Typically it's the developers who worry about cap rates and the environmentalists who worry about preserving ecologically sensitive lands. That tradition could be upset, however, if a recent proposal to restrict the investments of nonprofit land trusts is approved by the California Department of Fish and Game.
The California Endangered Species Act allows for developers and other landowners to set aside sensitive lands and receive incidental take permits in exchange. These lands are typically preserved in perpetuity, using the investment income from endowments that the landowner sets aside.
Currently, land trusts hold and manage CESA endowments on their own, with relatively little oversight by DFG. DFG's proposal, however, would mandate that all endowment monies be pooled and managed by the National Fish and Wildlife Foundation, a nonprofit typically associated with the protection of federal lands. The DFG chose the NFWF because it "manages a program tailored to mitigation endowments," according to a DFG memo.
"This is mitigation in perpetuity and we want to make sure that the funding is available to carry out the management," said Tina Bartlett, chief of the DFG's Habitant Conservation Planning Branch.
DFG began allowing third-party land trusts to hold CESA mitigation lands and endowments only last year, with an initial program that called for interested trusts to apply. This approach contrasts with land trusts' usual strategy, which is to acquire land that it deems valuable from willing sellers, rather than holding them for government agencies. However, the DFG is now considering a policy that would deny the trusts control of the endowments attached to mitigation lands.
"The department doesn't want to hold these lands themselves," said Darla Guenzler, president of the California Council of Land Trusts. "They trust (land trusts) to hold the land, but they don't want to trust them to hold the money. So this is really a dysfunctional relationship."
In reviewing these third parties DFG officials said that they were overwhelmed by the variability in the trusts' management schemes and admitted that the agency did not have the expertise or personnel to oversee the endowments properly.
"We received numerous applications and substantial interests expressed not only by land trusts but also by businesses….and entrepreneurs expressed a lot of interest that we didn't expect," said Bartlett. "To be honest, we were struggling with how to review the financial health and responsibility of the organizations."
DFG hosted discussions throughout the summer on the proposal to keep endowment funds with NFWF, with protests from representatives of interested land trusts. Many of them complained that the policy was drafted and proposed with little input from them and that the stakeholder meetings came later than they should have.
In fact, uncertainty about the proper relationship between land trusts and DFG has persisted despite several legislative attempts to clarify it. Last year Assemblymember Anna Caballero introduced AB 444, which was intended to head off the current disagreements. AB 444 passed through both houses before being vetoed by the governor. According to Caballero, the veto was at the behest of DFG.
"The whole purpose of it was to be able to efficiently utilize the money to benefit the land as opposed to, in my mind, in favor of a bureaucracy," said Caballero. "(Land trusts) are just closer to the properties and closer to the work that's being done. We wanted to take away the bureaucratic part of it that keeps things from getting done."
The proposal, if implemented, would apply only to new endowments held by nonprofit groups. Mitigation endowments held by the state have been, and will continue to be, held in the state Special Deposit Fund. Barlett said that the agency issues roughly 30 incidental take permits per year but noted that not all of those permits require mitigation endowments.
DFG officials say that this plan would both ensure that the monies were managed properly and conservatively and that it would give DFG greater oversight over the endowments. The plan would apply to land acquired because of CESA requirements or by land bankers, which acquire land and sell conservation credits to developers.
While the DFG insists that it trusts NFWF because of its ten years of experience as well as congressional oversight, representatives of land trusts say that such a plan constitutes overkill. Guenzler referred to Washington, D.C.-based NFWF as a "completely unrelated organization to the ownership of the land to hold the endowment."
"It actually increases the risk to have an overwhelming proportion of these endowments held by a single entity…the bigger you are does not necessarily insulate you from problems," said Guenzler. By contrast, she said that land trusts are, "in most cases quite sophisticated nonprofits that are used to handling millions of dollars."
Many land trust officials say that the policy, even if it did insulate endowments from the vagaries of aggressive investing, would all but ensure a slow death. For that reason, some land trusts may hesitate to take on CESA mitigation lands if this policy goes into effect.
"If an organization… cannot monitor it, they might not want to make the deal," said Nita Vail, CEO of the California Rangelands Trust. "We don't have that kind of control if an organization like NFWF is the endowment-holder." Vail added that her organization has pending projects involving CESA mitigation that "might be affected" by DFG's decision.
Land trust officials see an alternative scenario that is not merely likely but is in fact predictable: the pooled monies might fail to generate the income needed for the endowments to keep up with inflation and spin off funds for maintaining the endowed lands. They say that far from being profligate, individual land trusts are far better able to determine the amount of investment income that they need and to make sound investments accordingly.
For its part, DFG is worried in part about catastrophic endowment losses and was spooked by the failure of The Environmental Trust in San Diego, which filed for bankruptcy and forced the state to take back eight properties in 2005 (see CP&DR Vol. 20, No. 1 Jan. 2006 http://www.cp-dr.com/articles/node-323). The Environmental Trust's failure came long before DFG started allowing land trusts to hold mitigation endowments, but DFG officials are still wary.
"I think that's added to our level of concern but we have some examples of failures that make us take pause," said Bartlett.
At a July 9 stakeholder meeting, several land trust representatives urged DFG not to set a policy based on that one failure.
Moreover, the trusts fear that if they cannot accurately predict the cap rate – the rate of return, minus fees, adjusted for inflation – then it will be difficult to estimate the amount of endowment needed in the first place. As a result, said Guenzler, developers will be wary of committing to deals while trusts will worry that easement lands will not come with sufficient funding.
"When endowments are calculated with extremely conservative return on investment numbers…the endowments becomes so expensive that it could stop development entirely or result in less on-the-ground mitigation being accomplished," said Nicole Byrd, executive director of the Solano Land Trust.
The proposal could have adverse effects on developers as well. Guenzler said that developers seek certainty and want a predictable amount of endowment that they will have to set aside. Additionally, if land trusts are unwilling to absorb lands that could turn into financial burdens, then developers who want to encroach on endangered species' habitats will have one less tool with which to strike mitigation deals.
Land trusts hold a tiny percentage of land set aside because of CESA requirements. Likewise, such lands and their attendant funds occupy a relatively small portion of land trusts' portfolios. Yet, some fear that this policy – on a relatively obscure issue – could set an unwelcome precedent.
Guenzler speculated that if CESA endowments are restricted then DFG could start restricting other endowments, such as those set aside under CEQA.
"DFG says it's going to relate very few projects," said Byrd. "But what we're hearing is that it will set precedent and become the standard for how mitigation is done."
Tina Bartlett, Branch Chief, Habitant Conservation Planning Branch, California Department of Fish and Game, 916.445.0411
Nicole Byrd, Executive Director, Solano Land Trust, 707.432.0150
Anna Caballero, Assemblymember, 28th District (Salinas), 916.319.2028
Darla Guenzler, President, California Council of Land Trusts, 916-497-0272
Nita Vail, CEO, California Rangelands Trust, 916.444.2096