Banking on success

• By Richard C. Allison, PhD
• May 01, 1999

Mitigation banking is the creation, restoration, enhancement or preservation of wetlands - areas of land frequently saturated by surface or ground water that include swamps, marshes and bogs - that is permitted by a state or federal agency as an approved mitigation bank. Because of their importance in providing flood control, purification of surface water and habitat for fish and wildlife, wetlands are protected under the Clean Water Act and cannot be disturbed or destroyed through development without the landowner first obtaining a permit from the U.S. Army Corps of Engineers. Wetlands mitigation banking allows for the creation of newly constructed wetlands to take the place of existing wetlands that will be impacted or destroyed through development.

Upon approval of the permittee's mitigation bank application, the permittee becomes known as the banker. Mitigation banking establishes wetland functional values prior to their loss as the result of unavoidable permitted wetland impacts.

The mitigation bank is assigned "credits" that are the result of enhancements made to ecological value of the wetland system. Credits may be exchanged for wetland losses as a result of a lender's project, or the lender may sell its credits.

Mitigation banking provides landowners, developers, environmentalists and regulators the opportunity to join together in making responsible, ecosystem-driven decisions about the future of local, regional and national wetland resources. Mitigation banks provide scientifically sound alternative means of compensating for impact to established functional values in a watershed area.

Mitigation for the loss of wetland functions did not become a national regulatory requirement until the early 1980s. Through the efforts of environmentalists such as Gene Stratton-Porter, the "voice of the limberlost," who brought national attention to the loss of a 13,000-acre hardwood forested swampland ecosystem in Indiana's Adams County, and Rachel Carson, who published Silent Spring in 1962, our nation began to take notice of the loss of our natural wetland resources. A decade later, Congress passed the Federal Water Pollution Control Act of 1972, and in 1977, passed the Clean Water Act. Only then did federal agencies have the regulatory tools to protect wetland systems. Although mitigation banking was identified as an alternative in the 1970s, final federal guidelines for this process were not published until 1995.

During this 20-year time period, wetland mitigation was in many cases being conducted at, or near, impacted wetland sites. However, the mitigation efforts were project-specific and often did not take into account other mitigation projects being conducted in the same watershed or basin. Additionally, these mitigation projects did not involve surrounding uplands, necessary for wetland species nesting or donning. As a result, many of these early wetland mitigation projects did not meet with the success that had been projected by the regulatory agencies and biologists who designed the mitigation systems. A major missing component was an ecosystem approach, defining what was needed in the watershed or basin to achieve sustainability of the mitigation projects being constructed.

Today, the prudent response to these challenges appears to lie in the concept of mitigation banking. A mitigation bank should be a large parcel of wetland with associated uplands; past experience has shown smaller mitigation projects do not normally have the same sustainability or provide the same wetland functions as a larger mitigation bank. The mitigation bank should also be located in a major watershed or basin, because the impacts that occur in a basin are more successfully offset with a mitigation bank than with smaller mitigation projects.

Several states had passed mitigation banking rules prior to the federal guidance issued in 1995. Today, 21 states have approved mitigation banking rules, and two additional states are in the process of developing rules. Currently, there are more than 110 approved mitigation banks.

Types of mitigation banks
At present, three user types of mitigation banks have been developed. These are the single user mitigation bank, entrepreneur mitigation bank and public/private mitigation bank.

Single user mitigation banks. The single user mitigation bank is developed for a specific project, and the property on which the bank is constructed is usually privately owned. The credits associated with the mitigation bank are used to offset the future impacts of that project, which usually include a long term build-out associated with the project's completion. Funding of the mitigation bank is provided by the user.

Consultants are usually employed to permit, construct, monitor and maintain the mitigation bank. Upon completion of the mitigation bank and when all credits have been used, the property is usually deeded to a state, federal, or local agency for long-term management.

Entrepreneur mitigation banks. The entrepreneur mitigation bank is developed for projects that are currently being permitted or will be permitted in the future. The property on which the bank is constructed is usually privately owned. The credits are sold on the open market to potential customers such as developers, municipalities, government, utilities and transportation agencies. Funding for the bank is provided by the entrepreneur.

Consultants are usually employed to permit, construct, monitor and maintain the bank. Upon completion of the bank and when all credits are sold, the property is usually deeded to a state, federal or local agency for long term management, along with a trust fund to manage the mitigation bank property.

Public/private partnership mitigation banks. The public/private partnership mitigation bank is usually financed by a private partner, while a public partner provides the property. The bank credits are used by both partners. A portion of the credits may be used for a partner's internal needs (single user) and the remaining credits are made available for sale on the open market. The revenue generated from the sale of credits is used to reimburse the partners for their financial investment, with the balance being distributed as profit among the partners. Upon completion of the bank and when all credits have been used or sold, the property may be retained by the original owner; however, a conservation easement will be placed over the property. The property owner may retain the long-term maintenance and the established trust fund for the property, or the owner may deed the property to a state, federal or local agency and transfer a long-term trust fund to that agency.

Considerations for a successful mitigation bank
There are many activities associated with a successful mitigation bank; each has its own distinctive risks. For a mitigation bank to achieve its goals, all of these activities must meet with success.

Location. The location of the bank is one of the most important considerations. There must be a demand for the bank to offset impacts to wetlands in the watershed, which is regulated by the growth or development in the area or watershed. The site needs to be a part of a large wetland system to give the wetland bank a good chance for sustainability. If the site is surrounded by development, a major road system, agricultural areas or a combination of these activities - which usually have a negative effect on a natural wetland hydrological system - it may be difficult for the mitigation bank to function on its own in the future. The site should lend itself to providing habitat for migratory animals or threatened or endangered species, and should also be able to provide passive recreational and educational opportunities for the community, whenever possible. Accordingly, if the site presents an excellent opportunity to restore wetlands for migratory birds, but is not in an area that is threatened by development pressure, the investment required to develop that site as a mitigation bank may never be recovered.

Permitting rules. The mitigation bank permitting rules for each state are different; however, a similar pattern has developed in every state. The federal guidelines for mitigation bank implementation may also be interpreted differently by each state. Each state, however, has a mitigation banking review team or board. The team or board meets, usually on a monthly basis, to review mitigation bank projects that are in the permitting process. These teams also review policies related to the mitigation bank rules and how they, as a decision-making group, will implement these policies. Therefore, knowing the permitting requirements and the permitting process will save the end-user time and money, and reduce the risk associated with the permitting process.

Establishing and using credits. An environmental functional analysis must be made on the property to determine the amount of credits that may be available when the property is restored. A credit can be defined as the difference of the functional values of a wetland system in its present condition and the functional values of the system after it has been restored. Several functional value systems are currently approved by various states and federal agencies; each system varies in the amount of credits that will be assigned to a bank. The federal agencies are now in the process of establishing one system, called the Hydrogeomorphic (HGM) system. Having a qualified staff who understands and can perform these functional analyses will reduce the risk of losing credits.

A conservation easement is required prior to the release of any credits for sale from the bank. Once the easement is filed, the property is protected from any form of development other than the mitigation bank. The easement is a legal document that addresses the rights of the property owner and the use of the bank. Should this document be executed in an improper manner, the property owner could lose the property to the grantor if any part of the mitigation bank does not meet the required conditions of the operating or construction permits associated with the bank.

The credit release schedule is developed during the permitting process. This document identifies the construction and monitoring activities required to release credits to the mitigation bank's credit ledger. The schedule identifies specific activities, such as the filing of a conservation easement or the removal of exotic vegetation from the site by the mitigation banker. The credits associated with filing the conservation easement are negotiated between the banker and the agencies.

The credits assigned to the removal of exotics are determined by the functional analysis. Once credits are placed on the ledger, they are available for use or sale. Successful negotiations between the mitigation banker and agencies in establishing the mitigation bank credit release schedule are vital to the revenue flow of the bank: A poorly negotiated schedule will risk the timely return of capital investment.

A performance bond must be posted before construction can begin. A performance bond for required short-term maintenance must also be posted to ensure success of the mitigation bank project. This bond is usually required for a five-year period after the construction is completed. The release of additional credits is associated with an annual wetland functions analysis. This analysis should reveal that the wetland functions are "trending toward success," and result in the release of a percentage of the total credits assigned to the bank, for posting to the ledger for sale or use.

The bank wetlands should be judged as successful and sustainable by the permitting regulatory agencies within a five-year period. When the bank has been determined to be successful, the final credits are released and posted to the mitigation bank ledger for use or sale. Some states require the establishment of a long-term maintenance fund or trust fund. This fund is to be fully capitalized when the bank is completed and all credits have been assigned to the ledger; the fund is then turned over to the organization that will manage the bank over the long term.

The credit marketing plan is vital to recovering the capital investment associated with the land purchase, permitting, construction and maintenance cost of the wetland mitigation bank. Credit sales and pre-credit release contracts need to be in place as early as possible to ensure that the capital investment is returned at the earliest possible date. The longer it takes to recover the investment, the greater the risk of changes in credit values, due to competition or a change in the regulatory climate.

Want to be a banker?
If you have a sincere desire to restore and protect our national wetland treasures, the heart of a lion, the patience of a saint, the financial resources of Fort Knox and 20 years to dedicate to the task, you may have what it takes to become one of the national wetland mitigation bankers who have helped to preserve our environment.

This article originally appeared in the 05/01/1999 issue of Environmental Protection.