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Appraising wetlands.

Confusion about wetlands is making the determination of property value difficult. An executive for the Maryland Bankers Association recently asserted that many banks had stopped making loans secured by raw land or farmland. As John Bowers, Jr., pointed out, "Unless we have a reason to know that it is or isn't a wetland, we just don't know the value of it." (1) This confusion arises as a result of two questions: what are wetlands, and what can be done with wetlands? The level of uncertainty has increased in the past year as a result of uniform standards adopted by federal regulatory agencies as well as the implementation of a "no net loss of wetlands" policy.

After presenting a brief historycal review of the wetlands issue, this article defines wetlands and how they may or may not be used. The focus is wetlands regulation by federal agencies, as this aspect appears to be creating a significant amount of the current confusion. Readers should be aware, however, that state and local laws may cause problems as well.

HISTORICAL PERSPECTIVE

It is estimated that the United States once had at least 215 million acres of wetlands. Since the mid-1950s the annual loss has averaged 450,000 acres, and fewer than 95 million acres remain. The govenment has attempted to prevent additional loss by adopting a policy of no net loss of wetlands.

The preservation of wetlands represents an abrupt reversal of federal policy. As early as 1849, the federal government passed Swamp Acts that encouraged state governments to drain and reclaim millions of acres of wetlands. Between 1940 and 1960, the U.S. Department of Agriculture subsidized the drainage of 60 million acres for farming. As a result, more than 90% of the wetlands in Connecticut, California, and Iowa are gone. (2)

Traditionally, wetlands were thought to reduce production, prevent or limit population growth, and create an unhealthy environment. They were considered obstacles to be overcome, generally by draining and filling. In the last 20 years research has produced significant evidence that wetlands are a national treasure to be cherished and nurtured. Ecologists have shown that wetlands are incubators of plants and organisms that are essential links in the food chain. Wetlands also play an important role in the maintenance of water quality by filtering pollutants and sediments from surface runoff.

Other than acting to preserve duck habitats, the earliest federal legislation that had the effect of preserving wetlands was the Clean Water Act of 1972. Section 404 of this act requires a permit from the Corps of Engineers (Coprs) prior to filling wetlands. The law's immediate impact on wetland preservation was insignificant, however--both because it exempted agricultural operations, which have historically accounted for 80% to 85% of wetland loss, and because the Corps had viewed the law as a permit system for navigable water-ways rather than as a wetlands conservation program. Consequently, the Corps initially was liberal in granting permits, while limiting their regulatory control to navigable waters.

In a series of court decisions during the 1970s of Corps was ordered to expand its Section 404 permit program to protect swamps, lakes, and other types of wetlands, including seasonal and artificially created wetlands. In 1977 President Carter issued an executive order that federal agencies should minimize the loss of wetlands. The Food Security Act of 1985 and its amendment in 1987 were attempts to preserve wetlands under the control of farmers by tying wetland preservation to farm subsidies. The impact of this act on wetlands was insignificant, however, because it was not enforced by the agricultural agencies. (3)

Serious interest in preserving wetlands intensified in 1987 when a National Wetland Policy Forum recommended a national poplicy of no net loss of wetlands that was later endorsed by President Bush. Implementation of the policy was partially slowed by the overlapping, frequently conflicting procedures of the fedeal agencies involved. For example, while the Clean Water Act authorizes the Corps to issue Section 404 permits in consultation with the Environmental Protection Agency (EPA), other federal agencies are required to review and submit such recommendations before the Corps can issue a permit. Although the approval of other federal agencies is not necessarily required, their concerns must be addressed.

To resolve conflicting objectives and standards, the Corps agreed to cooperate with the EPA, the Soil Conservation Service, and the Fish and Wildlife Service to develop a standard method for identifying wetlands. The result was the Federal Manual for Identifying and Delineating Jurisdictional Wetlands. (4) Since its publication in January 1989, wetlands have become a major issue for every owner, lender, broker, and appriaser of real estate. In addition to providing uniform procedures, the manual revised and greatly expanded the definition of wetlands. Consequently, as much as 66% of Alaska, 58% of Louisiana, 48% of Florida, and even 500,000 acres in Arizona may be included in the new definition of wetlands. (5)

In February 1990, the Corps and the EPA entered into a Memorandum of Agreement (MOA) that will affect every developer of wetlands. The MOA stresses the following evaluation sequence when the Corps considers development proposals that involve wetlands.

* Avoidance;

* Minimization of impact; and

* Compensation.

The Corps will not approve a developer's plans for wetlands if it is practicable to avoid wetlands and still complete the proposed project. The term "practicable" is defined for this purpose as "available and capable of being done after taking into consideration cost, existing technology and logistics in light of overall project purposes." (6) A developer can thus be required to use an alternative site, even if such a site is not currently owned.

If loss of wetlands cannot be avoided, the next step is to minimize the impact of such a loss. A developer can be required to change designs, reduce size, and carefully select points of discharge to prevent erosion or contamination. If the impact on a wetland erea is significant, the developer will be asked to compensate. He or she can be asked to create additional wetland areas or improve the quality of existing wetlands. Generally such compensation occurs on the same site as the development.

The expanded definition of wetlands as well as various sequenced procedure requirements and a no-net-loss policy have combined to make wetlands a significant and uncertain variable in the formula for determining value. The next section may offer some help by both defining wetlands and explaining under what circumstances they must be taken into consideration.

DEFINING WETLANDS

Nearly evryone has a preconceived perception of wetlands. That perception is probably similar to the following EPA and Corps definition.

Those areas that are inundated or saturated by surface or ground water at a frequency and duration sufficient to support, and under normal circumstances do support a prevalence of vegetation typically adapted for life in saturated soil conditions. Wetlands generally include swamps, marshes, bogs, and similar areas. (7)

Unfortunately, this definition creates a false sense of what constitutes wetlands. Areas that appear to fit this definition may not be wetlands, while areas that appear to be dry land may in fact be wetlands. The official Corps of Engineers standards for determining wetlands provide a more detailed description. According to these standards, if the following three conditions exist, the property is considered to be a wetland area.

* Over 50% of the dominant vegetation consists of plants that are typically adapted for life in saturated soil conditions (hydrophytes). Seven thousand plant species are listed in the manual.

* The soil is saturated long enough during the growing season to develop anaerobic (without oxygen) conditions that favor the growth of hydrophytes. This type of soil is called "hydric soil" and is generally identified by its gray or dark color.

* Wetland hydrology is present. The water table is no lower than 12 inches or hydrologic indicators show that water saturates the plant root system over long periods during the growing season. Long period is interpreted to mean at least seven consecutive days. (8)

A wetland scientist can normally determine the presence of wetland conditions with a brief inspection. A more difficult challenge is to determine exactly how extensive these conditions are. A thorough analysis and survey is necessary to establish a boundary between wetlands and uplands. A Corps inspector is responsible for setting the official boundary lines, which are known as 404 lines. Such boundaries should be established by potential buyers, developers, or appraisers before purchasing, developing, or valuing a piece of property.

U.S. wetlands are divided into the following two broad categories.

* Tidal or coastal wetlands, which occur at the boundary between dry land and saltwater; and

* Freshwater (inland) wetlands, which occur at the boundary between dry land and freshwater.

In the absence of wetlands, the landward limits of Section 404 jurisdiction in tidal waters extends to the high tide line. In nontidal areas this jurisdiction extends to the "ordinary high water mark" --usually determined by such visual evidence as marks on shorelines and trees or debris lines. When adjacent wetlands are present, Section 404 jurisdiction extends beyond the ordinary high water mark to the upper limit of the wetland area as determined by the presence of the three wetland parameter--hydrophytic vegetation, hydric soil, and hydrology. Most recently developed tidal property has been evalutated, and plat and survey maps that show the exact location of 404 lines are frequently available. In older coastal areas and undeveloped areas, however, wetlands have not been delineated and to derive value in such areas is thus more problematic.

Unfortunately for appraisers, 90% of U.S. wetlands are freshwater or inland wetlands. These create the greatest risk for appraisers because most have not been surveyed or mapped to establish 404 lines. An appraiser who does not know what constitutes a wetland area or does not understand the possible consequences is not prepared to value such property.

CONSEQUENCES OF

WETLAND STATUS

If property is known to be wetland, what are the consequences? For one thing, the property cannot be filled without a Section 404 permit. Fill is interpreted broadly to include paving, pouring a slab, and exchanging types of soil. Some of the following specific fill activities are controlled by Section 404 permits.

* Levee and dike construction;

* Land clearing, if it involves relocation of dirt;

* Road construction;

* Bulkheading;

* Dam construction; and

* Filling wet areas.

It is possible to dig 20-foot ditches to drain a 100-acre swamp without obtaining a Section 404 permit, provided that all dirt taken from the ditches is removed from the wetland. A wetland forest can be clearcut, but the cleared land cannot be moved with a bulldozer. Moving the dirt is considered to be filling and requires a permit.

Building dams in wetlands to create fishing and recreation lakes requires a Section 404 permit. The dam might create a lake that actually increases the quantity of wetland; nevertheless, a permit is required. Pouring a concrete slab in a wetland to build a single-family home is also considered filling and may require a permit.

Nationwide permits

In certain circumstances wetlands may be filed without applying for a permit. The filling is allowed by a "nationwide permit" under the following conditions.

* Roads may be built across wetlands or creeks provided crossing is done at the narrowest point and does not exceed 100 feet on each side of a creek. The road must also contain adequate drain pipes.

* Utility lines and sewer lines may be dug through wetlands provided the contour of the land is not changed.

* Wetlands that are isolated or part of headwaters may be filled subject to certain limiations. Headwaters are wetlands on small streams that have a normal water flow of less than five cubic feet per second. In central Alabama such a stream normally has a drainage area of about five square miles. South Alabama receives more rain so the area is closer to two square miles. Wetlands within the headwaters drainage area are controlled by Nationwide Permit #26, which allows up to one acre to be filled if no other practical alternative exists. Filling of one to ten acres requires approval from the Corps, but may not actually require a Section 404 permit. Aerial maps and agricultural extension personnel are helpful in the estimation of headwaters.

Determining whether wetlands are in a headwaters area and thus subject to the nationwide permit is critical. If in headwaters, wetlands can be filled or converted to a lake provided the area does not exceed one acre. If wetlands are not part of the headwaters, a permit is required. If the permit is granted, the mitigation procedure previously noted must be followed.

Liability for violations

If the Corps discovers a violations, the normal procedure is to determine whether a permit would have been granted. If so, the violator must apply for the permit; if such a permit would not have been granted, the violator must restore the property to its original condition. Contractors and developers who are repeat offenders may be treated less politely: fines of $2,500 to $25,000 per day can be levied.

If a known violator selss the property, he or she as well as the buyer is liable; however, the Corps has a policy of finding the seller liable. If a buyer purchases property from a seller who has committed violations unknown to the Corps, the buyer is held liable.

Farming

Normal farming operations are exempt from Section 404 permitting. If a farmer is plowing and planting wetlands, he or she may continue to do so. If the property is converted to another use, however, the exemption is lost. A farmer can build farm ponds without a permit provided the pond is a reasonable size. The Corps would probably consider a 20-acre pond on a 40-acre farm to be unreasonable.

CONCLUSION

The value of property is influenced by the highest and best use options available to the owner. Recent developments in federal regulation of wetlands have decreased the options available to many owners of wetlands. The resulting uncertainty can cause a significant reduction in value. If an owner of a property is violating wetland laws, he or she could also be liable for significant penalties.

Events in 1989 and 1990 have resulted in an expanded definition of wetlands. In addition, federal agencies such as the Corps and the EPA have begun to aggressively pursue a policy of no net loss of wetlands. Use of a sequence procedures for evaluating permit requests makes it more difficult for owners and developers to obtain the required Section 404 permits. Further, even when permits are granted compensation may be required.

Evaluating the impact of wetland laws on value is more difficult than ever. An appraiser cannot assume that no wetland area exist if no water or march is in sight. According to the current definitions, wetlands are not always what they seem. Exemptions for normal farming operations as well as nationwide permits for some filing of headwaters futher add to the confusion. As a result appraisers need to become more knowledgeable and to qualify their results. The issue of wetlands will not disapper--it will be a factor in the valuation process for many years.

(1). John Bowers, Jr., Executive Vice President, Maryland Bankers Association, as reported in Real Estate Review (Winter 1991): 69.

(2) Peter Steinhart, "No Net Loss," Audubon, Speaking for Nature (July 1990): 18.

(3). Lonnie Williamson, "Battle of the Farm Bill," Ourdoor Life (June 1990): 45.

(4). Federal Interagency for Wetland Delineation; Federal Manual for Identifying and Delineating Jurisdictional Wetlands (January 1989).

(5). Lori M. Rodgers, "Wetland Conservation: A Concern of Gas Producers," Public Utility, Fortnightly (February 1, 1991): 38.

(6) Code of Federal Regulation, [section] 230.03(q).

(7) "Regulatory Program of the Corps of Engineers: Final Rule," Register (15: 219, November 19, 1986): 41251.

(8). Rodgers. 38.

William Bunkley is a member of the regulatory branch of the U.S. Corps of Engineers in Mobile, Alabama. He received a BS from the University of South Alabama.

Charles P. Edmonds III, PhD, is professor of real estate at Auburn University in Alabama. He received his PhD from the University of Arkansas.
COPYRIGHT 1992 The Appraisal Institute
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1992 Gale, Cengage Learning. All rights reserved.

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Author:Bunkley, William; Edmonds, Charles P., III
Publication:Appraisal Journal
Date:Jan 1, 1992
Words:2674
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