October 29, 2008
California Wildlife Agency Approves Form Surety Bond to Guarantee Mitigation Projects, Lowering Up-Front Costs and Streamlining Process
Holland & Knight Alert
A new and potentially less burdensome financial guarantee option is now available to project proponents facing extensive mitigation costs for aquatic resources and species impacts. The California Department of Fish & Game (“Department”) can now accept surety bonds under a pilot program developed with the involvement of Holland & Knight attorneys.
For larger projects, mitigation obligations stemming from California Endangered Species Act (Fish & Game Code Section 2080 et seq.) take authorizations and Lake and Streambed Alteration Agreements (Fish & Game Code Section 1600 et seq.) may involve substantial restoration projects and long-term monitoring and maintenance obligations. If the mitigation cannot be completed before construction activities commence, the Department requires financial assurances to guarantee completion.
Until this bond form was approved, the Department policy was to accept only letters of credit from banks or cash deposits to guarantee the costs of mitigation plans and would not accept bonds. However, banks frequently require that a permittee maintain sufficient cash or security-backed assets to cover the entire amount of a letter of credit. Cash deposits lock up assets that a permittee may need for project development or mitigation itself. For large, long-term projects with multi-year mitigation commitments, this up-front cost creates a significant burden. In contrast, a bond surety acts as an insurer for a fee, which typically lowers the up-front costs.
Over nearly two years of negotiations, Holland & Knight attorneys worked closely with the Department, bond companies and project developers to draft a bond form and instructions. The California Attorney General and Office of Administrative Law approved the form on October 23, 2008. As a pilot project, this surety bond option is currently available only to projects with $1 million or more in mitigation obligations and will sunset in 2013, unless extended.
A Step in the Right Direction
The Department’s willingness to accept surety bonds represents a step in the right direction for large projects, since this financing burden has slowed down or halted projects. Note, however, that as a pilot project, each project will need to be reviewed and approved for the use of the approved bond form. Project proponents will need to review the bond form and instructions carefully with their bond representative and plan to have the application reviewed by their Department project manager.
With positive feedback and demonstrated success, we are encouraged that the Department may extend the surety bond option past its pilot period and offer the option to smaller-scale projects. Therefore, we encourage all eligible projects to take advantage of this new option during the pilot period in order to ease their own processes and to build a record of success. We look forward to assisting clients to benefit from this option.
For larger projects, mitigation obligations stemming from California Endangered Species Act (Fish & Game Code Section 2080 et seq.) take authorizations and Lake and Streambed Alteration Agreements (Fish & Game Code Section 1600 et seq.) may involve substantial restoration projects and long-term monitoring and maintenance obligations. If the mitigation cannot be completed before construction activities commence, the Department requires financial assurances to guarantee completion.
Until this bond form was approved, the Department policy was to accept only letters of credit from banks or cash deposits to guarantee the costs of mitigation plans and would not accept bonds. However, banks frequently require that a permittee maintain sufficient cash or security-backed assets to cover the entire amount of a letter of credit. Cash deposits lock up assets that a permittee may need for project development or mitigation itself. For large, long-term projects with multi-year mitigation commitments, this up-front cost creates a significant burden. In contrast, a bond surety acts as an insurer for a fee, which typically lowers the up-front costs.
Over nearly two years of negotiations, Holland & Knight attorneys worked closely with the Department, bond companies and project developers to draft a bond form and instructions. The California Attorney General and Office of Administrative Law approved the form on October 23, 2008. As a pilot project, this surety bond option is currently available only to projects with $1 million or more in mitigation obligations and will sunset in 2013, unless extended.
A Step in the Right Direction
The Department’s willingness to accept surety bonds represents a step in the right direction for large projects, since this financing burden has slowed down or halted projects. Note, however, that as a pilot project, each project will need to be reviewed and approved for the use of the approved bond form. Project proponents will need to review the bond form and instructions carefully with their bond representative and plan to have the application reviewed by their Department project manager.
With positive feedback and demonstrated success, we are encouraged that the Department may extend the surety bond option past its pilot period and offer the option to smaller-scale projects. Therefore, we encourage all eligible projects to take advantage of this new option during the pilot period in order to ease their own processes and to build a record of success. We look forward to assisting clients to benefit from this option.