In Sierra Club v. Van Antwerp, decided by the U.S. Court of Appeals for the District of Columbia Circuit, the Army Corps of Engineers approved a permit under the Clean Water Act (the Act) authorizing the fill of approximately 54 acres of wetlands for the construction of a large town center outside of Tampa, Florida.  In issuing the permit, the Corps found that the alternatives to the project—such as reducing its size to lessen the impacts to wetlands—were impracticable for economic reasons.  While the court found some minor deficiencies in the permit, it upheld the Corps’ economic analysis and reversed the lower court’s finding that this analysis violated the Act.

Under the Clean Water Act and its implementing regulations, the Corps may issue a wetlands permit for a project only if no practicable alternative to the project exists that is less damaging to the aquatic system.  An alternative is practicable “if it is available and capable of being done after taking into consideration cost, existing technology, and logistics in light of overall project purposes.”  The regulations distinguish between projects that are “water dependent” (such as a port or a marina) and projects that are “non-water dependent” (such as housing or a shopping mall).  For non-water dependent projects, there is a presumption that a practicable alternative exists that would avoid or reduce impacts to aquatic resources.  To obtain a wetlands permit for such a project, the applicant must rebut the presumption by clearly demonstrating that no such practicable alternative exists.  Especially for non-water dependant projects, the alternatives requirement is often the steepest hurdle that project proponents face in seeking wetlands permits from the Corps. 

In granting a wetlands permit for the town center, the Corps accepted the applicant’s demonstration that reducing the project size was economically infeasible.  Based on several market studies submitted by the applicant, the Corps found that an 8% rate of return was a reasonable minimum for the project’s economic viability.  The Corps then measured the expected rate of return against the total project costs.  The major component in defining these costs was the nearly $73 million market value of the project site at the time of the permit application, which is the figure used by the Corps instead of the $52 million the applicant paid to acquire the site.  The Corps reasoned that the use of the site's market value properly accounted for the applicant's “opportunity cost," which is the amount the applicant foregoes by developing the site instead of selling it for a profit.

The Corps also agreed with the applicant that it was not economically feasibly to reduce the number of parking spaces, which accounted for nearly half of the project’s wetlands impacts.  The applicant had demonstrated that while the project included a higher proportion of parking than any other mall in the area, additional parking was needed for the project due to the higher proportion of restaurants. 

After the permit was issued was in 2007, concerns arose about unauthorized discharges into the wetlands and a nearby creek.  The Corps reopened the permit and modified some of the permit’s storm water management and mitigation measures.  In reissuing the permit in 2009, the Corps did not update the prior economic analysis.

The district court rejected the Corps’ economic analysis.  In the court’s view, the record contained conflicting evidence on the appropriate rate of return, and there was no clear and convincing showing that “anything less than an 8% rate of return would be impracticable.”  It also held that the Corps erred in using the fair market value of the project site instead of the actual amount the landowner had paid.  And it stated that while fewer parking spaces would make the project less desirable for the applicant, that fact did not establish impracticability under the Clean Water Act.  The ruling would have established a new precedent to support challenges against findings of economic impracticability by the Corps in the wetlands permitting context. 

But the Court of Appeals reversed the lower court's ruling that the Corps' economic evaluation conflicted with the Act.  The appeals court first upheld the Corps’ use of fair market value rather than the acquisition cost for several reasons:

• Opportunity costs are a well-recognized economic metric.  An important part of the cost analysis is what the landowner foregoes by not realizing the profits from selling the land at its market value.

   

• Where the analysis involves a potential alternative site that the applicant has not yet acquired, costs will necessarily be evaluated in terms of the site’s market value.  To make a meaningful comparison, the costs of proceeding on the proposed project site should similarly be based on market value.
• Reliance on market value minimizes subjective, applicant-specific factors.  Reliance on the applicant’s acquisition costs could make an alternative practicable for one applicant, but impracticable for another.

The court also rejected the claim that the Corps, in reissuing the permit in 2009, should have updated the site’s market value to reflect the sharp drop in land prices as a result of the 2008 economic crisis.  The court reasoned that because the only reason for reopening the permit was to address effects on water quality, it was reasonable for the Corps to limit the scope of its reevaluation to “ecological matters.” 

The court next upheld the Corps’ use of an 8% rate of return.  The court pointed to the applicant’s market studies showing that other mall projects in the area were making returns of 7.6% to 10%.  It noted that the low end of this range reflected returns on completed malls, and that the studies emphasized the need to account for the risk factors involved in calculating the minimum acceptable rate for an as-yet-unbuilt mall.

The court also upheld the Corps’ decision that reducing the number of parking spaces was not a practicable alternative.  The court emphasized the language of the regulations, which requires that practicability be assessed in light of the project’s purpose.  Here, the purpose was to create a “town center,” not a traditional mall.  The court further noted that the plaintiffs did not put forth any evidence showing that a traditional mall on the site would have earned the requisite 8% rate of return necessary to make the project profitable.

Accordingly, the court ruled that the Corps conducted a reasonable economic analysis that fully complied with the Clean Water Act.  The effect of the ruling is to restore the status quo for how the Corps evaluates economic factors such as project cost and profitability when considering applications for wetlands permits.  The ruling therefore provides important guidance on economic practicability in the wetlands permitting context.

© 2011 Perkins Coie LLP