Missed Opportunities: Wetland Banking

By: John T. Schmick

In the development of real property, the emphasis is generally on maximization of the property either in the form of new buildings or in land development. With the exception of retaining excess land for future phases of the project or future expansions for the user, maximization of the property is consistent with the concept of highest and best use. However, occasionally we find situations where the physical characteristics of a site suggest that maximization of the site is in the form of something other than building density. In this article, we discuss the development of wetland bank credits.

It is important to note that previously designated wetlands are monitored by the United States Army Corps of Engineers. Any type of disturbance to wetlands is subject to government approval and requires a permit. Over the years, many areas of natural wetlands were drained, filled and developed. With an eye to the future, the Department of Natural Resources and the Army Corps of Engineers designated and protected the remaining natural wetlands. In an attempt to reverse the decline in wetland areas, the Wetland Bank System was developed to provide an incentive to restore former wetlands or create new wetlands. Wetland banking provides all of the benefits of existing wetlands: enhanced water quality, reduced flooding, increased wildlife habitat, recreational opportunities and so on. It also provides a financial opportunity to the land owner as well.

Wetland bank credits represent the creation of new wetlands specifically for the purpose of selling or transferring credit for the new wetland to developers and others who must replace wetlands destroyed as part of development projects. Following the general principle of "avoid, minimize or replace wetlands," a developer who destroys wetlands on his or her project site must replace those wetlands. Wetland bank credits from a new site will offset the loss of damaged wetlands. Through the wetland bank system, the developer can also "buy" credits for new wetlands instead of physically creating new wetlands.

The Minnesota Wetland Bank is maintained through the Minnesota Board of Water and Soil Resources (MBWSR). This is essentially a clearinghouse for those who have restored old (or created new) wetlands specifically to sell or transfer those credits and those who must buy the credits. The actual wetland bank credits are held by the entity that creates the new wetland through a procedure approved by the Minnesota Board of Water and Soil Resources. A current list of available wetland credits can be found on the Internet by going to: Minnesota Board of Water and Soil Resources (www.bwsr.state.mn.us). Click on Wetlands, click on Wetland Banking and select Wetland Bank Account Listing.

An important distinction must be recognized went discussing wetland bank credits. We are not talking about land that is currently delineated as wetland. Rather, we are talking about land that is currently usable but can be turned into a wetland. The obvious question is why would someone intentionally destroy usable land to make an unusable wetland? The simple answer is that this process can have attractive economic benefits to the wetland developer in the form of real cash profit. Just as a land developer sells finished lots to builders, wetland bank credits can be sold as well.

Not all land parcels are attractive candidates for wetland development and we certainly do not advocate turning valuable commercial/industrial sites into wetlands. It is equally true that not all land parcels are nice square sites with high, dry, level ground. It is quite common to find irregular sites in which there are some lower areas that may need to be filled to make them usable as building sites. These low areas are often turned into water retention ponds to support development of that particular site. However, sometimes these low areas can be turned into wetlands and the credits sold.

The process of developing a wetland bank is similar to other development projects. It starts with a survey of the physical characteristics of the land and soils. The land owner must first determine whether the low land is already defined as a wetland. If not, do the soil and hydrology tests show that the area is suitable for transformation into a wetland? Once the survey is completed, a wetland development plan can be created, detailing the changes to be made to the area, the types of vegetation that will be restored/introduced and the overall costs, as well as the time needed to ensure that the wetland restoration plan takes place and is successful. With regard to this last issue, the land owner must agree to monitor the new wetland for a designated period of time and make any changes necessary to ensure that the wetland and vegetation replacement is stable.

Once the wetland restoration plan is completed, it must be approved by the MBWSR. The wetland restoration project is now just like any other development project; site design and engineering is completed, construction of the wetland takes place, and operation of the site begins. Operation of the wetland refers to the on-going monitoring and management of the new site to ensure that the hydrology and vegetation take hold and the ecosystem functions as planned. In terms of wetland development timing, the survey, plan development and approval process, depending on the size of the project, can be accomplished in approximately four to six months. Construction timing is dependent on the overall plan and complexity of the wetland ecosystem to be developed, but it can generally be completed in one construction season or less. The wetland credits become available sometime after the construction phase and review of the site for compliance to the plan. We are aware of a modest-sized wetland bank project which was planned, approved and successfully completed (with credits available for sale), in a twelve month time frame.

The economics of a wetland bank project can be quite surprising. The sale price of credits is a function of location, supply and demand. Generally, wetland credits should be within the same watershed district as the wetlands that are being destroyed. To the extent that this is true, proximity can increase value. Secondly, when there is a large supply of wetland credits, the price will decline as the number of entities offering credits increases. There is a difference between one entity offering 100 credits versus 10 entities offering 10 credits each. Additionally, as demand for credits increases relative to the number of credits available, the price will increase as well. Furthermore, due to the fact that there are different types of wetlands, a particular type of wetland may be in short supply at any given time. We have seen prices for wetland credits range from a low of $15,000 per acre for buffer wetland to as much as $76,000 per acre, or more, for full wetland. In contrast, the construction cost for wetland restoration can be as low as a few thousand dollars per acre. We know of one project which required only that some drainage ditches be blocked to allow water levels to rise and let nature return the site to wetland. Other projects may be more extensive and costly. Wetland bank sites, or the restoration of wetlands, can be as small as a few hundred square feet to as large as many acres in size. As of this writing, there were only 7.65 acres of type four wetland credits available in Hennepin County in a single wetland bank.

In conclusion, the restoration or creation of wetlands is a process that can add value to a development project and turn marginal land into an asset. It is important to remember that the project land cannot be classified as wetland before starting the project. Marginal land that may be expensive to fill to create a level building site might be less expensive to turn into a wetland bank, thereby creating value to the owner as well as an enhancement to the remaining land area surrounding the new wetland. This is a valuable opportunity that is easy to miss in the overall development of real property.

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