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THE WALL STREET JOURNAL / CALIFORNIA
Economic Focus
`Butterfly Bank' May Save Insects -- and Developers
By Ryan Tate
Special to The Wall Street Journal

04/14/1999
The Wall Street Journal
CA1
(Copyright (c) 1999, Dow Jones & Company, Inc.)

California's newest bank, which opened earlier this month in Riverside County, doesn't offer checking accounts or automated teller machines.

It's the state's only "butterfly bank."

Launched by Escondido developer Greg Reden, it provides what proponents say is a market-based way to end the battle between developers -- eager to build on prime Southern California land -- and environmentalists, determined to protect one of the region's most fragile creatures: the quino checkerspot butterfly.

For Mr. Reden -- who with his partners at Johnston, Poutre & Reden Inc. owns 2,000 acres of butterfly habitat east of Temecula -- the butterfly bank offers a chance for financial redemption.

"All my money is on this project," says Mr. Reden, 48. "I'm praying."

The pivotal figure in the project is the quino checkerspot, which once ranged throughout Southern California but is now confined to just two locations: western Riverside County and the Otay Mesa area of San Diego. Since it was declared an endangered species in 1997, developers have dreaded discovering the red, yellow and black butterfly on their property. The federal Endangered Species Act restricts destruction of the habitat of any species so designated.

Or, as Borre Winckel, president of the Southern California Building Industry Association, puts it: "If you find quino, it sends a red flag, and you're screwed."

That is what happened to Mr. Reden. In 1987, his firm bought 2,800 acres called Silverado Ranch near the unincorporated town of Anza, planning to turn it into "ranchettes" of five to 20 acres each. Some 800 acres had already been developed when endangered species started turning up: the kangaroo rat three years ago, followed two years later by the quino checkerspot.

Mr. Reden saw one hope of rescue: Under a 1981 amendment to the Endangered Species Act, property owners may destroy some habitat, provided they come up with an acceptable plan to preserve equivalent habitat elsewhere. The Fish and Wildlife Service, which administers the act, must approve the plan.

As a result, the government may allow builders to destroy a large amount of low-quality habitat if the builders also agree to preserve a smaller amount of higher-quality habitat. What makes it palatable for developers is that land that's generally the best for the endangered species is less valuable to builders, since it's often isolated from other development. So they get to develop more-valuable parcels, while preserving parcels that are less valuable.

"All habitat is not created equal," explains Dennis Murphy, a University of Nevada-Reno entomologist who helped write the portion of the Endangered Species Act covering the quino checkerspot. "You cannot necessarily take this incredibly small remnant distribution of butterfly, carve its habitat up into pieces and still ensure species survival."

Mr. Reden's land happened to be prime territory for the butterfly, far superior to other areas where it also lived. He proposed selling portions of his property to developers who own that less-prime butterfly land. Those developers would deed the Silverado Ranch land as a butterfly preserve in perpetuity, in exchange for the right to develop their other property.

The Fish and Wildlife Service had opened similar conservation banks for other species, or authorized their establishment by other public agencies; indeed, Riverside County runs such a preserve for the kangaroo rat. But Mr. Reden's butterfly bank is the first privately owned preserve in the county, and the first preserve of any kind devoted to the checkerspot.

There proved to be plenty of demand: In its first week, which ended last Friday, the bank sold off a tenth of its land -- at $10,000 per acre. There were two buyers, one preserving butterfly habitat and the other preserving kangaroo rat habitat. So hot is the property that Mr. Reden says future acres will cost $15,000; his firm figures to make as much as $20 million in all -- about what he thinks it would have made if the original development plans had gone ahead unimpeded.

Local developers are eager to buy the credits because they are poised to exploit one of the nation's hottest housing markets. The Building Industry Association projects that southwestern Riverside County will add 1.4 million new residents in the next two decades.

And as developers rev up their bulldozers, politicians, scientists and environmentalists are looking at the bank as a way out of future ecological gridlock.

"It's the wave of the future," says Rick Hoffman, an aide to Riverside County Supervisor Jim Venable, whose district includes Silverado Ranch. "The previous thought process was that if you had occupied habitat on your property, it was valueless. Well, that is no longer the case."

Adds Prof. Murphy: "If you can put together a defensible banking scheme for this species, you can do conservation anywhere."

To establish his bank, Mr. Reden had to negotiate an intricate agreement with federal officials specifying how the habitat would be maintained.

For example, Mr. Reden's firm must burn away certain kinds of vegetation each year to guard against wildfires. And it had to stipulate that the land would be preserved "in perpetuity." (To guard against the possibility that developers won't want to buy all 2,000 acres, Mr. Reden and his partners are adding only one-third of their land at a time to the conservation bank). Mr. Reden's firm and the Fish and Wildlife Service also had to agree on the distribution, density and size of the quino checkerspot population.

There lies one of the potential pitfalls for the Silverado Ranch plan: No checkerspot has yet been seen there this year -- and unless one is, the first sale for butterfly habitat will be canceled, and the buyer will have to go shopping elsewhere.

There are other pitfalls as well. Among the biggest right now is that the Fish and Wildlife Service is "overwhelmed" with requests from developers for butterfly surveys and permits to buy conservation credits, according to field supervisor Jim Bartel. And an agreement between the service, county planning officials and developers to streamline that process is not expected to be completed for at least two years.