Taking Mitigation to the Bank - Mitigation Credits Offer a Lucrative Upside for Forest Landowners Who Have the Requisite Property, Patience and Openness to Conservation

By Alan Wood, PWS This article appeared in the November/December 2018 issue of Forest Landowners Magazine

A forest landowner in South Carolina owned a 1,000-acre parcel worth $5,000 an acre. The land was mostly wetland, which reduced its value. You can grow and build things on dry land, after all.

On the other hand, the wetlands and the property’s proximity to the path of progress made it an ideal candidate for mitigation banking. That’s because prospective developers within the same watershed looking to build on property that include wetlands must purchase mitigation credits to offset the environmental impact. One of the largest credit buyers, as was the case with this landowner, is the Department of Transportation, which disrupts wetlands by building new roads and widening existing ones.

Thus, the landowner with 1,000 acres who thought he had a $5 million property found himself with a potential $14.4 million property – nearly three times the value - once adjusting for the value of the mitigation credits.

Welcome to the world of mitigation banking, which can be both complex and lucrative. It also can be costly, time-consuming and involve dealing with multiple state and federal agencies, ultimately placing restrictions and conservation easements on property.

So it’s not for everyone, regardless of financial upside. You need to have a minimum of 800 acres for it to be financially feasible, along with location within the same watershed (roughly a 100-mile radius) as the projects requiring mitigation credits. Plus, you have to be receptive to conservation easements and other restrictions on your land, including possibly selling it at a highly reduced cost or donating it altogether.

Wetland mitigation is the practice of offsetting unavoidable impacts to aquatic resources at one site by restoring and/or enhancing wetlands at another site in the same or adjacent watershed. Mitigation banks offer these offsets, called credits, to developers by preemptively completing a large restoration and/or enhancement project on a site known as a mitigation bank and selling credits to new construction projects to meet regulatory compensatory mitigation requirements that are issued as conditions of a permit.

Mitigation banking has grown in popularity as the economy has emerged from the 2008 recession, driving demand for new development and infrastructure projects in major metropolitan areas and into emerging markets through urban sprawl.

In many parts of the country, wetland (and stream) impacts are difficult to avoid during new development (industry, businesses, residential, municipal, new/widened roads). This is especially true across much of the Atlantic and Gulf Coastal plain region where both new development and wetlands can be found in abundance.

Even with the best site planning considerations, wetland and stream impacts often are unavoidable and will continue to be associated with urban growth and development. The practice of mitigation banking has made it possible for many government and private sector projects to satisfy regulatory concerns when projects impact aquatic resources.

Any forest landowner with applicable property can take advantage of these opportunities, though as with forest management it’s beneficial to enlist a consultant to both expedite the process and maximize the benefit. There are about a dozen different steps, some easier and less time consuming than others – that must be negotiated for a mitigation banking site to be identified, financed, and restored effectively to credit-earning—and profit-generating—status.

Since 2008, the U.S. Army Corps of Engineers (USACE) regulations have identified mitigation banks as the preferred method to satisfy compensatory wetland mitigation for impacts associated with unavoidable losses. The 2008 rule created a gold rush of sorts in areas with few or no banks in a watershed where there was a strong development potential.

However, those unfamiliar with mitigation bank requirements can have their judgment clouded by the potential for credit sales in a particularly fast growing market. Although mitigation banking can be a rewarding and potentially profitable endeavor, there are many capital costs incurred during the review and approval process before the first credits are available for sale; an approval process typically takes 18 to 24 months. Other times it takes longer or may never be reached.

While mitigation banks are the preferred method for providing compensatory mitigation, there are times where a large industrial or commercial project will incur such a significant impact to wetlands/and or streams that the number of credits needed to offset that impact are either not available or would consume most of the credits available in a particular service area.

In these situations, the regulatory agencies will consider an alternative means by which a developer can satisfy the required mitigation need, called a Permittee Responsible Mitigation (PRM) project. PRM projects typically involve restoration, enhancement and preservation of wetland and/or stream components that the Interagency Review Team (IRT) deems as being adequate in size and scope to offset impacts involved with the permittee’s development project impacts.

Successful PRM projects can be accomplished on tracts smaller than a proper mitigation bank; however large-scale projects that rely on PRM to offset impacts are uncommon in all but the largest metropolitan areas.

Site Selection

Wetland and stream mitigation is completed by restoring areas that were historically wetlands but have been manipulated by man (through ditching or other methods) to improve conditions for agriculture or other uses; enhancing existing wetlands that have been impacted or impaired by anthropogenic manipulation; or preserving existing wetlands in high priority areas.

The best restoration and/or enhancement sites often can be identified by the presence of soils with lower agricultural productivity, have been highly ditched and drained and/or otherwise managed to “dry” the area out.

Full restoration of an area from an existing upland to highly functioning wetland system is most desirable, with enhancement opportunities being valued based on quantifiable degradation in an existing wetland system and the ability to improve its function. Preservation can only represent 50 percent of a potential bank at most, so sites must have a majority of convertible uplands and/or degraded wetlands.

Mitigation projects typically require restoration or addition of hydrologic input and expressed water rights must be secured. This requires that the landowner either have direct access to an upstream water source or the ability to gain access from an adjacent landowner(s).

Site Location

Site potential also is weighed based on its location on a local and regional scale. At a local level, priority is given to sites where long-term protection provides high ecological benefit. A site located in a rapidly growing area and near expansion would be more desirable than a site located far from expansion, as it would not likely provide any protection from development.

Additionally, sites located adjacent to or near existing protected lands, such as national forest, conservation area or scenic rivers, are more desirable as large-scale protection is more valuable to natural resource agencies.

At the regional level, a site is more valuable if located in or adjacent to a watershed that has growth potential but few or no existing mitigation banks. Additionally, preference can be given to a potential mitigation project that results in a net gain in cumulative ecosystem services within a watershed and contribute to improving environmental factors that directly affect local populations.

For example, a project that supports an existing watershed management plan or one that could improve water quality in a downstream waterway that provides recreation or drinking water for a large population would bolster chances of a bank or PRM getting approval.

Size

When evaluating a site for use as a potential mitigation project, tract size also should be considered. From a regulatory standpoint, there is no guidance with respect to the size of a mitigation bank. From an investment standpoint, a site must be large enough that there will be a sufficient number of credits that can be generated so that when sold, they will offset bank development and management costs and yield a solid ROI to the landowner.

Markets differ widely and smaller banks can make financial sense where demand for credits is high, availability is low and credit prices are justifiably high (such as salt/tidal credits). In many cases, however, freshwater wetland mitigation banks will range from around 200 acres to several thousand acres, depending on the functional lift that can be achieved through restoration/enhancement work.

Sites that have a high potential for a mitigation project in respect to convertibility for restoration/enhancement and location but may be too small to be considered for a proper mitigation bank can be considered for PRM projects.

A mitigation project is typically going to arise from one of two scenarios, either a landowner will reach out to someone familiar with mitigation to determine if their property could potentially be used as such. Alternatively, in regions that are experiencing high development, or expect to be in the near future, and that area is currently lacking adequate mitigation credit availability to serve that development, a mitigation consultant may work with land managers and owners to try and identify a potential mitigation project to meet regional demand.

Scope

The scope of a mitigation project depends on the existing wetlands. If you have swampland, there’s not much you can do to make it better. That means its preservation. But since only half of a mitigation program can be preservation, you must find some area to restore and/or enhance. Perhaps there have been ditches and dikes added over the years that can be removed to return an area to a natural, functioning wetland system. Perhaps some roads can be removed or breached with low water crossings.

Of course, these measures would devalue property from a forest management standpoint. In some instances, landowners have retained the hunting and recreation rights to the property while, of course, getting the financial windfall of the mitigation credits.

Most forest landowners would agree that habitat restoration and preservation is a good thing, though landowners won’t pursue such projects without financial incentive. Mitigation banking can involve a large capital investment and many landowners unfamiliar with this relatively new industry can be understandably reluctant to consider a mitigation project as a potential highest and best use of a tract.

Thankfully, consultants and land managers increasingly are able to work with landowners to provide insight needed to make informed decisions when considering land use options.