Opinion: Ten Things Rural Landowners Should Know About Ecological Land Value

12 August 2019 | Four years ago, the US Army Corps of Engineers and the US State of Washington’s Department of Ecology passed judgment on a degraded peat bog in the southern part of the state.

Specifically, they approved it as a mitigation bank, opening the door for its owners to make money if they could revive it to the point that it once again delivered the ecosystem services that bogs provide – namely, storing and filtering water and, in this case, providing habitat for the rare Oregon white oak.

They’d earn money by selling mitigation credits to the City of Vancouver, Pacific Energy, or a dozen other entities that might need to offset their environmental impact, but it would only work if their restoration efforts passed a series of regulatory inspections. Doing the job right would require money they didn’t have.

They applied for a loan with Riverview Community Bank, and the loan officers hired real estate group Colliers International to appraise the land. Colliers then engaged EASI to estimate the potential earnings from mitigation banking.  We showed they could earn a net of $97,000 per acre at the prevailing wetland credit price of $156,000 per credit-acre. Based on the Colliers appraisal, the bank granted the loan, and the Terrace Mitigation Bank was born.

Today, Terrace is selling wetland credits at $190,000 each –20% over predicted earnings – and serving as a testament to the importance of ecological evaluation as an indicator of land value.

Unfortunately, too few landowners think about opportunities like this when planning their estates or selling property – something that jumped out at us as we compiled our 2019  Land Value Slide Deck.

The Deck provides an overview of lessons learned from working with landowners over the past five years. It includes ten case studies, including the Terrace story, and it summarizes ecological asset valuation methods and results that can help boost the value of rural lands. Here are ten lessons that every rural landowner should consider when looking to optimize annual earnings, land appraisals, or estate valuation.

Lesson 1 – Ecological assets, in the form of credits earned from mitigation banking, can generate significant one-time revenues for landowners.

This lesson has been proven hundreds of times over the past thirty years as the market for mitigation credits has grown and diversified.  We know that mitigation bankers now hold (round numbers) $300 billion in market-ready eco-assets nationwide.  How do we know?  EASI has carefully tracked the economic value of wetland credits, stream credits, species and habitat credits – land based ecological assets.  We have tallied the number of credits that have been approved by federal agencies.  Multiplying the average price paid for these credits times the number of approved credits allows us to derive a reasonable estimate of nationwide asset value for the entire mitigation banking industry.  The industry has created $300 billion in commercial paper assets and enjoys about $4.8 billion in annual credit sales.  Not only that, but nearly 2.5 million acres have been added to the nation’s conservation ledger.  The industry continues to grow as agencies diversify and expand policies supporting compensatory mitigation environmental compliance.

Lesson 2 – Just knowing a property’s potential ecological asset value can boost land sale prices.

Many landowners have heard that creating a mitigation bank can be a time consuming and expensive process.  They’ve heard that mitigation banking is a business unto itself, with its own language and rules of the road.  This makes them cautious about digging into the details of land ecological asset valuation since mitigation banking seems far removed from the core business of farming and ranching.  But it turns out that creating a mitigation bank isn’t always necessary in order for a landowner to benefit from the presence of ecological assets – wetlands, riparian zones or habitat for rare species.  Buyers may agree to premium prices for eco-asset rich parcels, especially if outside pressures such as regulatory compliance have increased their willingness-to-pay.  This means that landowners should inventory potential eco-assets, stay abreast of current market prices, and look for opportunities to leverage that land value as new development projects are announced.

Lesson 3 – The gift value of land, and the related tax value of that gift, can be increased by taking eco-asset values into consideration.  This is also true when figuring estate value and net worth.

Donating conservation-rich lands to non-profits or government entities has long been seen as a way to earn tax credits and reduce tax liabilities.  But land value depends on more than just traditional uses for agriculture or animal husbandry.  It depends on more than the value of traditional land based commodities such as water, minerals or oil and gas.  Ecological assets, and the market value of potential mitigation credits, should also be part of the land appraisal equation.  This can boost the worth of land and consequently improve the downstream benefits of tax deductible gifts and/or overall estimates of net worth.

Lesson 4 – Mitigation credits, although intangible assets, have known market value.  That value can contribute to project debt financing.

Lenders have recently learned that mitigation credits have real market power.  The credits have a 30-year history and a proven track record especially in high growth areas.  Mitigation credits are anchored to the land and track with changing land ownership.  Borrowers have been successful showing that mitigation credits qualify as collateral in the same way that traditional assets like minerals, water or oil and gas can do.

Lesson 5 – Figuring out the gross or bulk eco-asset value of a property is only the beginning of a successful mitigation bank venture.  Development costs and market conditions are equally important determinants of long term mitigation bank success.

Mitigation banking is full-on business undertaking with its own specialized requirements.  A new mitigation bank demands comprehensive analysis beyond predictions of potential gross revenues.  Learning about development costs (which vary region to region) helps to determine simple benefits-to-costs ratios.  But market conditions such as mitigation credit supply vs. demand, and predicted sale timelines should also be studied to fully understand business net present value (NPV) or return on investment (ROI).

Lesson 6 – Just like any business commodity, mitigation credits don’t always generate desired profits.

After all the data comes in sometimes the NPV/ROI numbers work to the landowner’s favor, other times they don’t.  Either way, a careful business analysis is called for in any land development undertaking, including mitigation banking.  This is the only way to manage business risk, increase the confidence of business decision making and thereby earn desired profits.

Lesson 7 – Attractive potential earnings are not always the determining factor in mitigation bank development decisions.

Landowners know that development decisions are not always based on the business bottom line.  Other factors such as landowner personal preferences and priorities can unexpectedly come into play.  Mitigation banking is no different, even when a strong return-on-investment has come to light.  Planners should always be prepared to postpone or even walk away from a seemingly high-value opportunity if landowner attitudes change.

Lesson 8 – Market saturation can be problematic in some areas, making it difficult for promising new mitigation banks to be successful.

A property may have all the characteristics of a successful new mitigation bank: ecological assets may be abundant, development costs may seem reasonable, and mitigation credit sale prices may look attractive.  But if too many credits have been brought to market by competing mitigation banks, and if local demand for credits is stagnant, the market may have become saturated.  A careful business analysis is always called for to include a thorough examination of mitigation credit demand vs. supply.

Lesson 9 – Hard market value is not everything for ecological assets.  ‘Soft’ eco-asset value can build willingness-to-pay for an attractive property, especially if promoted by a reputable party.

Prices for mitigation credits shed light on the direct or ‘hard’ market value of local ecological assets.  But this is not always representative of a landscape’s total economic value.  Indirect market values such as recreation, or long term existence and bequest values may be equally important to buyers.  These subjective considerations can resist definitive estimation.  How can personal opinions about land value be converted to something conclusive?  By drawing on the opinions of reputable specialists who are skilled in data gathering and analysis methods supporting ‘soft’ market valuations.  Trustworthy views about such indirect values may help boost buyers’ willingness to pay.

Lesson 10 – Knowledgeable buyers will underbid eco-asset rich properties knowing they can be flipped.

It goes without saying that sellers are looking to maximize gain while buyers are looking for a bargain.  People who are knowledgeable about ecological assets may happily pay traditional appraised value for land that they know carries untapped commodities capable of earning a handsome profit.  Mitigation credits are an example.  For all the strength and rapid growth of the mitigation banking industry, only a tiny fraction of properties have been inventoried for their eco-asset market potential.  Plus the market for eco-assets is constantly changing; new asset development prospects may present themselves at any time.  Smart land shoppers will hunt for opportunities to ‘buy low and sell high’, to ‘flip’ a land investment and take home strong earnings.  Landowners deserve to be well informed about all aspects of property value including the ecological assets that are part of the natural landscape.

Conclusions

Ecological assets – in the form of potential mitigation credits – are the invisible factor when it comes to tallying land value today.  Lack of knowledge about eco-asset values can place the landowner at a disadvantage.  As a partial remedy to this problem, the ten lessons presented here should be part of every landowner’s checklist when it comes to estate planning, estimating potential land revenues, or positioning a property to sell.  Once the lessons are taken to heart, the landowner should look for resources to assist with eco-asset valuation, mitigation bank business analysis and, ultimately, eco-asset development and market pricing.