Wetland banking market wet, but not liquid
Becca Madsen on August 11, 2009 2 Comments
If you impact (dredge or fill) a wetland in the US, you have to apply to the Army Corps of Engineers for a 404 permit and provide mitigation for whatever impact you have on wetlands. Transferring legal liability from the permittee to a wetland mitigation bank has always been an attractive reason for a permittee to use a mitigation bank. No muss, no fuss, just buy an existing wetland credit from a mitigation bank and you are good to go with your 404 dredge & fill permit. Not so, it appears, with a transfer of credits from a bank to a broker. Hidden in the bowels of 2008's wetland mitigation banking regulations is a sentence that puts a damper on the liquidity or scalability of the US wetland mitigation market:
"...the permittee retains responsibility for providing the compensatory mitigation until the appropriate number and resource type of credits have been secured from a sponsor and the district engineer has received documentation that confirms that the sponsor has accepted the responsibility for providing the required compensatory mitigation." Section 332.3(l)(3) - see p. 84, middle column, bottom of the page
My interpretation: the permittee is responsible for the wetland mitigation that's required in their permit until they get the pass-off from a bank via documentation that says the bank agrees to take on the responsibility. This means that if a third-party broker came in and bought wetland credits to sell to permittees, that broker would still have to get documentation from the wetland bank for each and every permit. Not attractive for a bank, because they would not be able to sell credits and be free and clear of the Army Corps of Engineers, the federal regulators of wetland mitigation in the US.
What's so important about third parties in environmental markets anyway? A couple reasons. One, the banker might want to sell their credits all at once (everything must go!) instead of piece-meal, one acre at a time. On the other side of things, a big financial firm might want to invest in a big way in wetland mitigation markets and could buy up lots of credits. Finally, there's the "buy low, sell high" set. Buy credits at a low price and hold on to them hoping there will be greater demand, and therefore a more attractive selling price, in the future.
This is by no means legal advice and I'd love to hear if other folks interpret this piece in a different way.
Personally I don't see that rule making too much of an impact unless the bank sponsor thought he could sell some credits to a broker and speculator and then write off any responsibility or liability. I believe a bank sponsor can transfer the LLC of the bank to another party and thereby transfer liability - if of course they want out of the deal all together. On the other hand I've been part of deals where the bank sponsor will continue to operate but needs equity to pay investors or start other projects so they just sell a percentage of their bank to a capital partner or speculator (based on current credit market price).
Thus I think market fundamentals still work, there is just a greater inherent risk in being a bank sponsor since you're on the hook for your project at least until all the credits are retired and the endowment is covered.
I see brokers working more like RE brokers and pairing investors with bank sponsors and sponsors with impacting parties, rather than some type of clearing house.
I think the original commentary and the initial comment are both accurate. However, both the regulatory community, the bank sponsor and the entity considering buying an LLC that owns a bank project or anyone funding such an acquisition need to be intimately familiar with the existing conditions of the site,long term maintenance and monitoring requirements, the liability tail associated with maintaining in good status the project to assure the availability of credits as well as the conditions surrounding posting of the bonds or letter of credits asscoiated with the M&M requirements.