Investing in Wetland Mitigation Banking on Junk Land

[Chris Newman]

Some quick context:

I invest in Snohomish county, WA rural junk land with hidden values. I started off with Transfer of Development Rights Credits and then discovered Small Denomination farmland from Ghost Plats. I love junk land and this kind of high-profit treasure-hunting!

My latest discovery is on 10 off-market acres of river waterfront for about $75k and everything is now lined up to buy it except the purchase capital, which needs to be all-cash. The first hidden value here is that the TDR credit that it will yield is worth $176,000, once I can get it sold. 

The second hidden value is that the land has about 700 full size Asian Pear trees. Working this as a commercial orchard is, clearly, not worth the hard effort, even if you process it into hard cider. However, it looks like these incredibly prolific  25' trees are worth at least $600 each, when professionally transplanted into the yards of wealthy gardeners. This price is just for the trees, with the cost of transplanting (including a one year guarantee) added on and outsourced for a total cost of about $1,500. For upscale gardeners, that's cheap instant gratification. 

The math is simple: $600 X 700 = $420,000. It may take a couple of years to sell them all, but the breakeven is fast and the unsold trees will just sit there until they're sold. So, not a bad total return on $75k invested, without having to sell the land, which still has even more remaining value higher than its original cost, still without selling it.

But, I'm just discovering that highest hidden value, at least on certain kinds of junk land, which is usually the cheapest of all, is Wetland Mitigation Banking. 

The basic idea with MB is that when developers and government infrastructure projects etc. unavoidably must destroy natural "habitat," they must either restore it or else offset the damage by purchasing credits in certified mitigation banks to preserve multiple acres more of habitat than was taken out. I've known about this niche REI market for a couple of years, but didn't pay a lot of attention to it because I didn't know the market value of MB credits and the paperwork is really complicated.

If you'd like to read WA's MB "manual," you can download it here:  https://fortress.wa.gov/ecy/publications/documents...

One of the interesting things is that the "Interagency Review Team" that makes the decisions on credits is charged to be entrepreneur-friendly. They actually bend over backwards to help the investors to succeed. That's rare for a government agency. 

However, a few months ago, I had a long conversation with the program manager for both TDR and MB in King County (home of Seattle) and he clued me in on the current free market value of WA MB credits: $2.2 million each! 

Depending upon a wide variety of factors, it takes between 1 and 10 acres of $3k/acre land (that's already paid for itself through TDR) to create one MB credit, so that got my attention. Shortly after that, I had the great good fortune to hook up with an environmental engineer (a fellow BP-er) who not only understands this complex stuff, but who is also a highly-ambitious real estate investor who wants to hit the Financial Freedom level ASAP. 

So, we've begun working on the certification process for our first MB project, which is 80 acres near Marysville with a 15 acre undeveloped trout lake right in the middle. In fact, I just made the offer yesterday: $3 million. But this is only going to work if the landowner is flexible, which he certainly can be. He owns the land debt-free, so he can do anything he wants. And, he's been trying to sell this property for many years, so he's plenty motivated. We'll know soon but, if this doesn't work, there is no shortage of other nearby qualifying sites available. We're particularly interested in this site because it should be a slam-dunk for fast-track certification with a high credit count and there's no construction required at all. 

Oh, and it also has about $600k in TDR credits and an extraordinary waterfront home, the only one on the lake, that's actually a top/bottom duplex with a daylight basement that will easily AirBnB for $1,000/weekend. But, those are just deal gravy.

One of the big reasons why there are such eye-popping profit margins in lWA Mitigation Bank Sponsorship (as it is formally known) is that there are only two MB players who supply these credits in the entire state of Washington, and only one of them is actually based in-state. So, it's a supply and demand situation, with neither company wanting or needing to cut their prices. We're going to be the third and, since our land cost basis is far lower (thanks to the TDR credits that had already paid off the land), we can afford to be very aggressive in our pricing without sacrificing profits.

So, that's what's going on locally. 

A little further research determined that mitigation banking is a national real estate investment niche, with only a few dozen players in the entire country. But they have already formed their own trade association, complete with conventions. So, that makes mitigation a good moderate-barrier REI option for Bigger Pockets investors and I'm starting this thread to see if anyone else in BP-land is curious or already playing the MB game or has something to share on the subject.

I also just discovered that someone wrote a book on this exact subject back in 2006: "Green Wealth: How to Turn Unusable Land Into Moneymaking Assets" My business partner has been reading it and says that it's filled with great information on "how-to," which is always better than reinventing the wheel, as we've been doing. I just ordered a one cent used copy from Amazon and am looking forward to the read. There are another couple of dozen used copies there: https://www.amazon.com/gp/product/075700282X/ref=o...

Looking forward to everyone's thoughts.