Seth: Hey, everybody, how's it going? This is Seth Williams. You're listening to the REtipster podcast. This is episode 211, and today I'm talking again with my friend, David Hansen. Last time David and I talked was back in episode 176, which you can find and listen to at retipster.com/176. And I have to say, episode 176 is one of the most frequently referenced episodes I've recorded over the past couple of years. It was so eye-opening for me, and I know so many people who needed to hear what David talked about in that episode. Even today, it happens all the time when I say, "By the way, you need to hear what David Hansen had to say about this," and then I give them a link to that conversation. So if you haven't already heard it, or maybe if you want to re-listen to it, you can go find that again on retipster.com/176.

But today we're getting into it again. For those of you who don't know David, he is a civil engineer, a planner, and a land developer, and a lot of other things. And he has a wide array of experience and expertise in the world of land development. And today we're going to pull back the curtain even more to help understand how to spot opportunities and extract the most value out of a larger value-add land deal. So David, welcome back. How's it going?

David: Wow, it's going great, Seth. Man, I'm embarrassed. I hope I live up to that billing.

Seth: Oh, you will. I'm sure you will. Well, let's go. What's on your mind? For those who are not going to listen to me and go back and listen to episode 176, is there anything else we should know about you beyond what I just said in that introduction? Like maybe give us a quick rundown of who you are, anything else we should know about what you've been up to this past year?

David: No, I think you hit everything pretty well. You know, as far as my background goes, I did want to jump on you and I changed a couple of, I don't know what it was, IMs or tips. But you brought up something about wetlands at one point. And one of the things, I actually developed three wetland banks in Northern Virginia. I'm a partner on four nutrient offset banks, which probably a lot of people don't know about, but is a very important development element in Northern Virginia, Maryland, and Pennsylvania to help offset nutrient loading in Chesapeake Bay.

Seth: This is awesome. I'm glad you reminded me of this. So for those who don't know, just starting at the super elementary level, wetlands - usually it's like a swamp or a bog or a fen, or there might even be like some kind of endangered species or a plant or animal or something that uses it as its habitat. And wetlands are a problem for anybody who wants to develop land, because for most intents and purposes, you can't build on them unless you can do this kind of wetland banking thing, which, and this is where I need you to kind of jump in and correct me if I'm wrong, but I think it's where you can develop the wetlands if you can say, "I'm going to create more wetlands somewhere else." Is that accurate?

David: You were close, but you're right from a rudimentary level of what they are. It gets even more basic than that. And it depends on where you are in the country. In, say, I spent a lot of time in Northern Virginia, Maryland, West Virginia. In that area, in order to qualify as a wetland, the area has to contain three elements. It has to have hydrology, you know, water source. It has to have the correct soil types, and it has to have plants.

Seth: And when you say plants, do you mean any plants or certain plants?

David: No, no, no - wetland-based plants. I think the classic is cattails is where everyone would go, "Oh yeah, that's that, you know, it's got the cattails, that's a wetland," but there's thousands of other plants that love to have it in the terms of the parlance, their feet wet.

Seth: So it's plant life that lives in wet, moist areas. The issue with wetlands, though, is that, and I guess this is the other part where I'm not totally sure about it, but what I have heard, and maybe it varies by state, I'm not sure, but you can develop wetlands if you create 150% more wetlands somewhere else?

David: Again, that's a very simplistic look at it. First, wetlands are federally protected. I'm sure everybody's seen stuff in the news where some farmer somewhere went and filled a wetland and the feds have prosecuted. The reality is they're federally protected. If you, without a permit, destroy or alter a wetland, you can be prosecuted. Period. Avoid that at all costs. That is the first rule in dealing with wetlands with the Corps of Engineers or wherever you are. Everything falls back to the Corps. Different states do things differently. In Florida, we have water management districts. St. John's River Water Management District, Southwest Florida Water Management Districts. And in Florida, the Corps actually defers to the water management districts for regulation because, oddly enough, those water management districts are more stringent in their requirements than the Corps is.

David: The Central Florida Swift Mud, I call them - I can't think of the terms of the acronym right now. You don't have to have all three of the elements there. You could have any of the three and they could determine it to be a wetland. Then they will determine the quality of the wetland. And then if you want to destroy it, it is Florida. They let you fill wetlands. You have to offset that impact with mitigation. And that's what you're speaking of when you talk about constructing. And normally that comes at a cost. I actually have a project right now in Sarasota where we are trying to avoid. That's always their first - they were pre-avoid. If you can't avoid, you can impact and mitigate.

David: There are no available banks currently in the HUC. That's the drainage area for the site that have available credits to sell. So we're trying to find out if we can buy from an adjacent HUC, but they run about $190,000 a credit.

Seth: On this whole thing of a wetland bank, are you literally creating new wetlands that weren't there before? Or you're just saying you can pay me money and then I'll let you use this existing wetland as your offset? How does that work?

David: The answer is yes and no. So part of a wetland bank is preservation, protection, and then creation. So you actually do have to have – now, they don't have to be in the same location. I could create a large new wetland. And if I had 100 acres and it had the right hydrology and I could do it, I could create 50 acres of wetlands. Then I would have to go purchase another piece of property where I protect 150 acres of wetlands. Now, you can either do it in the same bank or you do them in what's called an umbrella bank. So I could have the creation at one site.

Seth: But in order for the bank to be valid, I would have to have the protected wetlands as part of the umbrella. And protective just means you promise not to develop it?

David: The property would have to be in a permanent conservation easement. It would have stipulations around the amount of buffers that you need from the wetland itself. Generally, it's like a 350-foot buffer that you provide all the way around the perimeter of that protected area. And you would be restricted from building anything within the buffer.

Seth: When you're creating a wetland, if you need a water source for this, are you basically just taking an existing wetland area and making it bigger, like digging out a bigger hole for it?

David: You can't. That is part of it. Not necessarily a hole, you know, because a wetland is a constantly evolving ecosystem. So it's not the same as digging a hole and creating another body of water. A real wetland is created with microtopography.

David: So go look at a wetland, or like you said earlier, like a swamp or a bog. And if you look at it, you'll see areas that have a little bit of high ground with some grasses, maybe a little bit of an upland grass. You'll see the microtopography where when it rains as the water is working its way through, it'll softly erode things and change the scape of it. That microtopography is highly necessary in the creation of, you know, to create a wetland because what you want it to do is you want it to hold water for an appropriate amount of time. You want it to saturate the soil to create that soil quality that you're looking for in a wetland. And then it has to support the plant life.

David: When you create a wetland bank, it's not one and done. You have to monitor it and maintain it for 10 years. And then it's protected because after 10 years, it's deemed to have been, it's established at that point. But you submit monitoring reports yearly and either the CORPS, SWIFMUD down in Florida, I know in Tennessee, TDEC manages all of the wetlands there. Their inspectors come out and they write you up. I mean, if something's failing, if you have a certain loss of plant life, you have to go back in and reestablish it. Then that is a continuing monitoring.

Seth: This sounds like kind of a huge pain and kind of expensive to do this. Is that accurate?

David: It is not easy. It is expensive to establish. Yet, if you are in an area of high demand, as I said, I helped establish banks in northern Virginia, just outside D.C., Loudoun County and Fairfax County, HUC-8 and HUC-10, if you are developing in that area and need to offset.

Seth: Like is a credit an acre or what does a credit mean exactly?

David: Yes, a credit is an acre, but if you destroy an acre of wetlands, you either have to replenish that one and a half, two or two and a half times.

Seth: What determines that, whether it's one and a half or two and a half times?

David: The wetland delineation report and the Corps' verification of the wetland, it's about quality. The higher quality, you know, and I don't know all of the language. I know there's palstrudian, there's emergent. It depends and it depends on the quality of those. Like if it's a very historic, an old wetland and well-established, that's of a higher value to the ecosystem. So the offset of that is, you know, cost more. Where a lesser wetland, it's treated as such and you can restore it. The other difficult thing is most of the jurisdictions don't like you to do on-site wetland mitigation because it's more difficult to, well, A, you've got development around it. B, it's more difficult to monitor and maintain. So they prefer to have the wetland mitigation in off-site banks.

Seth: So on that whole issue, if the only way to know for sure, like a hundred percent certainty that there are wetlands present is to do a wetland delineation. But nobody has done a wetland delineation throughout the entire country. And it's not like every square inch has been covered. So like if I buy a property with wetlands and I just fill it in before anybody sees it, not saying I would do this. I'm just trying to push the envelope and see like what the answer is. I don't even know if you know this, but how am I going to get in trouble for that? Is there some wetland police where they know this stuff somehow?

David: With the advent of mass communication and social media, and the fact that I know every single jurisdiction allows for anonymous reporting. If at your house where you live, you're not allowed to have an RV, but you live way out, nobody's going to do anything. But you got a neighbor that doesn't like you so much, and he sees the RV there, even though, get this, say it was a friend of yours in town, your friend's gone. He anonymously reports you to zoning. And I guarantee you, every single jurisdiction has within five days of an anonymous report, they have to go investigate. So the zoning person comes out, knocks on your door with their clipboard, said, you know, Mr. Williams, sorry about this. We got a report that you had an RV on your property. You do realize and they'll if it happens again, we do. It's crazy.

David: So earth moving is like this unbelievable red flag for people. So you'll see somebody, even if you have a permit, I've had my site inspectors come out to my jobs where we just got finished going through the LDP. I've got my permit in hand. The signs are all posted. And I've had my inspector call me and go, "I just got three reports that you're disturbing dirt out there." And I actually started laughing. He goes, "This is going to be a fun job." Because that means every time a truck rolls off the site, if the tires are dirty, one of those people is going to call that, you know, they're leaving the road a mess. And he goes, "It's such a pain in my neck." So if you're to be quite honest, there's... it's not those police. It's everybody is everybody in the states at this point are so much more connected and feel that protection of the abyss. Like I'm nameless, I'm faceless. I can report you anonymously. And if I really have, if I've got an issue with you, then I, you know, but it's, it's not. So that's your bigger risk is just somebody coming past and seeing it and going, "Oh, I wonder if zoning knows what Seth Williams is doing out there." Quick phone call and you're anonymous. And some of them, you go online and you fill it out.

Seth: So you were working on one wetland bank and then one nutrient?

David: No, I have a client and we actually partnered together. We built a huge wetland bank and sold it to, there's a number of national companies that owns huge wetland banks. The company we're working with, they're called TimberVest. They're a timber entity, but they saw the value in owning wetland banks. Buying it from us for 65 cents on the dollar, knowing what the value of the underlying asset was.

Seth: Help me understand the whole value thing. So how do you make money from this? So whatever that means. And then the value thing I'm missing, it seems like a curse to have wetlands. So how are you actually extracting money out of that?

David: Well, again, so if you have, I'll use the project that I did at Red Hill in Virginia. So what we had there, we didn't have any wetlands per se. What we had were what they call it. It's bed and bank. It's still a wetland, but it was the stream. So we had everything was a lot of spring fed feeding down to a large Creek at the bottom. But what we had was a lot of potential for low-lying, even though it didn't qualify as a wetland, it had been farm fields forever. And so we took advantage of that by grading in and creating the microtopography and planting. We established the setbacks, planted the setbacks, reforested all of the setbacks. And from that, we were able to create 45 acres of wetlands.

Seth: How much was there originally of wetlands, of that acreage?

David: Just the stream bank.

Seth: So you took an existing stream bank and expanded it to make the entire 45 acres a wetland area?

David: Yeah. Well, actually, it was a lot bigger than that once you factored in some other setbacks. But yeah, essentially, that's what we did. And of that, we had seven acres of created wetlands in there. But the number of credits, there are 45 credits. The credits at the time we established it, at that point, it cost planting and everything else. It was around just under $100,000 an acre.

Seth: It cost you that to make?

David: Yeah, to create it. But when you're selling credits between $275,000 and $400,000, that's your value.

Seth: So it costs you $4.5 million to taint this property by making it all wetlands and undeveloped, but then you sold it for two and a half times that amount?

David: Well, there's a better story. So the property, it's in Virginia. So the first thing, and I would always recommend this to anybody looking or thinking about this, the first thing that you do, because some things can't happen, some things can happen sequentially and some things can't. So if you are thinking about doing a wetland bank, the first thing you do is a permanent conservation easement. So with your permanent conservation easement in the Commonwealth of Virginia, you create Virginia state tax credits. You create federal and Virginia state tax deductions for your property.

Seth: I'm not a tax guy. Run that real fast.

David: But I understand how the process works. And so in Virginia, for Virginia state tax credits from land conservation. Essentially, if you agree not to develop your land, put it in a permanent conservation easement, you are given 40% of the value of the donation, essentially. And the donation is predicated on an appraisal based on the development potential of the property. The tax credits are free. They're open market. So if you lived in Virginia and you owed the state of Virginia $10,000 in taxes at the end of the year, you could go to a CPA who has state tax credits and buy tax credits from him for 75 cents to 90 cents on the dollar. So, I mean, if you owed, just to say it was 75 cents on the dollar, if you owed $10,000, you could buy $7,500 worth of $10,000 worth of tax credits. Submit that, you save $2,500.

David: For the people doing it, if you're high net worth, there's federal deductions. So the difference between, again, what the state gives, and I'm not a tax guy, so this is very rough numbers. I keep repeating that. It says, I'm going to go, well, that's not true. But the difference between what you get in your state tax credits and the 100% value, you can use as federal deductions off the top 50% of your income for 15 years. So that's why people do the conservation easement.

David: So in Virginia, you can stack things. Now, that works. There's a couple of states that do state tax credits. Virginia, Georgia, North Carolina, and Colorado, I believe, all do that in varying degrees. I don't know what their programs are. I know the Virginia one because I was there. But they all allow stacking of benefits. So if you do the conservation easement first, you can take your cash benefits from that. Then on top of that, then we did the wetland bank. So it's stacked on top. So now the land basis, his land basis was zero. So the cost to do the wetland bank, all of that outstail came to him. And then last but not least, we did a nutrient offset bank.

Seth: And what is that? Okay. How is that different from Wetland Bank?

David: It's way different. It's way different. I could talk on that forever as well.

Seth: I've never even heard of it until you brought it up. So I'm curious to hear what this is.

David: Let's do the wetlands for now because it's a whole other subject. I will tell you this. If you disturb in Virginia and Maryland and Pennsylvania. If you disturb over one acre, you have to figure out how to offset your nutrient loading. Essentially, by disturbing the soil, you raise three things: nitrogen, phosphorus, and sediment. There are numerous ways to offset that impact. You can do detention with extended detention to allow it to settle out, or you can convert farmland or hay fields or scrub into managed hay or reforest. And for doing that, you take something out of production where you're plowing it and fertilizing and doing all of that, you pull it out of production and you reforest, you're given a credit.

David: So on a development site, if you disturb over an acre, you have to buy an offset credit for that acre, you know, and you offset in pounds of phosphorus. So in the same two HUCs, eight and 10 in Northern Virginia, a pound of offset is about $35,000.

Seth: When you say HUC, what is that? I'm not sure what you're talking about.

David: It's a hydrologic unit. If you look anywhere in the United States, the Army Corps of Engineers breaks up every single drainage shed in the country into these hydrologic units. They're numbers, they're long numbers. If you're in the Rappahannock River, if you're in the Potomac River sub-basin, if you're where I live here in the St. John's River. And so the numbers start out with the first like eight digits are the river digits. And then the last four or six are specific units within that overall shed. When you're dealing in wetlands or almost anything else to do with runoff, it always breaks down into that HUC number.

David: And with wetlands, so the reality is, like with wetlands, if I'm in the Potomac River HUCs and I'm disturbing wetlands, I can't go over to the Rappahannock River HUCs and buy credits. They're cheaper. I'd love to be able to do that, but I can't because you're trying to protect, the whole idea is to protect the shed you're in first. And they do it from like a micro shed. If you can do it like within your very reduced shed good, if not you can go out a little bit further, if not you can do it within the main HUC or you can go to adjacent HUCs if there's nothing available in your HUC you can go to an adjacent HUC that serves the same river basin so that's kind of how that works.

Seth: Yeah, it's crazy. This nutrient offset bank, the problem that it's solving, is it pollution from disturbing these things you talked about?

David: Yeah, so the release or the elevation and the release of nitrogen, phosphorus, and sediment, of course, they're damaging to the river systems. Too much sediment release clogs up the small flowing streams. Too much nitrogen, too much phosphorus can either create the algae blooms or kill fish or has deleterious effects against other flora and fauna in the system. It's a way to offset that release of those products.

Seth: Yeah. So does it need to be in a close proximity to where this release happened or does that not matter?

David: Yes and no. If you are in an impacted stream system.

Seth: Impacted means what?

David: It had a lot of development around it. There's a lot of runoff. It could even be just a segment of the stream. The initial push is to offset there. Now if it's a heavily developed area there's not going to be a bank nearby so then you can radiate out from that. Okay, I'm right in that particular impact.

David: I can go out a little bit to a broader area and find it and it's the same thing it radiates out until you either if you can't find it in radiating out you can go to the HUC or you can go to an adjacent HUC.

Seth: So you were able to do this on top of the wetland area that you created at the wetland bank and it's stacking?

David: And then the real interesting thing on the one bank we got pretty far and I haven't - I haven't talked to the owner in a while - we were trying to do carbon offsets on top. I work with him on a number of nutrient offset banks and all total we had... They reforested about 450 acres. So we approached a boutique carbon offset group, and we were talking to them about aggregating the reforestation and rolling it into a carbon offset program. Again, trying to leverage the fact that we are right outside D.C. And that if all those congressmen were talking about how great carbon offsets were, why not a boutique offset bank? Generally, the carbon offset banks are monstrous and out in the West where people are. And they're interesting because you can't take credit for existing forests. It's got to be new forest, which is kind of what made this interesting because they had been reclaimed farm fields that we reforested.

Seth: I don't really know the actual situation, but I've heard people talking about like, uh-oh, we're losing productive farmland because new housing developments are taking them over and we're losing that as if it's a problem. But it sounds like that's not a problem or I guess the carbon offset problem is a bigger problem to take the farmland out of production or how does that work?

David: I love the idea of, and don't get me wrong. I mean, Virginia is a, I was there forever. It's a gorgeous place, but productive farmland? No, I mean, it's not black soils of Iowa and Nebraska. Give me a break. Production rates, because I did this. I mean, we were buying farms and I, you know, would plant in between while we were taking stuff through the process.

David: And, you know, we're getting 30 to 90 bushels of corn. Iowa is 400, 500 bushels of corn per acre. I mean, most of where I was in Virginia, mostly dairy farming, small scale. Most of the corn that was planted was used for cow solids, just chopped up and siloed and fed to the cows or for milk production. I get it that the perception is, oh, it's all this productive. It was not as productive. Way more productive as, you know, suburban residential because of the proximity to bustling metropolises. That's the reality. And the real production takes place in, you know, there are plenty of areas in southwestern Virginia that have super productive farming operations. You know, the things there on the foothills of the Blue Ridge, yeah, not so much. The valley, I mean, if you get out into the Shenandoah Valley, yeah, super productive stuff there.

Seth: So were you able to do this carbon offset thing? Like, did that work out?

David: No, you know, like I said, we got everything set up. I don't know if he was ever – I was acting as a consultant for the wetlands and the nutrient offset, and it was just kind of intriguing. I mean, I consulted for what I knew. I don't know anything about carbon offsets, you know, other than I can help run the calcs and explain what we had done. I'd love to think that they took down the calculations and he sold his carbon offsets to somebody and made good money. But I don't know. But I was speaking of that as the ability to stack things, these various elements of opportunity on top of each other. And you could probably end up doing the same thing almost anywhere if you created it right.

Seth: Yeah. Did I hear you right? You said you reforested 450 acres, but wasn't this a 45-acre property?

David: That was just one. No, I said we had – that was one where we created the wetland bank. Oh, no, the property, that property was 650 acres. We created a 45-acre wetland, and then the nutrient offset bank surrounded it. It was different. The conservation easement was different. And he actually had three farms at close proximity to each other. And on all of that, with all the reforestation, it took it up to 450 acres.

Seth: In this section of the property where the stream was running through it, I mean, that stream is kind of a problem, right? I mean, that means you can't do a bunch of stuff. You almost sort of like dove in headfirst. Okay, we got a problem. Let's make it this whole wetland thing now. So like-

David: Now you hit on the thing where you're speaking earlier. I was looking at something with somebody actually in Tennessee. As we were looking at it, it was two problems, three problems, two in particular, one south, one north. The one to the north had gotten some approvals four or five years ago. Nobody built on it. I couldn't figure out why. We got on the phone with the realtor representing it, you know, and he went through what they'd done. He sent a plan over. Look at the plan. And there is a huge creek that flows along the border of the property of the south that we're looking at and right through the property to the north and then along its northern boundary. And I looked at a notation from the engineer at a confluence and it said draining, you know, D.A., 1200 acres to that confluence point. And the plan to the north showed a road crossing this creek. And I'm talking to the guy I'm going through this with, I went, "Dude, the only way to cross that's a bridge. And the impacts of the floodplain study, the floodplain alteration, the bridge construction, 10 other things, that make no sense to cross that creek for those lots. It just makes no sense."

David: And we actually had a conversation yesterday with the planning staff for this little town in Tennessee because I was trying to shrink lot sizes. Aggregate the lots on one side, not do that crossing. And my brilliant idea on that was because now if we had the north property and the south property, I know that looking at the topography, looking at the lay of the land, there's an opportunity to protect the wetlands with a healthy buffer, existing stream valley, and probably create 15 acres of wetlands. On the northeast side of this creek. And I don't know, now we got to get in touch with TDEC to see if there's a possibility of doing that and creating sellable wetland credits to offset the cost of developing this property.

Seth: There's clearly a lot going on here with this property. So what I'm trying to get to the bottom of is like, how did you make money? Like, what kind of money did you make? What did it cost to buy this thing? What did it cost to make these improvements and then who buys it from you?

David: The property was, I'm going to take a stab. Gary probably bought the property for 10,000 an acre. It's in Loudoun County, not too far from the Potomac River, a lot of wetlands, but I mean, it was a working farm. The main farmhouse was built in 1840. Fully restored, beautiful. When we did the conservation easement, the steward for the land trust allows you to break everything up into 50-acre lots and some 25-acre lots, but a limited number. So the owner broke all the lots up, but broke the land up into the various, I think he ended up with eight or 10 lots at the end of the day, between 25 and 50 acres and greater. And after the conservation easement went on, we started working on the wetland bank.

David: In between that, since as we did the subdivision, the large lot subdivision, essentially, in Loudoun County, not exempt, you know, you had to take it through the platting process. It didn't really matter. We platted out the wetland bank, platted out the house lot, the big house with all its outbuildings and everything. And so he got the cash influx from the conservation easement tax credits. He then started selling off the lots that were around the perimeter that weren't going to be affected either by the wetland bank or the nutrient offset bank. Then, with the creation of the Wetland Bank, we were approached by that institutional entity that offered to buy the Wetland Bank for a healthy fee.

Seth: More than $100,000 an acre, I take it?

David: Yeah, way more. And what he did was he actually sold the bank with the stipulation that when the monitoring period was over, they had to convey the land back to him free. All they bought really were the wetland credits. They sold those. They did their monitoring. They conveyed the land back to him. And part of the land they conveyed back held the opportunity to do the nutrient offsets.

Seth: The people that built out this wetland stuff, who is that? Is this like a civil engineer or like what kind of company plans it out and actually implements this work that you're paying 100 grand for?

David: I contracted, managed and was on site for the planting. So it's you. Yeah, I did that. We hired a wetland firm that did the design, and the microchipography grading was done by a civil engineering firm. And I hired a small contractor to do the grading, and I brought in a planting firm out of Newport News, Virginia. They showed up with - God, I swear to God there were 24 semi loads of plants because you have to plant different sizes, everything from whips to one-inch diameter trunk stock. And so we planted the whole thing. I did the monitor- I well, we turned it over so I did the first year monitoring or the grow-in monitoring. When he sold the bank, the other firm took over the monitoring and maintenance. And today it's a thriving wetland.

Seth: So if I'm trying to do what you're talking about here in the state of Washington or something, like you're nowhere nearby, you can't do it. Like, who am I looking for to help me do this kind of thing?

David: You would be looking for a wetland scientist.

Seth: So they're the ones that kind of act as the general contractor to find all the people to do it all?

David: No way. Nah, they're just, that's the starting point. So you start with the wetland scientist. He will tell you what the possibilities are for, first off, he'll do your delineation. He'll tell you what the possibilities are for creating a bank. The bigger question would be, is there a need in wherever you are? Because creating these for the sake of creating them is a fool's errand.

Seth: How do you know that? What are you looking for to know if there's demand for it?

David: Well, I would say, again, I go back to my experience in northern Virginia being that I know how the Corps, just from working in the jurisdiction for all those years, I know how the Corps treats the wetlands that have to be protected. I know how they evaluate them. And I also know that with the influx of commercial and residential construction, the potential to have to, I might have said this when we talked the last time.

David: Not, you know, all of the easy land has been developed, not all the good land. So now we're down to the point, if all the easy stuff is gone, but not necessarily all the good stuff, why is it not easy? Well, it's got wetlands. It's got topo. It's got several things that may be against it, but it may be in great location. But if you can be permitted to, say it's got two acres of wetlands, and you can get a permit to remove the wetlands and massage the site, and it creates that benefit, then it's worth the cost to buy the offset credits. So Northern Virginia has this high demand for wetland offset credits. Stream bank credits are great. I've got a friend that has a wetland stream bank credit bank. God, it's kind of monotonous. He created 10,000 stream bank credits. Now, one credit is both sides of the bank. But imagine this, every time you build a road crossing over a stream, it's an easy permit to get. But once you impact on one project, they'll let you do small portions. But once you hit 300 feet, you got to start buying offset credits. And if you imagine a large project with multiple crossings, you hit the 300 feet pretty fast. And the 300 feet isn't to get out of jail free either. If you hit 300 feet, you have to offset the 300 feet plus whatever else you do. A foot of wetland mitigation credits is $525.

David: And that's one side of the creek, $525, that side of the creek. So it's $1,000 a running foot. And imagine once you get to a certain point, those offset credits start to make a huge difference on a project.

Seth: So on this whole thing you said about doing a wetland bank just for the sake of doing it is a fool's errand. It sounds like it matters that there is a need for that nearby. So how do you know that? In the HUC that you're in. So is there like a phone number I call and say, hey, is this a website? Where do I go right now to find out, you know, there is a demand for this in my backyard?

David: I would start with the wetland scientists because they know. They do the delineation. They provide it to your civil engineer. Your civil engineer, again, his first effort is always going to be to avoid. If he can't avoid, then you start looking at impacts and mitigation. And that wetland consultant will advise you as to whether it's smart to impact an area, whether it's better to avoid it in that area. But once they go through with the impacts, the civil engineer conveys it back to the wetland scientist. He runs your permit through the process with the Corps of Engineers. By doing that, he knows everybody in the market that needs wetland offset credits. So if you're talking to a wetland scientist and you go, "Hey, I had this idea about doing a wetland bank in Washington, where would you lean towards?" And he'll tell you, "You know, we just don't have that much of a need for it here." Or, "Oh my God, there's no banks left." And if you have a 500-acre property in this HUC and you're just thinking about keeping it rural and protected, it may be a smart play.

Seth: You're mentioning like these pretty big properties, 600 acres, 500 acres. Is there a minimum acreage we should be looking at before we even start thinking along these lines?

David: You know, as soon as you say yes or no, the answer is, it's the same. I have people that won't look at a small project, like a little infill project somewhere. And "Oh I wouldn't, I couldn't possibly look at that. Fewest lots I'll do are 50. No I wouldn't do a small project." Because as soon as you say that honestly like in, uh, if I had the ability in stuff I'm working on in Sarasota, Florida, if I thought that I had enough uplands and the value was there to create a wetland at $200,000 an acre, it may be worth it. Generally speaking, because you have to get with my understanding of what I've done in Virginia, we could establish a wetland, we could offer up protection on parts, but you also had to have, you got to protect that three to one. So if you didn't have enough that you could protect, you'd have to go find that offsite. I don't know how they do it in Florida. So that's my only basis for that.

David: So again, I go back to most of them were larger properties where we isolated the size of the wetland protection and the bank itself, 45 to 100 acres. But overall, like I said, the one property was 600. I helped somebody do wetland protection and nutrient offset on almost 1,000 acres because the farmer had already done his conservation easement. He was making his – it all depends on –

Seth: Kind of a demand for it, right?

David: Yeah, it is. It really – and that's why I say I hate to say there's a cutoff because as soon as you do, there might be an amazing opportunity.

Seth: I'm assuming you probably wouldn't even start doing this until you know there's a buyer, right?

David: This is different because there's a market for the credits. I wouldn't do it. I wouldn't do a bank in an area where there wasn't a built-in market for the credits.

Seth: And the way you would know that is by talking to the Army Corps or the wetland scientist?

David: Yeah, wetland scientist will tell you whether or not there's demand and whether or not there's enough an opportunity to satisfy the demand.

Seth: And do you just go based on the word or like you need to get on the phone call with this supposed buyer to make sure they're going to buy from you?

David: No, no, no, no. No, see, the buyer. OK, that's interesting. So the buyer like just showed up because they're smart. They go on. So the Corps of Engineers has a website called RIBITS, like a frog, R-I-B-I-T-S. OK. And if you have access to RIBITS, I do. I can go in and I'm funny. I can actually go anywhere in the country. Maybe you're on to something here, Seth. Yeah, there's a site you can go to anywhere in the country. Type in a HUC, and it'll tell you the banks in the area, who has credits.

David: How many they have, how many they sold. Because you have to log in. I do this all the time with my nutrient office. You've got to log in, and you have to show that you sold credits and reduce your total. So you can do that and see who's got banks, where the banks are, how many credits they were issued, how many they have left. It doesn't say how much they sell for. And when I say most people doing this don't care about a buyer because there's a market. Anybody that is bulldozing wetlands in your HUC is your market. They're going to have to buy it somewhere.

Seth: It sounds like what you just said there, there's probably not a ton of people, right? But the people who need it really need it.

David: In Northern Virginia, if they can barely satisfy the need right now, then they have a fund that you can pay into. But that has limited capacity. So if you want to develop and you want to impact wetlands, you better be able to find offset credits. Like my little project in Sarasota, very small. We could be looking at one and a half to two credits. That would be $400,000 if we can't avoid it. Right now, there are no credits available in that HUC. So the answer is just no, like you can't develop, period. Right. Unless you can find, unless you can convince them that there's a bank and an adjacent HUC, there's an opportunity.

Seth: So it's a big deal if you are in an area and you have a need and that need can't be satisfied. That bank and an adjacent HUC, how does that help you if it's far away from where the property is?

David: Because what they're looking at is a preserved wetland and an adjacent HUC is still in your watershed. So if I'm developing in Sarasota, I couldn't buy a wetland credit in Palm Coast because I've got two different riverine systems. That's not permitted. Like I said, generally what they like to do is keep you to an adjacent HUC because that way you're closer to where you are. But if there's nothing available, they may let you expand out to somewhere in that riverine system.

Seth: This wetland property that you developed and sold 45-ish acres, is there a difference between selling the developed wetland property and selling the credits? Are those the exact same thing?

David: No and yes. Basically, what we saw- I don't know the answer to that. It was kind of hard because basically what we put together was a deal where they bought the land and the bank, but written into the agreement was after the monitoring period was up, they had to convey the land back to the owner.

Seth: Yeah, so really all they were after was the credits then.

David: I mean, they actually owned it. I mean, it was under their name, this entity, under their name the whole time they owned it. Once the monitoring period was up, they conveyed it back to the previous owner.

Seth: And the monitoring period, what does that mean? Is that once the credits are sold?

David: No, I know past that. So you can sell all the credits on day one. I mean, you have somebody approach you and go, "I need 45 wetland credits. Here's $30 million." Or you can sell them over time. And generally, you sell them over time. Nobody's going to have that huge demand.

Seth: I mean, could you just be an investor in wetland credits and that's it? Not owning the land? Like, I just own the credits and I'll sell them to you for 150% of what I paid for. Like, is that what's going on here?

David: I think you could, but I don't know that it would... Unless you were buying in bulk, like this group bought the whole thing. So they bought it for 75 cents on the dollar, willing to make 100 cents and whatever it escalates. I mean, they took a calculated risk that... The need and the requirement for wetland credits is not going to wane. And the value, you know, if today's credits are selling for $250,000, we're betting in two years, they're going to be selling for $300,000. And that was the calculated risk that they took.

David: So they bought it in bulk because my guy was like, yeah, I'd be a fool to not take that check. But I do know that there have been instances where somebody has purchased, I've had this happen in our nutrient bank, where somebody purchased a credit from us, you know, a number of credits, their engineer made some changes on the plan, their requirement went down, and they were holding, they had one credit left over. And they approached us like, "Will you buy it back?" And we were like, "Yeah, we'll buy it back for 50 cents on the dollar." They were like, "Well, that's not fair." And like, "Well, we don't, we don't want it back. Like, sure, we'll take it for that."

Seth: And in that case, they could sell it to someone else as long as it fit all the parameters.

David: So this entity that you sold the wetland bank to, they bought the credits and the land, but they have to convey the land back after the monitoring period. So like, did they not pay much for the land portion? They just paid a lot for the credit portion?

David: The land basis was zero. They bought the credits at a set number.

Seth: Yeah. So when we say bank, does that just mean a bunch of credits? Is that what we're talking about?

David: Yeah, essentially the bank itself, it kind of is a paper. It appears on RIBITS and the bank itself is an area with boundaries and limitations. But I mean, the real bank part of it is the credits and the cash transactions, in my opinion.

Seth: So for you to get comfortable spending four and a half million dollars to create this wetland bank, do you have this conversation with a wetland scientist? And I guess between them and whatever the RIBITS website said, those things made you really confident. Like if we spend this money, it's going to sell.

David: Right. Well, again, I'm in Northern Virginia. It's common sense just with how much the cost is. It's just zero chance it's not going to work. It's just a question of the early things that you talked about, the cost to establish it and whether you have the capital to do that. And then whether you have the time value of money to wait the number of years that it's going to take to sell the bank out.

Seth: How many years did you project that was going to take?

David: Well, we predicted close to 10.

Seth: Okay. Because I like what you're saying in terms of like, this is kind of a sure thing. It's going to work. It's just a question of do you have the money and the time?

David: Yeah, in my opinion, at the end of the day, it gets down to, can you expend the capital on the belief that it's going to return dramatically? All of the banking instruments I worked on, the owners had managed the idea of the capital purchase of the land, the conservation easement first, those credits, and then rolled it into the stacking of whether it was the Wetland Bank first or the Nutrient Offset Bank, and then the Wetland Bank. And basically all of those capital stacks were huge gains.

Seth: Let's say I want to work with you, David. I want to find one of these properties. I want to do this all over again. Is there a way I can spot this kind of opportunity? Like, what am I looking for? Just like 100 plus acres with a stream going through it or buy it or a pond or something? Or is there a way you can reverse engineer or is this kind of a luck thing? You just have to come across the right property where it makes sense.

David: No, actually, again, it goes back to an area with a need is the real bottom line. I mean, if you've got, you know, the market that has the demand, then they're trying to figure out how to satisfy it. So I would start there. I mean, if you're looking in, I wouldn't be looking in real arid places. I don't, I'm sure there's a small need for it, like in Arizona, but the likelihood of that's kind of low. I would think the Eastern seaboard, probably the Northwest, then it really depends on what's going on that's creating the need or can they avoid it there? I know that house prices and everything are relative to where you are. I don't know what land prices are relative to those things. And if, you know, some places discount, if you've got difficult terrain or ecological impacts, land's kind of discounted based on that. When you're buying land in Northern Virginia, no one cares that there might be wetlands, there might be this, there might be that. It's this.

Seth: So it sounds like, I guess, first of all, start maybe looking in areas of the country where there's a lot of water features, like just natural water around. And then also look for places, a lot of development and economic activity where people are likely to be bulldozing those wetland areas if they exist. And then also assess the existing amount of credits available through that RIBITS website. And then at that point, you're looking for a big enough property where there is a natural source of water already there, right? Because you need that in order to expand it and make a bigger wetland area. Am I on the right track here?

David: From a rudimentary look at it, yeah, you're kind of hitting. That's where I would be looking toward. And, you know, there's so many other great things. I mean, a lot of people do it on hunting properties. None of this conservation easement, the wetland bank, none of that takes away from you being able to go out there and duck and goose hunt or set up a deer feedlot.

Seth: Well, David, it's been awesome to talk to you. If people want to connect with you, I don't know if you want to share anything. You don't have to. But is there a place they should go?

David: Email me, david@openlandcommunities.com, spelled all the way out. I respond. I talk, you know, I respond to your stuff when you reach it. No, I do that. Listen, I do that. Funny, my partner Rafi was talking about something today. Somebody asked him why he always makes time for people. I'm the same way. I think whether it's a way of giving back or just trying to stay connected and relevant, I always tell people, people have schedules. Shoot me a text or something or an email and ask. I'll always make time to talk. I love to talk. And just, you know, I'm happy to, if I can be a benefit or give a little bit of knowledge, what the heck.

Seth: Yeah. Well, we're all very fortunate you wanted to do that because that's a, you got a lot to contribute for sure.

David: I appreciate that. You too. I enjoy what you do. I enjoy listening to you guys. I'm thrilled to be part of it. Like I said before, I didn't even know this existed. Now it's kind of makes a difference for me.

Seth: Yeah. Oh, that's awesome. It's great to hear. Well, thanks again, David. Again, if anybody wants to see the show notes, I'll have links to some of the stuff we talked about, including that RIBITS website, just go to retipster.com/211. David, thanks again. And we'll talk to you all next time.