Mitigation Banking

An environmental mitigation bank is a tract of land managed for its ecological resource values. Once a tract of land is acquired for conversion to a mitigation bank, critical ecosystems are restored, enhanced and/or preserved for offsetting adverse impacts to similar environmental resources elsewhere. Marketable credits are awarded to a mitigation bank by the regulatory agencies in return for 1) improvements that enhance the natural state of the property and 2) limitations on future use. The concept of a “bank” refers to the general act of creating and storing credits in advance of real estate and infrastructure development impacts that will require mitigation. A wetland bank can be made up of freshwater or saltwater habitats associated with wetlands, while a conservation bank encompasses preservation of endangered species habitat. Hybrid banks protect wetland habitat and endangered species on a single tract of land.

The Clean Water Act authorizes both wetland and stream bank restoration while conservation banks are authorized under the Endangered Species Act. Since enactment of the Clean Water Act of 1972 and the Endangered Species Act of 1973, mitigation banking and habitat conservation activity have been shaped by a sequential series of rules and regulations.

In early 2008, new federal guidelines for wetlands conservation opened the door for third party mitigation banking to become both a viable and scalable institutional investment opportunity.

A mitigation bank is like any other real estate business – it is fundamentally based on location. First, a mitigation bank developer seeking to establish a mitigation bank must locate an appropriate property in the proximity of high and/or growing demand for a particular environmental credit where competing banks are limited. Second, the location should lend itself to environmental improvement at relatively low cost such as low-lying land with soils well suited to wetland plants. Third, the location should be within a regulatory and political circumstance favorable for mitigation banking.

Demand for mitigation credits is driven by three distinct groups: commercial development, residential development, and government infrastructure:

The value of any particular bank is determined by the projected credit market absorption rate and the price expected to be received for credits. The mix of credit demand sources at any mitigation bank varies by location and local economies. Credit supply reflects the cost to obtain, sell and maintain credits relative to credit price.