Energy Finance Report

Considerations for Participants in the Expanding Market for Compensatory Mitigation Credits

Posted by Jerry Muys on 8/1/17 12:36 PM

In a recent blog post, we described the basic statutory and regulatory framework supporting the increasing popularity of mitigation banking.  In this update, we offer some additional observations for property owners and other sponsors who may wish to develop a mitigation bank, and identify some of the risks associated with that undertaking.

As described in our previous post, a mitigation bank is a wetland, stream or other aquatic or habitat resource area that has been restored, established, enhanced (or in certain circumstances) preserved for the purpose of providing compensation for unavoidable impacts to aquatic resources resulting from development.  The person or entity that establishes a mitigation bank and undertakes the restoration activities is sometimes referred to as a “mitigation banker” or “bank sponsor.”  Bank sponsors can generate “compensatory mitigation credits,” which can be sold to developers whose permits under Section 404 of the Clean Water Act (and similar federal and state regulatory authorities) impose mitigation obligations.  We have outlined below the basic steps that a sponsor seeking to establish a mitigation bank would need to follow to generate marketable credits. 

The first step in the process of establishing a mitigation bank is to identify and, if necessary, purchase a suitable project site.  Candidate properties should be limited to those that offer the greatest likelihood that they can be restored or enhanced at a cost that corresponds favorably with the likely value of the credits to be generated.  Factors relevant in assessing the ecological suitability of a potential project site include the soil characteristics of the site, landscape features of the surrounding watershed or habitat area, and reasonably foreseeable effects the project might have on the surrounding ecosystems.

In addition, because regulatory obligations generally require that the mitigation occur within the same watershed or habitat area in which the ecological damage occurred, a prospective sponsor should also consider the amount and nature of development taking place and expected to take place within the subject watershed or habitat area.  This assessment can assist the sponsor in selecting the optimal project site and restoration plan.

Once the sponsor decides to move forward with a restoration project at a particular location, a prospectus and mitigation plan must be submitted to a regulatory body known as the “Interagency Review Team” (“IRT”); this is a group of federal, tribal, state, and local regulatory and resource agency representatives who historically have been headed by the local district engineer for the Army Corps of Engineers.  These initial submissions serve to document the key aspects of the proposed project, and also provide the primary source of information for the public during the public comment period (which begins within 30 days of the IRT’s receipt of the prospectus and continues for an additional 30 days).

The prospectus should provide a summary of information concerning the proposed bank, as well as more specific information pertaining to its establishment and operation, long-term management strategies, and the bank’s proposed service area.  The prospectus should also address the technical feasibility of the restoration project.

The mitigation plan must provide a description of the nature of the project to be undertaken (i.e., restoration, establishment, enhancement, or preservation), documentation of the needs of the local watershed or habitat area, and a description of the factors considered during the site selection process.  The mitigation plan should also identify the number of compensatory mitigation credits to be issued by the bank upon completion of the project.

Following regulatory review of the prospectus, a draft banking instrument must be prepared that conforms with the terms of the prospectus.  It should describe the physical and legal characteristics of the mitigation bank as well as the protocols pursuant to which the bank will be established and operated.  In addition, the banking instrument identifies the number of credits to be issued in connection with the mitigation bank, provides a description of the protocols governing management of the bank, and includes a long-term operation and maintenance plan for the site.

The draft banking instrument is subject to review by the appropriate regulatory authorities (depending on whether the project is a watershed or habitat restoration).  The review process typically includes some evaluation of the economic viability of the proposed project.  Upon completion of the review process, the draft banking instrument is subject to a 30-day comment period, following which the sponsor may be required to make additional revisions to the document.  

Once the sponsor has addressed any remaining concerns regarding the terms of the draft banking instrument, it may submit the final version of the instrument, together with supporting documentation detailing any changes from the draft, to the regulatory authorities for approval.  Only after this documentation has been submitted and approved may the sponsor begin selling credits into the mitigation banking market.

Although the potential financial and ecological benefits of establishing a mitigation bank are well-documented, there is some uncertainty associated with the endeavor.  Like any major construction project, there is always the risk of substantial cost overruns due to delays in the regulatory review process or other unforeseen circumstances.  There can also be uncertainty resulting from variability over time in the market value of the compensatory mitigation credits to be generated. 

Some of the risks inherent in restoration projects can be addressed through a thoughtful and comprehensive due diligence effort at the outset.  For example, because the existence of conflicting property rights (for example, preexisting easements) can pose an obstacle to the timely and cost-effective completion of a restoration project, a thorough title search should be performed during the early stages of the project.  In addition, because of the variability in the value of the compensatory mitigation credits to be generated by the project, early consideration of possible hedging strategies might be prudent.

Jerry Muys is a partner, Patrick Mulpeter is a summer associate, and Leigh Ratino is a law clerk with Boston-based law firm Sullivan & Worcester LLP.

Topics: Compensatory Mitigation, Mitigation Banking, Compensatory Mitigation Credits

Monetizing Vacant Land Through Mitigation Banking

Posted by Jerry Muys on 6/13/17 3:14 PM

A mitigation bank is a wetland, stream, or other habitat area that has been restored, established, enhanced, or (in certain circumstances) preserved for the purpose of providing compensation for unavoidable impacts to such natural resources. When a corporation or other entity undertakes these activities, it can generate “compensatory mitigation credits” (“CMCs”), which in recent years have significantly increased in value. Corporations and other owners of brownfield or dormant/underutilized properties are increasingly using these lands to create mitigation banks in order to generate CMCs that can be sold into the mitigation market.

Mitigation banking originated under Section 404 of the Clean Water Act and similar state statutes intended to protect wetlands and streams. Developers of projects which involve the discharge of dredged or fill materials into wetlands, streams, or other waters of the United States are required to obtain a permit from the U.S. Army Corps of Engineers (Corps) or an approved state, and must avoid and minimize negative environmental impacts to the extent feasible. When negative impacts are unavoidable, compensatory mitigation is required to offset the impacts on aquatic resources. The Corps or an approved state authority determines the necessary quantity and method of compensatory mitigation, which can be performed by the permittee, a third party under contract to the permittee, or through the purchase of CMCs from a mitigation bank.

Mitigation banking is completed off-site, meaning it is performed within the same watershed as the site of the impacts but not at the same location. Banks are regulated by Interagency Review Teams (IRTs), which are chaired by the district engineer or a designated representative and include federal, tribal, state, and/or resource agency representatives. The person or entity that establishes a mitigation bank and undertakes the restoration activities is sometimes referred to as a “mitigation banker” or “bank sponsor.”

In order to generate CMCs, the mitigation banker must first negotiate a written agreement with the IRT that provides for the long-term funding and management of the bank, as well as the design, construction, monitoring, ecological success, and long-term protection of the bank site. The agreement also identifies the number of credits available for sale and requires the use of ecological assessment techniques to certify that those credits provide the required ecological functions. See EPA Mitigation Banking Factsheet.

Federal policy favors the use of mitigation banks and CMCs to offset the negative environmental impacts of development for a number of reasons. Since mitigation banking is performed prior to development, there is less uncertainty about whether environmental impacts will be effectively offset. In addition, mitigation banking allows for the use of scientific expertise and financial resources that are not always available when mitigation is performed directly by the developer. Mitigation banking also tends to be more cost-effective and to allow for shorter permit processing times.

In 2008, the Corps and EPA adopted regulations that made mitigation banking the preferred method for both wetland restoration and compensation for wetland losses. Due to the success of mitigation banking, the concept was expanded to offset losses of endangered species and associated habitat; known as “conservation banks,” they are under the jurisdiction of the U.S. Fish and Wildlife Service and the National Marine Fisheries Service. Today, there are more than 1,200 mitigation banks in the U.S., and the market value of all CMCs exceeds $100 billion.

Jerry Muys is a partner and Leigh Ratino is a law clerk with Boston-based law firm Sullivan & Worcester LLP.

Topics: Compensatory Mitigation, Mitigation Banking, Compensatory Mitigation Credits, Wetlands

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