Land development is a tricky business that juggles many moving pieces simultaneously. One of those key pieces is compensatory environmental mitigation required under numerous state and federal laws. Many developers know firsthand how much compensatory mitigation requirements can affect their project, especially in California. More difficult still is getting regulatory agencies to agree with the project mitigation strategy. Some difficulty can be alleviated through the development and/or purchase of environmental credits. In some cases, it may be beneficial for developers to consider developing their own credits for a large pipeline of projects in a specific region.
Compensatory Mitigation: The Status Quo
A typical land development project starts with a land acquisition. Environmental risks and contingencies are understood to varying degrees, but often nothing will be finalized until applying for state and federal permits. For this stage of the process developers will present their environmental mitigation strategy for the project by submitting a mitigation plan. The mitigation plan often identifies land for mitigation onsite or potentially a property offsite adjacent to or very near the project site. Regulatory agencies may disagree with the land selection based upon the characteristics of the original mitigation site, or push back on the details of the mitigation plan. Any disagreement results in a longer permitting process, which is held up until appropriate compensation is provided.
Compensatory Mitigation: Credit Purchase
There is a growing trend for developers to elect to buy mitigation credits. A mitigation credit is acceptable compensatory mitigation for project impacts because agencies have already vetted and agreed upon the mitigation actions it represents. What that means for developers is that using credits rather than turnkey mitigation will likely be a faster, less painful proposition. The one downside is that credit prices are controlled by the market and the supply is not always assured. While developers may be able to use options to tie up credits far in advance to guarantee supply, they are still beholden to prevailing market prices which can make some larger projects with many impacts infeasible.
Enter a New Option: Developer Created Mitigation Bank
For developers with multiple projects in their pipeline with predictable, unavoidable impacts: consider the option of developing credits in advance through the mitigation banking entitlement process. If the development pipeline is significant enough, creating mitigation credits will provide greater certainty throughout the entitlement process. In addition the creation of a bank provides a myriad of benefits:
- Permitting timelines are shortened with pre-approved mitigation credits
- All agencies have signed off on the credits and thus agree on the ecological value of the credits
- Those credits not used by the developer can be sold to other projects and developers
- Bank credits do not expire
- Creating a bank can limit mitigation credit market price risk and the risk of market credit supply being insufficient for a project
- If the development project out-paces the creation of the bank, a turn-key mitigation site can be identified within the mitigation bank property
A New Environmental Strategy
Mitigation and conservation banking has been the focus of opportunistic investors and land owners as a means of monetizing undervalued real estate with high environmental value. Developers should also consider the opportunity. A mitigation bank can be a forward-thinking strategy to develop environmental assets to cover future environmental liability.
Creating a mitigation and/or conservation bank is not an easy endeavor. Being well informed and having the counsel of a trusted adviser before undertaking a mitigation bank or starting to plan for future development projects is important. Developers with large land holdings are great candidates for creating their own mitigation, but they should weigh their environmental assets and liabilities:
- What land is already acquired or controlled?
- What type of habitats will be built on?
- What is available for mitigation now, and potentially in the future?
Mitigation banking is not just an investment. It is a solution for developers to help manage their environmental liability.