A specialized land development business emerged in the early 1990s following adoption of state and federal rules that defined provisions for establishing and operating wetland mitigation banks. The essence of the process is this: A prospective wetlands mitigation banker, which may be a government entity or private entrepreneur, identifies a site where wetlands have been negatively altered by agriculture, silviculture, or similar activities.

The mitigation banker negotiates an agreement with wetland regulatory agencies to restore, enhance, and preserve the land. Regulators allot mitigation credits to the bank based on the degree of ecological “lift” resulting from the improvements. When the credits are earned and released, the mitigation banker can then sell credits to developers who have received their federal and often state and local permits, a.k.a. “wetlands permitees,” to offset the impact of their activities elsewhere within a defined service area.

The term mitigation credit was originally defined as the amount of mitigation required to offset an acre of impact. The amount of land included in a credit may vary depending upon the mitigation type. And the number of credits required to offset an impact acre may vary based upon the quality of the impacted wetland.

Some mitigation banks today deal in functional units of wetland value rather than credits. In this case, a mitigation bank is awarded a predetermined amount of units. However, the units must be earned by the banker and released by the agencies, before they may be sold. The impacts are evaluated by the same methodology, and the permit applicant and agency negotiate the exchange, which is normally equal replacement of functional units.

The process of developing a wetland mitigation bank is time-consuming and costly. Yet, when the process is well understood and carefully managed by an experienced team, the resulting wetlands mitigation bank may quickly sell all of its allotted credits at an attractive profit.

It is a truism that location is of paramount importance to the success of any real estate endeavor.

Wetlands mitigation banking is no exception. Areas wherein which there is a significant amount of wetlands, high development pressure land values are prime areas for wetlands mitigation banking conditions. For example, there is a lot of mitigation banking interest in Florida, where development is booming, including the northeastern area around Jacksonville, the southwestern area south of Fort Myers, the area north of West Palm Beach, and the Orlando area.

In fact, in some areas, demand is such that we are now seeing competition between two or three mitigation banks, and mitigation credits are quickly selling out. Since the 1990s, a number of mitigation banks have been developed in Georgia, South Carolina, and Virginia, including the edge of Washington, D.C., as well as in other areas across the country.

Determining Feasibility
Wetlands mitigation can take several forms: specifically, creation, preservation, restoration and enhancement. Each form yields a certain “mitigation ratio,” according to the degree of ecological lift, that is, increased ecological value. The ratio refers to the number of acres a wetlands permittee would have to use, or purchase in the form of mitigation credits, to offset the impact on one acre of an existing wetland.

Creation involves mechanically scraping down upland to the level of the water table, thereby creating a wet environment, and re-planting with wetland plants. Creation typically yields a 2:1 to 3:1 mitigation ratio, meaning that a wetlands permittee could purchase credits equal to two to three acres for each acre of wetland filled as part of a development project within the service area. However, because creation involves drastic alteration of upland to create the conditions for wetland, it is costly and associated with a certain amount of risk that the new wetland plants will not thrive.

Restoration takes land that historically was wetland, yet has been severely altered by development (often agriculture or silviculture), and restores it to its previous condition. The most desirable approach in the eyes of regulatory agencies, restoration typically yields an attractive 2:1 to 3:1 mitigation ratio — yet, at a lower cost and risk than wetland creation.

Enhancement improves the ecological value of an existing wetland that has been altered, although not as severely altered as to require restoration. The mitigation ratio typically ranges from 5:1 to 10:1, depending on the particular site conditions.

Preservation of existing high-quality wetland is achieved by placing a conservation easement over the land, which preserves it perpetually. Preservation typically yields a 20:1 ratio, but it may go as high as 50:1 or higher, depending on the particular site conditions. Each of the above processes requires different acreages of land and manipulation to achieve the same result. Thus, the cost to affect an acre of impact should be more or less the same for each method. The values of the land involved on a per acre basis may vary greatly because of the different ratios.

The process of establishing a wetlands mitigation bank starts with the prospective owner assembling a team comprising an environmental consultant with experience in siting and designing wetlands mitigation banks, a surveyor, an experienced environmental attorney, and, frequently, a civil engineer. The owner will also identify potential lenders. If the project goes forward, the owner will bring in a construction team, which may include one or more specialists in certain processes, such as stream restoration.

Led by the environmental consultant, the team will conduct a feasibility study to identify a site for sale that has the appropriate characteristics from ecological, regulatory and market perspectives. In particular, the team will look for former wetlands that have been altered for agriculture or silviculture, since these typically have the hydrogeological characteristics that allow for a cost-effective project.

Assessing the Land to Determine Credits
Wetland mitigation banks typically are hundreds to thousands of acres in size, and require a combination of preservation, restoration and enhancement. The environmental consultant will develop a preliminary estimate of the number of wetland mitigation credits that a candidate site will yield based on existing topographic and hydrogeological maps and the consultant’s experience in working with the regulatory agencies that have jurisdiction over the site.

Service area is another consideration. Mitigation banks have discrete geographic service areas within which wetland permittees are allowed to purchase mitigation credits to offset the impact of their projects. The size of the service area is determined by the regulatory agencies, and standards differ from state to state. In Florida, for example, service areas are relatively small, but in the case of one wetland mitigation bank in South Carolina, the service area covered the entire state. Both the size of the service area per se and the demand for mitigation credits in that service area affect the potential profitability of the mitigation bank.

If a good bank site is located in a good service area, then the banker and his team of professionals assesses the competition: are there other mitigation banks, how much are their credits selling for, how many credits are they selling, and do permittees tend to purchase mitigation credits rather than carrying out their own mitigation efforts?

Finally, the consultant estimates the costs associated with preservation, restoration and enhancement efforts; adds the land cost; and divides the total by the number of projected credits. If the owner decides to proceed, the team must secure the appropriate permits and approvals.

Gaining Regulatory Approvals
If the project is to move forward, it must have the approval of the regulatory agencies with jurisdiction. These include the U.S. Army Corps of Engineers and may include state or local agencies. The U.S. Army Corps of Engineers utilizes a Mitigation Banking Review Team (MBRT) for the process. The MBRT typically is chaired by representatives of the Corps and includes; USDA Natural Resources Conservation Service, the Environmental Protection Agency (EPA), U.S. Fish and Wildlife Service, and may include representatives from National Oceanic and Atmosphere Administration, and other federal agencies. Depending on location, the MBRT may include state natural resources agencies and other organizations.

The MBRT requires presentation of a prospectus, which details site conditions, proposed mitigation approaches, projected degree of ecological lift, obstacles, etc., in order to determine whether or not the land is viable as a mitigation bank site. The project team must conduct extensive field work to assess site conditions using a number of different quantitative and qualitative assessment techniques to evaluate baseline conditions, including existing ground cover, hydrogeologic conditions and wildlife habitat. If the MBRT is satisfied with the prospectus, it will conduct a site visit to evaluate the land for approval as a wetlands mitigation bank.

Working with the regulatory agencies, the team develops a detailed plan for construction, success criteria, monitoring requirements, process for credit release, operational guidelines for the mitigation banker and agencies, etc. This becomes the body of a document called the Mitigation Banking Instrument. Because land movement and construction activities are involved, like any other development activity, the project may also require state and federal permits.

The process of developing the approved Mitigation Banking Instrument and gaining the permit can take up to eight months in a favorable mitigation banking environment, however, it can even take more than 24 months and could take as much a four years.

Once the permit is granted, the owner must place a conservation easement over the land, usually in the lead agency’s name. Frequently the banker must post a bond, irrevocable letter of credit or other financial instrument for the bank that not only assures construction and maintenance but also provides for the perpetual care and maintenance of the bank. At this point, the Corps typically releases about ten percent of the mitigation credits, which allows the banker to begin selling credits. Most owners start the mitigation process at that point.

The mitigation process varies according to the site, of course. A restoration and enhancement project on former agricultural land might involve termination of any grazing leases. Fencing, culverts, sheds, troughs and other structures will be removed, as will any accumulated animal or plant waste. The hydrology of the land will be restored by filling ditches and removing irrigation systems. Non-native plant stock and invasive plant species will be removed. The land will be replanted with native wetlands plants.

Operation of a Bank
The regulatory agencies release portions of the total credits over a period of time, as the project meets certain pre-determined success criteria, including plant survival and growth rates. This requires the environmental consultant to perform annual monitoring and submit reports to the agencies. The final credits — which may comprise 20 to 25 percent of the entire bank — are only released after meeting all of the banks performance criteria. This usually takes five to ten years. In this author’s experience, most owners sell all of their credits within the same time period. Once all the credits are sold, many mitigation bankers will deed the title and the perpetual care trust fund to one of the regulatory agencies or a conservation organization.

Wetland mitigation banking can be a risky endeavor. But when a mitigation bank is located in a prime mitigation banking area — one in which there is a significant amount of wetlands, high development pressure and high land values — and the development process is managed by an experienced team, it can become a profitable endeavor.  SLDT