Designing and Financing Transactions to Conserve Biodiversity and Lands Important to Biodiversity

• Author: Robert B. McKinstry Jr., James McElfish, and Michael Jacobson
• Pages: 347-366

Chapter 21

Designing and Financing Transactions

to Conserve Biodiversity and Lands

Important to Biodiversity1

by Robert B. McKinstry Jr., James McElfish, and

Michael Jacobson

I. Introduction

There are many types of transactions essential to long-term biodiversity con-

servation that require financing. Thus, the long-term protection of biodi-

versity often depends upon a government, organization, or individual being

able to finance a transaction. For example, acquisitions of land or conserva-

tion easements by government entities or land trusts, large ecological resto-

ration projects, and the establishment of trust accounts to finance manage-

ment of a property for the foreseeable future all require the dedication of sig-

nificant amounts of capital. In some cases, this capital must be made avail-

able in a short period of time, such as when a piece of property critical to

biodiversity conservation but attractive as a shopping center,landfill, or resi-

dential development site, comes on the market.

There are a variety of mechanisms whereby a government can generate

the capital funds to allow it either to undertake such a project for biodiversity

conservation itself or to encourage the dedication of private capital to fund

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1. Some of the discussion in this chapter has been adapted from an analysis of

laws prepared by James McElfish, an analysis of methods for land protection

prepared by Robert B. McKinstry Jr. and Michael Jacobson, and an analysis of

best management practices and best stewardship practices prepared by

McKinstry, Emily B. Schwartz, and Curtis P. Wagner for the Pennsylvania

Biodiversity Partnership (PBP) and the Pennsylvania Department of Conser-

vation and Natural Resources (PDCNR) and is used by their permission. The

three articles are identified on the PBP website at http://www.pabiodiversity.

org and will be posted on that website in the future. The views expressed here

are solely those of the authors and should not be deemed to represent the views

of either the PBP or the PDCNR.

such projects. Many of the incentives discussed in Chapter 21 of this book

that encourage the long-term conservation or management of land for bio-

diversity conservation purposes involve the use of government revenues to

encourage the dedication of private capital for these purposes. However,

even these government mechanisms that directly or indirectly provide capi-

tal, such as grant programs, require financing. For example, grant programs

must be funded by way of bonds, dedicated taxes, and other funding pro-

grams. Moreover, these government incentives often provide insufficient

capital by themselves or are not well enough targeted to encourage the con-

servation of a particular parcel. For example, tax deductions will encourage

preservation of only some lands valuable to biodiversity and are inadequate

to fund the conservation of all lands. One grant program, alone, may present

inadequate funding for an integrated land conservation program and may re-

quire supplementation with other incentives.

A number of incentives, particularly bond and trading programs, will en-

courage the dedication of private capital that can be targeted for a particular

biodiversity conservation project. In project financing, these incentives can

be integrated to encourage use of private capital, which is supplemented by

tax-exempt bonds that are repaid with proceeds generated by a project. Fre-

quently, multiple incentives are put together to make a project a reality.

Some of these mechanisms for raising capital and their application to

biodiversity conservation projects are described below.

II. Issuance of Bonds to Acquire Easements or Land

The government’s ability to issue bonds, particularly tax-exempt bonds, is a

critical tool often used to protect land to preserve biodiversity. Proceeds

from the bonds can be used by the government to fund projects that it under-

takes itself or to provide capital for projects that it wants to encourage. One

of the principal incentives provided by tax-exempt financing arises from the

fact that government obligations are exempt from federal income tax. This

allows the government to borrow at a lower interest rate.2The bond proceeds

can be used immediately to finance projects and be paid off over a longer pe-

riod of time at favorable interest rates.

Generally, there are two types of tax-exempt bonds—general obligation

bonds (GO bonds) and revenue bonds. GO bonds are general obligations of

the public government, and the payment of interest and principal is secured

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2. This is because an investor is primarily interested in the after-tax return that

an investment bears. If, for example, an investor pays state and local income

taxes equal to 30%, a taxable bond that pays 10% would pay only 7% after

taxes. A non-taxable bond offering anything more than 7% would produce a

higher after-tax yield. If a government borrows at a tax-exempt rate and can

make its borrowing “available” to a project, the project will have lower bor-

rowing costs.