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, based on a Council referral sumitted by Councilmember Oddie, 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, and 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), the City’s environmental consultant, the Huffman-Broadway Group, Inc. (HBG), and legal counsel.

As property is developed along the coastline of San Francisco Bay, regulatory agencies such as the U.S. Army Corps of Engineers (Corps), U.S. Environmental Protection Agency (USEPA). U.S. Fish & Wildlife Service (USFWS), National Marine Fisheries Service (NMFS), San Francisco Bay Regional Water Quality Control Board (RWQCB), San Francisco Bay Conservation and Development Commission (BCDC), and the CDFW have the jurisdiction to require developers - both public and private - to mitigate the loss of aquatic habitats including both tidal and non-tidal wetlands, streams, and open water. (For the purposes of mitigation banking, wetlands are defined as areas that are ponded, flooded, and/or saturated by water at a frequency and duration sufficient to support vegetation that is specifically adapted for life in saturated soil conditions.) Permitting agencies require that wetlands and other aquatic habitats be avoided by developments unless there is no practicable alternative to achieve the project’s purpose. If impacts cannot be avoided, then the agencies require developers or other entities affecting wetlands to create wetlands elsewhere along the Bay’s coastline or purchase mitigation credits from a qualified mitigation bank in exchange for any proposed destruction of existing wetland or other types of aquatic habitat. The objective of the agencies is to have no net loss of wetlands or other types of aquatic habitats.

The result of permitting agency requirements is the creation of a market for locations in the Bay Area for the restoration of historically filled former aquatic habitats or creation of new aquatic habitats. Property owners in possession of former or would-be aquatic habitats can create, restore, or enhance such habitats and sell the resulting mitigation credits 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”), the regulatory agencies generally prefer that those impacting aquatic habitat purchase appropriate mitigation credits from a qualified mitigation bank. Typically, 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 wetlands and other aquatic habitats within a specified area and then sells those mitigation credits to developers or other entities needing mitigation to satisfy environmental regulatory agency project authorization requirements. 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 aquatic habitats, including 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 for a total of 170 potential acres at Alameda Point (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 mitigation bank area to an Interagency Review Team (IRT), a group with representatives from agencies which authorize mitigation banks. The IRT is comprised of the Corps, EPA, USFW, NMFS, and CDFW. Non-voting agencies such as the RWQCB and BCDC may also provide input regarding a proposed bank. After a series of consultations with the IRT, if the IRT determines the proposed mitigation feasible, the City would then incorporate the IRT’s feedback and draft a full, final Bank Enabling Instrument (BEI). 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 BEI approval, regularly takes three or more years and requires significant expenditure of time and resources as the BEI approval 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 Corps of Engineers, will normally allow the advanced sale of approximately 15% of the total credits upon BEI 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 successful aquatic habitat development post-construction.

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. Staff has also conferred with the HBG, one of the City’s environmental consultants. HBG owns a non-tidal mitigation bank in Alameda County, has recently obtained authorization for a tidal marsh mitigation bank in Redwood City, and continues to perform agency- required compliance monitoring and assist with the management these banks.

There are two basic partnership options that the City can explore when working with an established mitigation bank developer:

1. Joint-venture (JV). 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.

2. Royalties. 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.

3. Turn-Key Mitigation. 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 partners with a wetlands mitigation biologist to provide turn-key mitigation for one or two specific development projects. The endeavor is less speculative as the restoration is done in conjunction with specific development projects, but the projects need to be large enough to allow the City to either realize their complete wetlands development objectives or create sufficient funds to facilitate mitigation bank approval on remaining lands.

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 the value of a mitigation credit beyond the aforementioned market factors. Tearing up concrete and creating a new wetland, as may be done in both the City’s sites, is rare in an urban environment and is most likely worth one credit per acre of aquatic habitat created. Other wetland mitigation projects are worth less depending on varying factors, and range from one credit for every two to three acres where existing wetlands would only be enhanced or preserved.

Not all of the gross revenue created by the sale of mitigation bank credits would directed towards the City, however. All permitting, design and construction costs are repaid to the mitigation bank developer to make them whole, the non-wasting endowment must be paid at least sufficiently enough to cover the credits being sold, and only after that point are the net proceeds split between the developer and the City. If the mitigation bank developer is shouldering the majority, if not all, of the risk, they will want to 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 the 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; however, the site could be used for seasonal wetland habitat creation. Seasonal wetlands also are considered of high value to approving agencies. Assuming that the agencies will allow seasonal wetlands creation at site 32, removing site 1 from consideration reduces the available total acreage for mitigation banking from 170 acres to 134 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 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 total acreage at Alameda Point further from 134 acres to 122 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 either excavated to create a bowl in which the wetlands will occur, and the drop in elevation - the sides of the bowl - cannot be vertical; or a berm with non-vertical side slopes has to be constructed. Slopes greater than 5:1 are typically acceptable to approving agencies. Furthermore, the upper portions of the slopes do not count as wetlands because they do not periodically become ponded or saturated. A safe estimate of the acreage directed to slope is approximately 20%, further reducing the total available land from 122 acres to 98 acres.

4. Regulatory Process. Although the regulatory agencies have looked favorably on the creation of mitigation banks, the regional office of the Army Corps of Engineers Regulatory Division is notably short-staffed and prioritizes enforcement and permitting development projects over mitigation bank approvals, exacerbating an already lengthy process.

5. Tidelands Trust. Property under California State Lands Commission (SLC) 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 SLC 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 if the SLC 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 obtain permitting agency approval for a wetlands mitigation bank. It is also possible for the City to seek approval of a Memorandum of Understanding (MOU) between SLC, bank approving IRT members, and the City, essentially negating the need for legislation. This has been done previously in other locations, but is a rarity, and is in no way a given for Alameda given the complexity of the site.

In conclusion, from a conservative perspective, the potential financial benefit to the City could be approximately $9 million, assuming 98 developable acres at $450,000 per acre less 30% for design, construction, and endowment seeding. The City would then realize 30% of these remaining net proceeds. However, attaining these revenues may prove elusive and may not be realized for five years or more and after significant time and resources are dedicated by the City and/or its JV partner to attain project approval by the Corps and attempt to either draft and pass legislation or gaining approval of an MOU between SLC, bank approving IRT members, and the City.

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.

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.

ENVIRONMENTAL REVIEW

This report is for informational purposes only and is exempt from the California Environmental Quality Act (CEQA) pursuant to CEQA Guidelines, section 15306.

RECOMMENDATION

Staff has no recommendation.

Respectfully submitted,

Jennifer Ott, Chief Operating Officer -Alameda Point

Financial Impact section reviewed,

Elena Adair, Finance Director

Exhibit:

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