Nature Conservancy deal opened the door for lavish homes

MARTHA'S VINEYARD, Mass. — Two years ago, The Nature Conservancy triumphantly announced a complex real-estate transaction, a $64 million deal in which it acquired 215 acres of rare open sand plain. Conservancy officials hailed it as "an important victory for conservation on Martha's Vineyard," part of a campaign to save the Earth's "Last Great Places."

The Conservancy, known for buying and holding raw land in perpetuity, did not opt for 100 percent preservation in this case.

Instead, as part of the deal, the Conservancy placed restrictions limiting some development on the newly purchased land and then immediately resold half of it to others, paving the way for lavish vacation houses on pristine beaches and grasslands. Those buyers included a pair of Oracle software tycoons, a Goldman Sachs executive and comedian David Letterman.

"It's a Last Great Place for David Letterman," quipped former Conservancy executive David Morine, now one of the organization's critics.

Conservancy officials defend the deal as one that preserved half the land and pre-empted denser development on the other half.

A closer look at the serpentine deal reveals another unexpected facet: The transaction hinged on an $18.5 million charitable gift made to the Conservancy two days before the closing, according to interviews with people involved in the purchase. The Conservancy used the gift to buy the land from business entities owned by the same family that donated the money. That series of transactions allowed the family to seek an $18.5 million tax deduction, according to a family spokesman.

The gift would not be deductible under Internal Revenue Service rules if it were made with a binding restriction that it had to be used to complete the property deal. Conservancy officials said there was no restriction on the donation. They said the deal violated no IRS rules and represented a "use of tax incentives for conservation that served the public good."

However, a Conservancy lawyer said in a separate interview that the money was used to "close the gap" between the buyers and sellers.

Letterman enters picture

How did The Nature Conservancy, once known as "nature's real-estate agent," end up clearing a path for resort-sized houses on environmentally sensitive land in Martha's Vineyard? The convoluted story goes back more than a decade.

In 1990, Boston developers Neil and Monte Wallace approached officials on the island with a plan to rezone a historic oceanside property known as Herring Creek Farm in order to build 54 homes. When development-shy officials rebuffed the plan, the Wallaces challenged the decision in seven lawsuits. They lost every time.

In November 1999, Letterman's development company, MV Regency Group, offered to buy Herring Creek Farm. His agent promised limited building: six eco-friendly oceanside homes. More than half the property — 115 acres — would be donated to the Farming Agriculture and Resource Management Institute, a small local nonprofit, to create a farming demonstration project for children, an institute official said.

But the Letterman proposal languished because of strong local opposition to development on the site. The Cohan family, the original owners who had sold to the Wallaces, could block the deal until 2010 because they had a first option to repurchase the land. The Cohans opposed "any further development at all," said Joseph Shea, a Cohan family attorney.

"We always wanted less rather than more development," Shea said.

Conservancy's offer

In 2000, the Conservancy, which had a longstanding interest in the property, quietly made its own offer to the Wallaces. The Conservancy said it planned to keep and preserve half of the acreage and sell the rest to "conservation buyers" who would agree to development restrictions on the land. The Conservancy convinced the Cohans to go along with the deal, Conservancy officials said.

After the Conservancy expressed an interest, the Wallaces let it be known in the small island community that the respected environmental nonprofit organization was a potential buyer, said Stuart Johnson, the Wallace family spokesman. With the Conservancy in the picture, the Wallaces were able to finally satisfy their desire to get a rezoning that would boost the value of their property.

Julia Wells, who covered the Herring Creek Farm saga for the Martha's Vineyard Gazette, said Johnson used the Conservancy's name to help sway votes on the zoning commission.

"Key people" on the commission were told that the Wallaces would not build on the property but instead intended to sell the land to the Conservancy, Wells said. "They did influence the vote that way."

Said Johnson, "I might have said that in the final quarter of the process." But he said other factors influenced the vote as well, including a desire to end the long standoff.

Conservancy officials said they were unaware the Wallaces had used their organization's name with the zoning commission and that "we did not, nor did we try to, have special influence over public officials."

The commission voted 7-6 to give the Wallaces permission to build 33 houses on the land. The rezoning boosted the property's estimated fair market value to $78 million, a considerable premium above the $64 million price the Conservancy eventually offered.

That would allow the Wallaces to apply for a $14 million IRS deduction for the difference, under tax provisions allowing such deductions for "bargain sales" to charities.

Complex deal

With the rezoning in hand, a complicated transaction went forward. It took nine months to close.

The $64 million purchase price was assembled from many pieces.

About $45 million came from a varied collection of buyers: the farming institute; Goldman Sachs executive Daniel Stanton and his wife, Mary; Oracle executives Roger Bamford and Denise Lahey; and Letterman's MV Regency Group.

That left $18.5 million that the Conservancy needed to come up with to meet the Wallaces' $64 million purchase price.

On July 10, 2001, Real Estate Equities LP, a Wallace-owned company, donated a partial interest in another family partnership, known as Windsor at Hauppauge LP, to the Wallace Foundation, whose trustees are the Wallace brothers. The interest was valued at $18.5 million.

On July 18, 2001, the foundation gave $18.5 million to the Conservancy. Two days later, the Conservancy placed $64 million in escrow for the purchase.

Conservancy officials and Johnson initially said that one key to the deal was the $18.5 million donation. Johnson referred to it as "the gift part" of the transaction.

Later, Conservancy officials denied the gift was tied to the purchase. They said the Wallace Foundation developed its tax strategy with no consultation with the Conservancy.

"We needed to find $18 million somewhere," Conservancy officials said in a statement, "but the funds could have come from anyone interested in conservation on Martha's Vineyard."

Mike Dennis, the Conservancy's general counsel, said there was never a "legal obligation" for his organization to use the $18.5 million to purchase the farm.

"It's a huge distinction," he said. "Because if you do it one way, it's allowable, acceptable and done all the time. If you do it the other way, you've violated the law."

Who won?

In the end, the Conservancy, the Wallaces and the private buyers all emerged as winners. In addition to the $64 million sale price, the Wallaces gained $32 million in tax breaks.

The Conservancy ended up with 102 acres of what it terms the most "ecologically important parcels" of the land, which it plans to restore. The organization also got a choice lot worth several million dollars earmarked for development of a luxury home.

"It's a real victory," said Conservancy President Steven McCormick. "Only 1 percent of sand plain grasslands ecosystem remains in the world."

Letterman acquired one of the old Wallace homes, a sprawling, 4,750-square-foot structure on 24 acres looking out on the Edgartown Great Pond. It is a short walk to a private ocean beach bordered by grasslands that are home to osprey, short-eared owls and piping plover.

Early last year, Stanton, the Goldman Sachs executive, began bulldozing for a $14 million mansion that soon resembled a high-end resort.

Five others are planned.