Section 6
· The Airport plans to expend up to $9,455,100 from January of 2002 through December of 20101 on the first three phases of an option agreement with Wildlands, Inc., a private firm serving as an intermediary to the option agreement. Under this option agreement, the Airport would secure 1,090 acres of North Bay land, known as "Haire Ranch," so that the Airport can fund Wildlands, Inc. to restore what is currently agricultural land into tidal wetlands in order to earn habitat mitigation credits if approval is given to construct runways on new Bay fill. However, the Airport has no guarantee that the Haire Ranch site will be chosen as a habitat mitigation site for future runway reconfiguration.
· Over the first 60 months of the option agreement, the Airport makes monthly payments to Wildlands, Inc. to prevent the Haire Ranch property from being sold on the open market. The full 60 months of the option agreement would cost the Airport an estimated $403,800 to $730,800 more than the current fair market value of Haire Ranch which has been described by the owners as worth between $1,308,000 and $1,635,000 as agricultural land.
· If the Airport exercises its option to purchase habitat mitigation credits from the Haire Ranch site, the Airport would be required to pay $18,835,200 over and above what the Airport has already paid in monthly option payments. The $18,835,200 would reimburse Wildlands, Inc. for its purchase of the Haire Ranch site ($17,440,000 for the property and $1,395,200 for the closing costs). The site's $17,440,000 purchase price for the property was negotiated and agreed to by the Haire Ranch owners and Wildlands, Inc. prior to the Airport's involvement.
· The estimated total cost to the Airport of maintaining the option agreement, reimbursing Wildlands, Inc. for its purchase of Haire Ranch, and restoring the Haire Ranch site as tidal wetlands is $69,167,082, or $63,456 per acre.
· There are 36,500 acres of alternative land which the Airport might be able to use for earning habitat mitigation credits.
· The Airport is paying the high price of up to $69,167,082 to be able to purchase habitat mitigation credits on a site that, moreover, the Federal Government has strong incentives to restore itself due to the Federal Government's existing and expensive contractual obligations to keep Haire Ranch dry while it is used as agricultural land.
· In 2001, when the Airfield Development Bureau negotiated the option agreement, the Airport anticipated constructing new runways in 2004. Since 2001, the economic situation has deteriorated markedly, and the draft Environmental Impact Report and the draft Environmental Impact Statement is not now scheduled to be released until 2005 at the earliest. Therefore, construction of a runway build alternative, if selected, could not occur until 2007 at the earliest. Each year's delay until December 31, 2006 costs $407,760 in monthly option payments.
· Immediate termination of the Wildlands, Inc. option agreement would permit the Airport to cap its expenditures on the option agreement at $741,637 (current expenditures plus a 60-day termination cost), which is $8,713,463 less than the $9,455,100 maximum cost of Phases A through C of the option agreement.
Mitigation Opportunities on Skaggs Island and Haire Ranch
Mitigation
The proposed expansion of the Airport's runways could require significant amounts of fill in the Bay if new runways are built. If runway expansion is approved by the regulatory agencies and San Francisco voters, the Airport must identify habitat substitution or replacement sites elsewhere in the Bay to mitigate for the damage caused by the fill. In such an event, the Airport anticipates that the number of acres to be mitigated will far exceed the amount of the Bay that would be filled for new runways.
Most of the runway reconfiguration options affect Bay floor which is 15 feet or more underwater. Once the Environmental Impact Report (EIR) and the Environmental Impact Statement (EIS) are issued, Federal regulatory agencies will determine the value of potential mitigation land relative to the value of the subtidal Bay land which would be filled to permit expansion of the Airport's runways. Using different types of land for mitigation credits will result in different values, therefore mitigation is not an acre-for-acre swap.
Baylands Ecosystem Habitat Goals
In 1999, the San Francisco Bay Area Wetlands Ecosystem Goals Project issued its report, Baylands Ecosystem Habitat Goals: A Report of Habitat Recommendations2 which identifies habitat restoration priorities in San Francisco Bay. The report recommends the kinds, amounts, and distribution of wetlands and related habitats that are needed to sustain diverse and healthy communities of fish and wildlife in the Bay Area. The overall goal for San Pablo Bay (the most northern portion of San Francisco Bay) is to restore large areas of shoreline agricultural land as tidal marsh and seasonal diked wetlands to provide roosting habitat for shorebirds and waterfowl.
Skaggs Island and Haire Ranch
Skaggs Island is a 4,388 acre delta island located at the northern end of San Pablo Bay in Sonoma County, adjacent to the 16,500 acre San Pablo National Wildlife Refuge. Skaggs Island is located in the middle of 30,000 acres of sensitive wetlands which are the largest restorable wetlands in the Bay. The Baylands Ecosystem Habitat Goals report recommends that the portion west of Skaggs Island Road be restored to tidal marsh and the seasonal pond habitat on the remainder of the island be enhanced.
Skaggs Island was created in the late 1800s by building levees to create agricultural land. Skaggs Island is currently divided between a former Navy communications center which closed in 1993 (3,298 acres) and Haire Ranch on the northeast side of the island (1,090 acres) which is owned by the Haire family which grows hay and oatseed on the land. In 2002, the Navy transferred ownership of its Skaggs Island land, which the Navy no longer required, to the U.S. Fish and Wildlife Service in order to maintain public ownership. The U.S. Fish and Wildlife Service intends to return that land to a tidal marsh habitat and incorporate it into the San Pablo National Wildlife Refuge. The U.S. Fish and Wildlife Service has testified to the Bay Conservation and Development Commission that Skaggs Island is critical to habitat restoration of San Francisco Bay.
Since a 1941 agreement between the U.S. government and the Skaggs family who farmed the 1,090 acre ranch at that time, the government has been obligated to keep Skaggs Island dry by maintaining the surrounding levels and pumping out excess water. Consequently, habitat restoration of the federally-owned land would have a significant impact on Haire Ranch. Under the 1941 agreement, if Haire Ranch is not restored to tidal marsh, the government would be required to build a new levee around Haire Ranch to keep it dry while the rest of Skaggs Island was restored. Federal officials view this as an expensive and complicated option and would, therefore, prefer that Haire Ranch be sold for habitat restoration purposes so that the whole of Skaggs Island can be restored in a coordinated manner and become part of the San Pablo Bay Wildlife Refuge. In a November 29, 2001 letter to the Airport Director, the U.S. Fish and Wildlife Service formally expressed its interest in having the Airport participate in restoring the former naval base site to tidal marsh. From the perspective of the U.S. Fish and Wildlife Service, combining habitat restoration efforts with the Airport would fund the initiative, avoid the need to build an expensive levee between the former naval base and Haire Ranch sites, and significantly lower the per acre habitat restoration cost. Simultaneously, the Airport might be able to earn mitigation credits for the habitat restoration of the entire 4,388 acres of Skaggs Island.
Airport Strategy
In light of the priority habitat restoration projects identified by the Baylands Ecosystem Habitat Goals report, the Airport has worked with a number of Federal and State resource agencies to identify mitigation opportunities should runway expansion involving Bay fill be ultimately approved. Between 1999 and 2001, the Airfield Development Bureau studied 36,500 acres around San Francisco Bay as potential habitat mitigation sites. The Airport Director reported to the Airport Commission that during that time the price for private land around San Francisco Bay increased by approximately 50 percent, which led the Airfield Development Bureau to conclude that prices would continue to rise as the Runway Reconfiguration Project moved forward.3 The Airport provided the Budget Analyst audit team with the following evidence to substantiate this claim. On October 23, 1998 Carneghi-Bautovich & Partners, Inc., real estate appraisers and consultants in urban economics, assessed wetlands owned by Cargill Salt Company in Alameda, Santa Clara, and San Mateo Counties as being worth $4,040 per acre. On November 29, 1999 the same company assessed wetlands in Alameda County as being worth $7,000 per acre, an increase of approximately 73.3 percent in the year since the 1998 valuation. Airfield Development Bureau staff advise that since 1999, the State Coastal Conservancy has paid $9,981 per acre for land at Bel Marin Keys in San Pablo Bay, and the Federal and State Governments have paid between $12,000 and $20,000 per acre for Cargill salt ponds in the South Bay.
Wildlands, Inc. is a California corporation which is the largest private company in the western United States specializing in creating habitat to mitigate for project impacts.4 The Airport argued that entering into a Master Agreement with Wildlands, Inc. for Option to Acquire Mitigation Credits, Airport Contract No. 7015.6 (the "option agreement"), for first rights to secure the 1,090 acres of Haire Ranch for tidal marsh restoration, would contain costs. Wildlands, Inc. approached the Airport in 2001 with this option agreement proposal. With the approval of the Airport Commission and the City Attorney's Office, the Airport decided to enter into the option agreement to purchase habitat mitigation credits from Wildlands, Inc. on a sole source basis since Wildlands, Inc. holds the sole development rights for Haire Ranch having entered into its own option agreement with the owners of Haire Ranch on June 21, 2001. Wildlands, Inc. is therefore acting as an intermediary between the Airport and the owners of Haire Ranch.
The Airport asserts that it is more affordable to secure land now, rather than waiting until the Runway Reconfiguration Project is approved and then trying to purchase land from other habitat developers acting as intermediaries for private land owners who will want to maximize the price of their habitat mitigation services in light of the Airport's urgent need to acquire habitat mitigation credits. The Airport further argues that having the Wildlands, Inc. option agreement in place will expedite the mitigation process by having the land ready for immediate approval by the regulatory agencies and for the actual habitat restoration process. However, to date, the Wildlands, Inc. option agreement is the Airport's only attempt to secure mitigation land up front.
With regard to the alternatives of using either condemnation or eminent domain to obtain Haire Ranch, the City Attorney's Office informed the Budget Analyst audit team that:
· The Airport determined not to rely solely on potential future condemnation after consulting with outside legal counsel about the benefits and risks of extraterritorial (i.e. outside of San Francisco) condemnation.
· Eminent domain is not an automatic right and could be opposed by the Haire Ranch owners, potentially resulting in lengthy and/or expensive litigation without guarantee of success.
The Wildlands, Inc. Option Agreement
Contractual Terms
The option agreement comprises five phases:
· Phase A - The Haire Property Phase: The Airport pays Wildlands, Inc. $33,980 per month, for up to 60 months, from January of 20025 until December 31, 2006, for a total cost of $2,038,800, to:
· Ensure that the Haire Ranch owners maintain the agricultural land as it currently is, either growing hay and oatseed, or plowing the land twice a year in order to keep it neat and weed free.
· Keep Haire Ranch off the property market and retain the Airport's right of first refusal.
· Provide property management services to oversee existing agricultural operations and water management, monitor site conditions, coordinate site visits and reconnaissance work with ongoing agricultural operations, and administer the financial arrangements associated with maintaining the option agreement.
As shown in Table 6.1 below, of this monthly option payment of $33,980, the owners of Haire Ranch receive $27,250 per month while Wildlands, Inc. receives a monthly option agreement fixed fee of $2,730 plus a further $4,000 per month for property management services, for a total payment of $6,730 per month.
The Airport will continue to make these monthly payments of $33,980 through Phases B and C. During Phase A, Wildlands, Inc. will also provide strategic consulting services at a total cost of $125,000 to define the scope of work for Phases B and C.
Paragraph 3.4.1 of the option agreement specifies a budget cap of $2,166,000 for Phase A services. However, the budget shown in Table 6.1 budgets the slightly lesser amount of $2,163,800.
· Phase B - Definitional Phase: Under the option agreement, Wildlands, Inc. and its subcontractors will evaluate the existing conditions of Haire Ranch, prepare a detailed development plan, prepare technical documents for environmental review, and develop the methodology for obtaining the necessary habitat restoration permits. Due to the Airport's current financial situation, Phase B will not proceed in FY 2003-2004. If the Airport and Wildlands, Inc. can negotiate a price, Phase B will be a lump sum payment. If they cannot, Wildlands, Inc. will charge based on either (a) time and materials, or (b) a negotiated hourly rate.
Paragraph 3.4.1 of the option agreement specifies a budget cap of $4,293,000 for Phase B services.
· Phase C - Processing Phase: Wildlands, Inc. and its subcontractors will work on obtaining the necessary habitat restoration permits. Phase C could begin simultaneously with Phase B. However, due to the Airport's current financial constraints, Phase C will not proceed in FY 2003-2004.
Paragraph 3.4.1 of the option agreement specifies a budget cap of $2,942,000 for Phase C services.
· Phase D - Restoration: If the Airport proceeds with a runway build alternative and exercises its option to purchase habitat mitigation credits from the Haire Ranch site, Wildlands, Inc. will perform the restoration if both the Airport and Wildlands, Inc. agree on the costs. If the parties do not agree on the costs, but those costs are within 25 percent above or below the original estimates, the Airport could compel Wildlands, Inc. to perform the restoration.
The option agreement estimates Phase D will cost $35,876,782.
· Phase E - Maintenance and Monitoring: Wildlands, Inc., or its successor, will maintain and monitor the Haire Ranch site in accordance with the permit requirements.
The option agreement estimates Phase E will cost $5,000,000.
The Wildlands, Inc. option agreement has a 60 day termination clause so that if Haire Ranch and/or the rest of Skaggs Island is determined to not provide the type of habitat mitigation necessary, the Airport can terminate the option agreement at the cost of $67,960 (two monthly payments, at $33,980 per month). In the event of terminating the option agreement, the Airport would not recover any monies it had already paid to Wildlands, Inc. unless Wildlands, Inc. continued to make the option payments itself with a view to enabling an alternate organization to purchase habitat mitigation credits from the Haire Ranch site. In that case, the Airport would be reimbursed for a portion of its Phase A option payments by Wildlands, Inc. and for any Phase B and C work products utilized by the alternate organization. However, in a letter to the Airport Director dated June 20, 2002, Wildlands, Inc. stated:
Due to the size and length of time of the option payments, if the Airport terminates its contract obligation with Wildlands following its contractual requirement of a 60-day notice, we probably would not be in a position to maintain the option. Wildlands would continue to look for funding avenues to ensure that the site is preserved for habitat purposes, but given the size and cost of the land it is uncertain that we could accomplish this goal.
Airfield Development Bureau staff advise that they have not received any more recent advice from Wildlands, Inc. on the ability of Wildlands, Inc. to maintain the option payments if the Airport terminates the option agreement.
At the end of the option agreement, if the Airport needed additional time in which to make a decision whether or not to reimburse Wildlands, Inc. for purchasing the Haire Ranch site, it would investigate "least cost" opportunities, including potentially renegotiating the contract.
In the event that the Airport does not select a runway build alternative, the Airport could try to recoup some of its expenses by exercising the option agreement and funding the development of habitat in order to sell habitat mitigation credits on the open market, subject to regulatory agency approval. The Airport would only be entitled to reimbursement of a portion of its Phase A option payments from Wildlands, Inc. if Wildlands, Inc. funds its own purchase of the property for restoration purposes. The City would be entitled to a proportionate share of the proceeds from resulting sale of habitat mitigation credits on the restored property.
The Airport maintains its first right of first refusal to purchase the Haire Ranch property in the event that Wildlands, Inc. should default on either its option agreement with the owners of Haire Ranch or on its option agreement with the Airport.6
Budget Provisions
The option agreement was approved by the Airport Commission in December of 2001 (Resolution 01-0358) for a five year period (terminating December of 2006), at a maximum cost of $9,429,300 for Phase A, B, and C services. 7 As of February 24, 2003, the Airport has expended a total of $537,757 on the Wildlands, Inc. option agreement comprising the expenditures shown in Table 6.1 below. The budget for the option agreement does not include the costs for (a) the EIR/EIS analysis required for evaluation of the Haire Ranch site as a mitigation opportunity, or (b) the required permit fees for restoring the Haire Ranch site.
Table 6.1
Phases A - C of the Wildlands, Inc. Option Agreement
Payment Category | Expended at 02/24/03 | Total Budgeted | Payment Calculation |
First Escrow8 | |||
First escrow for Haire Ranch | $50,000 | $50,000 | Lump sum9 |
Legal fees associated with first escrow | 6,267 | 6,300 | Lump sum |
First escrow subtotal: | 56,267 | 56,300 | |
Phase A (approved under Airport Commission Resolution 01-0358) | |||
60 months of option agreement payment @ $27,250/mo10 | 354,250 | 1,635,000 | Cost + fixed fee |
60 months option agreement fixed fee @ $2,730/mo | 35,490 | 163,800 | Cost + fixed fee |
60 months of property management services @ $4,000/mo | 48,000 | 240,000 | Lump sum |
Strategic planning consultation | 43,750 | 125,000 | Lump sum |
Phase A subtotal: | 481,490 | 2,163,800 | |
Phase B (subject to negotiation and Airport Commission approval) | |||
Habitat restoration design | - | TBD | Lump sum |
Habitat restoration design fixed fee | - | TBD | Lump sum |
Project management and coordination | - | TBD | Lump sum |
Project mgmt and coordination fixed fee | - | TBD | Lump sum |
Negotiate endowment fund12 | - | 50,000 | Cost + incentive fee |
Negotiate endowment fund incentive fee | - | 25,720 | Cost + incentive fee13 |
Phase B subtotal: | 4,293,000 | ||
Phase C (subject to negotiation and Airport Commission approval) | |||
Community outreach | - | TBD | Per diem |
Permit preparation and processing | - | TBD | Per diem |
Legal review and contract management | - | TBD | Per diem |
Phase C subtotal: | - | 2,942,000 | |
TOTAL: | $537,757 | $9,455,100 |
Future Costs
If regulatory agencies deem the Haire Ranch agricultural land to be appropriate habitat mitigation for runway fill, the Airport would exercise its option to purchase habitat mitigation credits from the Haire Ranch site by reimbursing Wildlands, Inc.'s purchase of the land at a cost of $16,000 per acre, for a total cost of $17,440,000, plus up to $1,395,200 for closing costs.16 The City Attorney's Office advises that this $16,000 per acre cost was negotiated and agreed to by the Haire Ranch owners and Wildlands, Inc. prior to City involvement. Therefore, the Airport was not involved in determining the cost per acre which the Airport would ultimately fund if the Airport exercised its option to purchase habitat mitigation credits from the Haire Ranch site. The owners of Haire Ranch had rejected earlier, lower Federal Government offers for the property. The owners of Haire Ranch have calculated that their land is worth between $1,200 and $1,500 per acre as agricultural land, with a total value of between $1,308,000 and $1,635,000.17
Table 6.2 below summarizes the Airport's future expenditures at Haire Ranch if the Airport exercises its option to purchase habitat mitigation credits from the Haire Ranch site. The City Attorney's Office advises that these costs will be subject to the approval of the Airport Commission and, most likely, the Board of Supervisors and Mayor.
Table 6.2
Future Expenditures if Haire Ranch Option is Exercised
Payment Category | Total Budgeted | Payment Calculation |
Second Escrow (subject to Board of Supervisors, Mayoral, and Airport Commission approval, and the Airport exercising its option to purchase habitat mitigation credits) | ||
Property payments (Wildlands, Inc. to be reimbursed by the Airport for the cost of purchasing Haire Ranch) | $17,440,000 | Cost at end of option period based on $16,000 per acre, for 1,090 acres |
Closing costs | 1,395,200 | 8% of purchase price |
Second escrow subtotal: | 18,835,200 | |
Phase D (subject to Board of Supervisors, Mayoral, and Airport Commission approval, and good faith negotiation of a Restoration Contract) | ||
Habitat construction cost | 35,876,782 | Cost estimate contained in Paragraph 5.2.3.A(1) and Exhibit F of the option agreement18 |
Phase D subtotal: | 35,876,782 | |
Phase E (subject to Board of Supervisors, Mayoral, and Airport Commission approval, and good faith negotiation of a Maintenance and Monitoring Contract) | ||
Ecological monitoring | 1,810,000 | Cost estimates contained in |
Special status species | 950,000 | Exhibit G of the master |
Physical systems monitoring | 1,370,000 | agreement. |
Access and trespass control | 225,000 | |
Annual reporting | 540,000 | |
Tours and interpretive activity | 105,000 | |
Phase E subtotal: | 5,000,000 | |
TOTAL: | $59,711,982 |
In November of 2001, Wetlands Research Associates, Inc. reviewed the habitat restoration proposals prepared by Wildlands, Inc. The reviewers concluded that (a) "the technical design and cost estimate met generally acceptable standards at this stage of the project planning;" (b) the planning and design scope of work, and the proposed budget for those tasks, were "in conformance with the approach taken in other major restoration projects in California;" and (c) the scope of maintenance and monitoring work after project completion was "acceptable in terms of industry standards." The working estimate of $70,000 per acre (including land acquisition) was "well within the range for large scale restoration projects of this nature." The reviewers noted that the cost per acre would drop significantly if the project is combined with the restoration of the rest of Skaggs Island because there would be no need to build a new, large levee between the two projects.19
Issues of Concern
Uncertain Need for Haire Ranch Site
The Airport believes that habitat restoration of Haire Ranch agricultural land would be a good mitigation measure for the impacts of a runway build alternative. Therefore, the Airport is paying Wildlands, Inc. $33,980 per month for up to 60 months or a total cost of $2,038,800 simply to preserve the Airport's opportunity to purchase habitat mitigation credits through Wildlands, Inc.'s purchase of Haire Ranch and restoration of its agricultural land to tidal wetlands at an estimated future cost of $59,711,982 (as shown in Table 6.2). The Airport cannot know whether or not the Runway Reconfiguration Project will go forward until after regulatory agency review of the draft EIR/EIS and after San Francisco voters have considered the matter. If none of the Airport's runway build alternatives proceed, the Airport could have expended up to $9,455,100 on Phases A through C of the Wildlands, Inc. option agreement to put a hold on a property that it does not require.
Uncertain Ability to Use the Haire Ranch Site
In addition to Federal and State review and approval of the EIR/EIS mitigation proposals, the Airport's ability to use the Haire Ranch site to gain habitat mitigation credits is dependent on permits or approvals from eight different regulatory agencies:
· Bay Conservation and Development Commission
· California Department of Fish and Game
· California State Historic Preservation Office
· National Maritime Fisheries Service
· Regional Water Quality Control Board
· Sonoma County
· U.S. Army Corps of Engineers
· U.S. Fish and Wildlife Service.
Once again, the Airport may spend up to $9,455,100 on Phases A through C of the Wildlands, Inc. option agreement to put a hold on a property that it cannot use if approvals from the above-named regulatory agencies are not obtained.
The Value of Haire Ranch
The monthly option payments of $33,980 for 60 months amount to $2,038,800 which is more than the value of the Haire Ranch as agricultural land. The owners of Haire Ranch have calculated that their land is worth between $1,200 and $1,500 per acre as agricultural land, with a total value of between $1,308,000 and $1,635,000. Therefore, the cumulative monthly option payments could cost between $403,800 and $730,800 more than the total value of Haire Ranch as agricultural land.
Under the Wildlands, Inc. option agreement, the Airport is effectively paying Wildlands, Inc. and the owners of Haire Ranch more than the value of their agricultural land to continue earning agricultural revenues off their own land for up to 60 months.
If the Airport exercises its option to purchase habitat mitigation credits from the Haire Ranch site, it would reimburse Wildlands, Inc. in the amount of $16,000 per acre for a total acquisition cost of $17,440,000 for Wildlands Inc.'s purchase of the property (plus $1,395,200 in closing costs). The proposed property cost of $17,440,000 is approximately 10.7 times the maximum $1,635,000 value of the property as agricultural land.
Airfield Development Bureau staff argue that the highest and best use for the Haire Ranch site is not as agricultural land, but as restored tidal wetlands. Therefore, Airfield Development Bureau staff argue that the best comparisons of land values are:
· The 9,460 acres purchased in 1994 for the Napa-Sonoma Marsh Restoration Project, managed by the State Coastal Conservancy, at a cost of $3,679 per acre. Airfield Development Bureau staff argue that this per acre cost is low because of the high cost of reducing the site's salinity. This site is immediately adjacent to Skaggs Island.
· The 1,603 acres purchased in 2001 by the State Coastal Conservancy for Bel Marin Keys in San Pablo Bay at a cost of $9,981 per acre.
· The Cargill Salt Ponds, purchased by the Federal and State Governments in 2002 for between $12,000 and $21,000 per acre. Airfield Development Bureau staff advise that this cost reflects Cargill's commitment to reduce the site's salinity before public agencies assume control.
Given these examples, the proposed $16,000 per acre cost of the Haire Ranch site is at the high end of the range of costs presented by the Airfield Development Bureau.
Restoration Costs
According to the Baylands Ecosystem Habitat Goals report, wetland restoration projects incur widely varying costs for site acquisition, planning and permitting, construction, monitoring, and maintenance. The report estimates costs per acre ranging from $5,000 to $50,000 with most costing between $10,000 and $20,000. "The main factors that account for the large range in the costs of these projects are land acquisition and design complexity."20 Under the Airport Master Plan for the new International Terminal, for example, the average wetlands restoration cost was approximately $150,000 per acre.
Restoration of Skaggs Island wetlands could be as simple as breaching the levee surrounding the island so that it floods naturally to form tidal marshes, or it could involve considerable interventions over a number of years to develop specific wildlife habitats. The per acre habitat restoration cost would be commensurate with the required level of intervention. Assuming that the Airport exercises the option to purchase habitat mitigation credits from the Haire Ranch site, the Airfield Development Bureau has calculated a total cost per acre of between $50,000 and $60,000 to purchase and restore the site. Based on Tables 6.1 and 6.2 above, which show a combined budget of $69,167,082 for the entire project, the total cost per acre could be as high as $63,456. This is higher than the range of per acre costs cited in the Baylands Ecosystem Habitat Goals report, but lower than the cost cited in the Wetlands Research Associates' independent review. However, Airfield Development Bureau staff argue that the habitat mitigation credits to be purchased from the Haire Ranch site, if sold by Wildlands, Inc. on the open market, could cost the Airport $150,000,000, or approximately $137,615 per acre. The Airfield Development Bureau did not present documentation to substantiate this claim.
The Airport Commission has considered the Wildlands, Inc. option agreement twice. On October 16, 2001, the Airport Commission unanimously authorized the Airport Director to negotiate and enter into a no-cost, non-binding agreement with Wildlands, Inc. to determine the terms for a follow-on option agreement. On December 4, 2001, the Airport Commission unanimously authorized the Airport Director to enter into the negotiated option agreement with Wildlands, Inc. in an amount not to exceed $9,429,300. The Budget Analyst audit team has reviewed the Airport Director's briefing documents on file and the resulting Airport Commission minutes. None of these documents refer to the full costs of the Haire Ranch restoration project, inclusive of the second escrow, Phase D, and Phase E costs shown in Table 6.2 above.
Other Mitigation Site Alternatives
There are approximately 36,500 acres of Bay land, divided over nine locations in the north and south of San Francisco Bay, which are good candidates for habitat mitigation.21 The EIR/EIS documents will contain conceptual mitigation plans for each of the nine locations, thereby giving regulatory agencies and the public the opportunity to consider what would be the most appropriate mitigation for Bay fill. If a runway build alternative proceeds, mitigation sites will be selected by the regulatory agencies menu-style. The regulatory agencies could chose one or more of the sites. The 1,090 acres of Haire Ranch represent just 2.99 percent of the total Bay land identified by the Airport as potentially available and suitable for mitigation credits.
Airfield Development Bureau staff argue that considerably fewer than 36,500 acres are available of privately held land which, if restored, would recreate U.S. waters to compensate for the U.S. waters lost by filling a portion of the Bay for runways. Airfield Development Bureau staff advise that publicly held lands which are already considered U.S. waters or are already in the process of being recreated as U.S. waters (for example, the Cargill salt ponds in the South Bay) would not count towards the Airport's recreation of new U.S. waters. According to Airfield Development Bureau staff, the most likely sites to mitigate for the loss of U.S. waters would be North Bay agricultural land. Airfield Development Bureau staff estimate that the 1,090 acres of Haire Ranch represent approximately 15 percent of the approximately 7,300 acres of suitable North Bay agricultural lands, currently divided between 16 private owners, which would permit the Airport to recreate U.S. waters. Only six of the North Bay ranches exceed 500 acres. Contiguous acreage is regarded as more valuable for habitat mitigation purposes than divided acreage. While Airfield Development Bureau staff have held discussions with habitat developers to determine the costs of potentially available sites under private ownership, Airfield Development Bureau staff do not have documents which summarize the comparative costs between these alternative sites and the Haire Ranch site. Further, Airfield Development Bureau staff do not evaluate any of these potential sites as offering appropriate disposal opportunities for the 7,000,000 cubic yards of Bay mud which could have to be dredged from the runway site.
While the Budget Analyst audit teams acknowledges that determination of the mitigation requirements for any runway build option are the purview of the responsible regulatory agencies, the Budget Analyst audit team questions whether the recreation of U.S. waters is the only criteria given that the EIR/EIS documents will contain conceptual mitigation plans for nine different options, thereby giving regulatory agencies the opportunity to consider what would be the most appropriate mitigation for Bay fill.
Other Agencies Could Share the Haire Ranch Site Habitat Restoration Costs
The Federal Government has strong incentives of its own to restore Skaggs Island, as evidenced by:
· The transfer of the former naval base site from the Navy to the U.S. Fish and Wildlife Service in order to maintain public ownership.
· The working partnership with Caltrans to begin habitat restoration of the former naval base site. Caltrans is currently demolishing the naval base and clearing away the remains for a cost to Caltrans of approximately $8,000,000. Caltrans' investment permits the Federal Government to begin site investigation while Caltrans earns habitat mitigation credits for the new eastern section of the Bay Bridge.
· The plan to avoid future costs under the 1941 agreement to protect the Haire Ranch site which already costs the Federal Government an estimated $250,000 per year. For example, if the federally-owned portion of Skaggs Island is restored as tidal marsh, a new and expensive levee would have to be built around Haire Ranch to keep it dry.
Therefore, the Airport is effectively paying the high price of up to $69,167,082 to be able to earn habitat mitigation credits on a site that the Federal Government has strong incentives of its own to restore with the funding involvement of other agencies seeking opportunities to earn habitat mitigation credits. Airfield Development Bureau staff argue that:
· The Federal Government has neither the plans nor the funding to purchase Haire Ranch and restore the whole of Skaggs Island.
· Airport funding of Wildlands, Inc.'s restoration of the Haire Ranch site would permit the Airport to seek habitat mitigation credits on the adjacent 3,298 acres of Skaggs Island owned by the U.S. Fish and Wildlife Service because restoration of the Haire Ranch site would (a) reduce the Federal Government's costs of restoring and operating the rest of Skaggs Islands and would, therefore, count as a contribution to the Federal Government's restoration project and its ongoing operation, and (b) increase the total area restored.
The Airport's involvement in the Skaggs Island restoration has relieved the Federal Government of the need to develop its own plans to restore all of Skaggs Island, explore collaborative funding arrangements with other agencies requiring habitat mitigation credits, and offer the owners of Haire Ranch a sufficiently attractive price for their agricultural land.
Airfield Development Bureau Management of the Wildlands, Inc. Option Agreement
Airfield Development Bureau maintains comprehensive and orderly files on the Wildlands, Inc. option agreement to which the Budget Analyst audit team had full access. However, in response to Budget Analyst audit team requests for information to clarify information contained in those files and in the Wildlands, Inc. option agreement itself, Airfield Development Bureau stated that the City Attorney, as counsel for the City, negotiated the contract between the Airport and Wildlands, Inc. and therefore all clarification requests should be referred to the City Attorney's Office. Airfield Development Bureau staff stated that it would be inappropriate for Airfield Development Bureau staff to comment on legal issues related to the Wildlands, Inc. option agreement.
However, some of the clarification questions raised by the Budget Analyst audit team were business-related, and the City Attorney's Office referred those clarification questions back to Airfield Development Bureau. While Airfield Development Bureau staff remained reluctant to provide informative answers to most of those business-related questions, they eventually did provide the requested information. The Budget Analyst audit team questions why Airfield Development Bureau staff regarded it as necessary to withhold information about the Wildlands, Inc. option agreement if, as Airfield Development Bureau staff argue, the option agreement represents a future benefit to the City.
The Business Case
Airfield Development Bureau staff advise that in 2001, when the Airport negotiated and entered into the option agreement with Wildlands, Inc., the Airport expected to commence construction of a runway build alternative in 2004. Therefore, Airfield Development Bureau staff evaluated the Wildlands, Inc. option agreement as a way to:
· Secure a site which would definitely enable the Airport to recreate U.S. waters and earn the Airport habitat mitigation credits in the near future. The Airfield Development Bureau requested Wildlands, Inc. to plan for the highest level of restoration construction intervention to provide tidal wetlands as quickly as possible. Airfield Development Bureau staff argue that implementing a complex, more expensive habitat restoration quickly on a smaller acreage would be regarded as more valuable by the regulatory agencies than undertaking a longer but less expensive implementation on a larger acreage, because the habitat mitigation results would be more immediate, with a greater certainty of success.
· Increase the Airport's credibility with regulatory agencies by demonstrating the Airport's commitment to mitigation.
· Support regulatory agencies' goal of unifying Skaggs Island.
· Secure a disposal site for the 7,000,000 cubic yards of Bay mud which could have to be dredged from the runway site. Airfield Development Bureau staff advise that not only would the Haire Ranch site provide a cheaper disposal site than an ocean disposal site, but disposal of Bay mud there would actually accelerate the restoration of the Haire Ranch site due to the need to increase the land height in certain places since all of the Haire Ranch site is currently below sea level.
The Budget Analyst audit team notes, however, that since 2001 the economic situation has deteriorated markedly, and the draft EIR/EIS is not now scheduled to be released until 2005 at the earliest. Therefore, given the time needed to obtain regulatory agency feedback on the draft EIR/EIS, and to permit voter consideration of any proposals to fill a portion of the Bay, construction of a runway build alternative, if selected, could not now commence until 2007 at the very earliest. Therefore, the Airfield Development Bureau is making option payments for longer than it originally anticipated. Each year's delay until December 31, 2006 costs $407,760 in monthly option payments (12 months, at $33,980 per month). Airfield Development Bureau staff advise that since the Airport and Wildlands, Inc. have not negotiated the cost of extending the option agreement beyond December 31, 2006, the cost of additional years is unknown.
Despite these considerations, in the Airport Director's May 7, 2003 letter to the Board of Supervisors advising them that most Runway Reconfiguration Project contracts had been suspended, with the exception of ongoing scientific studies, the Airport Director advised the Board of Supervisors that the monthly option payments to Wildlands, Inc. should continue. On May 14, 2003, the San Francisco Airline Liaison Office, the association representing the airlines which operate at the Airport, wrote to the Board of Supervisors advising that "the Airlines do not support continuation of payments by the Airport related to the Option Agreement entered into by the Airport for a tract of land at Skaggs Island."
Conclusions
The future need for the Haire Ranch site is unknown because the Airport cannot know whether or not the Runway Reconfiguration Project can go forward until after regulatory agency review of the draft EIR/EIS and after San Francisco voters have considered the matter.
The Airfield Development Bureau's ability to use the Haire Ranch site to earn habitat mitigation credits is unknown because that decision depends on permits or approvals from eight different regulatory agencies.
As agricultural land, Haire Ranch has a maximum value of $1,635,000. The Airport is proposing to reimburse Wildlands, Inc. for a total acquisition cost of $17,440,000 which is approximately 10.7 times the maximum value of the property as agricultural land. At that cost, Haire Ranch is also expensive when considered in relation to other sites purchased for habitat mitigation purposes.
The total cost of maintaining the Haire Ranch option agreement, reimbursing Wildlands, Inc. for its purchase of the property, and restoring the site is estimated to be $69,167,082. This cost estimate was not presented to the Airport Commission.
There are approximately 36,500 acres of Bay land which are good candidates for habitat mitigation. The 1,090 acres of Haire Ranch represent just 2.99 percent of this potentially available land.
The option agreement has relieved the Federal Government of the need to develop its own plans to restore all of Skaggs Island, explore collaborative funding arrangements with other agencies requiring habitat mitigation credits, and offer the owners of Haire Ranch a sufficiently attractive price for their agricultural land.
Since 2001, when the option agreement was negotiated, the economic situation has deteriorated markedly, and the draft EIR/EIS is now not scheduled to be released until 2005 at the earliest. Therefore, any runway build alternative, if approved, could not now commence until 2007 at the earliest. Each year's delay costs $407,760 in monthly option payments.
Recommendations
The Airport Commission should:
6.1 Terminate the Wildlands, Inc. option agreement.
6.2 Apply the balance of the Wildlands, Inc. budget of $8,713,463 to the purchase of habitat mitigation credits once the regulatory agencies and San Francisco voters have determined whether a runway build alternative will go forward, and what habitat restoration needs to occur to mitigate the environmental impacts of Bay fill.
Costs and Benefits
Under the Wildlands, Inc. option agreement, the Airport could expend up to $69,167,082, or $63,456 per acre, to maintain its option agreement, and to reimburse Wildlands, Inc. for its purchase of the Haire Ranch site and restore it. At a budgeted cost of $2,038,800 (60 monthly payments of $33,980), the option agreement payments alone would, over 60 months, exceed the estimated value of the site as agricultural land by between $403,800 and $730,800. The estimated property purchase price of $17,440,000 is $16,000 per acre (multiplied by 1,090 acres), or approximately 10.7 times the maximum $1,635,000 or $1,500 per acre value of the property as agricultural land.
As shown in Table 6.1, the Airport has already expended $537,757 on the Wildlands, Inc. option agreement as of February 24, 2003. Since that time, it has spent a further $135,920 on four months of option payments at $33,980 per month (March through June of 2003), for a total expenditure of $673,677. By terminating the option agreement now, the Airport would only be liable for an additional $67,960 in option agreement payments (two monthly payments of $33,980) over and above what it has already paid due to the 60-day termination clause which is the equivalent of two monthly payments at $33,980 per month. Therefore, the Airport could cap its expenditures on the Wildlands, Inc. option agreement at $741,637 ($673,677 in current expenditures, plus the two monthly payments of $33,980 required under the 60-day termination clause). By capping expenditures at $741,637, the Airport would save $1,353,463 of the $2,095,100 budgeted for first escrow and the 60 months of option agreement payments. The balance of $7,360,000 would be available for future mitigation opportunities.
1 The term of the Wildlands, Inc. option agreement commenced in January of 2002 (when Wildlands, Inc. submitted its first invoice) and extends to the earliest of either (a) nine years later, in December of 2010, (b) the close of second escrow, or (c) December 31, 2006 if the City has not yet funded Wildlands, Inc. to purchase Haire Ranch, and Wildlands, Inc. has not independently acquired Haire Ranch. The monthly option payments of $33,980 have a maximum term of 60 months, from January of 2002 until December of 2006.
2 This report, which was prepared by over 100 scientists from around the Bay Area, was supported by the U.S. Environmental Protection Agency, the California Water Resources Control Board, the California Department of Fish and Game, the Bay Regional Water Quality Control Board, and the Bay Conservation and Development Commission.
3 Airport Director's briefing to the Airport Commission's October 16, 2001 meeting, Habitat Mitigation Option Agreement with Wildlands, Inc.
4 Wildlands, Inc. was established in 1991 by CEO/CFO Steve Morgan as a for-profit habitat development and management company which establishes and manages wetlands and wildlife habitat through public and private sector projects. Wildlands, Inc. is based in Citrus Heights, California, and employs ecologists, biologists, planners, landscape architects, computer assisted design (CAD) operators, geographic information system (GIS) specialists, and construction contractors. Wildlands, Inc. is experienced in San Francisco Bay mitigation issues. In 1999, Wildlands, Inc. completed a large tidal wetland restoration design and mitigation plan, South Bay Restoration Cost Study, for Cargill Salt Company, in which it provided two detailed restoration alternatives for more than 22,000 acres of salt ponds owned by Cargill and the U.S. Fish and Wildlife Service. As a subcontractor to Jones and Stokes Associates, Wildlands, Inc. has developed habitat restoration plans for both the north of San Francisco Bay (18,637 acres) and the south of San Francisco Bay (17,463 acres) mitigation proposals for the Runway Reconfiguration Project.
5 The Controller certified the Wildlands, Inc. option agreement on March 21, 2002. Wildlands, Inc.'s own option agreement with the Haire Ranch owners commenced in January of 2002, and therefore Wildlands, Inc. made the first two monthly option payments for January and February of 2002 at its own risk. In March of 2002, after the Controller's certification, the Airport retrospectively reimbursed Wildlands, Inc. for the monthly option agreement costs for January and February of 2002.
6 According to the City Attorney's Office, Sections 8.4.3 through 8.4.6 of the Airport's option agreement with Wildlands, Inc. (the "Airport/Wildlands Agreement") cover the assignment of the option agreement between the Haire Ranch owners and Wildlands, Inc. (the "Haire Property Agreement") to the City upon termination of the Airport/Wildlands Agreement., and Section 10.3 of the Airport/Wildlands Agreement allows the City to cure any Wildlands, Inc. defaults at Wildlands, Inc.'s expense.
Under Section 8.3 of the Haire Property Agreement, the Haire Ranch owners are not permitted to terminate the option agreement with Wildlands, Inc. without first giving the Airport notice of the default and an opportunity to cure. This provision was further confirmed in an estoppel certificate signed by the Haire Ranch owners for the City's benefit. The City Attorney's Office also notes that so long as the City continues to pursue the Haire Ranch property, all work performed by Wildlands, Inc. shall be owned by the City under Section 9.5 of the Airport/Wildlands Agreement.
7 The amount of $9,429,300 also appears in Paragraph 3.4.1 of the option agreement as the Contract Guaranteed Maximum Amount. However, the budget contained in Table 6.1 exceeds this maximum cost of $9,429,300 by $25,800.
8 On December 4, 2001 the Airport Commission approved the Wildlands, Inc. option agreement (Resolution 01-0358). By authorizing the "first phase" of the option agreement under that resolution, the Airport Commission approved the close of the first escrow and Phase A work, at a not to exceed cost of $2,142,300. This is $77,800 less than the above $2,220,100 budget for first escrow and Phase A services.
9 Applicable to the second escrow property purchase price.
10 This represents $25 per acre per month.
11 The total estimated cost for Phase A services in Paragraph 3.4.1 of the option agreement is $2,166,000. This is $2,200 more than the above $2,163,800 budget for Phase A services.
12 The Airport would fund long-term maintenance of the Haire Ranch site by paying total maintenance costs into an endowment fund which will then be used by Wildlands, Inc., or its successor, to maintain the habitat for the period required under the applicable permits.
13 The incentive fee increases as the endowment fund decreases.
14 The total estimated cost for Phase B services in Paragraph 3.4.1 of the option agreement is $4,293,000.
15 The total estimated cost for Phase C services in Paragraph 3.4.1 of the option agreement is $2,942,000.
16 Under the option agreement, if the Airport exercises its option to purchase mitigation credits from the Haire Ranch site, it will fund Wildlands, Inc. to purchase the property at a cost of $17,440,000, plus $1,395,200 for closing costs of $18,835,200. Wildlands, Inc. will become the property title owner in perpetuity unless (a) Wildlands, Inc. defaults, or (b) the Airport and Wildlands, Inc. cannot negotiate a mutually agreed Restoration Contract under Phase D of the option agreement and a mutually agreed Maintenance and Monitoring Contract under Phase E of the option agreement. In those cases, the property title ownership can be transferred to another party. Airfield Development Bureau staff argue that this approach reduces risk for both Wildlands, Inc. and the Airport. The arrangement permits Wildlands, Inc. to hold property title ownership of the asset, while ensuring a client up front (in this case, the Airport) for the habitat mitigation credits created by Wildlands, Inc.'s restoration of the property, with the restoration costs being met by that client. Simultaneously, the arrangement permits the Airport to pay progressively for the restoration costs as they are incurred, at a much lower profit margin (Airfield Development Bureau staff advise that Wildlands, Inc. is charging approximately 15 percent), rather than at open market rates which Airfield Development Bureau staff advise typically have a 65 percent profit margin.
17 Mr. Spencer A. Sherman, in his January 25, 2002 San Francisco Chronicle article "Cultivating a deal: Skaggs Island hay farmer holds key for trade-off plan to expand SFO runways," quotes Mr. Jim Haire, the current owner of Haire Ranch, as follows, "For Haire, 60, it may mean windfall of $16 million, or about $15,000 per acre ... If [Mr. Haire] were to see the place as a hay farm, he figures it would be worth $1,200 to $1,500 per acre, or a maximum of $1.65 million." The article goes on to cite Ms. Marge Kolar, Refuge Manager for the San Francisco Bay Wildlife Refuge Complex, as saying that the Airport's Haire Ranch offer "is much higher than anything that has ever been purchased in that area." Ms. Kolar is reported as saying that a nearby 10,000 acres of salt flats had recently been purchased by the California Department of Fish and Game for $1,000 per acre.
18 The amount of $35,876,782 is an estimate negotiated between the Airport and Wildlands, Inc. Since the components of this estimate are considered by Wildlands, Inc. to be proprietary business information, the budget breakdown is secured in the escrow documents. However, Airfield Development Bureau staff advise that the $35,876,782 estimate incorporates $17,000,000 for the disposal of 7,000,000 cubic yards of Bay mud which could have to be dredged from the runway site.
19 November 27, 2001 letter from Dr. Michael Josselyn, Wetlands Research Associates, Inc. to the Airfield Development Bureau.
20 San Francisco Bay Area Wetlands Ecosystem Goals Project, Baylands Ecosystem Habitat Goals: A Report of Habitat Recommendations, pp.172-173.
21 By consolidating potential mitigation sites together into nine 1,000 to 2,000 acre locations, the sites form ecological complexes which provide the best habitat for wildlife. Large sites are preferred by the regulatory agencies because they best protect threatened ecosystems.