’s ability to use stewardship funds where

they are most needed. Additionally, accepting numerous gifts restricted to specific properties will

increase the complexity and cost of the land trust’s accounting system.

Endowment Gifts

In general, the term endowment is used to describe a fund or funds that a nonprofit organization

has established to accept gifts intended to be invested permanently with only the earnings from

the investments being made available to meet either specific or general purposes consistent with

the organization’s mission. True endowments consist of gifts restricted by donors who have



expressed their intention for the gift to be added to an existing endowment or used to fund a new

endowment established through board action. If you solicit a landowner for a contribution to your

stewardship endowment, you are indicating that the funds will be set aside in a permanent

endowment. (If you solicit funds using the term endowment but are not restricting the funds

accordingly, you must change your solicitation materials to match how you restrict the funds and

avoid the term endowment.)

The creation and management of true endowments is regulated under state law. Currently, all

states except Pennsylvania have adopted some version of a law drafted by the American Bar

Association and known as the Uniform Prudent Management of Institutional Funds Act (UPMIFA).

Land trusts with endowments or considering creating endowments should work with an attorney

who is expert in UPMIFA to be certain that both the structure of the endowment and its

management are compliant with state law.

Your endowment policy should describe how your land trust will manage the funds in the

endowment and how you calculate the portion of the earnings that may be used for purposes

established by the endowment agreement. Most endowment policies identify the amount of funds

that may be transferred from the endowment each year for use in meeting either unrestricted

costs or specific costs described in the endowment’s restrictions. Typical policies express this

amount as a percentage of the fair market value of the fund at a specified point in time. For more

on investment policies, see Practice 3A2e.

The provisions of UPMIFA also apply to other investments the board has designated to be managed

like an endowment. These funds are frequently referred to as board-designated quasi-

endowments. They are created through board action that specifies the purposes for which the

quasi-endowment is established, which could be general purposes or specific purposes, such as

stewardship. When a board creates a board-designated quasi-endowment, it is expressing its

intention that the funds should be managed in ways that parallel a true endowment. This intention

includes the direction that the funds be invested for long-term growth with only the income earned

on the fund, or portions of it, used for specific purposes.

FUNDING MODELS FOR CONSERVATION EASEMENT ENFORCEMENT

Land trusts commonly use one of the two following dedicated fund models to prepare for

enforcement costs.

• Combined easement stewardship and legal defense fund. For many land trusts, it is

standard practice to plan for major defense funding to come from the principal of the





dedicated easement stewardship fund. The income of the fund may be available for annual

stewardship, but the principal is invaded only in the case of a major enforcement action. As

a result, such a fund is not a true endowment because the principal may be withdrawn.

One problem with this approach is that the fund may be drained to address an expensive

legal challenge. If a land trust finds itself in the unenviable position of defending two or

more violations or potential violations simultaneously, it might jeopardize the entire

easement stewardship program by depleting the overall fund.

• Separate legal defense funds. Alternatively, more land trusts are establishing a true

stewardship endowment (from which income but not principal may be spent) to cover

routine stewardship expenses and set up a separate dedicated fund for easement defense

(from which income and principal may be withdrawn). Some land trusts add money to the

fund with each conservation easement that they accept and, as a result, have established

significant easement defense funds. The typical amount deposited per easement varies and

can be as much as $5,000 per transaction or more.

With either arrangement, land trusts must plan to replenish the fund if it is drawn down to support

easement defense. This may take the form of a major fundraising drive at the time of the easement

violation or through major gifts and grants at any time. A land trust may also be able to replenish its

coffers if the court orders the landowner to pay the land trust’s litigation costs. Be aware, however,

that land trusts that have been in this situation report that it may be difficult or impossible to

collect a court-ordered settlement.

For accreditation, a land trust can co-mingle its stewardship and defense funds. However,

the total funding required is the sum of the stewardship and defense amounts. In addition,

the land trust needs to be clear to its donors that the funds received can be used for either

purpose of stewardship or defense.

Every land trust must be prepared to pay significant enforcement expenses at some point in time

for its conservation easements or fee lands. To help land trusts determine the minimum board-

designated or restricted defense funding needed for conservation easements and property owned

by the land trust, the Alliance has created a Legal Defense Reserves Calculator (Calculator). The

calculator is a forecasting model based on actuarial data collected from hundreds of land trusts

across the nation with risks tailored to different regions. Land trusts will want to test their defense

reserve calculations at least annually to account for additions to their portfolio and other changes

to their risk profile. The Land Trust Alliance will review and update the calculator every three to six

years.




For accreditation, a land trust provides the results from its completed Calculator to

determine its defense funding needs for its conservation easements and conservation

properties. The land trust needs to have the amount specified by the Calculator in a board-

designated or restricted fund for defense. If a land trust does not yet have the full amount,

then it must have at least half of the funds and a feasible plan to raise the additional funds.

By the time the land trust applies for its next renewal of accreditation, it must have the

required funds.


funds are not counted toward the total amount available for defense and the land trust can

exclude the property from the Calculator. For example, the donors of the Smith property

provided $125,000 for the stewardship and defense of solely that property and not the land

trust’s 20 other properties. When the land trust runs the Calculator, the Smith property

should not be counted as a property in the Calculator (the total number of properties

would be 20, not 21). Then, the $125,000 restricted to the Smith property will not be

counted toward the total moneys the land trust has available to cover the defense needs of

the remaining properties.

Land trusts have no way of knowing when they will need to litigate to protect an easement or

conserved property, how long litigation may take or how much it may cost. The Land Trust Alliance

created Terrafirma as a charitable risk pool owned by participating land trusts that insures its

members against the legal costs of defending conservation. Even if a land trust has Terrafirma

insurance coverage, it must still build its legal defense funds. Terrafirma is an additional safety net,

not a substitute for sufficient reserves and sound practices. Land trusts should think of Terrafirma

as standing behind them to protect their resources from catastrophic legal expenses and to help

them avoid unnecessary litigation through solid practices, early dispute resolution and smart risk

management.


Accreditation indicator element and Terrafirma enrollment prerequisite Last revised May 16, 2018

With either arrangement, land trusts must plan to replenish the fund if it is drawn down to support

easement defense. This may take the form of a major fundraising drive at the time of the easement

violation or through major gifts and grants at any time. A land trust may also be able to replenish its

coffers if the court orders the landowner to pay the land trust’s litigation costs. Be aware, however,

that land trusts that have been in this situation report that it may be difficult or impossible to

collect a court-ordered settlement.

For accreditation, a land trust can co-mingle its stewardship and defense funds. However,

the total funding required is the sum of the stewardship and defense amounts. In addition,

the land trust needs to be clear to its donors that the funds received can be used for either

purpose of stewardship or defense.

Every land trust must be prepared to pay significant enforcement expenses at some point in time

for its conservation easements or fee lands. To help land trusts determine the minimum board-

designated or restricted defense funding needed for conservation easements and property owned

by the land trust, the Alliance has created a Legal Defense Reserves Calculator (Calculator). The

calculator is a forecasting model based on actuarial data collected from hundreds of land trusts

across the nation with risks tailored to different regions. Land trusts will want to test their defense

reserve calculations at least annually to account for additions to their portfolio and other changes

to their risk profile. The Land Trust Alliance will review and update the calculator every three to six

years.

For accreditation, a land trust provides the results from its completed Calculator to

determine its defense funding needs for its conservation easements and conservation

properties. The land trust needs to have the amount specified by the Calculator in a board-

designated or restricted fund for defense. If a land trust does not yet have the full amount,

then it must have at least half of the funds and a feasible plan to raise the additional funds.

By the time the land trust applies for its next renewal of accreditation, it must have the

required funds.

https://terrafirma.org/calculator/start


Accreditation indicator element and Terrafirma enrollment prerequisite Last revised May 16, 2018


funds are not counted toward the total amount available for defense and the land trust can

exclude the property from the Calculator. For example, the donors of the Smith property

provided $125,000 for the stewardship and defense of solely that property and not the land

trust’s 20 other properties. When the land trust runs the Calculator, the Smith property

should not be counted as a property in the Calculator (the total number of properties

would be 20, not 21). Then, the $125,000 restricted to the Smith property will not be

counted toward the total moneys the land trust has available to cover the defense needs of

the remaining properties.

Land trusts have no way of knowing when they will need to litigate to protect an easement or

conserved property, how long litigation may take or how much it may cost. The Land Trust Alliance

created Terrafirma as a charitable risk pool owned by participating land trusts that insures its

members against the legal costs of defending conservation. Even if a land trust has Terrafirma

insurance coverage, it must still build its legal defense funds. Terrafirma is an additional safety net,

not a substitute for sufficient reserves and sound practices. Land trusts should think of Terrafirma

as standing behind them to protect their resources from catastrophic legal expenses and to help

them avoid unnecessary litigation through solid practices, early dispute resolution and smart risk

management.

1 · Land Trust Alliance · Land Trust Standards and Practices · Practice 6C1. External Financial Evaluation Accreditation indicator element Last revised November 16, 2018


C. External Financial Evaluation 1. Obtain an annual financial audit, review or compilation by an independent certified public accountant or a qualified accounting professional, in a manner appropriate for the scale of the land trust


IMPORTANCE OF EXTERNAL FINANCIAL EVALUATION

Financial oversight is a critical board role. As the governing body, your land trust’s board holds

ultimate responsibility for ensuring that land trust resources are used only to accomplish your

mission, your assets are safeguarded, you’ve complied with all laws and regulations and have

honored all agreements with donors regarding the use of their funds. Boards must have reliable

financial information to fulfill these critical oversight roles.

Yet land trust board members typically lack the time and, in many cases, the expertise needed to

directly determine whether the financial reports they are given to review actually provide a fair

picture of the land trust’s financial condition and the financial impact of its activities. The good

news is that there are accounting professionals who are able to offer a variety of services designed

to help the board be sure that they can rely on the financial information they receive. The bad news

is that the variety of different services that accounting professionals offer can create confusion and

misunderstanding. The following sections are designed to help your board clarify the professional

help it needs and determine the most effective way to obtain it.

The primary purpose of obtaining professional accounting services is to provide information for

management and the board, as well as external stakeholders such as potential funders. The extent

to which your land trust obtains the maximum possible value from your external financial

evaluation depends upon your skill in selecting the right certified public accountant (CPA) or other

qualified accounting professional for your organization. The American Institute of Certified Public


2 Land Trust Alliance · Land Trust Standards and Practices · Practice 6C1. External Financial Evaluation Accreditation indicator element Last revised November 16, 2018

Accountants has an excellent toolkit to help nonprofit boards obtain the greatest possible value for

audits and other engagements with CPAs. Many of the tools in their toolkit are also useful for

boards that decide to secure a review instead of an audit. You may download the AICPA Audit

Committee Toolkit for a small fee.

OVERVIEW OF TYPES OF OUTSIDE ASSISTANCE

Audits, reviews and compilations provide an opportunity for a knowledgeable professional to

provide feedback on your financial statements, accounting systems and practices. However, there

are significant differences among them and the assurances each provides. Audits, reviews and

compilations have significantly different purposes, involve different procedures and, importantly,

provide very different levels of assurance regarding the reliability of your financial statements.

Although audits and reviews are different, in one respect they are the same: only a licensed CPA

may refer to work they perform as either an audit or review in accordance with standards issued by

the American Institute of Certified Public Accountants. A CPA who does not manage your books on

a day-to-day basis must always conduct financial reviews or audits. A knowledgeable professional

who is not a CPA, on the other hand, may complete compilations.

CPAs must be clear in agreements with clients about the nature and scope of each engagement.

Once you have selected a CPA to perform financial examination services for your land trust, they

will draft an engagement letter to spell out exactly what they will do and what your responsibilities

will be. It is very important for a knowledgeable land trust staff or board member to review the

engagement letter to be sure that it matches your understanding of the assignment.

FRAUD DETECTION

A standard audit or review of financial statements focuses on the reliability of the financial

statements taken as a whole, not the discovery and documentation of fraud. Neither audits,

reviews nor compilations are designed specifically to uncover fraud or malfeasance. Where a CPA

detects evidence of impropriety, they will communicate the facts to the appropriate level of

management and may recommend steps to increase the level of scrutiny. If your board has specific

concerns about possible dishonest acts or willful misrepresentation of your financial position, you

should work with a forensic accountant who can offer fraud audit services.

It is also important to understand that while the CPA performing your audit or review will ask

questions about your accounting policies and procedures and your controls, the purpose of an




audit or review is not to provide a formal evaluation of your system of internal controls. Your CPA

may provide a number of very useful observations and suggestions about controls while conducting

an audit or review, but that will not be the primary purpose of their work.

AUDITS

The primary purpose of an audit is to obtain enough information for the auditor to reasonably

assert that the financial statements are free of material misstatement. To make that assertion, the

CPA must perform audit examinations in accordance with Generally Accepted Auditing Standards

(GAAS), which are the industry standards. Thus, the auditor’s opinion letter will provide peace of

mind for your funders, donors, regulators and board. It will provide readers of your audited

financial statements reasonable assurance that, in your auditor’s opinion and in all material

respects, the statements conform to accounting principles generally accepted in the U.S. An audit

conducted to the highest professional standards will help your board fulfill its role of overseeing

land trust operations and enhance donors’ and other outside parties’ assessments of your

organization’s credibility and financial stability.

In a deeper sense, audits are designed to permit the auditor to state an opinion about the extent to

which your financial statements fairly present your financial condition and the results of your

activities over the past year.

REVIEWS

In contrast to audits, a review is designed to provide the reviewer with enough information to offer

only “negative assurances,” which is a statement that tells readers that the reviewer found no

evidence that the statements do not fairly present your condition and the results of your activities.

The review report, which notes that the reviewer has not found anything indicating the statements

do not present accurate and complete information, provides much less assurance than an audit

opinion.

COMPILATIONS

CPAs also perform engagements to provide compilations. In a compilation, the CPA (or person

doing the compilation) offers no assurances as to whether the financial statements fairly present

the financial condition of the organization. Instead, in performing a compilation, the CPA gathers

information from the organization about the balances of each general ledger account at yearend

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and puts that information into the proper format to produce a statement of financial position,

statement of activities, statement of functional expenses and statement of cash flows. The

compilation report may include notes to the financial statements, but in many cases, the

organization elects to omit substantially all footnote disclosures relating to the financial

statements. The CPA is not bound by the rules for disclosure about the financial statements that

would guide the notes in a review or audit engagement. The compilation report is bound with the

financial statements and includes a letter from the CPA stating that the statements have been

compiled.

For accreditation, a CPA needs to complete a compilation or, if a land trust is not using a CPA,

the person preparing the compilation must be an independent qualified accountant. (The CPA

does not have to be independent and thus could be a member of the land trust’s board. If the

qualified accountant preparing the compilation is not a CPA, they must be independent,

meaning the person cannot be on the board or have financial or other interests in the

organization.) All compilations submitted for accreditation must include the footnotes and

disclosures related to the financial statements and show unrestricted, board-designated and

restricted net assets.

While a financial compilation does not provide the level of assurance that is available through a

review or audit, it does help a land trust present its financial information in a format that complies

with GAAP rules and, thus, is included as an option for this practice. A compilation may be helpful

to a new land trust without staff or volunteers who are knowledgeable about GAAP for nonprofits.

Alternatives to Compilations

Some small land trusts undertake a compilation primarily to obtain help presenting their financial

information in a standard format. Your land trust may want to consider some other alternatives to

accomplish this same goal. You may be able to work with a skilled accounting consultant who will

treat the engagement as a consultation, rather than a compilation. While the consultation alone

does not meet the requirements of this practice, it may provide substantial help improving your

underlying accounting system so that you will be able to provide more useful reports more easily,

as well as build your understanding of the standard formats for nonprofit financial reports.

In some circumstances, the more appropriate person to provide such a consultation may not be a

CPA engaged in public accounting. Instead, they may be a non-CPA who is employed as a fiscal

manager in a nonprofit organization or a for-profit business or a knowledgeable accountant

working in government and currently retired. In all of these circumstances, even if the individual is

a CPA, they may not be covered by the type of insurance needed to feel comfortable performing

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audits, reviews or compilations. Consequently, they will not be willing to enter into an engagement

to perform those services or issue the appropriate reports.

What they may be able to do is help you put your financial information into financial report formats

that comply with not-for-profit GAAP and help you develop practical accounting policies and

procedures. For many small land trusts, this work may enhance the value of the typical consulting

engagement.

BOARD EXAMINATION OF YOUR FINANCES

For a land trust with a budget of only a few thousand dollars and simple financial records, an audit

or review or even a compilation may seem unnecessary or not worth the cost. While an audit,

review or compilation is a requirement of this practice, a first step for small organizations may be to

have the finance committee conduct an internal review of financial records and systems. The

finance committee should consist of two or more board members who feel capable of reviewing

the organization’s records.

The procedures performed in this review should resemble those applied by independent

accountants. The committee should review all supporting documents and journals for accuracy. The

committee should also review a sampling of the year’s financial transactions. Land trusts may want

to standardize and document this process to provide guidance for future committee members.

This board review process is particularly helpful if your land trust has relied on one person (often

the treasurer) to maintain all the records, handle all transactions and produce all the financial

reports. This person should not be an active participant in this exercise. The committee’s role is to

provide independent confirmation that this person has been handling the finances appropriately

and relieve that person of holding sole responsibility for all fiscal functions.

If you are considering this approach, it will be important to recruit committee members and other

volunteers with the background and expertise necessary to perform the accounting, financial

reporting and governmental compliance duties. If none of your current board or committee

members have the necessary background, you may want to approach other nonprofit organizations

in your community for suggestions of individuals with the needed skills who may be willing to help

with this limited project.

WHAT TYPE OF FINANCIAL REVIEW IS RIGHT FOR YOUR LAND TRUST?

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In deciding what level of review is most appropriate for your land trust, you should start by looking

at your state laws. Twenty-six states have laws requiring charitable nonprofits to conduct an

independent audit under certain circumstances. The requirement for a nonprofit to submit audited

financial statements to the state is most often triggered by either the total revenue received by the

charitable nonprofit during the fiscal year or the total contributions received. In some states, the

threshold of contributions or income received that triggers the independent audit requirement is

relatively low; in other states the threshold is higher.

For accreditation, a land trust must obtain annual audited, reviewed or compiled financial

statements at the following level based on total annual support and revenue, include footnotes

and disclosures and show unrestricted, board-designated and restricted net assets. [Annual

support and revenue excludes the value of donated properties and conservation easements. It

includes support and revenue from grants and special fundraising and for the purchase of land

and easements, as well as money received for another organization as part of a fiscal

sponsorship arrangement.] A land trust must meet these requirements over its entire

accredited term, not just for the year of renewal.

o >$750,000: Audit by independent CPA

o $100,000 - $750,000: Review by independent CPA

o <$100,000 compilation by CPA (if not a CPA, must be an independent qualified

accountant)

[An independent CPA or independent qualified accountant is one who has no financial or other

interest in the organization.]

If state law requirements are stricter than these guidelines, the land trust will want to follow

state law. If state law is less strict, the land trust must meet the accreditation requirements.

The Commission established the accreditation requirements to operate a fair and credible

accreditation program, regardless of where a land trust is located, and they are based on an

analysis of the thresholds set by a majority of states, as well as standards set by other nonprofit

charity evaluators.

Beyond the minimum requirements mandated by state law and required for accreditation, boards

should take a hard look at what type of financial review would best serve their land trust.

Determining whether your land trust should have an audit, a financial review or a financial

compilation will require your board to evaluate the costs and benefits of each option. An audit will

provide significantly greater assurance about the reliability of your financial statements than a

review, while a compilation provides no assurance at all.


Because a review opinion on your financial statements is more limited than an audit opinion and

does not require the CPA to obtain independent confirmation of information in the organization’s

financial records, it is less expensive than an audit. For smaller land trusts on tight budgets, a

review may be a perfectly adequate approach to providing assurances about an organization’s

financial reports to its board, funders and other interested parties.

A compilation does not offer any assurances about the reliability of a land trust’s financial

information. While a compilation is an option under this practice, a land trust might first consider

spending the money on an accounting consultation and training for staff who will maintain the

financial records and then growing into a review or audit.

If you think that your land trust may have significantly weak systems or missing records, you should

discuss these problems with the CPA before you enter into an agreement for an audit. It may be a

much better strategy to undergo a review of financial statements before attempting an audit. The

review will identify problem areas to resolve before engaging in an audit.

The review engagement does not involve as high a standard in its opinion on the reliability of the

financial statements, so the report does not call the reader’s attention to problems in quite so

dramatic a fashion as an audit report. If you wish this type of review, called an agreed upon

procedure, be sure to clarify exactly what you want from the accountant. This type of special review

provides an opportunity for an independent professional to look closely at the financial records and

point out areas of weakness and opportunities for improvement.

Many newer organizations will have a review done the year before they have their first audit. This

strategy provides opportunities to identify problem areas and make improvements before the first

audit and increases the likelihood of obtaining a clean audit opinion. This approach also provides

the auditor better assurance regarding the year-end balances contained in the review of the

previous year after the new systems have been in place for a year.

BOARD’S ROLE IN SELECTING AND WORKING WITH THE AUDITOR OR REVIEWER

The selection of an auditor and maintaining clear communication with the auditor throughout the

audit process are key board responsibilities. Some boards assign these functions to the finance

committee. Other boards form a separate audit committee with the specific responsibility of

managing the audit process. There are strong arguments for both of these approaches.

Some land trusts find that they have so much difficulty recruiting board members or other

volunteers with strong finance skills that trying to populate more than one committee seems


impossible. These boards feel that the finance committee can do a good job in selecting the audit

firm and ensuring full and open communication with the auditor, so there is no need to set up a

separate audit committee.

Other land trusts see great advantages to appointing a separate audit committee. They find that

some individuals with strong finance skills are willing to fulfill the time-limited duties of the audit

committee but are unwilling or unable to take on the more open-ended and time-consuming duties

of board membership or even serving on a finance committee. Land trusts that have been

successful in recruiting a separate audit committee report that they have found the finance experts

that were only willing to join the audit committee frequently become more interested in the

organization and more willing to serve on the board through their audit committee service.

Beyond this board recruitment benefit, a separate audit committee can evaluate the effectiveness

of the finance committee and report to the full board if there are problems, such as lack of

expertise or infrequent meetings.

Whether you are using an audit committee or assigning these responsibilities to the finance

committee, you should develop and follow a clear process for selecting the audit firm. The board

should provide clear direction to the committee about its authority for selection, either allowing

the committee to make the final selection or requiring the committee to bring a recommendation

about selection to the full board for approval.

Once the board selects the audit firm, the committee or committee chair should meet with the

person in charge of your audit. Establishing this relationship is important because auditing

standards require the auditor to inform the board of any significant concerns about management

that arise during the course of the audit.

Practice 3A2d requires the board to review the audit, review or compilation. The auditor should

meet with the entire committee or the full board after they prepare the draft audit report. This

meeting allows committee and board members to ask the auditor questions about the proposed

report and about the auditor’s observations about the land trust’s financial systems. You should

conduct at least part of this meeting without staff (executive session) to encourage a frank

discussion. You may also want to have a portion of the meeting with the executive director present

but with the accounting staff or fiscal manager absent so that the committee and the executive

director may ask the auditor to share their observations about the quality of the accounting staff’s

work.


For accreditation, a land trust needs to provide the minutes from the board meeting at which

the results of the most recent audit, review or compilation were presented. See more about

the board’s role in reviewing the audit, review or compilation in Practice 3A2d.

The auditor should discuss any findings that will be included in the management letter. These

letters are generally prepared using standard accounting language and often quite hard for non-

accountants to understand. Do not hesitate to ask the auditor about both the meaning of

unfamiliar terms and the overall seriousness of the findings. It is fine to ask questions like, “How

worried would you be if you were a member of this board?”

Your auditor will ask the committee and management whether there are any changes to the

financial statements or the audit report that you would like to discuss. Remember, the financial

statements are your responsibility, so you should be satisfied that they fairly present the financial

reality of your land trust.

The audit or finance committee is responsible for ensuring that the full board understands the audit’s

findings. The committee may decide that it would like the auditor to be available for a discussion with

the full board or it may decide that the committee will simply report on its meeting with the auditor

and provide copies of the audit report to all board members.

AUDIT OPINIONS

At the conclusion of the audit process, the auditor prepares the final audit report. The auditor will

bind the report with a cover displaying the audit firm logo, the name of your land trust and the dates

of the financial statements. The auditor’s opinion letter will appear at the beginning to alert readers

to the auditor’s assessment of the degree to which readers should rely upon the financial statements.

All audit opinion letters describe what the auditor has done using the phrase “we have audited the

financial statements for the period [ ].” There are four distinct types of audit opinions that your

auditor may express:

• Unqualified opinion. The auditor states, without qualification, that the financial statements

do fairly present the financial position and activities of your organization in accordance with

GAAP. This opinion is referred to as a clean opinion and is most desirable.

• Qualified opinion. The auditor states that the financial statements do fairly present the

financial condition and activities of your organization in accordance with GAAP, except for

certain matters. The qualifications or exceptions can include items such as using a non-GAAP

treatment to record certain transactions, using a method of accounting other than the




accrual (usually referred to as another comprehensive basis of accounting), lacking

documentation to establish certain balances and so forth.

While there are many possible types of qualifications your auditor may include in the opinion letter,

one type of qualification should be of particular concern to your board – the “going concern”

qualification. Auditors may issue a going concern opinion if the auditor fears that an organization

lacks the financial resources to “stay alive.” Circumstances that may give rise to this uncertainty

include:

• Capital deficiency

• Default of credit agreements

• Significant operating losses

• Default on loan agreements

• Bankruptcy reorganization

If an opinion expresses a going concern qualification, the auditor, in effect, warns readers that there

are factors that may limit the ability of the organization to continue its operations. This qualification

is a strong warning that the organization confronts serious problems.

• Disclaimer of opinion. It is quite unusual to see a disclaimer of opinion in an audit report. An

auditor generally issues a disclaimer opinion in response to a scope limitation. This situation

generally occurs when the organization fails to provide information necessary for the auditor

to form an opinion. The rules also require that, in those circumstances, auditors state that the

scope of their audit was not sufficient to warrant the expression of an opinion. A disclaimer

opinion can also result from going concern issues that are of such significance that the

organization’s ability to continue is in substantial doubt.

The disclaimer due to lack of information is a very bad outcome for an audit. It tells the reader of the

audit report that the organization lacks the underlying records needed to support the financial

statement information. Land trusts that are concerned that their financial recordkeeping may be

weak or inadequate should explore these concerns before engaging the auditor.

• Adverse opinion. This is the opinion no nonprofit wants. In the adverse opinion, the auditor

states that, in their opinion, the financial statements do not fairly present the financial

position of the organization. This opinion tells the reader that the group’s financial

statements may not be accurate or verifiable, undermining the credibility of the organization.


It is quite rare for a nonprofit to receive an adverse opinion because auditors can generally identify

situations in which there will be problems likely to lead to an adverse opinion before they accept the

audit engagement and let the client know that this is a possible or likely outcome. Even in situations

in which it was not apparent before starting the audit that problems would result in an adverse

opinion, many auditors would prefer to withdraw from the audit engagement rather than issue an

adverse opinion.

If your land trust is concerned that its systems and financial reports have problems that may be so

serious as to result in an adverse opinion, you should work with an outside accountant other than

your potential auditor to assess ways to improve your system and records before engaging an

auditor. You may decide that you will not obtain either a review or audit for the year you are

concerned about and will instead obtain assistance in improving your systems so that an audit will be

productive in subsequent years.

MANAGEMENT LETTERS

In addition to the opinion letter, the auditor may provide a management letter addressed to the

board. The management letter alerts the board and management to concerns about the reliability of

the fiscal systems and accounting data. This letter focuses on the concepts of substantial deficiencies

and material weaknesses, which are issues that would likely cause a modified or adverse auditor

opinion on the financial statements or cause a halt to the audit engagement entirely. Material

weaknesses must be brought to management’s attention immediately.

Material weaknesses include such problems as not tracking donor restrictions or not recording

donated property at its fair market value at the date of receipt. Inconsequential or consequential (but

not material) management issues should be communicated to the board even though they do not

have a material impact on the financial statements for purposes of the audit engagement. These are

referred to as management points and are included in the management letter.

The management letter may also discuss other matters that are not significant deficiencies or

material weaknesses. Instead, they are observations the auditor has made about flaws within your

systems that have not yet caused problems that meet the definitions of significant deficiency or

material weakness but still should be addressed in order to avoid future problems.

For accreditation, if the management letter or correspondence that accompanied the most

recent audit, review or compilation indicated that the land trust should make significant changes


to its financial procedures, the land trust will need to provide a statement describing the actions

it has taken to address the recommended changes.

SINGLE AUDITS UNDER THE UNIFORM GRANTS GUIDANCE 2 CFR 200

Some land trusts must obtain a more intensive audit that complies with the Single Audit

requirements established by the federal Office of Management and Budget as part of the Uniform

Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (commonly

called "Uniform Guidance") and published in the Code of Federal Regulations under Section 2 CFR

200. These requirements have replaced those previously described in OMB Circular A-133 and are

sometimes referred to as a Yellow Book audit.

A Single Audit is required if a land trust expends more than a total of $750,000 of federal funds in a

single fiscal year. The $750,000 threshold includes all funds that originate with the federal

government, even if the direct provider of the funds to the land trust is a state or local government or

another nonprofit organization. Another common way an organization may be subject to Single Audit

requirements is through provisions included in grant agreements or contracts, regardless of the

amount of federal awards expended, if any.

The amount of federal funds expended for purposes of determining whether a Single Audit is

required does not include amounts organizations receive when acting as contractor/vendors of goods

or services under service contracts. However, this is a hotly contested issue because there is

substantial disagreement about what constitutes a true contractor/vendor agreement.

A good place to start to is to read the language in your funding award or funding agreement. The

Uniform Guidance requires that funders specify whether the organization receiving the funds is a

recipient or sub-recipient or a vendor/contractor. If the organization is a recipient or sub-recipient,

the agreement must specify the specific federal program that is the source of the funds by providing

the CFDA (Catalogue of Federal Domestic Assistance) number of the program.

If your agreement with funders providing federal funds (including federal funds that are being passed

through state or local government or another nonprofit) is silent on the question of whether the

organization receiving the funds is considered to be a recipient or sub-recipient, you can contact the

funder to request clarification (be sure to get the answer in writing).

The Single Audit includes the standard financial statements and a separate schedule of the

expenditure of federal funds (SEFA), each with an auditor’s opinion. The auditor’s opinion letter will

reference government auditing standards and the Uniform Guidance. Additionally, the auditor will


prepare reports on their review of the land trust’s internal control structure and compliance with

laws and regulations. The auditor’s reports on these items will include any findings of material

weaknesses. The report on compliance must contain the auditor’s opinion on whether the

organization administered the federal funds in accordance with applicable law and regulation.

If you believe your land trust may be subject to the Single Audit requirement of the Uniform

Guidance, you will want to discuss the situation with any potential audit firms you are considering to

provide audit services. Not all CPA firms are able or willing to perform Single Audits. Moreover,

because Single Audits require substantially more time to perform and expose the auditor to

substantially more risk, the cost of such an audit done is significantly higher than the cost of a

standard independent audit of financial statements.

For accreditation, if the schedule of findings from a land trust’s most recent Single Audit indicated

that the land trust should make significant changes to its financial procedures, the land trust will

need to provide a statement describing the actions it has taken to address the recommended

changes.


• Audit Committee Effectiveness Center. The American Institute of Certified Public Accountants

sponsors this site to help audit committees implement best practices. The site contains a

wealth of resources for audit committees.

• Audit Committee Toolkit, American Institute of CPA’s

• Audit Guide for Audit Committees of Small Nonprofit Organizations. This guide, sponsored by

the Virginia Society of Certified Public Accountants, can assist the audit teams of small

nonprofits in performing a limited review of their organizations’ financial statements. This

guide should help a land trust’s board control financial activities until they reach the stage

when a professional audit is possible. It also emphasizes the importance of internal controls

in safeguarding the assets of an organization.

• Warren Ruppel. Not-for-Profit Audit Committee Best Practices San Francisco: Jossey-Bass,

2005.


WHAT DOES AN AUDIT INVOLVE?

The engagement letter should outline the procedures the auditor will perform during the audit

process. The letter should also contain details regarding what will be expected of land trust

personnel and the documentation they will be expected to produce. If, in the course of performing

the procedures needed to render an opinion on your financial statements, the auditor obtains

information about possible fraud or impropriety or learns about significant weaknesses in your

fiscal controls, auditing standards require that the auditor inform the appropriate individual within

your organization about these problems. However, uncovering these problems will not be the

primary purpose of the audit, so do not rely on a traditional audit to uncover malfeasance. Auditors

take the legal position that the purpose of the standard audit of financial statements is not the

discovery of fraud or malfeasance. Consequently, the engagement does not include all of the

procedures that would be necessary to provide reasonable assurance that such fraud or

malfeasance did not occur (fraud audits are a different type of engagement and are considerably

more expensive). The auditor also has no responsibility for alerting authorities of any fraud.

Your auditor will use a variety of procedures to obtain the information needed to form an opinion

on the reliability of your financial statements. The auditor will design an audit program to guide the

audit process, which typically includes steps that allow the auditor to obtain an overall

understanding of your accounting policies and procedures, as well as your internal control

structure. The auditor will conduct a preliminary assessment of the areas in which there is the

highest risk for error or misstatement in your financial statements.

In most cases, the auditor will begin with an in-depth interview with management personnel

through whom the auditor gains an understanding of the nature of your operations, including your

primary sources of funds and their primary uses. With this understanding in mind, the auditor will

ask a series of detailed questions about how you handle different types of financial transactions,

focusing on who is responsible for various steps in initiating, authorizing, recording and reviewing

them.

Most auditors will provide their clients with a list of documents and schedules needed to conduct

the audit. Gathering these materials for the auditor will save time, and because audit fees are

based on time required, having requested materials ready and complete may save your land trust

money. Your staff should feel free to ask the auditor for clarification about exactly what they will

need to avoid wasted effort or delays.

During the course of the audit, the CPA will:

• Obtain an understanding of the land trust’s operation, systems and procedures

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• Test the procedures to determine the extent to which your internal systems can be

depended upon to produce reliable information

• Determine what additional procedures are necessary to obtain assurances of the reliability

of the financial statement information

• Perform those additional procedures

• Obtain independent evidence to support key elements of the information presented on

your financial statements

• Identify and discuss with the land trust any significant areas in which the financial

statements do not appear to conform to GAAP

• Reflect on all of the information obtained through the audit process to create an opinion

regarding the financial statements

• Issue a draft audit report and discuss the draft report and financial statements with the

land trust and prepare revisions if needed

• Issue the final audit report and management letter

Although the auditor is responsible for planning and executing all of these steps, each of them will

require participation by your land trust’s staff, volunteers or board.

You can help the auditor form a more accurate understanding of the nature of your operations by

carefully selecting the land trust personnel assigned to the audit. You should ensure that the initial

interviews involve the executive director, board chair or other person having the deepest

understanding of your land trust’s overall mission and operations, including the nature of its

financial support and underlying strategies to fulfill your mission.

When the auditor is ready to move on to building an understanding of your fiscal systems and

procedures, you should pull together the team of individuals with the clearest knowledge of how

your system works. One of the questions the auditor is required to ask is: “Where are the

opportunities for someone to commit fraud in this organization?” This question does not reflect on

the integrity of your land trust or its personnel – it is just part of the auditor’s duty to identify and

evaluate risks for impropriety in the design of audit procedures.

Your auditor will take an in-depth look at your general ledger and financial statements. They need

to understand the structure of your chart of accounts, your procedures for posting adjusting entries

and the process you use to review the accuracy of your financial statements. The auditor will


identify general ledger accounts for which independent confirmation is needed and ask you to send

letters to the parties that could provide that confirmation. Typically, confirmation letters will be

sent to your banks, brokerage house, major funders and donors, attorneys, vendors and creditors.

Your auditor will ask your accounting staff, volunteers or board members to prepare schedules that

support the accuracy of the balances in significant asset, liability, revenue and expense accounts.

For example, if your financial statements report that you have pledges receivable totaling $50,000,

the auditor will ask for a schedule listing the names of everyone who has pledged along with the

amount of the original pledge, the amount collected and the amount outstanding. The auditor

might then ask you to request that these donors write directly to the auditors confirming that they

intend to pay the pledges.

The auditor will also ask you to provide a schedule reconciling the bank account balances included

in your financial statements with the bank statements provided by your bank. If there are transfers

between bank accounts, the auditor will ask for a schedule of those transfers in order for the

auditor to trace them.

If your land trust receives funds with donor restrictions, either from individual donors or from

foundations and governmental sources, your auditor will ask to see the contracts, award letters and

other documents that establish the donors’ restrictions. The auditor will also ask you to provide an

analysis of the amounts received from each restricted source, the amounts used for the restricted

purposes and the amounts remaining to be used for the restricted purposes in future periods.

While you are compiling this information, the auditor will conduct tests of transactions. These tests

involve examining sample invoices, checks, deposit records and other documents of transactions in

your records to determine whether all of the procedures that you describe in your written fiscal

policies and procedures and in your interview with the auditor are being followed consistently. The

purpose of the test of transactions is to help the auditor determine the extent to which they can

rely upon your systems or the extent to which they will have to use alternative analytic procedures

to form an opinion about the reliability of your statements. This step is required, even if the auditor

does not intend to rely on your internal controls.

As the audit proceeds, your auditor will identify areas where they believe you may not have

followed GAAP in recording financial information. For example, some land trusts record

conservation easements as assets at cost. A change an auditor might recommend would be to

expense conservation easement costs as program services expenses. Alternatively, an auditor may

suggest that a land trust report investments in mutual funds and readily marketable securities at

market value, as opposed to cost. If issues such as these are identified and corrected, then the

auditor’s reports will not require modification.


The auditor will want to speak with management personnel about their interpretation of GAAP and

possibly propose changes (adjustments) to the way you record information. If the organization

chooses not to accept the recommendations, the auditor may find it necessary to take a number of

different steps, depending on the significance of the departure from GAAP. The most serious

departures from GAAP may require the auditor to disclaim any opinion or present an adverse

opinion on the financial statements. In some cases, the auditor may be compelled to withdraw

from the audit engagement entirely.

Less significant departures from GAAP may only require modification of the audit opinion in order

to make the reader aware of the issue. These modified opinions are often referred to as except for

opinions. As the term implies, the auditor may state that the financial reports present fairly, in all

material respects, the activities and financial position of the land trust, except for the areas

identified as departing from GAAP. Ultimately, however, management needs to decide whether to

accept the auditor’s interpretation and agree to the adjustments or stick with the original

interpretations.

As you have these discussions about potential adjustments, you will have to weigh the

consequences of agreeing or not agreeing to the auditor’s suggestions. In some situations, your

auditor may tell you that if you do not agree to the adjustments, they will need to issue a qualified

opinion on your financial statements. You must determine whether receiving a qualified opinion

will damage your credibility to such a degree that it is worth accepting the proposed audit

adjustments in order to obtain a clean, unqualified opinion.

Once the issues about potential adjustments to your statements are resolved, your auditor will

issue a draft report. Management and the board audit committee or finance committee should

review the draft carefully. Pay particular attention to the notes to financial statements to be certain

that they describe your organization, its work and its financial activity clearly and accurately.

Remember that both donors and other outside parties may have access to your audit. The notes to

financial statements are also the land trust’s responsibility, not the auditor’s, so you will want to be

sure that they present the clearest, most compelling picture of your organization.

FACTORS TO CONSIDER IN AUDITOR SELECTION

There are a number of factors that the audit or finance committee should consider in selecting an

auditor, including:

• Knowledge of and experience with auditing community-based nonprofit organizations. Not

every CPA or CPA firm has expertise in the requirements of nonprofit accounting. A firm that


provides audit services for a substantial number of community-based nonprofits will be

knowledgeable about GAAP for nonprofits and probably be familiar with the typical challenges

that organizations with limited resources face and their need to conduct complex accounting

for gifts and grants with donor restrictions.

• Experience with land trusts. Land trusts have unique accounting challenges, most notably how

to report conservation easements. It will be very helpful if your audit firm has provided services

to other land trusts or has access to colleagues who have served land trusts. A firm that is

committed to providing the highest quality of service will complete preliminary research to

familiarize itself about land trust issues before submitting a proposal to provide services.

• Demonstrated capacity and commitment to researching areas of specialized accounting. While

there may be no CPA firms in your area with experience auditing land trusts, you can still

evaluate potential firms based on their experience conducting research on specialized areas of

accounting. Ask the potential firms to describe other audit engagements that have required

specialized research. You may wish to contact those clients for references.

• Capacity of the firm to do quality, timely work. Failure to complete audit work on time is one of

the most frequent complaints that nonprofits have about auditors. Delays in finishing audit

work for other nonprofit clients may be a sign that a firm underestimates the time required to

complete nonprofit engagements. It may also be a sign that the firm is prioritizing for-profit

clients over nonprofit work. This would not be a surprising decision because nonprofit audit

work is generally less profitable to the firm than work for business clients.

However, in evaluating the question of timeliness, you should check with several of the firm’s

clients. Sometimes, delays in the completion of audits have more to do with the difficulties the

nonprofit organization has providing the needed information than with the timeliness or

commitment of the audit firm.

In terms of audit quality, you should check with your state board of accountancy to determine

whether any complaints have been filed against the audit firms under consideration. You

should also ask audit firms to describe any specialized training completed by the staff and

principals who will be involved in your audit engagement.

• Capacity to communicate complex accounting concepts to non-accountants on the board and

staff. Before committing to an audit firm, check that both your accounting staff and at least one

member of the committee has had an in-person meeting with both the audit firm member who

will be in charge of your engagement and the person who will supervise the fieldwork (the

work conducted at your office that involves the most direct and intense communication with

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your staff). You should be sure that both the staff and the committee feel confident that the

audit firm staff can communicate clearly and respectfully with both accountants and non-

accountants.

• Plan for conducting the audit, including use of junior or senior staff. It is very important that you

obtain a detailed description of which members of the audit team will perform the various

components of the audit. In larger firms, a partner will officially manage your audit

engagement. However, the larger the firm, the more likely it is that the partner in charge will

delegate most, if not all, of the responsibility for the audit to more junior staff. In the worst

case, you may find that the person assigned to do the fieldwork, the work that involves the

most direct contact with your staff, is a recent accounting graduate with little or no experience.

This situation can pose a tremendous burden on your staff who will be training this junior

auditor about the basics of nonprofit accounting. Each year you may find yet another junior

rotated onto your engagement.

In small firms, particularly in sole proprietorships, you may find that the owner of the firm will

conduct the fieldwork, or at least provide direct supervision to the person doing the fieldwork.

If the owner is very experienced in nonprofit auditing, this arrangement can be a tremendous

advantage. However, small firms often have more difficulty meeting timelines because they

have fewer resources to deploy when unanticipated events arise.

Past performance is the best predictor of future experiences. So be sure you check references

and think carefully about the experiences that others have had with this firm.

• References. All of the firms interested in providing audit services for your land trust should

provide references. Ask to see, if possible, a list from each of the firms of their nonprofit clients

and make your own selection of which organizations to contact.

Whenever possible, your reference checks for your final candidates should include discussions

with the executive director and a member of the audit committee of the client organizations

served by the auditor. You should ask about overall satisfaction, timeliness, communication

skills and any reservations the organization would have about working with the audit firm

again.

• Pricing and multiyear contract options. Audit proposals should explain the basis for the

proposed price and whether the auditor is willing to enter into a not-to-exceed agreement,

which limits the maximum amount of the fee. Typically, audit fees are determined by the

number of hours required to complete the audit. Most auditors are somewhat cautious in the

pricing proposals for new audit clients. They recognize that they will not really know how


difficult the engagement will be until they start working and learn the strengths and limitations

of an organization’s systems.

You should not assume that the least costly proposal is the best or that the most costly

proposal is an indication of the highest quality work. In most cases, you will find the total

proposed prices somewhat similar despite the fact the different audit firms arrived at their

estimates through different methods.

You should consider requiring that audit firms propose multiyear pricing options. This approach

requires that the firm commit to holding the price steady or instituting only minimal increases

over a three-year period. This approach avoids the possibility that an audit firm will submit an

initial year proposal with an unreasonably low price and then propose unreasonably high prices

in subsequent years.

In most cases, you will want to work with the same audit firm over at least a three-year period.

Changing auditors usually makes the audit process more time-consuming and stressful for your

staff and audit committee. Changing auditors frequently may also cause funders and donors to

wonder if you are having disagreements with your auditors, which may reflect some questionable

practices in your organization.

On the other hand, you should rotate auditors periodically so that they do not become too

accustomed to your practices and friendly with your staff or volunteers, which may impair their

independence. If there are not sufficient audit firms locally, you should at least try to make sure

that the personnel on the audit team are rotated from year to year.

WHAT DOES A REVIEW INVOLVE?

The CPA begins the review by examining the financial statements you prepared at the end of your

fiscal year. They will identify the most significant information on the financial statements, including

your cash accounts, major receivables, major payables and the presence or absence of temporarily

or permanently restricted net assets. These are all items presented on your statement of financial

position or balance sheet. The CPA will also examine your statement of activities to identify the

income and expense accounts with greatest significance, usually the largest components of your

income and expense. Once the CPA has identified the most significant information on the financial

statements, they will examine your general ledger and other underlying accounting records to

determine whether the records agree with or support the numbers presented on the financial

statements.


While evaluating all these components of your financial statements, the CPA will often perform the

procedures and examinations outlined in an analytical inquiry checklist. Many of the procedures

outlined in this checklist could be used in either audit or review engagements. They will prepare a

series of work papers that demonstrate the connection between the financial statement numbers

and the underlying records. For example, to make the connection to the number you reported as

accounts payable, the CPA will prepare or ask your accountant to prepare a list of all the amounts

your land trust owed to specific vendors or creditors at yearend and compare the sum of that list

with the amount reported on your financial statements.

These procedures involve examining records maintained by your land trust, rather than gathering

information from outside sources (a procedure used in an audit). The CPA will review your bank

statements to verify the cash balances in your accounts, but will not seek independent

confirmation from the bank about the accuracy of the statements. Of course, with the advent of

online banking, reviewing your bank statement online will allow the CPA to see the records as they

are maintained on the bank system.

If the CPA determines that the underlying accounting records do not support the numbers in your

financial statements or that you have not followed the guidance of GAAP, they may suggest

revisions or adjustments to your financial statements. If you decide to accept the proposed

adjustments, you will revise your records and financial statements, and the CPA will include those

revised statements in the review report. If you decide not to accept the adjustments, the CPA may

comment on those issues in the report.

The CPA will also work with you to draft notes to the financial statements, which describe your land

trust’s accounting policies, and provide more detailed information about key areas, such as lists of

grants included in net assets with donor restrictions or explanations about the type of in-kind

assistance your land trust received. While assistance with preparation of the footnotes to the

financial statements are outside of the scope of the review engagement, most CPAs are willing to

propose a draft of the notes for review by your organization, if requested.

Upon completion of the work, the CPA will issue a report, which includes a signed letter describing

the review engagement and expressing an opinion on the financial statements taken as a whole.

The CPA binds the letter into a report document that includes each of your financial statements at

yearend – the statement of financial position, statement of activities and statement of cash flows,

as well as the notes to the financial statements. If the land trust completed a statement of

functional expenses, it would also be included.

If, in the course of the review engagement, the CPA discovers information that would have a

material impact on the conformity of the financial statements with GAAP when taken as a whole,


the opinion will so indicate. The opinion may identify the deviation from GAAP and indicate the

scope of the deficiency in the report, or the accountant may decline to offer an opinion on the

financial statements.

The CPA will show you a draft of the letter before issuing the report. Your board, staff or relevant

volunteers should review the draft carefully to be sure that you are comfortable with both the facts

and the tone of the letter. If you have declined to accept adjustments to your financial statements

that the CPA considers important and includes in the draft letter, you may want to reconsider your

decision to decline the adjustments to ensure that your books are accurate and will pass the

harshest scrutiny.

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23 Land Trust Alliance · Land Trust Standards and Practices · Practice 6C1. External Financial Evaluation


assistance your land trust received. While assistance with preparation of the footnotes to the

financial statements are outside of the scope of the review engagement, most CPAs are willing to

propose a draft of the notes for review by your organization, if requested.

Upon completion of the work, the CPA will issue a report, which includes a signed letter describing

the review engagement and expressing an opinion on the financial statements taken as a whole.

The letter is bound into a report document that includes each of your financial statements at

yearend – the statement of financial position, statement of activities and statement of cash flows,

as well as the notes to the financial statements. If the land trust completed a statement of

functional expenses, it would also be included.

If, in the course of the review engagement, the CPA discovers information that would have a

material impact on the conformity of the financial statements with GAAP when taken as a whole,

the opinion will so indicate. The opinion may identify the deviation from GAAP and indicate the

scope of the deficiency in the report, or the accountant may decline to offer an opinion on the

financial statements.

The CPA will show you a draft of the letter before issuing the report. Your board, staff or relevant

volunteers should review the draft carefully to be sure that you are comfortable with both the facts

and the tone of the letter. If you have declined to accept adjustments to your financial statements

that the CPA considers important and includes in the draft letter, you may want to reconsider your

decision to decline the adjustments to ensure that your books are accurate and will pass the

harshest scrutiny.

1 · Land Trust Alliance · Land Trust Standards and Practices · Practice 6D1. Written Internal Controls



D. Written Internal Controls 1. Establish written internal controls and accounting procedures, including

segregation of duties, in a form appropriate for the scale of the land trust,

to prevent the misuse or loss of funds


WHAT ARE INTERNAL CONTROLS?

Internal controls are a system of checks and balances designed to safeguard the assets of the

organization and to help ensure that resources are directed to appropriate and authorized

purposes. A key element of sound internal controls is segregation of duties, which mandates that

no one person has complete control over a financial transaction. Proper internal controls are

crucial, not only to help protect the land trust against theft, fraud and loss due to unethical or

illegal behavior, but also to inspire confidence in donors, regulators and other board members.

Examples of internal control policies and procedures may include requiring multiple signatures for

large checks, having one person log in checks received and another responsible for making bank

deposits and requiring competitive bids for certain contracts.

The core concept that underlies effective internal controls is the recognition that bad things do

happen to good organizations. And while it is not possible (or at least not cost effective) to prevent

every bad outcome from occurring, it is extremely important to understand the risks your land trust

might confront and design comprehensive internal controls to prevent errors and malfeasance and,

if they do occur, to ensure that they are detected and corrected quickly.


2 Land Trust Alliance · Land Trust Standards and Practices · Practice 6D1. Written Internal Controls


Many land trusts have only really thought about internal controls when confronted with a checklist

of policies and procedures that experts advise them to put in place. While policies and procedures

are a critical part of effective internal controls, they are only part of the comprehensive system that

your land trust will need to establish and monitor to be certain that the controls are working as

intended.

FRAMEWORK FOR ESTABLISHING AND EVALUATING INTERNAL CONTROLS

In the United States, the most common framework for establishing and evaluating internal controls

is the COSO Framework, which is a comprehensive framework for thinking through the controls

that both nonprofits and business entities need to put in place to manage significant risks. You can

download a free Executive Summary of the latest version of the COSO Framework and find a variety

of helpful resources at the main COSO website.

Five Key Elements of Effective Internal Control

The COSO Framework emphasizes five key elements for internal controls, with the understanding

that all five elements must be addressed to establish and maintain effective controls. The elements

are:

1. Control environment

2. Risk assessment

3. Control activities

4. Information and communication

5. Monitoring

Control Environment

The starting point for effective controls lies with establishing clear expectations for integrity and

accountability at the top. In a nonprofit organization, the board must express and demonstrate

absolute commitment to integrity and compliance with controls. The control environment includes

the board’s commitment to disclosing and addressing their own potential conflicts of interest and

moves beyond those basic policies and procedures to include embodying the highest standards of

integrity and ensuring that the executive director, all staff and volunteers meet those standards.

https://www.coso.org/Pages/default.aspx

https://na.theiia.org/standards-guidance/topics/Documents/Executive_Summary.pdf



The most significant aspect of the control environment is actually how people experience the

behaviors and expectations of those in authority. It extends well beyond the adoption of specific

policies and compliance with specific procedures to focus on the perceptions of all who are

exposed to the organization – staff, donors, volunteers, partners and others. In a strong control

environment, all those who come in contact with the organization’s leaders perceive their

commitment to integrity and accountability and understand that each leader meets those

standards and holds their fellow leaders fully accountable for meeting them as well.

For accreditation, the “control environment” aspect of internal controls is addressed, in part,

with requirements for adopting Land Trust Standards and Practices (which are the ethical and

technical guidelines for the responsible operation of a land trust) and carefully managing

conflicts of interest (see Practices 4A1 and 4A2).

Risk Assessment

Every land trust faces a variety of risks from external and internal sources. The concept of risk

includes the possibility that an event will occur and adversely (or positively) affect the achievement

of objectives. As noted in the COSO Internal Control – Integrated Framework:

Risk assessment involves a dynamic and iterative process for identifying and assessing risks to the

achievement of objectives. Risks to the achievement of these objectives from across the entity are

considered relative to established risk tolerances. Thus, risk assessment forms the basis for

determining how risks will be managed.

To conduct a meaningful risk assessment of management practices, the board and management

must identify their objectives for operations, reporting and compliance “with sufficient clarity to be

able to identify and analyze risks to those objectives. . . . Risk assessment also requires

management to consider the impact of possible changes in the external environment and within its

own business model that may render internal control ineffective.” Your land trust’s assessment of

its risks should focus on both the significance of each risk (what damage would be done if controls

failed and errors or irregularities occurred) and the likelihood that such a control failure will occur.

Based on that assessment, you will be able to develop control activities, appropriate

communication around risk controls, as well as a targeted plan for monitoring. For more on

assessing your risks and developing a plan to mitigate those risks, see the Alliance’s online risk

management course (now located on the Terrafirma website) and Practice 6E.

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https://terrafirma.org/risk_management/01_introduction

https://terrafirma.org/risk_management/01_introduction

https://terrafirma.org/

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For accreditation, the “risk assessment” aspect of internal controls is addressed with a short

risk-assessment questionnaire completed by someone familiar with the land trust’s financial

and accounting practices. (A land trust may have responded to a similar questionnaire for its

auditor; the auditor uses the information to determine whether the financial statements fairly

represent the land trust’s financial position, not to evaluate internal controls. The answers

given to the auditor, however, can be useful in answering the accreditation questionnaire.)

Control Activities

As the COSO Framework notes: “Control activities are the actions established through policies and

procedures that help ensure that management’s directives to mitigate risks to the achievement of

objectives are carried out.” Control activities include the development and implementation of

written policies and procedures that are designed to prevent error or irregularity from occurring

and ensure rapid detection and correction for any errors or irregularities that do occur, despite the

land trust’s best effort to prevent them from occurring

Control activities include both manual and automated systems, policies and procedures, such as

authorizations and approvals, verifications, reconciliations, reporting and meaningful employee

performance reviews. Segregation of duties mandates that no one individual performs the roles of

authorizing, executing, recording, supervising and reporting any financial transaction or activity. For

example, the person who gets the mail is not the same person to record the checks. Where

segregation of duties is not possible due to limited staffing, management, possibly at the board

level will need to become more involved. This may also require development of alternative control

activities, such as random review of transactions, dual signature requirements or review of

exception reports. It is also important to remember the critical role the budget plays in internal

controls. The budget forms the road map by which those individuals charged with executing,

overseeing and reporting transactions are guided.

Small land trusts often struggle with the design of control activities that will be effective when full

segregation of duties is not possible. As is true for organizations of all sizes, the key issue in the

design of control activities is clarity about the risks that the control is intended to mitigate and

consideration of alternative approaches to address those risks. You may also find it helpful to talk

with the CPA who provides you with audit or review services. While they may not have conducted a

study of your internal controls, as part of their work they will have learned a great deal about both

the risks that your land trust confronts and the control activities you have already put in place. They

may also have worked with other nonprofits of similar size and have some practical suggestions for

control activities.

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Once you have completed your risk assessment and designed the controls you believe will be most

effective in addressing your most significant risks, you will need to develop written fiscal policies

and procedures to document your controls. Be sure to avoid the temptation to simply copy the

policies and procedures developed by another organization without conducting a risk assessment

that is specific to your land trust and determining how you can best mitigate those risks. Adopting

another organization’s policies and procedures without thinking through their appropriateness or

feasibility in your situation can increase your actual risk. This unintended consequence arises from

the reality that effective fiscal policies and procedures provide a basis for evaluating whether staff

and volunteers are following the requirements described in them. If you have adopted sample

policies that cannot be fully implemented within the limitations of your organization, and

consequently tolerate non-compliance, you have eliminated an important accountability tool.

For accreditation, the “control activities” aspect of internal controls is addressed with

requirements for written internal controls or accounting procedures that address the risks of

misuse, loss or misstatement of funds – such as those risks identified in the risk-assessment

questionnaire. (Many land trusts already have policies and procedures that address these risks,

and organizations can provide these existing documents with the accreditation application;

some organizations may need to formalize written internal controls that address these risks.)

Information and Communication

Your staff, volunteers and others who are expected to perform control activities and comply with

fiscal policies and procedures must have good information in order to carry out internal control

responsibilities. Beyond providing basic information about your control expectations, risk

assessment and control activities, the board and management team must ensure that a continual

iterative process is in place to provide, share and obtain necessary information. Equally important is

implementing systems and processes to ensure clear communication of information flowing up,

down and across the entity. Personnel must receive a clear message from the board and

management team that control responsibilities and fiscal policies and procedures must be taken

seriously.



Clear communication with external parties is also a key part of effective internal controls. External

communication is twofold: it enables inbound communication of relevant external information and

it provides information to external parties in response to requirements and expectations. For

example, your control activities must include systems that will ensure that the appropriate staff are

aware of key compliance requirements in funding agreements. Your land trust’s communication

with external parties can also provide an important control resource. For example, if you are

required to submit requests for reimbursement of covered expenses to some of your funders, the

submission of reports provides an excellent opportunity for feedback from the funder that will help

you identify potential misunderstanding regarding the funder’s requirements and expectations.

For accreditation, the “information and communication” aspect of internal controls is

addressed, in part, with the requirements for board oversight of the land trust’s finances (see

Practice 3A2a-d), the board’s governance practices and the land trust’s response to any

significant concerns identified through the annual financial audit, review or compilation.

Monitoring

Your land trust will need to develop effective approaches to monitoring its entire system of internal

controls in order to understand whether they are working as intended. Your monitoring system

may include periodic confidential surveys or interviews designed to reveal whether staff, volunteers

and partners perceive the board’s and management team’s commitment to integrity and

accountability as serious and effective. You may also want to establish a regular procedure to

review and evaluate your risk assessment to determine whether new risks have emerged or your

perception of the significance of various risks has changed.

If your land trust has an audit, the auditor will conduct a limited evaluation of your control activities

to learn whether they appear to address your most significant risks and whether they have been

implemented consistently. But, as your audit engagement letter will emphasize, the auditor’s

evaluation of internal control is limited, conducted as part of their effort to determine whether the

financial statements fairly present your financial condition and not intended to function as a

separate evaluation of internal controls. So while your auditor will have useful observations and

should communicate those observations directly to your board (or a committee designated for that

purpose), you cannot rely on the auditor’s work as your only strategy for monitoring the

implementation of your internal controls. This means that as part of your system of controls you

will need to identify ways that your board and management team can learn whether your

comprehensive system of controls is working.

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For accreditation, the “monitoring” aspect of internal controls is addressed with an internal

controls certification, completed by a board officer or executive director, attesting that the land

trust periodically verifies the organization’s financial controls to ensure they are effective.

ESSENTIAL POLICIES AND PROCEDURES

One way to begin thinking about the policies and procedures that will be important for your land

trust is to review the sample Land Trust Financial Controls Checklist. The checklist is organized to

reflect the cycle of financial management that guides your efforts throughout the year, beginning

with the board’s adoption of the budget and moving through your efforts to minimize risks as you

execute your financial plan, ensure proper recording of all activities, generate reports needed for

effective oversight and monitor your financial results. The checklist suggests policies, procedures

and practices that can address risks that arise in each phase of the financial management cycle.

Once you have conducted your risk assessment and identified your most significant risks, you will

be ready to develop specific policies and procedures to minimize opportunities for damage from

those risks. The Sample Fiscal Procedures will give you an outline of the topics that are frequently

included in land trust controls. You may identify other risks and other control strategies that you

want to include in your written fiscal policies and procedures document. Alternatively, you may

determine that you do not need to establish policies or procedures in some of the areas listed on

the sample outline.

Many organizations experience challenges drafting fiscal policies and procedures. In fact, creating

them is one of the most frequently put off tasks among land trusts. You may be able to clear away

one barrier to getting the policies and procedures done by thinking clearly about the difference

between a policy and a procedure.

A policy is a high-level description of what the land trust intends to do, approved by the land trust

board. For example, you will almost certainly have a policy that requires you to distinguish whether

a donor has or has not restricted the use of a contribution. You will also have a policy to use gifts

with donor restrictions only for the purposes for which the donor has restricted them. In order to

implement these two policies, you will need to establish a number of procedures, including

obtaining written guidelines from the donor about the restriction, recording the receipt of the gift

as a restricted contribution and identifying specific expenditures that meet the donor’s restriction.

Over time, you will probably maintain the same policies with regard to distinguishing and following

donor restrictions, but your specific procedures may change as you restructure your staff,

implement new accounting and donor-tracking software and so forth.



Your auditor or reviewer may have already helped you describe some of your most important

policies by helping you draft the Notes to the Financial Statements that appear in your audit or

review report after the financial statements themselves. Typically, those notes will include your

policy with regard to following or not following Generally Accepted Accounting Principles (GAAP),

your policy regarding the recording of easements, your policy regarding recording investments at

their fair market value and many other policies. The level of detail provided in these descriptions of

some of your policies may provide a good example for drafting your policies and procedures.

Drafting procedures can be particularly challenging. The most common temptation is to be overly

detailed – for example describing what to do on each screen that appears in your accounting

software when you are processing a check or a deposit. Trying to include this level of detail

presents two problems: (1) It makes the drafting of the procedures too time-consuming and

overwhelming; and (2) software changes regularly, and overly detailed procedures will become out

of date quickly.

Instead, you want your written procedures to focus on the critical control features, especially

requirements for authorization and review of transactions, reconciliation of accounts and retaining

key documents. For example, you may have established a policy that a board member must review

and approve travel expense reimbursements for the executive director. Your procedures would

describe when the board member conducts that review, what documents would be provided for

review and that the board review and approval must be documented. You would not need to

describe the exact forms that would be used to request and document approval.

Another significant barrier to writing fiscal policies and procedures is the reality that it is often the

person doing the bookkeeping and fiscal processing who knows the most about the specific

procedures used to accomplish various functions. Therefore, it is very tempting to ask this

individual to write the policies and procedures. However, this individual is often too close to the

subject to understand what a person coming to the system cold would need to know to be able to

step in and follow the policies and procedures.

An alternative approach is to ask a volunteer with background in financial management to review

your risk assessment and any current policies and interview the people involved in operating your

financial systems. This outside party may actually find it easier to write clear policies and

procedures than the people doing the work. Another approach is to contact a nearby college with

an accounting program and see if a graduate student or an advanced undergraduate could draft

your policies and procedures as a class project.



Whatever approach you end up using, the most important thing is to get a first draft of your

policies and procedures completed and then get feedback on them. While your auditor will remind

you that they cannot make management decisions for your land trust and cannot decide what your

policies should be, they may be very willing to review your draft to point out missing pieces or areas

in which either the policies or procedures are unclear.

ONCE IS NOT ENOUGH

One of the wonderful truths about land trusts is that they are constantly growing and changing.

This means that effective internal controls will require regular reassessment of the control

environment, updates to the risk assessment and review of the control activities, including fiscal

policies and procedures, to be sure they still meet the land trust’s needs and address its most

significant risks.


COSO Executive Summary

Sample Financial Controls Checklist

Sample Land Trust Fiscal Procedures

Sample Land Trust Accounting and Financial Management Policies

https://na.theiia.org/standards-guidance/topics/Documents/Executive_Summary.pdf

https://tlc.lta.org/topclass/topclass.do?retrieve-object-278326D0



1 · Land Trust Alliance · Land Trust Standards and Practices · Practice 6E2. Risk Management and Insurance Accreditation indicator element and Terrafirma enrollment prerequisite ( ) Last revised December 17, 2019


E. Risk Management and Insurance

2. Carry general liability ( ), directors and officers liability, property and other insurance, all as appropriate to the land trust’s risk exposure or as required by law


IMPORTANCE OF INSURANCE

None of us knows exactly what tomorrow will bring, but most of us — including most managers of

nonprofit organizations — expect that tomorrow will be much like today. However, events that we

cannot now fully foresee may, occasionally and with little warning, make a nonprofit’s tomorrow

much different — much worse or much better — than it is today. Unpredictable events involving

each of the four fundamental values of a land trust — its people, its property, its income and its

reputation — may bring near disaster or good fortune.

Unpredictable events involve risk, which is a measure of the possibility that the future may be

surprisingly different from what we expect. To fulfill its public service mission, land trust boards, employees and volunteers must manage risks effectively by countering threats of loss and

leveraging opportunities for gain. A correctly tailored insurance portfolio is an effective way to help

manage risk.

What will you do if the unthinkable happens? Fire, flood, damaging encroachment on a preserve, a

landowner who refuses to abide by an easement or a tree that crushes a car? That is where

insurance comes in. Most land trusts do not keep enough money in reserve to cover such losses, so

they purchase insurance to insulate them from the financial consequences of the unthinkable. The

role of insurance and other strategies within a land trust’s risk management program depends upon


2 Land Trust Alliance · Land Trust Standards and Practices · Practice 6E2. Risk Management and Insurance Accreditation indicator element and Terrafirma enrollment prerequisite ( ) Last revised December 17, 2019

the goals and resources of the organization. Insurance is one means to an end, and its role will

depend on what your land trust seeks to accomplish.

Some of the most common goals related to insurance include:

• Ensuring a source of financial recovery should an individual suffer bodily harm or property

damage while visiting the land trust’s property or while participating in a program

sponsored by the land trust

• Ensuring the availability of funds to cover the cost of defending claims filed against the

land trust, including its directors and officers

• Reducing the risk that the land trust’s cash on hand will be exhausted by costly property or

liability claims

• Giving peace of mind to the land trust’s leaders with respect to the organization’s ability to

survive a property loss or liability claim

• Helping land trusts defend their conserved lands from violations or legal challenges

Insurance can be a significant expense for a cash-strapped organization. Land trusts can also find

themselves insurance rich and coverage poor when their insurance program does not address

insurable risks properly. The role of insurance often depends on a nonprofit’s financial resources,

appetite for risk taking and uncertainty, and risk management activities.

Purchasing insurance with a high deductible may free up financial resources to be spent on mission-

related activities in the short term, although a prudent organization choosing a high deductible will also choose to set aside funds to pay that deductible in the event it becomes necessary to do so.

High-deductible coverages usually have a moderate premium and, generally, insurance coverage

helps the land trust spread risk so that it does not need to have as much cash in reserves for

contingencies. Careful analysis of the policy terms and your land trust’s risk and risk tolerance is

essential to understand the limits and implications of such plans so that the organization has

adequate reserves for the deductible and uncovered events.

The role of insurance in a land trust’s risk management program will vary from one land trust to the

next. In some organizations, the portfolio of insurance purchased from commercial carriers is the primary source of funding for losses and claims. In other organizations, the same set of coverages is

a safety net, to be tapped in emergencies only. Regardless of the perspective that land trust leaders

hold with respect to the proper role of insurance, all leaders can benefit from gaining a better

understanding of the types of risks addressed in commonly purchased coverages.


For accreditation, a land trust must carry general liability insurance, and the policy must cover

significant risks. In addition, the board or other delegated entity must evaluate insurance needs

at least every five years to determine risk exposure and needs for directors and officers liability insurance, property insurance and other insurance required by law (such as workers’

compensation insurance).

TYPICAL INSURANCE PRODUCTS FOR LAND TRUSTS

Land trusts typically purchase a number of different insurance products (summarized in Table 1).

Before looking at each type of insurance individually, let’s consider how the various insurance

coverages fit together. General liability insurance covers claims alleging bodily injury or property

damage. Directors and officers (D&O) insurance covers claims alleging wrongful management

decisions by the land trust board and staff. Unpaid directors of nonprofits, such as a land trust, may

have some coverage available under their individual homeowners or personal liability umbrella policies, but the protection, when it is available, is limited to the individual and does not offer

defense and indemnity for the land trust where the board member volunteers. Title insurance

generally excludes items on the ground, unless the survey exception is deleted, and usually

excludes landowner compliance with the conservation easement. Title insurance does compensate

the land trust if the actual title to (ownership of) the conservation easement is challenged or if

there is a dispute about the legal description of the property, provided that it is not excluded by the survey exception. Terrafirma fills gaps in coverage that these other insurance products do not cover

and provides coverage for the costs of upholding conservation easements and owned lands held for

conservation purposes when they have been violated or are under legal attack.


Table 1: Common Insurance Products for Land Trusts

Coverage Type Purpose

General liability Bodily injury

Cyber risk insurance Data loss and system damage, business interruption,

notification expenses for victims of data breach,

strategies to repair damaged reputation, content liability, regulatory investigation expense, extortion

Directors and officers Wrongful management acts

Property Damage or destruction to real property, such as buildings,

conservation land and personal property; embezzlement

of funds

Conservation defense liability: Terrafirma Cost of a lawsuit to protect a land trust’s easements and

conservation properties

Employment practices liability Wrongful discrimination or harassment of employees

Professional liability Errors or omissions in the delivery of professional services

Non-owned auto Accidents involving vehicles used on the land trust’s

behalf, but not owned by the land trust

Umbrella/excess liability Catastrophic claims

Volunteer accident Medical payments for accidents suffered by volunteers

Crime/fidelity coverage Theft, forgery or other fraud, including computer fraud

Workers compensation Medical costs and income replacement for staff who

suffer injuries or illness at work

Title insurance Defense of title impairment or failure (for fee-owned land

and easements)


Tips for Assessing Your Insurance Needs

• Document the land trust’s goals for its insurance program. The role of insurance and other

strategies within a land trust’s risk management program depends upon the goals and

resources of the organization. Insurance is one means to an end, and its role will depend on

what your land trust seeks to accomplish. Therefore, you need to document your goals for your insurance program.

• Obtain an updated schedule of insurance at least annually from the land trust’s agent or

broker. An annual review of all insurance coverage is an essential risk management activity

because circumstances change. For example, property values may have changed

dramatically resulting in insufficient coverage to fully replace a total loss. Without an

annual review of your insurance, you may find you have less coverage than you need or you

are wasting money on unnecessary coverage.

• Request that your agent or broker disclose the method and amount of compensation

associated with your account. In order to not overpay for insurance, you must understand

both how and how much your agent or broker is compensated for your account.

• Schedule and convene an annual meeting with your agent or broker. Your annual insurance

review should include an annual meeting with your agent or broker to review your insurable exposures and to determine the need for changes in your insurance program in

order to stay current with changes in values, property acquisitions and advances in risk

management planning.

• Provide each member of the board with a copy of the land trust’s directors and officers

(D&O) liability coverage. Because the land trust’s D&O liability coverage benefits board

members in particular, it is important that they have a copy of the current D&O policy.

• Have written documentation on the differences in coverage provided by your commercial

general liability, D&O liability and property policies. Having written documentation on the

differences in coverage will help you know in the event of a claim whom to notify and what

is covered and what isn’t and will assist your attorney, as well, in coordinating with the insurers.

• Assign responsibility for coordinating the insurance buying process to a senior manager in

the land trust. The insurance-buying process is a serious matter and should be managed by

a senior leader in the land trust, not by junior staff or inexperienced or uninformed

volunteers. This person will need to make many judgment calls and must be well informed

about the land trust risks and programs.


• Have a board member or other personnel carefully review your insurance options and needs

on an annual basis. High-level staff or volunteers must conduct a careful annual review of

your insurance options, which are influenced by your current program activities and risk management needs.

• Resist the temptation to simply renew all existing policies at the same limits and with the

same providers. While it can be expedient to merely renew all existing policies at the same

limits and with the same providers rather than undertaking a meaningful annual review, it

will benefit the land trust in the long run to be confident that it has adequate insurance all

the time to ensure a smooth resumption of operations after a loss with a minimum of

disruption to mission-critical activities.

• Work with an agent or broker who specializes in nonprofit organizations, including

environmental organizations or land trusts. Nonprofits and particularly land trusts have

specific, unique needs and risks. You need to work with an agent or broker who specializes in nonprofit organizations, including environmental organizations or land trusts, to be

certain that your coverage is adequate and appropriate for your activities.

• Follow the requirements for prompt reporting of claims and incidents and take steps to

ensure compliance with the claims-reporting requirements of your various insurers. When

you have a claim, unless you follow the requirements for prompt reporting of claims and

incidents and take steps to ensure compliance with the claims-reporting requirements of

your various insurers, you may find that the insurer denies all coverage of the claim or

imposes greater limits. You may also seriously undermine the effective early resolution of your claim. Be sure to notify the insurance carrier and your insurance agent, as well as your

board and attorney, in the event of a claim or incident.

General Liability

General liability insurance policies typically cover an organization’s exposure for bodily injury and

property damage caused by an accident, except for liabilities that are specifically excluded.

Coverage applies at your premises or anywhere else in the United States, its territories or Canada.

This insurance is extremely important for land trusts to acquire as one bad accident could lead to

financial ruin. You may also be surprised how often general liability will cover the land trust in a

trespass or enforcement lawsuit where the neighbors or successor owners sue the land trust.

Insurance underwriters—the professionals who determine the terms, conditions and pricing of

coverage offered to your land trust—generally add endorsements to general liability policies. An


endorsement either excludes or expands coverage. The scope of coverage under any general

liability policy will depend upon the particular exclusions and enhancements added to the standard

policy.

Common categories of claims under a general liability policy include:

• Injuries arising from your premises

• Injuries to visitors on land trust properties

• Injuries to volunteers, employees or consultants working for you

• Injuries to guests at special events

• Injury caused by products you sell or manufacture

• Fire damage to your or your landlord’s building

• Damage to property not owned by you or in your possession

Regardless of the specific general liability policy, general liability won’t cover:

• Emotional distress, unless arising from bodily injury

• Financial loss, unless arising from bodily injury or property damage

• Property damage to intangible property (such as information stored on a computer

network)

Commercial general liability coverage refers to an expanded form of general liability that includes

two additional categories of coverage: personal (non-bodily, property) and advertising injury

liability and medical expense coverage.

Cyber Risk Insurance

General liability won’t cover losses from a cyberattack or data breach. Good computer protocols,

relentless information technology hygiene and repeated volunteer and employee training can

reduce the threat of cyberattack. Data breach threats come from many sources: an employee falls

prey to email phishing; a laptop vanishes from an employee’s car; a disgruntled employee leaves

with donor credit card numbers and more. Unintentional privacy breaches, such as information

lost, stolen or accessed by an unauthorized source, regardless of where the data is stored, can be just as costly as the more notorious hacker data theft. The device—and all the vital data on it—


could be damaged, lost forever or fall into unscrupulous hands. These common activities can lead

to potential liability:

1. Conducting e-commerce, especially collecting credit card data and processing payments

online

2. Storing and transferring employee, client or donor data—both electronic and paper

3. Storing personal information on laptops, smartphones, pads, thumb drives or external

portable drives without proper safeguards

4. Remote workers with sensitive data on remote hard drives and mobile devices

5. Allowing partners or vendors to access personal information without proper safeguards

6. Storing personal information on cloud servers or systems

An experienced broker can identify the insurers who offer the product most suited to your

company’s needs and help negotiate favorable terms and price. Working together, a team including

your broker and outside counsel can ensure that you purchase the right coverage with appropriate

terms and conditions.

Directors and Officers Liability

Directors and officers (D&O) liability policies cover liability for economic damages resulting from

poor judgement, breaches of duty, conflicts of interest, errors or omissions in the governance or

management of an organization. Similar to the structure of a general liability policy, a nonprofit

D&O policy covers liability claims, except those that are specifically excluded. The two policies,

therefore, are intended to be mutually exclusive, meaning that they do not cover the same liabilities; in fact, they specifically exclude the events that the other covers. See Tables 2 and 3 for

an overview of differences and similarities in the policies. The principal difference between general

liability and D&O is that the general liability form covers claims alleging bodily injury and property

damage only. D&O liability covers wrongful acts (wrongful management decisions) and always

excludes bodily injury and property damage. D&O insurance is important for land trusts because

board members may be targeted in lawsuits and need to defend themselves (state and federal volunteer protection laws may be inadequate in such situations).


Table 2: Key Differences between Commercial General Liability and D&O Policies

Commercial General Liability Directors and Officers Liability

Covers bodily injury, property damage and

personal and advertising injury.

Always excludes bodily injury and property

damage.

Covers accidents only. Claims usually arise

directly from operations rather than governance (management decisions).

Covers wrongful acts. Claims usually arise from

governance or management decisions. Board members, management personnel and the

organization itself are often defendants in these

claims and are listed under a broad definition of

insured in the policy.

Most often sold to nonprofits as an occurrence

policy. The coverage trigger in this policy form is

the date of the event, accident or occurrence.

Most often sold to nonprofits as a claims-made

policy. In some cases, D&O is available on an

occurrence form. In a claims-made policy, the

coverage trigger is the date the claim was made

against the organization. For example, a lawsuit alleging sexual harassment is likely to be filed or

made many months after the alleged incident or

incidents of harassment occurred.

Standard policy wording. Most insurance

carriers use one of the forms issued by the

Insurance Services Offices (ISO). The form

number and ISO reference appear at the bottom

of each page of the policy.

Nonstandard policy wording. Each insurer drafts

or “manuscripts” its own D&O policy forms.

Differences in wording and policy structure

make it more difficult to undertake a side-by-

side comparison of coverage, which is key to

determining which provides better or preferable protection for the insured.


Table 3: Similarities in Commercial General Liability and D&O Policies

Commercial General Liability Directors and Officers Liability

Covers liabilities common to all nonprofits,

including land trusts.

Covers claims alleging wrongful management

acts that are common to all nonprofits.

Provides broad catch-all or basic liability

coverage. Other liability coverages are more specific and narrower in scope.

Provides broad coverage for wrongful

management acts.

Includes all board members, employees and

volunteers as insureds.

Includes all board members, employees and

volunteers as insureds.

Claims typically covered by nonprofit D&O policies that include employment practices coverage

include those alleging:

• Wrongful termination

• Breach of employment contract

• Discriminatory hiring practices

• Failure to promote

• Negligent evaluation (an assertion that an employee’s performance evaluation was

excessively negative, unfairly low or otherwise inaccurate and therefore did not reflect the

employee’s actual, higher level of performance)

• Retaliation

• Wrongful discipline

• Failure to grant tenure

• Invasion of privacy

• Employment-related defamation

• Employment-related infliction of emotional distress

The majority of claims filed under nonprofit D&O policies allege wrongful employment practices,

but not every covered D&O claim is related to human resource matters. Land trusts should note the


many areas are subject to risks of negligence. Examples of non-employment claims alleging

wrongful management acts typically defended by D&O policies include:

• Misallocation of funds

• Breach of fiduciary responsibilities

• Self-dealing/conflict of interest

• Antitrust or restraint of trade violations

• Third-party discrimination, defamation or invasion of privacy

• Negligent financial advice to third parties

• Failure to maintain insurance

• Tortious interference with contract

• Breach of contract

• Failure to accredit or certify

• Infringement of trademark, patent or copyright

Exclusions Common to Nonprofit D&O Policies

Each insurance company offering D&O coverage develops and uses its own, somewhat unique,

policy wording. As a result, the coverage offered by two competing companies can vary

significantly. Nonetheless, there are exclusions common to all nonprofit D&O policies. These

include:

• Bodily injury

• Property damage

• Theft

• Criminal acts

• Sexual abuse and harassment

• Deliberately fraudulent acts

• Pollution


• Nuclear reaction or radiation

• Litigation pending prior to the original inception date of the policy

• Claims involving retirement plans, employment disputes or security laws

Property Coverage

Most land trusts purchase some type of property insurance. The scope of coverage depends upon

the type of property that may be damaged and what caused the damage to occur. Common

property policies protect the following types of property against damage or destruction:

• Real estate/buildings

• Valuable papers

• Money and securities

• Computer equipment

• Boilers and machinery

• Lost income/extra expense

• Personal property

• Fine arts (owned and non-owned; transit and exhibition)

• Accounts receivables

• Contractors’ equipment or buildings under construction or renovation

• Property while it is in transit

• Property belonging to others

To collect under a property policy, the covered property must be damaged by certain causes of loss.

Most policies cover every type of cause, except those specifically excluded in the policy (for

example, nuclear war), but some policies only cover damage caused by specific causes, such as fire,

lightning, wind, water or objects falling from the sky. Many policies do not cover significant

catastrophes that affect a wide geographical area, such as floods or earthquakes.


Conservation Defense Liability Insurance: Terrafirma

Although land trusts have had relatively few legal challenges, conservation easements and

preserved lands are increasingly under attack across America. As population and development

pressures increase, so does the value of conserved properties, making them vulnerable. Eventually,

every land trust will face legal challenge even if they don’t end up in court. Experts to help you

resolve and document any legal challenge are just as expensive as lawyers, so insurance to protect conserved land is important for all land trusts to consider.

The Land Trust Alliance created Terrafirma to offer a significant layer of protection from risk

exposure not covered by other insurance products. To the extent that other insurance policies do

provide coverage, those resources are to be used first to address claims. Terrafirma is owned by

the participating member land trusts as a safety net for the costs of upholding conservation

easements and protecting fee lands held for conservation purposes when they have been violated

or are under legal attack and to provide information to those land trusts on risk management.

Terrafirma is the first far-reaching, national service to ensure the permanence of conservation undertaken by the land conservation community. The insurance program is a risk retention group, a

mutual insurance arrangement whose business is limited to insuring its members, all of whom are

members of the Land Trust Alliance. Terrafirma is a charitable risk pool with tax-exempt status

under the Internal Revenue Code. Learn more at www.terrafirma.org.

Employment Practices Liability Insurance

Most nonprofits that purchase D&O coverage purchase employment practices liability (EPL)

coverage as part of the D&O policy, but EPL coverage is also available as a standalone. A separate

EPL policy may not provide a nonprofit with the depth of coverage that a nonprofit D&O policy with

EPL coverage may include. Many stand-alone EPL policies do not include the organization, all employees or volunteers as insureds. The definition of covered employment actions may be

narrower in a stand-alone EPL policy than a nonprofit D&O policy with included EPL coverage.

Finally, a stand-alone EPL policy may be more expensive and include a large retention or possible

coinsurance provision in which the insured must pay a certain percentage of the loss.

Purchasing employment practices coverage as part of a D&O policy has one clear disadvantage. A

policy with both D&O and EPL coverage addresses two very distinct exposures with one policy limit.

The inclusion of EPL coverage, therefore, could erode the amount of funds available to protect the

directors’ and officers’ personal assets and to protect the nonprofit and its employees and volunteers from other claims. The defense and resolution of an employment-related claim will

reduce and could possibly exhaust the D&O policy limits, thereby leaving limited or no funds for any


additional non-EPL claims. The majority of nonprofit D&O policies provide no separate limit for EPL

coverage. However, some companies are introducing either a sublimit or separate limit for EPL

coverage. Therefore, a land trust should carefully evaluate the adequacy of its D&O policy limit when it purchases a D&O policy that includes employment practices liability coverage. At the same

time, it is important to keep in mind that some nonprofits, including land trusts, will never face a

non-employment-related claim, and therefore, a D&O policy with employment practices liability

coverage may represent an affordable and appropriate option.

Professional Liability Insurance

Professional liability insurance, also known as errors and omissions liability insurance or malpractice

insurance, covers liability for the higher standard of care required of professionals when providing

services within their area of expertise. Professionals subject to this higher standard of care must

possess and demonstrate the same expertise and competencies common to members in good standing of their profession. Land trusts do not typically purchase professional liability coverage

because their customary liability exposures are covered under commercial general liability or D&O

or other typical coverage (but not always).

Does your land trust need professional liability insurance? Whether a particular service provider in

a particular situation can be held to a professional standard of care is a legal question that can only

be answered definitively in a court of law. The relevant question for insurance purposes is: does

your land trust provide services that are specifically excluded under your general liability and D&O

policies? If the answer is “yes,” you probably need a professional liability policy. Ask your insurance agent if your land trust’s activities are covered or not. You should also compare the scope of your

policy and its exclusions with the services you provide.

Non-Owned Automobile Liability

Non-owned automobile liability insurance covers liability for accidents caused by an employee or

volunteer driving their own vehicle on a nonprofit’s behalf. The coverage is designed to protect only

the nonprofit organization—not the employee or volunteer. Coverage applies when the liability

limits of the vehicle owner’s personal automobile policy have been exhausted. This policy form

does not provide coverage for damage to the employee or volunteer’s vehicle.

Non-owned auto liability is excess coverage, designed to cover the nonprofit only when it is

specifically named in a lawsuit and the damages are higher than the vehicle owner’s policy limits or

when the vehicle owner has no personal auto liability in force. Obviously, if a land trust does not rely on employees’ or volunteers’ personal cars, this insurance is unneeded.

http://www.terrafirma.org/


Excess and Umbrella Liability

Liability insurance policies provide either primary or excess coverage. Primary coverage is the first

to apply or respond to covered claims. When the limits of a primary policy have been exhausted,

the excess policy will be triggered and provide additional limits of liability for defense costs,

judgments and settlement expenses. Excess policies follow form, which means that they mirror the

terms and conditions of the underlying policy. They do not cover claims that would be excluded by the primary policy. Some of these coverages, such as excess auto liability, include the label excess in

their names and are, therefore, easy to identify. Excess coverage is often inexpensive due to the

low probability that it will be needed.

Umbrella insurance policies generally provide broader protection than excess policies. Why? In

addition to providing excess coverage over underlying limits, an umbrella policy will “drop down” to

cover losses not covered under a land trust’s primary insurance policies. This coverage is subject to

a large deductible, which is called a self-insured retention. The standard self-insured retention

amount is $10,000.

Umbrella policies supplement the coverage a land trust has through its other liability policies. If an

organization does not have sufficient liability coverage to resolve a claim or a lawsuit, the person bringing the action might go after the organization’s property assets to pay for damage. Umbrella

policies cover the excess liability of damage claims against an organization or its employees and

volunteers. Generally, umbrella policies provide coverage only when the limits of other policies

have been exhausted. In determining if your land trusts needs an umbrella policy, take a look at

your activities, the amount of insurance coverage you hold and the communities in which you

operate (are they particularly litigious with high awards common?). It may make more sense to increase your insurance coverages across the board. Most land trusts that reach a staff size of more

than five full-time equivalents usually start considering umbrella coverage merely due to the extent

of the organization’s activities and obligations.

The declarations page (“dec page”) for your umbrella policy will typically indicate the relevant

underlying policies. In order for the umbrella coverage to apply, the scheduled underlying policies

must be in force at the time of loss.

Volunteer Accident Coverage

Although permitted in some states, including volunteers in a land trust’s workers compensation

coverage is an expensive proposition. As an alternative, land trusts that use volunteers extensively

may elect to purchase volunteer accident coverage. This coverage provides medical reimbursement

up to a defined limit, but it does not provide income replacement. A typical policy offers no-fault


coverage that is available if a covered individual suffers an injury while serving a nonprofit

organization. Accident medical reimbursement coverage (also known simply as accident coverage)

can also be written to cover volunteers and participants. A volunteer accident policy does not provide coverage for the organization itself; however, the availability of the coverage may dissuade

an injured volunteer from bringing a legal claim against the land trust.

Accident coverage provides reimbursement for medical treatment, hospitalization and licensed

nursing care, for dental care or repair and replacement of dentures and for repair and replacement

of eyeglasses. It also includes benefits for accidental death and loss of limb and sight. Limits of up to

$25,000 per covered accident are generally available.

Most accident policies are available with no deductible. Accident policies are written on an excess

basis, which means that they are excess over Medicare, Medicaid or any supplemental insurance

the volunteer may have in place. If there is no such insurance, the coverage becomes primary.

Common exclusions for this policy include sickness, injuries occurring while performing fire or

rescue duties or playing sports or accidents incurred while under the influence of controlled

substances.

Crime/Fidelity Coverage

A crime policy is generally a package of policies that protect an organization against intentional

theft by insiders as well as theft of assets by third parties. A fidelity bond is often used interchangeably with crime coverage; however, a fidelity bond or employee dishonesty bond is

actually just one component of a broader crime policy. The coverage can be purchased separately

or as a stand-alone policy.

A fidelity or employee dishonesty bond addresses a single type of exposure that is theft and

embezzlement committed by a staff member. It also covers claims concerning mishandling of

retirement plans and frequently is provided by the D&O carrier. If a client, contractor or a third

party, such as a burglar, steals anything, the fidelity bond does not apply. Most nonprofits purchase

blanket position bonds rather than only coverage for specific persons on the policy so that the organization has coverage for all of a person’s acts associated with the organization. In determining

whether you need this type of insurance, review your land trust’s activities and financial systems to

see if makes sense to purchase. If the organization handles large amounts of funds, has complex

financial arrangements, works with donors outside of the state in which your land trust is

organized, has a significant payroll and certainly if it manages a pension plan or other retirement

funds, then you may be wise to buffer the organization from this type of loss. Risk balancing


through excellent financial management systems of course is the first critical step. It is also

important to remember that this type of insurance protects the honest employees, board,

volunteers and your reputation from suffering effects of dishonest actions.

Common claims allege employee dishonesty, embezzlement, forgery, robbery, safe burglary,

computer fraud, wire transfer fraud, counterfeiting and other criminal acts. Because dishonesty-related losses are not typically covered by most property insurance policies, fidelity insurance is an

additional component for many businesses.

Workers Compensation

Coverage A (or Part One) of the policy provides reimbursement for medical claims and income

replacement for workers unable to work due to illness or injury. The coverage, therefore, reduces,

but does not eliminate the risk that the employer will face a liability claim from an injured worker.

Coverage B (or Part Two) provides employers with liability protection for liability claims that are

narrowly allowed by statute.

Today, every state requires that employers who meet defined thresholds (based on number of

employees or type of activity) carry workers compensation coverage. Workers compensation is

governed at the state level through state statutes (no fault). Employers’ liability is governed through the legal system and tort law (common law and negligence). The only named insured of a

workers compensation policy is an employer of at least one full-time employee. The employer must

have a federal employer’s identification number (EIN) to obtain coverage. Most states require

confirmation that workers compensation coverage is in place on unemployment tax forms.

Title Insurance

Sometimes title problems occur that could not be found in the public records or are inadvertently

missed in the title search process (see Practice 9F). To help protect your land trust in these events,

consider obtaining an owner’s policy of title insurance to insure you against the most unforeseen

problems when you acquire conservation easements or fee-owned land. Owner’s title insurance, called an owner’s policy, is usually issued in the amount of the real estate purchase (or its value, if a

donation). It is purchased for a one-time fee at closing and lasts for as long as you or your heirs

have an interest in the property. Only an owner’s policy fully protects the land trust should a

covered title problem arise that was not discovered during the title search. Possible hidden title

problems can include:


• Errors or omissions in deeds

• Mistakes in examining records

• Forgery

• Mortgage holder fraud, forgery or false information

• Undisclosed heirs

• Potential boundary issues if not excepted from coverage

An owner’s policy provides assurance that your title company will stand behind you—monetarily

and with legal defense, if needed—if a covered title problem arises after you acquire land or a

conservation easement. The title company will help pay valid claims and cover the costs of defending an attack on the title. Receiving an owner’s policy isn’t an automatic part of the closing

process, and it is paid for by different parties in different parts of the country. For more on title

insurance and when your land trust needs to purchase it, see Practice 9F and this Practical Pointer.

INSURANCE TRIAGE QUESTIONS

The kinds and amounts of insurance will depend on your organization’s size, risk profile, property

and legal structure. Use the following questions to determine your land trust risk categories, which

should help you select the proper types of insurance.

Do you own real estate?

o If yes, consider property, general liability

Do you have employees?

o If yes, consider D&O (with employee practices liability or as a separate policy),

general liability, non-owned auto (if employees use their personals cars for land

trust business), crime/fidelity coverage, workers compensation (required in all

states), harassment and sexual abuse

Do you hold conservation easements?

o If yes, consider Terrafirma, title insurance, volunteer accident (if your volunteer’s

monitor easements) and also carry general liability and D&O because all these

coverages provide defenses when unhappy successor owners or neighbors sue the

land trust


Do you employ licensed professionals?

o If yes, consider D&O, general liability, professional liability

Do you buy or sell land?

o If yes, consider Terrafirma, title insurance, general liability, property,

umbrella/excess liability and D&O (you will be surprised how often disgruntled

persons will sue a land trust for bad faith, misrepresentation or fraud in the context

of a failed real estate transaction, or even a successful one, where negotiations

were aggressive)

Do you have volunteers?

o If yes, consider D&O, general liability, volunteer accident, crime/fidelity, non-

owned auto, harassment and sexual abuse

Do you have events?

� If yes, consider property, general liability, crime/fidelity

Do you own a company vehicle?

� If yes, consider auto, general liability, property, umbrella/excess liability

Do you use power equipment or hand tools likely to cause injury?

� If yes, consider property, general liability, volunteer accident, workers

compensation (required in all states)

Do you use or are personnel exposed to chemicals?

� If yes, consider property, general liability, volunteer accident, workers

compensation (required in all states)

Do you conduct children’s programs or events?

� If yes, consider D&O, general liability property, crime/fidelity and, sadly, land trusts

must also now have harassment and sexual abuse protection

Do you lease office space?

� If yes, consider general liability, renter’s insurance

https://tlc.lta.org/practice9f


Do you lease equipment?

� If yes, consider general liability, volunteer accident, workers compensation

(required in all states)

Are you in a litigious area of the state?

� If yes, consider D&O, general liability, Terrafirma, volunteer accident,

umbrella/excess liability

Are attorney fees generally high in your region?

� If yes, consider Terrafirma and umbrella/excess liability

Is your area of the state subject to severe weather or flooding?

� If yes, consider general liability, property, umbrella/excess liability

If your office was forced to shut down for one or more months, would it cause operations

to cease?

� If yes, consider general liability, property, umbrella/excess liability, business

interruption

Does your area have heavy media coverage?

� If yes, consider commercial general liability and D&O should a land trust decision

result in a lawsuit or adverse media campaign

Do you use computers and the Internet to conduct fundraising and your operations?

� If yes, evaluate your cyber risks and consider purchasing an appropriately sized

cyber policy

https://tlc.lta.org/practice9f



Table 4: Insurance Coverage Matrix


What to Do When Purchasing Insurance

• Find a competent insurance professional (broker or agent) whom you trust to advise you on

insurance matters and act as your advocate in the insurance marketplace

• Ask your insurance agent or broker to disclose how they are compensated and also the

amount of compensation they receive for work on your behalf

• Have a senior staff person or board member purchase insurance and annually review the

policies

• Take the time to read your insurance policies annually

• Investigate the financial stability of your insurers

• Ask your broker or agent to respond in writing to your questions

• Consider seeking multiple bids for your insurance coverage at least every four to five years

• Give thoughtful consideration to how much risk your land trust can afford to retain

• Provide your board of directors with a copy of the actual policy wording for the land trust’s

D&O liability policy

• Provide a periodic briefing on your insurance program to the land trust’s board of directors

• Review your risks annually

What Not to Do When Purchasing Insurance

• Delegate responsibility for your insurance program to a junior staff member or new

volunteer

• Simply renew your coverages each year without considering whether your coverage needs

have changed

• Wait until the last minute to submit completed applications

• Be evasive about your operations and exposures on your application

• Be shy about asking questions concerning your coverage or the process

• Regard your insurance coverage as the equivalent to a risk management program


Tips for Working with Your Insurance Professional

• Provide prompt, clear, concise answers to questions

• Expect your quote in a timely manner

• Ask questions and expect understandable answers

• Get important answers in writing

• Don’t withhold information from your broker

• Report claims to your broker immediately and be prepared to give detailed information

regarding the claim

• Meet with your broker annually to review your policies

Insurance Professional Services/Responsibilities

The following list indicates some of the services an insurance professional might provide to a land

trust. The leaders of your land trust must decide which services it requires or views as desirable.

• Provide complete and accurate information to the insurance carrier on behalf of the

insured, including signed applications and updated information at renewal.

• Remit down payments and balance payments to the insurance carrier in a timely fashion.

• Arrange financing, if requested by the insured member.

• Help insured with compliance with safety recommendations.

• Complete certificates of insurance and request additional insured endorsements, as

required by funding sources, landlords and so forth.

• Review all contracts for the insured with respect to insurance requirements. Forward

unusual contractual obligations to the insurance carrier for review and comment.

• Be available to answer questions regarding the insurance contract.

• Report claims and coordinate claim adjusting with the insurance carrier.

• Be available to participate in the land trust’s risk management committee, if requested.

• Be available to attend at least one of the land trust’s board meetings per year, if requested.


• Present an appropriate insurance package to the land trust for its review and action.

• Serve as a source of information with respect to insurance questions.

• Maintain a complete insurance file for the insured nonprofit (as the insured, you should

keep a copy, as well).

• Maintain continuing education and proper licensing status at all times.


Online

• A Guide to Risk Management for Land Trusts, an online course offered by the Land Trust

Alliance.

• Nonprofit Risk Management Center. Complimentary for Land Trust Alliance members. Click

on “Affiliate Login,” and first-time users need create an account (be sure you indicate you

are a member of the Land Trust Alliance to receive free access).

Publications

• Boggs, Ron, Emily Stumhofer, Melanie Lockwood Herman, Covered: An Insurance Handbook

for Nonprofits, Leesburg, VA: Nonprofit Risk Management Center, 2016.

• Head, George L. “The ‘Additional Insured.’”

• Herman, Melanie Lockwood. “Insurance for Volunteer Programs.” Chapter 12 of No

Surprises: Harmonizing Risk and Reward in Volunteer Management. 5th ed. Leesburg, VA:

Nonprofit Risk Management Center, 2009.

• ___ and Erin Gloeckner. “Contemplating Coverage: Insurance for Nonprofits.”

• Nonprofit Risk Management Center. “Ten Tips for Buying Insurance.”

• Stumhofer, Emily. “How to Read an Insurance Policy.”

25 Land Trust Alliance · Land Trust Standards and Practices · Practice 6E2 Risk Management and Insurance


Tips for Working with Your Insurance Professional

Provide prompt, clear, concise answers to questions

Expect your quote in a timely manner

Ask questions and expect understandable answers

Get important answers in writing

Don’t withhold information from your broker

Report claims to your broker immediately and be prepared to give detailed information

regarding the claim

Meet with your broker annually to review your policies

Insurance Professional Services/Responsibilities

The following list indicates some of the services an insurance professional might provide to a land

trust. The leaders of your land trust must decide which services it requires or views as desirable.

Provide complete and accurate information to the insurance carrier on behalf of the

insured, including signed applications and updated information at renewal.

Remit down payments and balance payments to the insurance carrier in a timely fashion.

Arrange financing, if requested by the insured member.

Help insured with compliance with safety recommendations.

Complete certificates of insurance and request additional insured endorsements, as

required by funding sources, landlords and so forth.

Review all contracts for the insured with respect to insurance requirements. Forward

unusual contractual obligations to the insurance carrier for review and comment.

Be available to answer questions regarding the insurance contract.

Report claims and coordinate claim adjusting with the insurance carrier.

Be available to participate in the land trust’s risk management committee, if requested.

Be available to attend at least one of the land trust’s board meetings per year, if requested.

26 Land Trust Alliance · Land Trust Standards and Practices · Practice 6E2 Risk Management and Insurance


Present an appropriate insurance package to the land trust for its review and action.

Serve as a source of information with respect to insurance questions.

Maintain a complete insurance file for the insured nonprofit (as the insured, you should

keep a copy, as well).

Maintain continuing education and proper licensing status at all times.


Online

A Guide to Risk Management for Land Trusts, an online course offered by the Land Trust

Alliance.

Nonprofit Risk Management Center. Complimentary for Land Trust Alliance members. Click

on “Affiliate Login,” and first-time users need create an account (be sure you indicate you

are a member of the Land Trust Alliance to receive free access).

Publications

Boggs, Ron, Emily Stumhofer, Melanie Lockwood Herman, Covered: An Insurance Handbook

for Nonprofits, Leesburg, VA: Nonprofit Risk Management Center, 2016.

Head, George L. “The ‘Additional Insured.’”

Herman, Melanie Lockwood. “Insurance for Volunteer Programs.” Chapter 12 of No

Surprises: Harmonizing Risk and Reward in Volunteer Management. 5th ed. Leesburg, VA:

Nonprofit Risk Management Center, 2009.

___ and Erin Gloeckner. “Contemplating Coverage: Insurance for Nonprofits.”

Nonprofit Risk Management Center. “Ten Tips for Buying Insurance.”

Stumhofer, Emily. “How to Read an Insurance Policy.”


https://nonprofitriskmanagementcenter.wildapricot.org/registration

https://www.nonprofitrisk.org/products/covered-an-insurance-handbook-for-nonprofits/

https://www.nonprofitrisk.org/products/covered-an-insurance-handbook-for-nonprofits/

http://www.nonprofitrisk.org/resources/articles/the-additional-insured/

http://www.nonprofitrisk.org/products/no-surprises-harmonizing-risk-and-reward-in-volunteer-management/

http://www.nonprofitrisk.org/resources/articles/contemplating-coverage-insurance-for-public-entities/

http://www.nonprofitrisk.org/resources/articles/ten-tips-for-buying-insurance/

http://www.nonprofitrisk.org/resources/articles/how-to-read-an-insurance-policy/