September 01, 2015

Wetland mitigation banking: An innovative practice grows to a major industry and provides an additional land revenue option

Eric T. Olsen

Conducting land development activities resulting in discharges of fill material to wetlands and other surface waters considered “Waters of the United States” requires a section 404 Clean Water Act permit. One requirement to obtain this permit is to provide compensatory mitigation to offset unavoidable impacts. Starting in the mid-1990s, the means of providing required compensatory mitigation evolved. Whereas before the 404 permit applicant would provide mitigation either on-site or in close proximity to the impact, beginning in the mid-1990s the focus changed to allowing third parties to provide the mitigation through an offsite mitigation bank with watershed scale benefits. Mitigation banks are now the preferred form of compensatory mitigation.

What is a mitigation bank?

A mitigation bank is a site, or suite of sites, where resources are voluntarily restored, established, enhanced, or preserved to provide compensatory mitigation for impacts authorized by 404 permits.

How are mitigation banks established?

The U.S Army Corps of Engineers (Corps) wetland mitigation rules set forth the process to establish, operate, and use mitigation banks. See 33 C.F.R. § 332. The entity proposing the mitigation bank is called a “bank sponsor.” The bank sponsor can be a landowner or an entity working with a landowner.

In summary, to establish a mitigation bank, the sponsor develops a mitigation plan, includes that plan in a formal proposal to the Corps called a “prospectus,” and then awaits the Corps’ determination as to whether the proposed mitigation bank can potentially provide appropriate compensatory mitigation. If the Corps so determines, the sponsor then prepares a mitigation banking instrument and submits it to the Corps. The Corps reviews the mitigation banking instrument with assistance from the U.S. Environmental Protection Agency (EPA) and U.S. Fish and Wildlife Service and occasionally the National Marine Fisheries Service and National Resource Conservation Service. If these agencies approve the mitigation banking instrument, they sign it along with the sponsor and the mitigation bank is created.

What do they sell?

Like any enterprise, mitigation banks market a product or service and in this case the product is credits and the service is compensatory mitigation and transfer of liability for mitigation compliance. Credits are units of aquatic resource function and, as compensatory mitigation, they replace the units of aquatic resource function authorized to be lost as unavoidable impacts in the 404 permit. Credits are released for use over time according to a credit release schedule contained in the mitigation banking instrument. The instrument also has a ledger to track credit usage and remaining balance.

The geographic marketplace in which the credits can be sold and used is determined by a mitigation service area set forth in the mitigation bank instrument. The mitigation service area size is usually set by reference to the watershed, ecoregion, physiographic province, or U.S. Geologic Survey hydrologic unit code. While the use of the mitigation bank’s credits is regulated by the Corps, the price is not. Price is determined solely by the bank sponsor and marketplace.

What is the size of this industry?

With the rise of the mitigation banking practice, the number of mitigation banks in the United States has grown exponentially. According to EPA, in 1992 there were only 46 authorized mitigation banks. In 2001, the Environmental Law Institute determined that there were 219 authorized mitigation banks. A 2005 Corps Institute for Water Resources inventory estimated 450 approved mitigation banks. An EPA inventory in August 2013 of the Corps Regulatory In-lieu fee and Bank Information Tracking System (RIBITS) database indicated over 1,800 approved mitigation banks with many more in the review process. A review of RIBITS in June 2015 indicates over 2,000 mitigation banks approved or undergoing review.

Sponsors are not required to disclose to the Corps credit sales prices so the Corps does not maintain this data. However, a private ecosystem marketplace entity estimates the total yearly credit sales volume in the United States to be $1.3–2.2 billion.

The mitigation banking industry is substantial enough to organize itself into a national trade association—the National Mitigation Banking Association—which advocates for the acceptance and use of mitigation banks.

What are the risks?

Mitigation banking comes with risks. For example, there is no guarantee the agencies will approve a mitigation bank instrument. One sponsor, frustrated by a Corps denial of its bank instrument, sued, claiming a taking. The U.S. Court of Appeals for the Federal Circuit, however, ruled that no taking occurred because no Fifth Amendment property right exists in a mitigation bank instrument. Hearts Bluff Game Ranch, Inc. v. United States, 669 F.3d 1326 (Fed. Cir. 2012) cert. den., 132 S. Ct. 2780, 183 L. Ed. 2d 640, 2012 U.S. LEXIS 4595 (U.S. 2012).

There is also no guarantee credits will sell or sell at the desired price. Credit demand and price depends upon general land development in the mitigation service area, sponsor credit marketing, and competition from other banks or compensatory mitigation opportunities.

What are the opportunities?

Even considering the risks, the growth of this industry demonstrates that good prospects exist to establish mitigation banks. Mitigation banks are best suited for land that can be preserved and ecologically enhanced or restored. Mitigation banking can be useful for properties that lack other marketable land use options due to significant wetland presence. Landowners may wish to consider establishing a mitigation bank if their land has the potential for ecological enhancement and the landowner’s goal is to preserve land from development while still generating income.

Eric T. Olsen

Eric T. Olsen is a shareholder at Hopping Green & Sams, where he practices in the fields of wetlands regulation, wetlands mitigation banking, and conservation banking. He has worked on establishing and operating many mitigation banks both in and outside Florida including resolving issues related to site protection instruments, financial assurances, credit award and use, and mitigation bank compliance.