Wetland Wednesday
July 15, 2020
Occasionally we get requests from Real Estate Appraisers asked how to determine the monetary value of a wetland. We all love wetlands and recognize their important functional and habitat benefits. However, they also have real dollars and cents value. The trick is how to make this determination?
A standard real estate appraiser practice is to look for comparable (comp) land values. For example, if a 10-acre piece of commercial land just sold for $500,000 in a town then a similar property comp would be $50,000 per acre. Most comps are market driven and are based upon what someone would be willing to pay for the land. The appraiser looks for multiple comps and makes the estimate based upon a reasonable average.
The problem with wetlands is that they usually do not have any comps to draw from. Most land speculators or developers tend to avoid wetlands and would be unlikely to buy them. Land that does contain wetlands is often referred to as constrained land and has no development value. However, the constrained land does have value and the appraiser needs a number. This becomes a bigger issue when a significant portion of the land is constrained. For example, say you have a 1000-acre property. Only 30% of the land is unconstrained. Would it be fair to only consider the value of the land based upon to 300 acres that can be developed? I doubt the landowner would give away 700-acres for free.
There are two ways to look at wetland land values. One way is as a liability and the other as an asset. The liability perspective assumes a cost to convert to an unconstrained state. If the developer wants to build on the land, then the cost to do this would include:
- Permitting
- Mitigation costs
- Extra costs to convert from wetland to upland
- Site specific management costs
To value this type of land would be to consider the unconstrained land comps in the area and subtract the conversion costs. For example, if our 10-acre piece of commercial land mentioned above required 2 acres of fill to make the entire land “useable,” then the cost to convert needs to be less than $100,000 to break even. Otherwise the const to convert becomes a project liability and would reduce the overall value of the land. However, this could still be an overall asset if the facility built on the land can absorb the cost to construct in a very short amount of time.
A new McDonalds is a great example of how this would work. The land development costs (including permits and mitigation) need to be recouped within 90 days. If this can be done, then the project would move forward. The idea is that the value of the project is a function of the development costs versus the overall revenue generated by the project. The average McDonalds make about $2.7 million per year or about $8,000 per day. It would take about 12 days to recoup the wetland costs in our scenario, although they would probably not buy a 10-acer piece of land.
Wetland can also be an asset. This is the case when looking at the mitigation side of the equation. Mitigation is required for most permitted wetland fills. The developer needs to buy credits or acres from somewhere. Thus, the wetland banking business has been born.
Wetlands mitigation is categorized into 4 general types. This is based upon the condition of the wetland at the present time. The four generally accepted categories are:
- Creation – New wetland
- Restoration – Former wetland converted back to a healthy wetland
- Enhancement – degraded wetland needing only minor repairs
- Preservation – healthy wetland dedicated not to be developed
Each of these categories merit different credit calculations based upon local focus. For example, many jurisdictions value restoration wetlands the highest. This is demonstrated by a credit to acre ratio. A restoration wetland may get 1 credit for each acre of restoration whereas a preservation wetland may require 10 acres of preservation to generate 1 credit. These ratios vary quite a bit around the country.
The good news for the appraiser is that here are actually comps for wetland mitigation. They take the form of credit sale prices either offered by a private wetland bank or a government run credit program. In North Carolina we have a state-run program that offers wetland credit sales. In round numbers the statewide average wetland credit cost is about $60,000 per credit. There are local variances to this number, but the average is a good place to start.
If you have an existing wetland and the state requires 10 acres of preservation to generate a credit, then your wetland value would be:
- $60,000 per credit
- 10:1 acre to credit ratio for preservation
- $60,000/10
- $6,000 per acre value
If you have a degraded wetland (restoration) then the value would be the full $60,000 per acre (1:1 ratio).
It seems ironic that the degraded wetland is worth more that the pristine wetland. However, I suppose that if it is truly degraded then it could be built upon with no constraints. So, I suppose it should be worth more. I offer this begrudgingly.
Lastly, the most important aspect of the land value is location. If your site is somewhere remote with no need for wetland mitigation, then the market demand is going to dive the value down. Conversely, if you are in a high growth area then the sky is the limit. I have seen wetland mitigation projects sell for hundreds of thousands and acre in urban areas. In North Carolina, our coastal wetland mitigation cost is $560,000 per acre.
Please let us know if you have any thoughts or comments by posing below.
All the best, Marc