Exhibit:

1. Map of Potential Wetlands Mitigation Banking Sites within Alameda Point

File #: 2015-2052
Type: Regular Agenda Item
Body: City Council
On agenda: 10/6/2015
Title: Response to City Council Referral Regarding a Possible Wetlands Mitigation Bank at Alameda Point. (Base Reuse 819099)
Attachments: 1. Exhibit 1 - Wetlands Mitigation

Response to City Council Referral Regarding a Possible Wetlands Mitigation Bank at Alameda Point. (Base Reuse 819099

To: Honorable Mayor and Members of the City Council

From: Elizabeth D. Warmerdam, Interim City Manager

Re: Response to City Council Referral Regarding a Possible Wetlands Mitigation Bank at Alameda Point

BACKGROUND

On January 21, 2015, the City Council directed City staff to research the concept of implementing a wetlands mitigation bank at Alameda Point, including engaging in discussions with relevant state agencies and mitigation banking consultants. In response to the direction provided by the City Council, the following is a summary description of wetlands mitigation banks, their creation procedures, partnership structures, revenue potential, feasibility of implementation in Alameda Point. This research and analysis was performed by City staff in consultation with a wetlands mitigation bank developer, the California Department of Fish and Wildlife (CDFW), and the City’s environmental consultant and legal counsel.

As property is developed along the coastline of San Francisco Bay, regulatory agencies such as the Army Corps of Engineers (Army Corps), U.S. Fish & Wildlife Service (USFWS), National Marine Fisheries Service (NMFS), Regional Water Quality Control Board (RWQCB), and the CDFW have the jurisdiction to require developers - both public and private - to mitigate any loss of wetlands, in this case tidal wetlands. (For the purposes of mitigation banking, tidal wetlands are defined as areas that are inundated by water at a frequency and duration sufficient to support vegetation that is specifically adapted to thrive in saturated soil conditions.) Whereas in the past permitting agencies required that developments be designed to completely avoid negative impacts on wetlands, a currently popular solution is to allow developers or other entities affecting wetlands to create wetlands elsewhere along the Bay’s coastline in exchange for any proposed destruction of existing wetland habitat.

This creates a market for locations in the Bay Area for the restoration or creation of wetlands by developers needing to mitigate impacts to wetlands. Property owners in possession of former or would-be wetlands can now sell the restoration or creation rights of those wetlands to developers eager to satisfy the permitting demands of regulatory agencies. While some smaller wetland properties are restored as direct mitigation for the impacts of a specific development project in another location (referred to as “project-specific mitigation”), a more common application is the creation of a wetlands mitigation bank wherein a property owner, often in conjunction with a wetlands mitigation bank developer with expertise in wetlands banking, receives advance approval from regulatory agencies to restore or create a specified wetlands area and then sells those restoration credits to developers or other entities affecting wetlands. Ultimately, the credits for mitigating wetlands are banked by one property owner and then sold on demand to a developer elsewhere within the region. In this way developers are charged for negative impacts to wetlands habitat, the overall acreage of wetlands is held stable or grows, and property owners of unrestored or potential wetlands can turn otherwise unused property into passive open space and a source of potential revenue.

City staff determined that there are two areas within Alameda Point that should be evaluated as possible locations for a wetlands mitigation bank due to their open space zoning designation: Depave Park along the western shoreline of Seaplane Lagoon (approximately 12 acres) and the designated open space in the Northwest Territories along the Oakland Estuary, which totals approximately 158 acres (see Exhibit A). In consultation with technical consultants and experts, these locations were further analyzed as feasible locations for a wetlands mitigation bank, as described further below.

DISCUSSION

The following discussion provides a more detailed summary of wetlands mitigation banks, including a description of creation procedures, partnership structures, revenue potential, and an overall feasibility assessment conducted by City staff, in consultation with technical consultants and subject matter experts.

Wetlands Mitigation Bank Creation Procedures

In order to create an approved wetlands mitigation bank on either of the two potential sites, the City would have to execute a complex multi-step process. First, the City must confirm that the site is sufficiently cleaned of toxic substances to allow wetlands construction and will not require any future environmental remediation work. Then the City must submit a draft prospectus that outlines the plan for the proposed wetlands area to the Interagency Review Team (IRT), a group with representatives from every agency from whom developers may be seeking wetlands credits. The IRT is comprised of the Army Corps, NMFS, CDFW, USFW, and the RWQCB. Additional non-voting members of the IRT are the U.S. Environmental Protection Agency (EPA) and the San Francisco Bay Conservation and Development Commission (BCDC). After a series of consultations with the IRT, the City would then incorporate IRT’s feedback and draft a full, final prospectus. If ultimately approved, the City would have to pay the cost of the restoration construction up front and show that it has met certain criteria, one of which is an ability to establish what the IRT refers to as a non-wasting endowment, essentially an investment fund large enough that the annual interest would cover operational costs of the site in perpetuity. This process, from prospectus submittal to approval, regularly takes three years and requires significant expenditure of time and resources as the permitting process often contains numerous iterations. Approval does not translate to immediate conference of banking credits, either. Instead, the permitting agency, which in the case of Alameda Point will most likely be the Army Corps, will hand over approximately 15% of the total credits upon concept approval and dole the remaining 85% of the credits over to the landowner as subsequent milestones are reached over the next five years, such as full construction and proof of habitat health post-construction at a pre-ordained date.

Partnership Structures

Because of the large up-front costs associated with establishing an approved mitigation bank, municipal property owners interested in creating a mitigation bank often partner with an established wetlands mitigation bank developer in order to offload risk and up-front costs. Staff met with a representative from Wildlands, a wetlands mitigation bank developer based in Rocklin, California, that specializes in establishing mitigation banks throughout the West Coast.

There are two basic partnership options that the City can explore when working with an established mitigation bank developer: joint-venture (JV) and royalties. In a JV, the mitigation bank developer takes an equity position, essentially sharing the burden of risk and costs with the City in exchange for a share of future revenues from mitigation credit sales to future developers. If the mitigation bank developer is asked to take on the full capital cost burden to establish the mitigation bank, then often the first tier of revenues are dedicated to recouping the mitigation bank developer’s capital costs. Only after that threshold is achieved are subsequent revenues split between the parties, and the ratio of revenues to be split among the members of the JV would correspond to the amount of upfront money and risk taken by each member.

Alternately, the City can choose to sell the banking rights, essentially leasing the land to the mitigation bank developer. In this instance the mitigation bank developer takes virtually all of the risk and thus receives a much higher percentage of revenue, but pays the city royalties for every given sale of credits.

As mentioned previously, the City could also pursue a project-specific mitigation, which is more applicable for smaller sites. In project-specific mitigation projects, the City still partners with a mitigation bank developer, but the endeavor is less speculative as the restoration is done in conjunction with a specific development project elsewhere in the region.

Potential Revenues

Given that there is currently a high demand for wetlands mitigation sites in the Bay Area and a limited number of locations available and suitable for wetlands mitigation, the per acre value of a wetlands mitigation site is high. Looking at the area south of the Bay Bridge (Alameda’s immediate competition), Redwood City has the only approved tidal wetlands mitigation bank. Another proposed bank is in the permitting pipeline for Newark, but those two sites comprise the only competition in the market. Given that low supply, a credit can currently be sold to a developer seeking wetlands mitigation for approximately $450,000 per acre.

There are variables that factor into that value of a mitigation credit beyond the aforementioned market factors. Tearing up concrete and creating a new wetland, as would be done in both the City’s sites, is rare in an urban environment and is most likely worth one credit per acre. Other wetlands projects are worth less depending on varying factors, and range from one credit for every two to three acres.

Not all of the gross revenue created by the sale of mitigation bank credits would directed towards the City, however. All design and construction costs are repaid to the mitigation bank developer to make them whole, the non-wasting endowment must be seeded, and only after that point are the net proceeds split between the developer and the City. And since the mitigation bank developer will most likely be shouldering the majority, if not all, of the risk, they would see a larger share of the profits, something on the order of 70%.

Feasibility Assessment

Before the City can attain any possible revenues from establishing a wetlands mitigation bank, there are five considerations that would need to be addressed that affect the feasibility of creating a wetlands mitigation bank at Alameda Point.

1. Environmental Conditions. Land used for wetland mitigation banking has significant restrictions regarding the presence of hazardous materials. Given that NAS Alameda is a Superfund site, this is problematic. Site 1 (see Exhibit A) was formerly used as a landfill for the Navy and is therefore disqualified from being used as a wetlands mitigation bank. Site 32, immediately adjacent, was originally created from dredge spoils. The area was subsequently found to contain radioactive materials in soil, which were probably relocated to Site 32 from Site 1 during runway-construction grading activities. The Navy has since removed radioactive materials detected during scanning of near-surface soil. The likely mitigation for the site is to cover all or most of the site with a 3-foot soil cover, raising the elevation to approximately 11 feet above sea level. This raised elevation precludes the site from being transformed into tidal wetlands, given that the land will be higher than sea level at high tide. Removing these two sites from consideration reduces the available acreage for mitigation banking from 170 acres to 74 acres.

2. Public Access. Wetlands mitigation banks are closed to the public. On rare occasion limited access via public trails (as would presumably be the case in the Northwest Territories) is allowed, but this is not looked upon favorably by permitting agencies and could even be a deal-breaker for the Army Corps. If public access trails are approved, any land used for trails is netted out of the acreage of the mitigation bank. For sites such as Depave Park, which is envisioned as a highly accessible park site, the intensity of public access in staff’s determination precludes mitigation banking. Removing the future Depave Park site from consideration reduces the available acreage at Alameda Point further from 74 acres to 62 acres (see Exhibit A).

3. Wetlands Construction. Not all of the land assigned to be transformed into a wetlands mitigation bank ultimately becomes a wetland capable of producing credits. The land must be excavated to create a bowl in which the wetlands will occur, and the drop in elevation - the sides of the bowl - cannot be vertical. Furthermore, the slopes do not count as wetlands. A safe estimate of the acreage directed to slope is approximately 20%, further reducing the available land to 50 acres.

4. Regulatory Process. The regional office of the Army Corps of Engineers is notably short-staffed and overall takes a dim view of the establishment of mitigation banks, placing them at the bottom of their priority list, potentially exacerbating an already lengthy process.

5. Tidelands Trust. Property under State Lands’ jurisdiction cannot be constrained by covenants or restrictions such as conservation easements, which are by definition perpetual. The vast majority of the parcels under consideration for banking at Alameda Point are either already under the jurisdiction of the California State Lands Commission or will be as soon as they are conveyed to the City by the Navy. There is no known statutory authorization for easements on trust land, so any attempt to alter the limitation on easements on State Lands would require state legislation. It is uncertain that the State Lands Commission would support any precedent-setting legislation such as this and without their support it is highly unlikely that it would be approved. At best obtaining state legislation approval would take 24 months if not more and be subject to significant political uncertainty. Once legislative approval is in hand the City could begin the approximately three-year process to attain permitting agency approval for a wetlands mitigation bank.

In conclusion, the potential financial benefit to the City could be approximately $5 million, assuming 50 developable acres at $450,000 per acre less 30% for design, construction, and endowment seeding, and then the City realizing 30% of these remaining net proceeds. However, attaining these revenues may prove elusive and will at best not be realized for five years or more and after significant time and resources are dedicated to passing legislation in Sacramento and attaining project approval by the Army Corps.

There are other sources for obtaining comparable funds for developing open space at Alameda Point, including $6.5 million in Measure WW funds dedicated towards a regional park at Alameda Point from the East Bay Regional Park District, developer contributions, and regional and state grants, which are routinely available and often fund open space, especially if they have other benefits, such as, water quality, flood protection, wetlands creation, and environmental protection.

FINANCIAL IMPACT

This is for informational purposes only. There is no impact to the General Fund or the Base Reuse Department budgets.

ENVIRONMENTAL REVIEW

This is for information only.

MUNICIPAL CODE/POLICY DOCUMENT CROSS REFERENCE

Wetlands mitigation banks are being explored for land zoned for open space consistent with the Zoning Ordinance for Alameda Point.

RECOMMENDATION

Staff has no recommendation.

Respectfully submitted,

Jennifer Ott, Chief Operating Officer - Alameda Point

By,

Lev Kushner, Project Manager - Alameda Point

Financial Impact section reviewed,

Elena Adair, Finance Director

Exhibit:

1. Map of Potential Wetlands Mitigation Banking Sites within Alameda Point