Having a Wetland and Developing It Too

Mitigation banking

January 1, 1997

Plans for the new suburban shopping mall and office complex are complete.

Groundbreaking is a few weeks away. Then the developers receive a call from the U.S. Army Corps of Engineers.

It seems that part of the mall will cover an acre of low-lying land that's wet for a couple of weeks a year--defining it as a wetland under federal law. The project can’t go forward without a permit from the corps. To get that permit, the developers must restore or create a wetland--usually at a ratio of 1.5 acres of new wetland for every acre of developed wetland--on or near the project site to mitigate, or lessen, the harm the mall will do to the old wetland.

The developers must flood the area and plant trees, grass, and other vegetation. They must agree to maintain the new wetland in perpetuity, though they're commercial real estate developers, not botanists. If they don't offer a reasonable guarantee, the project is dead.

Fortunately, the developers find an entrepreneur who, with help from experts, has established nearby a large reserve, or bank, of functioning wetlands in an area that was previously farmed. The bank comprises 500 acres and is full of grass, plants, and wildlife. It's home to endangered and threatened species and includes trails for hiking and bird-watching.

The sponsor of the bank has developed it at a cost of $10,000 per acre (or $15,000 for 1.5 acres). He's offering the acres for sale as credits that can be used to fulfill the corps’ requirement to lessen the harm to wetlands caused by development projects.

The shopping mall developers pay the entrepreneur, known as a mitigation banker, $18,000 for 1.5 acres but don't take title to the land. The mall project goes forward, the mitigation banker makes money (a $3,000 gross profit on 1.5 acres), and valuable wetlands are maintained.

This scenario is known as mitigation banking, a concept gaining recognition as a pro-environment, pro-development, private sector means of meeting the demands of the complex federal program that governs activities affecting wetlands. Mitigation banking offers opportunities for commercial real estate developers, not only as a means of moving forward projects affecting wetlands but also as a potential entrepreneurial venture.

Since the government adopted the policy of no net loss of wetlands, compensating for the harm caused by unavoidable activities in wetlands has become an essential element of the federal regulatory program run by the Army Corps of Engineers. Yet most developers lack the expertise to carry out wetlands restoration or creation activities effectively, even if a suitable area is located on the project site. In addition, on-site projects are costly and offer limited environmental benefits.

The best sites for restoring or creating wetlands can be selected for mitigation banks because they can be located off-site, though how far from the proposed development project is still being debated. Furthermore, to help get corps approval, mitigation banks often employ wetlands ecologists and other experts to ensure that the functioning and value of wetlands are realized.

Perhaps most important, because mitigation banks can take advantage of economies of scale, far greater environmental benefits are achieved through mitigation banking than by piecemeal restoration or creation projects.

From an entrepreneurial standpoint, mitigation banking is an idea whose time has come. It dates back to the late 1970s and was primarily government sponsored and used mainly by departments of transportation and oil and gas pipeline companies. About 40 such banks have been created in the last few years. They've been sponsored by the client, that is, the bank user, but few offer mitigation on the open market to a range of users.

The absence of comprehensive federal guidelines has created uncertainty among potential private sector mitigation bankers regarding the standards sufficient to allow the sale of mitigation credits.

Late in 1995, however, the Army Corps of Engineers and other federal agencies issued guidelines for the establishment and operation of mitigation banks. And that action has spurred private sector interest in mitigation banking. About eight to 10 “entrepreneurial” mitigation banks now exist, and many more are in the planning stages. These types of mitigation banks are available to anyone who wants to use them. They offer a way to make a profit from providing a service that helps both the economy and the environment.

For information about the location of mitigation banks, contact Jack Chowning at regulation division, U.S. Army Corps of Engineers, 202/761-0199.

How to Set Up a Mitigation Bank

Establishing a mitigation bank is a complex undertaking. Here attorney Howard Bleichfeld suggests some basic steps:

  • Choose the site carefully. Make sure it has ecological characteristics necessary to support wetlands. The restoration of previous wetlands or currently degraded wetlands using proven mitigation techniques offers the best chance of success.
  • Consult early and often with the U.S. Army Corps of Engineers. The corps will typically be the federal agency that, along with other agencies, approves the proposed mitigation bank. It's important that communication be established and maintained with the corps.
  • Submit a prospectus. A plan setting forth the objectives of the bank and how it'll be established and operated should be submitted to the Army Corps of Engineers and other federal agencies.
  • Obtain federal approval of a mitigation banking instrument. All banks must have an instrument that reflects agency approval and details the operation of the bank. The bank sponsor must work with the Army Corps of Engineers and other agencies to create the mitigation banking instrument, which should address such issues as land ownership, method of determining credits and withdrawals, performance standards and financial assurances, compensation ratios, and long-term management and maintenance.

Howard Bleichfeld is an associate with the law firm of Van Ness Feldman P.C., Washington, D.C. Telephone: 202/298-1945. He practices environmental law, with an emphasis on Clean Water Act issues, including the federal wetlands permitting program.

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