The Environmental Trust, Inc., (TET) became the first land trust in the nation to declare bankruptcy in March 2005. The San Diego nonprofit organization’s bankruptcy raises questions about the long-term stability of land trusts and mitigation banks, and casts concern over the fate of TET's 3,542 acres of preserves, all in San Diego County.

In December, the trust finalized its bankruptcy plan that lays out a strategy for liquidating its assets and for the continued protection of roughly 90 preserves. U.S. Bankruptcy Court Judge Louise Adler is scheduled to consider the bankruptcy plan on January 16.

Not only is TET’s bankruptcy without precedent, but it also spotlights a rather unorthodox group. While most trusts have strong member and donor support emphasizing private acquisition and management, TET dealt exclusively in mitigation banking, according to Darla Guenzler of the California Council of Land Trusts. TET’s business came solely from developers forced to mitigate the destruction of sensitive habitat.

Formed in 1990, TET quickly gained a reputation as a fierce competitor, eventually becoming the most dominant of the region's nonprofit mitigation banks. But its business model may have been flawed. TET's problems began with a systematic under-valuation of the cost of land-management, said Sherry Teresa, executive director of the Fallbrook-based Center for Natural Lands Management. TET would regularly underbid its competition, she said, leaving it with insufficient endowment funds for maintaining its preserves.

As a result, TET regularly drew from the principal of its endowments to maintain preserves, steadily eating away at its financial base. TET’s board also set high targets for financial return on their endowments, a strategy that caused a real problem when the stock market began to decline. In December 2003, the majority of the board resigned, and Brad Thornburgh, then TET's director, took control in an attempt to salvage what he could of the trust's remaining responsibilities. Ultimately, he concluded that Chapter 11 bankruptcy presented the most viable option.

"We could have continued to operate for many more years," Thornburgh said, "but it was obvious that matters would only get worse." Presently, the trust holds roughly $3.1 million in endowment funds and roughly $100,000 in cash, while it expects to face claims totaling up to $4.8 million, according to TET’s Chapter 11 counsel, Michael Breslauer.

This bankruptcy begs the question: How can a land trust whose assets are wrapped up in conservation and open space easements, and which are therefore not saleable, recoup its losses? TET holds fee title to 90 parcels on approximately 2,380 acres, and has conservation easements totaling 1,202 acres on 37 parcels. TET owns one unencumbered piece of land, valued at around $400,000, but that is unlikely to be enough to cover all of its liabilities.

Adding to the intrigue is concern over the validity of many of TET's easements. Standard practice when recording an easement on one's own property is to have another party hold the easement; otherwise, real estate law considers that easement to be "merged" with the property's deed, nullifying the easement’s protections. According to Breslauer, TET recorded its conservation easements on preserves that TET owns.

Under the terms of TET's bankruptcy plan, all easements—properly recorded or not—would be handed off to a capable land-manager and be permanently protected. The plan specifies that the developer from which each preserve originated would receive first opportunity to reclaim the land and could choose to manage the property itself or else locate a suitable conservation group to do so. Should the developer refuse, the properties would then be offered to local municipalities, then to the U.S. Fish & Wildlife Service or the State Department of Fish & Game, then to other capable nonprofits, and finally to the state. If no one is interested, TET’s interest in the land will be abandoned.

Keith Greer, San Diego deputy planning director, said the city's interest depends on the level of liability associated with each preserve, most notably how much money TET can provide for ongoing stewardship. According to Breslauer, TET has enough funding to provide roughly 76% of each endowment’s original value. The city would be willing to consider assuming some liability for the preserves with the greatest resource value, Greer said. Seventeen of TET's preserves are within the city's jurisdiction.

In an attempt to increase interest in TET's preserves, a group of local conservationists has hatched a plan to raise additional funding. In November 2004, San Diego County voters narrowly passed a half-cent sales tax increase, known as TransNet, for transportation-related improvements. To win conservation groups’ support, TransNet backers earmarked $850 million for land conservation. Mike Kelly of the San Diego Conservation Resources Network and other environmentalists have proposed that a very small slice of the $850 million be offered to qualified land managers willing to take responsibility for TET's preserves.

However, should Judge Adler reject TET's bankruptcy plan, most all of this could be thrown out the window. If that happens, Guenzler wonders whether the improperly filed easements will be in jeopardy.

While the legal scenario is ongoing, land conservation practices in San Diego County have already self-corrected in light of TET’s troubles. First and foremost, said San Diego's Greer, the city now requires that a trust's endowments be held by a qualified financial institution. For example, the city has already arranged to work with The San Diego Foundation, an organization that specializes in managing the endowments of nonprofits, and providing other services and financial advice.

“TET’s case,” said Emily Young, director of the foundation’s Environmental Analysis and Strategy Group, “provides an impetus to make sure that land trusts have the tools and skill-sets needed to effectively acquire and steward lands. That includes stable resources, accountability, and transparency.”

Plenty of other land trusts have adhered to this sort of advice, said veteran San Diego conservationist and mitigation banker James Whalen, "Look at the Center for Natural Lands Management,” said Whalen. “They've been around just as long, and they’re expensive, but they're still there."

Darla Guenzler, California Council of Land Trusts, (707) 469-0926.
Sherry Teresa, Center for Natural Lands Management, (760) 731-7790.
Brad Thornburgh, The Environmental Trust, (858) 395-0300.
Michael Breslauer, Solomon, Ward, Seidenwurm, & Smith, (619) 231-0303.
Keith Greer, City of San Diego, (619) 235-5200.
Emily Young, The San Diego Foundation (619) 235-2300
James Whalen, J. Whalen Associates, (619) 683-5544.
The case: In re: The Environmental Trust, Inc., U.S. Bankruptcy Court, Southern District of California, Case No. 05-02321-LA11