Environmental Protection

12 Steps to Successful Wetlands Mitigation Banking

New regulations gave a big boost to the mitigation banking industry recently, meaning good news for the emerging business and its investors. The latest ruling by the U.S. Environmental Protection Agency and Army Corps of Engineers declared mitigation banking to be the preferred alternative for any wetlands mitigation project nationwide. Coupled with an increase in private-equity capital investments in mitigation banks, it is apparent just how far the industry has come in the last 10 years. Plans going forward include new banking industries for water quality, natural resource damage, natural resources, and biological diversity.

Mitigation banking includes both freshwater and saltwater banks, plus a growing number of stream banks. A highly conservative estimate by the U.S. Environmental Protection Agency put the number of mitigation banks at about 450 in 2005, with another 198 in the proposal stage. The survey cited by EPA actually counted umbrella banks as a single bank, so the true number was in fact much higher. The current total may be closer to 700 banks.

The Basics
As defined by EPA, “mitigation banking” refers to the restoration, creation, enhancement and, in exceptional circumstances, preservation of wetlands and/or other aquatic resources expressly for providing compensatory mitigation in advance of authorized impacts to similar resources.

EPA’s release of a long-awaited federal mitigation banking guidance in November 1995 provided the regulatory certainty and procedural framework needed for mitigation banking to take off. Today it is increasingly well understood that the development of raw land in areas with protected wetlands, or with potentially threatened or endangered species, often creates significant market opportunities. The new EPA and Corps regulations recognize and encourage this potential.

You don’t have to be a rocket scientist—or even an ecologist—to take advantage of these opportunities, but they do require careful attention and the ability to approach familiar issues from an unfamiliar angle. There are about a dozen different steps—some fairly simple and obvious, others more complex and time-consuming—that must be successfully negotiated for a banking site to be found, financed, and restored effectively to credit-earning—and profit-generating—status.

Mitigation Bank Planning: The 12 Steps

  • Identify the opportunity
  • Understand the problem
  • Identify the development community and likely market for mitigation credits
  • Predict the remedy or resource demand
  • Identify location for bank
  • Secure the land
  • Negotiate with the Interagency Review Team
  • Complete the restoration and/or mitigation plan
  • “Pre-sell” the mitigation credits
  • Permitting, design, & construction
  • Collect payment and sell credits
  • Provide for post-transaction maintenance of the improved resources

1. Identify the opportunity
Opportunities may occur whenever raw land that includes federally and state protected wetlands is being developed. The most obvious places to seek opportunities are areas experiencing rapid development, such as Florida, but opportunities can be found in built-out locations, such as the San Francisco Bay Area, where the high cost of coastal land acquisition is creating significant business opportunities.

2. Understand the Problem
Environmental credits are valued based on the “uplift” established in the restoration or enhancement of habitat values present on a particular site. During the due-diligence assessment, sites are evaluated for the pre-project habitat value and the potential post-project, or enhanced, value.

Wetland scientists and consultants typically conduct the six studies required to complete a site’s baseline value:

  • The contaminant site assessment process, Phases I, II and III;
  • Wetland delineation;
  • Endangered species surveys;
  • Soil surveys;
  • Hydrological analysis, including salinity and water flow; and
  • Vegetation communities

3. Identify the development community and the likely market for mitigation credits
Purchasers of wetland mitigation credits are predisposed to securing their offsetting credit acquisition because the mitigation must be acquired prior to or concurrent with the implementation of the project (ergo the project cannot be implemented until the mitigation is secured). Marketing of the availability of such a solution is critical to ensure the earliest sale of all the wetland credits in the bank to ensure the most rapid return on the investment.

4. Predict the remedy or resource demand
Wetland mitigation projects must identify the types of wetland credits that will be demanded by developers such as salt marsh, seasonal wetland, vernal pool, forested wetland, etc. In some cases, multiple habitats may be required. Thus, it is important for the project that needs the credits to be clearly defined.

5. Identify the location for bank
With mitigation banks, the location of the bank must provide a nexus to the location of the injury or the area where the wetland impacts are incurred. Mitigation banks generally have a service area defined by the watershed boundaries, which will provide compensation credits of a particular type (such as forested wetland, shaded riverine, vernal pool, etc.).

6. Secure the land
The ability to sell credits will be predicated on the authority and ability to transact over a piece of land. If the bank sponsor does not have ownership, it will be necessary to obtain contractual assurances that credits can be sold and liability transferred.

7. Negotiate with the Interagency Review Team
A bank sponsor must coordinate with the Interagency Review Team (IRT) through submittal of a Mitigation Bank Prospectus, a formal document that proposes the location of the bank, the type of wetland credits to be sold, the proposed service area of the bank, the number of credits available to be sold, and the value and uniqueness of the bank location. Upon approval of the prospectus, the IRT approves the bank through the approval of the Mitigation Banking Instrument.

8. Complete the restoration and/or mitigation plan
Detailed plans must be prepared and approved by the IRT as appropriate defining the type of habitats to be constructed, the services to be sold, total number or credits available, a plan of implementation, and the necessary financial assurances. For many players, this is the least familiar and potentially the riskiest area of the process. However, a “road map” can be constructed to get the bank sponsor safely through this hazardous terrain.

A wetland mitigation plan acceptable for mitigation bank purposes must include the following sections:

  • Objectives -- A qualitative and quantitative description of the types of resource and amounts that will be created.
  • Site selection -- A description of the site selection process and a discussion of the practicability of successful habitat construction.
  • Site protection instrument -- This section describes the specific legal documents, including site ownership documentation, that will be used to ensure long-term protection (conservation easement or deed restriction, which severely restrict future uses and potential development) of the site.
  • Baseline information -- A description of the hydrology, plant communities, soil conditions, wildlife habitat usage, and functions and values of the site. Baseline studies are conducted by trained or certified wetland scientists.
  • Determination of credits -- A statement of the number of credits to be provided and the rationale for this determination.
  • Mitigation work plan -- A description of the project including the boundaries, sequencing, source of water, planting plan, etc. This plan typically is developed as a set of design documents that include construction plans, site plans, bid documents, and materials supporting permitting.
  • Maintenance plan -- A description and schedule of required maintenance actions.
  • Performance standards -- These are ecology-based standards that include improved wetland functioning and provide benchmarks for determining that the project is progressing toward meeting the objectives.
  • Monitoring requirements -- How will the site parameters be monitored to determine that the mitigation project is on track to meet performance standards?
  • Long-term management plan -- A description of how the compensatory mitigation project will be managed after performance standards have been met and to ensure the long-term sustainability of the site.
  • Adaptive management plan -- Specifies the procedures that will be in place to address potential changes in site conditions or other components of the compensatory mitigation project. Typically, these will include replacing dead or dying plants, changing hydrological regimes, and removing invasive or exotic species.
  • Financial assurances -- A description of financial assurances that will be provided and how they are sufficient to ensure a high level of confidence that the compensatory mitigation project will be successfully completed, in accordance with its performance standards.

9. “Pre-sell” the mitigation credits
Wetland mitigation banks provide for selling a percentage of the credits prior to the full implementation and build-out of the project. Under current guidelines, 15 percent of the total number of credits will be released for sale when

  • The IRT has executed the Banking Instrument;
  • The mitigation plan has been approved;
  • The financial assurances have been delivered; and
  • The preservation mechanism has been recorded.

The “pre-sale” should include any fees or other costs related to maintenance of the improved resources.

10. Permitting, design, and construction
Development of a mitigation bank involves coordination and approval from various regulatory agencies such as the Trustees or the IRT. However, the actual implementation of bank and the construction of habitats involves actions that trigger a number of permits with the U.S. Army Corps of Engineers and state environmental agencies.
Permitting and the construction of the bank will require detailed design drawings that include the existing natural resources that are to be protected or enhanced as well the new features that will provide the credits for “created wetland” or “restored ecosystem services.” Design of the project involves much of the same information that is collected during the due-diligence, typically consisting of

  • Detailed topographic data of the site;
  • Stamped drawings by a professional engineer or landscape architect for site construction;
  • Estimates of spoils and fill to be moved; and
  • A detailed accounting of all plantings to be installed, including specifications as to size of container stock, planting densities etc.

The plantings should usually to be native species sourced from local seed stock. Plants spaced at higher densities provide a more effective barrier against invasive species, which can ultimately reduce wetland functions and values.

11. Collect payment and sell credits
Once the bank is constructed, additional wetland/habitat credits are released for sale. To ensure that the bank meets the established performance standards, release of the credits is phased throughout the implementation period, which is generally defined as the first five years after construction.

12. Provide for post-transaction maintenance of the improved resources
Once the bank has sold its credits, the bank closes and, in most cases, the property is then transferred to a suitable non-profit third party that is commonly responsible for land stewardship of natural areas.

To Bank or Not to Bank?
Wetland mitigation banking is not only a complicated, multi-dimensional undertaking, but it also forces investors to take a long-term view of both the development process and ultimately of the return on investment. Furthermore, as a highly regulated industry, changes in the legal landscape can affect the decision to open a bank.

Costs for mitigation banking vary widely. One study estimated costs ranging from around $4,000 per acre plus land costs for nontidal wetland restoration in rural Minnesota to $350,000 per acre for estuarine wetland mitigation in the Norfolk area.

On the plus side, restoring degraded habitats can be deeply satisfying. It can enable an otherwise doubtful project to move forward, and create intangible benefits, such as local acceptance and goodwill, that can translate into a quantifiable business advantage. And if done correctly, it can also be highly profitable.

References

U.S. Environmental Protection Agency, Mitigation Banking Factsheet, http://www.epa.gov/cgi-bin/epaprintonly.cgi

Wilkinson, Jessica, and Jared Thompson, 2005 Status Report on Compensatory Mitigation in the United States, Environmental Law Institute, April 2006.

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