Gulf Coast Wetland Mitigation Answers, LLC Information Profile: Mitigation Banking

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1 Gulf Coast Wetland Mitigation Answers, LLC Information Profile: Mitigation Banking The Brief History of Mitigation Banking In the past 40 years in the United States and, indeed, throughout the world, we have witnessed significant growth of political and regulatory forces that impact the way business operates when it impacts the natural environment. Many government agencies and outside non-profit groups have done studies throughout the years that study the impact that we have on our natural environment here in the USA. In 2001 by the National Academy of Sciences (NAS) and the General Accounting Office ("GAO") reviewed the effectiveness of wetlands compensatory mitigation for authorized losses of wetlands and other waters under Section 404 of the Clean Water ACT ("CWA"). In its study, the NAS concluded that, despite progress in the last 20 years, the goal of "no net loss" of wetlands is currently not being met for wetland functions by the compensatory mitigation programs of Federal Agencies. This study was used as a justification for expanding wetland regulation and a direct result of that expansion was the need for a complimentary expansion in wetland bank properties. In the early 1990 s wetland banks first began to expand across this country. The Environmental Protection Agency estimates that mitigation banking grew from 45 banks in 1992 to 219 banks at the end of After the NAS study the number of banks grew to more than 450 in In the early 1990s, nearly 75% of the nation's existing banks were single-user banks sponsored by state or local governments. Since that time there has been a shift toward privately held banks as opposed to state sponsored banks. In 2002 nearly 63% of the nation s existing banks were privately held. Since 2002, the trend of federal and state governments deferring to the entrepreneurial efforts of the private mitigation banking industry has continued. What is a Mitigation Bank? Here is the EPA s definition of a Mitigation Bank taken directly from their website. A mitigation bank is a wetland, stream, or other aquatic 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 permitted under

2 Section 404 or a similar state or local wetland regulation. A mitigation bank may be created when a government agency, corporation, nonprofit organization, or other entity undertakes these activities under a formal agreement with a regulatory agency. Mitigation banks have four distinct components: The bank site: the physical acreage restored, established, enhanced, or preserved; The bank instrument: the formal agreement between the bank owners and regulators establishing liability, performance standards, management and monitoring requirements, and the terms of bank credit approval; The Interagency Review Team (IRT): the interagency team that provides regulatory review, approval, and oversight of the bank; and The service area: the geographic area in which permitted impacts can be compensated for at a given bank. The value of a bank is defined in "compensatory mitigation credits." A bank's instrument 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. Although most mitigation banks are designed to compensate only for impacts to various wetland types, some banks have been developed to compensate specifically for impacts to streams (i.e., stream mitigation banks). Mitigation banks are a form of "third-party" compensatory mitigation, in which the responsibility for compensatory mitigation implementation and success is assumed by a party other than the permittee. This transfer of liability has been a very attractive feature for Section 404 permit-holders, who would otherwise be responsible for the design, construction, monitoring, ecological success, and long-term protection of the site. What are the Benefits of Mitigation Banking? Again, the following is taken from the EPA s website. Mitigation banking has a number of advantages over traditional permittee-responsible compensatory mitigation because of the ability of mitigation banking programs to: Reduce uncertainty over whether the compensatory mitigation will be successful in offsetting project impacts; Assemble and apply extensive financial resources, planning, and scientific expertise not always available to many permittee-responsible compensatory mitigation proposals; Reduce permit processing times and provide more cost-effective compensatory mitigation opportunities; and

3 Enable the efficient use of limited agency resources in the review and compliance monitoring of compensatory mitigation projects because of consolidation. In its 2001 critique of compensatory mitigation, the National Research Council (NRC) concluded that third-party compensatory mitigation such as mitigation banks offer advantages over permittee-responsible mitigation in the fulfillment of regulatory goals. One such advantage identified by NRC is the consensus-driven, interagency review process used to approve banks. The 2002 National Mitigation Action Plan acknowledges that more expertise and collaboration should be brought to bear on the Section 404 mitigation process. The 2008 Corps/EPA compensatory mitigation regulations codify the consensus-based interagency review team approach endorsed by the NRC. NRC also noted that banks are more likely than traditional compensatory mitigation to achieve desired long-term outcomes and to create mitigation sites that are protected in perpetuity by organizations dedicated to resource conservation. Additionally, banking represents an increasingly important economic component of the environmental consulting sector, showcasing the synergies that can arise between effective environmental protection and economic expansion. Sixty two percent of the banks identified in a 2002 study were privately-owned entrepreneurial mitigation banks; entrepreneurial providers of bank credits have emerged as a nationally-organized industry contributing hundreds of millions of dollars annually to the domestic product. History of Legislation Regarding Wetland Banking: The 1990 Memorandum of Agreement concerning the Determination of Mitigation under the Clean Water Act Section 404(b)(1) Guidelines (Mitigation MOA) between the Environmental Protection Agency (EPA) and the Department of Army; The 1995 Federal Guidance for the Establishment, Use and Operation of Mitigation Banks (Banking Guidance); The 2000 Federal Guidance on the Use of In-Lieu-Fee Arrangements for Compensatory Act (ILF Guidance); The 2002 Corps Regulatory Guidance Letter (RGL) 02-2, Guidance on Compensatory Mitigation Projects for Aquatic Resource Impacts Under the Corps Regulatory Program Pursuant to Section 404 of the Clean Water Act and Section 10 of the Rivers and Harbors Act of SAFTEA-LU (Transportation Act 2005) Authorized $286.5 Billion from 2006 to 2009 with a Mitigation Bank Preference for Compensatory Mitigation

4 Bipartisan Legislative History: preference for private-sector mitigation banks Preference intended to encourage the use of approved private-sector banks for wetlands lost through highway construction. H.R. Rep , at 432 (1998) DOD Authorization Act Allows use of mitigation banks and in-lieu-fee programs; Mandates rulemaking To ensure opportunities for Federal agency participation in mitigation banking, the Secretary of the Army, acting through the Chief of Engineers, shall issue regulations establishing performance standards, and criteria for the use, consistent with section 404 of the Federal Water Pollution Control Act (33 U.S.C. 1344), of on-site, off-site, and in-lieu fee mitigation and mitigation banking as compensation for lost wetlands functions in permits issued by the Secretary of the Army under such section. To the maximum extent practicable, the regulatory standards and criteria shall maximize available credits and opportunities for mitigation, provide flexibility for regional variations in wetland conditions, functions and values, and apply equivalent standards and criteria to each type of compensatory mitigation. Proposed Rule: Compensatory Mitigation for Losses of Aquatic Resources Published: March 28, 2006 U.S. Army Corps of Engineers 33 CFR Parts 325 and 332 Environmental Protection Agency 40 CFR Part 230 Major Themes: Implementing effective, equivalent standards: Raising the bar for compensatory mitigation Emphasizing best available science Watershed approach Ensuring predictability and efficiency Expanding public participation Gulf Coast Wetland Mitigation Answers, LLC Currently we are developing Wetland Banks in Jackson and Hancock Counties in South Mississippi. I will include a cost estimate and anticipated revenue estimate for these and other proposed Banks later on in this document. In addition, we are contemplating and have initiated the environmental work to put Wetland Banks in North Mississippi near Memphis, Tennessee and in South East Texas near Devers.

5 We have registered our LLC with the Secretary of State offices in Texas, Louisiana, Mississippi, Alabama, and Florida. At first glance the price per credit varies substantially depending on the different Army Corp of Engineers District that the bank is located in but, that difference is only superficial. Each District has its own methodology for determining how many credits are awarded to the Bank. In the Mobile District prices for credits range from $10,000 up to $15,000 per credit and in the Vicksburg District prices range from $6,000 up to $7,000 per credit. While that seems like a huge difference it is not. The methodology used by the Corp in the Mobile District is awarding us almost one credit per acre and in the Vicksburg District their methodology should award us in the neighborhood of two credits per acre. Therefore the value of an acre in a Wetland Bank property is very similar in each District. I have focused on providing information that focuses on Wetland Banks but, it should be noted that there are other types of Mitigation Banks that we are interested in putting in and operating as well and here are a couple of examples. In South Mississippi, Florida and South Alabama Mitigation Banks that focus on providing habitat for Gopher Tortoise relocation are in demand. In fact, the only Gopher Tortoise Bank in South Alabama is at full capacity and can take no more Gopher Tortoises at this time. These Banks typically are very Soil Type specific and are regulated by the Fish and Wildlife Service, as opposed to the IRT which regulates the Wetland Banks. The owner of the bank manipulates the site and then manages the site for conditions that are favorable for Gopher Tortoise habitat. The revenue for these banks comes when a business person needs to utilize a property that is inhabited with Gopher Tortoises. The Gopher Tortoises are captured and transported to the Bank where they are released. Typical fees for taking the Gopher Tortoises are around $9,000 per Tortoise currently. Stream Side Mitigation Credits can be generated for sale that can either be in conjunction with a Wetland Bank or as a standalone Stream Side Bank. These Banks typically provide some type of mechanical enhancement of the subject stream to justify the credit allowance. Examples of enhancement in this type of bank could be the elimination of beaver dams or removal of storm debris in the stream that impacts the stream flow. The typical person who would purchase this type of credit would be someone who needs to cross a stream that requires a permit to do that. Examples would include companies engaged in road construction and companies engaged in pipeline construction. Currently credits for these Stream Side Banks are priced around $75 per linear foot and these Banks are regulated by the Army Corp of Engineers.

6 Non-Profit Easement Holdings and Gifting Each of these Banks are required to set aside funds for the long-term management of the properties once all credits have been sold. The amount set aside has historically been approximately $500 per credit and is placed in the fund when the credits are sold. Also a Non-Profit organization will actually hold the conservation easement that is put on the property at the time of the Banks initial credit release. The purpose of the Non-Profit holding the easement is so they can take over the Bank if the owners of the Bank do not comply with the management objectives laid out in the Mitigation Banking Instrument (MBI). Typically the Non-Profit serves another purpose to the Bank Owner as well by providing an outlet for the Bank Owner to Donate the property to, along with the management fund, when all the credits have been sold. This Donation qualifies for a tax credit/deduction and the amount of this credit/deduction will be determined at the time of the gifting by an appraiser. Estimates of Cost and Revenue of Current and Proposed Bank Properties Jackson and Hancock Counties in South Mississippi Projected Cost of Project Real Estate Purchase: 911 $1,500 per acre $1,366,500 Consulting Fee for Banking Instrument $ 91,000 Hard Cost of Development (Heavy construction) $ 364,000 Total Cost for Project $1,821,500 Projected Revenue of Project **Estimated 820 Total per credit $7,380,000 **Estimate of credits derived by taking the total number of acres and multiplying by 90% to determine the number of usable acres for this project. I have used an assumption of a 1 to 1 ratio of credits to acre on the total usable acres to arrive at 820 credits for this project. Note: At present, the average sales price for credits in the South Mississippi drainage area is $10,500 per credit. The Bank that we previously owned, under the name of Little Biloxi Wetland Trust Inc., is getting $12,000 per credit for their remaining

7 credits. The absorption rate for credits in this market area is in flux at the present time. We understand that other banks in this project area have a waiting list for the sale of their credits at a $10,500 per credit rate. We will be required to set aside approximately $300 per credit, as we sell the credits, for long term maintenance of these lands. Therefore, our actual estimated sales price will be set at $9,300 per credit. This is 11.4% under the current market prices and reflects a conservative view of demand. Marshall County Property in the Vicksburg District near Memphis Projected Cost of Project Real Estate Purchase: 1,120 $2,000 per acre $2,240,000 Consulting Fee for Banking Instrument $ 233,000 Hard Cost of Development (Heavy construction) $ 623,000 Long Term Management Set Aside $ 769,000 Total Cost for Project $3,856,000 Projected Revenue of Project Estimated 1,850 Total per credit $11,100,000 Estimated 140,000 stream side $75 per credit $10,500,000 Total Revenue over the life of the project $21,600,000 Note: At present, the average sales price for credits in the Vicksburg Corp District range between $6,000 and $7,000 per credit and Stream side credit range from $75 per foot and up. The absorption rate for credits in this market area is in flux at the present time. We understand after speaking with the Corp of Engineers out of Vicksburg that there is a need for mitigation credits in this area. We will be required to set aside approximately $ per credit, as we sell the credits, for long term maintenance of these lands and I have illustrated that above.

8 Liberty County Texas Property Projected Cost of Project Real Estate Purchase: 2,334 $1,500 per acre $3,501,000 Consulting Fee for Banking Instrument $ 233,000 Hard Cost of Development (Heavy construction) $ 933,000 Total Cost for Project $4,667,000 Projected Revenue of Project **Estimated 2,100 Total per credit $37,800,000 Conclusion **Estimate of credits derived by taking the total number of acres and multiplying by 90% to determine the number of usable acres for this project. I have used an assumption of a 1 to 1 ratio of credits to acre on the total usable acres to arrive at 2,100 credits for this project. Note: At present, the average sales price for credits in the South East Texas area is $18,000 per credit. We called several banks in the area and were given current sales pricing from $18,000 per credit up to $24,000 per credit. The absorption rate for credits in this market area is in flux at the present time. We understand after speaking with the Corp of Engineers out of Galveston that there is a need for mitigation credits in this area. We will be required to set aside approximately $ per credit, as we sell the credits, for long term maintenance of these lands. I hope this document will provide you with valuable information and history on Mitigation Banks. I know there are specific details and questions that you will still need to ascertain regarding this business. I would be pleased to come and meet with you and the family to discuss this further and hopefully answer any questions you have. I have no preconceived ideas on how to structure a venture of this type with you but, I would be happy entertain and insert my thoughts on such at the time of the meeting. Martin L. O Neal