The Forest Resilience Bond: Structural Design and
Contribution to Water Management in Collaborative Forest
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U.S. EPA Water Infrastructure and Resiliency Finance Center
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Background
In the face of urgent forest management challenges, the U.S. Forest Service (USFS, Forest Service) has been
investing in new approaches to land management. Catastrophic wildfire, aggravated by their increasing size and
severity, the growing length of fire seasons, the onslaught of invasive species, the increasing incidence of
drought, and epidemics of forest insects and disease increase demand for these investments. The Forest Service
has identified shared stewardship as the most effective approach to wildfire management. Working closely with
states, USFS's goal is to expand the scale of coordinated planning among stakeholders and across political and
ownership boundaries.1 The Forest Service's coordinated forest management efforts reflect the challenge
presented by the incidence, velocity, and scale of wildfire growth in the second decade of the 21st Century.
Congress has played an active role in redefining the authority and the mission of the USFS in the development
and implementation of new collaborative forest management approaches to meet increasing challenges.
Congress's efforts included the 2009 Forest Landscape Restoration Act, which established the Collaborative
Forest Landscape Restoration Program (CFLRP). The purpose of the Act was to encourage the collaborative,
science-based restoration of ecosystems in priority forest landscapes. CFLRP was established to serve the Act's
public policy objectives by institutionalizing collaborative forest restoration efforts. Congress provided CFLRP
funding to support a 10-year restoration strategy on multi-ownership forest parcels in excess of 50,000 acres.
Between 2010 and 2018, CFLRP has established 23 collaborative projects to reduce fire risk, improve forest
conditions, and protect municipal watersheds.2 As a result, more than $90 million in partner investments were
secured for work on National Forest System lands and another $207 million were secured for investments on
state, private, and other federal lands. The 2014 Farm Bill expanded collaborative authority by formally
establishing the national scope of the Good Neighbor Authority (GNA), initiated as a pilot in 2001. The GNA was
designed to expand federal capacity to implement and plan restoration work on federal lands by facilitating
partnerships with state agencies. In 2018, the USFS reported that 163 GNA agreements had been signed in 25
1 "Toward Shared Stewardship Across Landscapes: An Outcome Based Investment Strategy" US Forest Service, 2018
https://nrcs.usda.gov/wps/PA NRCSConsumption/download?cid=nrcsl463885&ext=pdf
2 https://www.fs.fed.us/restoration/CFLRP/
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The Forest Resilience Bond: Structural Design and Contribution to Water Management in Collaborative
Forest Restoration Partnerships
states. More recently, the 2018 Consolidated Appropriations Act provided authority to update internal
processes, including a streamlined federal environmental review process that is required by the National
Environmental Policy Act (NEPA), to increase efficiency. The Act directed the USFS to advise as to how it would
leverage the new authorities. USFS responded with the development of its Shared Stewardship Strategy, which
is predicated on an outcome-based investment approach that relies on larger scale partnerships enabled by the
improved USFS processes. The report clearly identified the challenge and the response in stating that:
"(T)he Forest Service and our partners have limited budgetary and other resources; even pooled, these resources
cannot begin to treat all the landscapes in need. In an era of megafires that sweep across landscapes in multiple
ownerships, no single entity can meet the challenge alone at the scale needed to reduce fire risk across broad landscapes.
The belief that individual landowners and land managers can and should shoulder all responsibility for disturbance-related
risks within their own jurisdictions is outdated. The risk is at scales that are simply too great.
Clearly, targeted investments are needed at the scale of shared landscapes, including partner contributions of resources.
We need shared approaches at the scale of the challenges we face within the wildlandfire environment, using shared
resources for the right kinds of investments in the right places. We can improve the wildland fire system by joining with
partners and stakeholders to make smart choices about where we work—shared decisions that are both strategic and
effective—investments that can truly make a difference at an all-lands scale."
From "To ward Shared Stewardship Across Landscapes: An Outcome-Based
Investment Strategy," U.S. Forest Service, 2018
Solving resource challenges is core to the success of nationally scaled forest management partnerships. With the
Forest Service's vision for shared stewardship in mind, the USFS National Partnership Office initiated a grant
program to support the implementation of innovative finance models that leverage private capital needed to
boost investment in National Forest System resilience and that of surrounding lands. The Forest Resilience Bond
finance model is one such innovative finance initiative, supported in part by the National Partnership Office. The
Yuba Project Forest Resilience Bond, the first application of this financing model, is the focus of this report.3,4
3 USFS Good Neighbor Authority, https://www.fs.usda.eov/manaeine-land/farm-bill/ena
4 USFS Shared Partnership Strategy, https://www.fs.usda.eov/sites/default/files/toward-shared-stewardship.pdf
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The Forest Resilience Bond: Structural Design and Contribution to Water Management in Collaborative
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The Yuba Project Forest Resilience Bond: An Overview
The inaugural Forest Resilience Bond (FRB) financing was undertaken in late 2018 to provide up to $4 million
over a 5-year period to fund a portion of a forest restoration project on the Tahoe National Forest in California's
North Yuba River watershed (the Yuba Project). The project protects and restores 15,000 acres of forest from
catastrophic wildfire while providing additional water related and rural community co-benefits. This financing
approach could lead the way for wider collaborative investment initiatives that would accelerate efforts to meet
forest restoration needs and reduce severe forest fire risk to local populations, local economies, and public
water supplies. The FRB is a first of-its-kind financing secured by a contractual payment stream from a third-
party water utility agency, the Yuba Water Agency (Yuba Water), and grant awards provided by the State of
California's Department of Forestry and Fire Protection (CAL FIRE). One of the main purposes of the Yuba Project
is to invest in critical forest fire risk mitigation to reduce the incidence and intensity of highly destructive crown
fires.5 The benefits are also expected to reach beyond the protection of forest resources as the work also
protects water quality while also enhancing water flows for downstream water supply and habitat needs.
This collaboration - among the USFS, the National Forest Foundation (NFF), the state of California, Yuba Water,
and investors - is facilitated through the FRB Yuba Project I LLC (LLC). The LLC operates as a Special Purpose
Vehicle (SPV) and serves as the debt issuer. The LLC mitigates the financial risks of all parties to the project to
the greatest extent possible. Blue Forest Conservation (Blue Forest), a 501 (c)(3) non-profit, is the project
investment developer and the project sponsor. The parties to the project were driven to engage in the Yuba
Project by the opportunity to pilot a funding approach that could attract private capital to accelerate and scale
forest restoration efforts beyond what public funding alone can support.
Yuba Water recognized the ecosystem service benefits resulting from a successful forest restoration. Yuba
Water also recognized that making a contractual payment obligation allows the project sponsor to accelerate
the project timeframe by securitizing investor financing, in part, with a pledge of Yuba Water contract revenues.
5 2020 was a devastating fire season. Through September, California had experienced five of its six largest fires in its history burning twice
the acreage that had burned in 2018. (Governor Newsom September 28, 2020 letter to President Trump, https://www.gov.ca.gov/wp-
content/uploads/2020/09/9.28.20-Presidential-Maior-Disaster-Request.pdf.) In the ten years prior to 2020, California had seen 5 of the
10 largest fires and 7 of the 10 most destructive fires in the United States, in part attributable to lack of timely investment in forest
restoration. https://www.theatlantic.com/science/archive/2019/07/climate-chanee-500-percent-increase-california-wildfires/594Q16/
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The Forest Resilience Bond: Structural Design and Contribution to Water Management in Collaborative
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In addition, Yuba Water committed to promoting a multi-party collaboration that could expand forest
restoration investment for the entire watershed.
The North Yuba Forest Partnership was formed one year after the closing of the Yuba Project FRB financing. The
Partnership is comprised of local and national NGOs as well as federal, state, and tribal representation. The
Partnership is has committed to expanding forest restoration efforts to an additional 275,000 acres within the
North Yuba River watershed.6 The parties expect a follow-on FRB financing to support this work as well.7 Forest
restoration collaboratives, such as this Partnership, have become a central approach to addressing difficult
challenges in funding and managing forest health and resiliency in U.S. public forests. A forest collaborative is a
partnership among federal, state, and/or local parties with a common interest in protecting and restoring forest
lands. The parties may not have a direct economic interest but directly benefit from public goods associated
with these lands and their productive management. Examples of such public goods include protection of habitat,
(including environmental flows critical to downstream fisheries), water quality, water supply, and public
recreation. Air quality benefits also result from healthy forests that are actively managed to reduce fire intensity
and severity. Crown fires that damaged or threatened their public water supplies catalyzed previous
collaboratives that have involved municipal agencies or municipal departments responsible for safe delivery of
water supplies.
The FRB represents a new direction for collaborative forest management, as the debts and revenues pledged for
repayment are provided by different parties. The SPV issued the debt, making project funding immediately
available, while ecosystem services beneficiaries, such as Yuba Water and the State of California acting through
CAL FIRE, provided the revenue streams over time. The Yuba Water revenue pledge increased the pace and scale
of the forest restoration investment that could immediately be undertaken.
If the collaborative model can improve project scale and create repetitive pathways for private capital
investment, the pace of restoration work can be accelerated to address the national forest restoration
6 For additional information, see https://vubariver.org/n-vuba-forest-partnership/
7 On February 17, 2021, Yuba Water approved a new funding commitment that will support a second FRB financing, proceeds of which
will support North Yuba River Partnership projects, https://www.acwa.com/news/vuba-water-commits-6-5-million-to-improving-forest-
health-in-vuba-river-watershed/
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The Forest Resilience Bond: Structural Design and Contribution to Water Management in Collaborative
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investment gap, improve forest management conditions, reduce wildfire risk, and protect water resources.
Additionally, the Yuba Project is expected to produce approximately 35,000 green tons of biomass for processing
at the nearby Loyalton Biomass facility. Increased forest restoration activity could prompt multiplier effect
investment in rural communities with the promise of more stable supplies of biomass for energy production and
timber products.8
Diagram 1: Yuba Forest Location
PROJECT AREA
Ranger District
Boundary
Yuba Project
Project Location Map
Yuba River Ranger District
Tahoe National Forest
Note: The USDA Forest Service Tahoe N.F. uses the most
current and complete data available. GIS data and product
accuracy may vary. The lines and areas represented on this
map are only approximate and their actual location on the
ground may vary.
Map by INF GIS Staff 3/2/2016
San Francisco
Los Angeles
Gias:
8 Woolworth, Nathalie and Knight, Zach "Forest Finance Unlocks Opportunities for Rural Communities," Community Development
Innovation Review, Federal Reserve Bank of San Francisco, October 2019
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Diagram 2: Project Location Within Yuba Forest
The Tahoe National Forest Yuba Project Partnership
Development of the Third-Party Financing Mechanism
The forest restoration investment gap presents a challenge to all stakeholders invested in the public goods
derived from forest health {e.g., ecosystem services, such as clean air, protected source water, and sustainable
rural jobs). In recent years the federal government, in collaboration with state and local governments and non-
governmental partners, has promoted and developed collaborative partnerships to pool public and private
resources as a solution.
The development of the FRB financing mechanism using the FRB Yuba Project I LLC SPV was in direct response to
a collaborative stakeholder engagement that focused on the forest investment challenge. In 2015, private
foundations supported the initial development of the Forest Resilience Bond concept. The result was "Forest
Resilience Bond: Fighting Fire with Finance," a report that established the basis, parameters, and process by
which a market could be developed for public-private capital investment in forest restoration.9 The sponsors
9 http://www.carpediemwest.ore/wp-content/uploads/Forest-Resillience-Bond-Report.pdf
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The Forest Resilience Bond: Structural Design and Contribution to Water Management in Collaborative
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included the Rockefeller Foundation and the Gordon and Betty Moore Foundation with pro bono contributions
from the legal firms, Orrick, Herrington, and Sutcliffe LLP and Brown Hyatt Farber Schreck, LLP. The FRB
developers (Blue Forest, Encourage Capital, and the World Resources Institute) worked closely with the USFS
Region 5 Office (State of California) and the USFS Washington Office
(National Headquarters). Integrally related to this support was the
Morgan Stanley Sustainable Investing Challenge selection of Blue
Forest Conservation as one of its 2015 winners for pioneering the
Forest Resilience Bond concept.10
As designed, the core value of the FRB financing model is its capacity
to harness private capital to complement existing public funding
available for investment on public lands. The FRB attracts and
positions private capital to drive needed collaborative forest
restoration partnerships. According to the work done by Blue Forest,
an FRB centric partnership engagement is an eight-step process:
1. Beneficiaries identify a project in need of funding - the
FRB sponsor works with USFS, utilities, forest
collaboratives, and other stakeholders to identify a high
priority project;
2. Metrics are determined to measure successful outcomes
- sponsor works with scientific community, the World
Resources Institute, and beneficiaries to define target
outcomes and measurements for project activities;
3. Beneficiaries enter into contracts - USFS,
implementation partners11, utilities, state and local
governments, and other beneficiaries' contract for services
Resilience Bonds;
10 https://www.morganstanlev.com/ideas/morgan-stanlev-sustainabilitv-challenge-blue-forest-fighting-fire
11 These partners consist of non-governmental organizations (NGOs) and state or local government agencies familiar with USFS policies
that can take on contracting and planning responsibilities. See: https://www.adaptationclearinghouse.org/resources/forest-resilience-
bond-fighting-fire-with-finance.html
Forest Resilience as a Public Good
and the Cost Benefit Analysis
In economics terminology the resiliency of forests is a
national public good. Market forces do not control a
public good's supply and demand, so a benefit cost
analysis must be performed. A resilient forest is less
prone to catastrophic wildfires, a better source of water
supply, and a stronger base for ecosystem diversity and
preservation. In a natural environment, a forest achieves
a self-sustaining level of resilience, but fire suppression
protocols and growth in residential and concomitant
powerlines have lowered resilience. There are two
practical choices to address this: passively accept the
expected losses or actively perform restoration work.
Some estimates put the cost of wildfires in California in
2018 as high as $400 billion, including direct insured
losses, cost of actual firefighting and clean-up, indirect
consequences (e.g., bankruptcy of PG&E), etc. Even if only
25% of this cost could have been avoided by having
performed restoration work that reduced fire intensity,
the benefit of increased resiliency would have been $100
billion in 2018 alone. This does not include less visible
benefits to the watershed, ecosystem diversity, etc.
On the cost side, forest maintenance costs roughly $1,000
per acre. The work will restore covered acres to a near-
natural level of resiliency for a period of about five years.
Assuming that a wildfire could occur anywhere in
California, the cost of restoring all 33 million acres of
forested land in the state would be about $33 billion -
nearly $70 billion less than the cost of potential benefit in
wildfire cost reduction in 2018 alone. Hence, the
economically rational choice is to actively perform
restoration work.
and pledge revenues to secure Forest
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The Forest Resilience Bond: Structural Design and Contribution to Water Management in Collaborative
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4. Investors provide upfront capital - development team working through a special purpose vehicle
(SPV) identify and raise funds from investors;
5. Implementation partners conduct restoration work - USFS directs and monitors restoration work
on National Forests through an implementation partner;
6. Third party verifiers measure success - outcomes measured based on beneficiary's public goods
enhancement targets and contracts;
7. Beneficiaries make payments, based on measured performance or on a cost-share basis;
8. SPV repays investors.
Based on these development steps, Blue Forest negotiated the first forest restoration collaborative partnership
engagement to successfully leverage private investment capital. The initial undertaking was designed to provide
proof of concept for the benefit of the wider stakeholder audience. The transaction that emerged from
discussions with prospective beneficiaries resulted in a project undertaking based solely on resource
commitments made by the state, Yuba Water, and USFS as described herein. The contractual terms negotiated
followed the guiding principles laid out in the research paper. The core principles from Blue Forest, Encourage
Capital, and the World Resources Institute's work were:
• Balancing beneficiary selection (i.e., ecosystem service payors) by including multiple groups while
recognizing that each additional beneficiary adds complexity;
• Working with beneficiaries to define success and, where applicable, measure and monitor outcomes;
• Balancing precise measurement requirements with cost-benefit realities that increased precision costs
more to obtain;
• Ensuring contracting flexibility that includes collaboration and iteration in developing mutually
beneficial terms that result in a return on investment for all beneficiaries;
• Leveraging concessionary capital to support project economics at the initial stage of market
development; and
• Striving for economies of scale within and across transactions.
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The Forest Resilience Bond: Structural Design and Contribution to Water Management in Collaborative
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The Yuba Project Partners
The Lead Partner - Blue Forest's role as lead partner and transaction developer was crucial to getting the Yuba
Project implemented. Their role started with their following the eight-step process and the guiding principles,
outlined above. Blue Forest assembled a group of committed parties to support the pilot undertaking the
development of the funding concept that could add value to forest collaborative engagements. The next series
of steps involved creating interest in the development of a public-private capital investment interface; leading
the negotiations with the involved parties; developing an impartial, quantifiable measure of value with the
assistance of Stanford University and the University of California, Merced; and developing a transferable
knowledge base on agreement execution. The core element of the partnership and financial architecture was
Blue Forest's creation of a SPV to manage the flow of funds that would move between investors and the project
beneficiaries. This was critical as the SPV, acting as a bankruptcy remote single purpose entity12 to provide a
sound foundation for securing third-party investment and assuring all parties that fund flows, could not be
tainted by a multi-purpose intermediary's financial deterioration. In addition, Blue Forest created cost benefits
for its partners by absorbing financial management responsibilities, managing stakeholder communication,
contract development, the financing, and partner coordination efforts. For these services, Blue Forest was paid
from grant funds.
Beneficiaries and Payors - Yuba Water is a local government agency created in 1959 by the Yuba County Water
Agency Act (Chapter 84 of California Water Code) to control and conserve flood and stormwater for beneficial
purposes within Yuba County. The Board of Directors of Yuba Water consists of the five members from the
Board of Supervisors of the County, and two at-large members representing two different areas of the territory
served by Yuba Water. The jurisdictional territory of Yuba Water includes the area within the County, as well as
entities adjacent to the County that are Yuba Water's customers. Yuba Water, in addition to its other powers,
has the express authority to develop hydroelectric power to the extent such power can be developed in
connection with the construction and operation of its projects. Yuba Water sells water to eight different water
districts, irrigation districts, and/or water companies located in the County, the State of California (for its
CALFED13 Bay-Delta Program Environmental Water Account), and to the California Department of Water
12 For more information on the bankruptcy remote nature of special purpose vehicles: https://librarv.wilmingtontrust.com/z-
featureditems/featured-2/the-use-of-spvs-in-asset-securitizations
13 CALFED began as a cooperative state-federal planning effort between water, environmental, state and federal officials involved in the
1994 Bay-Delta Accord.
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Resources. Yuba Water is also responsible for the operation of the Yuba River Development Project, which
includes the New Bullards Bar Dam and reservoir, and hydroelectric facilities capable of generating more than
400 megawatts of electricity. Yuba Water also operates various groundwater, fisheries monitoring, and other
programs.14 Yuba Water's reservoirs, which contain more than one million-acre feet of storage capacity, are
closely connected to the health of its watersheds. A large portion of its upper watershed is located in the Tahoe
National Forest.15
CAL FIRE is a state agency under the California Natural Resources Agency. CAL FIRE is responsible for fire
protection and prevention across all State Responsibility Area (SRA) lands. CAL FIRE manages and administers
the California Climate Investment (CCI) Program, a forest health and research grant program funded by the
California Greenhouse Gas Reduction Fund. CCI is the Yuba Project grant funding source.16
The Land Manager- The U.S. Forest Service is an agency of the U.S. Department of Agriculture that administers
the nation's 154 national forests and 20 national grasslands. USFS manages the National Forest System
representing 193 million acres (780,000 km2) or 31 percent of federal lands. USFS estimates that about one-third
or 58 million of these acres are at high or very high risk of severe wildfire. The remainder of federally owned
lands fall under the jurisdiction of the Department of the Interior and Department of Defense. USFS's mission is
to sustain the health, diversity, and productivity of the Nation's forests and grasslands to meet the needs of
present and future generations.17
The Implementation Partner-JUe National Forest Foundation (NFF) was created by Congress in 1992 to be the
official non-profit partner of USFS. Its mission is to engage Americans in community-based national programs
that promote the health and public enjoyment of the national forests. The foundation receives funding from
Congress and solicits additional funds from the private sector. USFS is prohibited by law from soliciting outside
funding, but the foundation has been expressly designated by Congress to fulfill that function. The federal
community forest partnership strategy, reaffirmed in EO 13855,18 is rooted in the creation of USFS.
14 From the Yuba Levee Financing Authority Official Statement, dated December 13, 2016. https://emma.msrb.org/ER1004345-ER786075-
ER1187348.pdf
15 http://www.vubawater.org
16 http://fire.ca.gov/grants
17 https://www.fs.usda.gov/sites/default/files/fv-2017-fs-budget-overview.pdf
18 https://www.federalregister.gov/documents/2019/01/07/2019-00Q14/promoting-active-management-of-americas-forests-
raneelands-and-other-federal-lands-to-improve
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The Forest Resilience Bond: Structural Design and Contribution to Water Management in Collaborative
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The Forest Resilience Bond Investors
Blue Forest succeeded in recruiting the four initial Forest Resilience Bond investors. The investors represented
diverse interests. As investors both Calvert Impact Capital and CSAA Insurance Group (CSAA) sought a market
return on investment. For Calvert, as an impact investor, the FRB investment vehicle provided a sufficient social-
market return. As a pilot, it offered promise as an impact investment product with the potential to scale. CSAA's
motivation was its social and environmental value in piloting a solution to counteract underinvestment in forest
restoration. CSAA also, importantly, recognizes that private capital investment in forest restoration could reduce
insurance liability risks to its property and casualty insured product lines over time.19,20
The Rockefeller Foundation and the Gordon and Betty Moore Foundation provided financing to the partnership
as a concessional investment.21 In both cases, the loan came from their Program-Related Investment group in
which below market rate loans qualify as a charitable distribution under tax law - an efficient approach to
provide financing to environmental and social impact ventures. Their focus was in supporting innovative models
that have promise to scale and thrive in a market environment without ongoing foundation support. They look
to market investors to become the sustainable capital source in future transactions.22
The complete list of Yuba Project Participants, their roles in the transaction, and their objectives are summarized
in Table 1.
19 Interview with Line Walworth, VP Investments, CSAA Insurance Group, July 1, 2019.
20 The Forest Resilience Bond was vetted and approved for investment by the California Department of Insurance's California Organized
Investment Network ("COIN"). COIN mission is "to guide insurers on making safe and sound investments that yield environmental
benefits throughout California and/or social benefits within the State's underserved communities."
http://www.insurance.ca.gov/0250-insurers/0700-coin/35-lnvestment-Programs/
21 Concessional investment in this arena is foundation capital willing to accept below-market rates of return in exchange for the
promotion of investment models that have the potential to scale societal or environmental benefits.
22 Interviews with Dan Winterson, Program Director, Bay Area Conservation, The Moore Foundation, July 2, 2019 and Caleb Ballou,
Associate Principal, Innovative Finance, The Rockefeller Foundation, July 10, 2019.
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Table 1: Transaction Participants
PARTY ROLE OBJECTIVES
Development & Execution
Blue Forest Conservation
Project developer
Non-profit, transaction development
The World Resources Institute
Project developer
Non-profit, model developer, economic
analyses
Encourage Capital
Investment
manager/advisor
Impact investor
Rockefeller Foundation
Funder
Promotion of market-financing mechanism,
innovative finance, environmental
Moore Foundation
Funder
Conservation finance market development,
CA conservation goals
Stanford University Water in the West
Academic institution
Environmental benefit analysis
UC Merced Sierra Nevada Research
Institute
Academic institution
Environmental benefit analysis
Orrick, Herrington & Sutcliffe
Law firm providing pro bono
services, corporate law
Public service
Brownstein Hyatt Farber Schreck, LLP
Law firm providing pro bono
services, environmental law
Public service
Beneficiaries/Funding Providers
Yuba Water Agency
Water and electric utility
Public service provider
CAL FIRE
State grant entity
Environmental, sustainable forest
management
USFS, Tahoe National Forest
Land manager
Sustainable forest management
Land Manager and Implementation
Partner
USFS
Land manager
Sustainable Forest Management
NFF
U.S. Forest Service
congressionally chartered
foundation partner,
Implementation Partner
Funding/contract vehicle for USFS
FRB Investors
Calvert Impact Capital
Lender (impact investment
firm)
Market return impact investor
AAA Insurance of California
Lender (insurance
company)
Market return investor
Rockefeller Foundation
Lender (foundation)
Program-related investment, concession
investor
Gordon and Betty Moore Foundation
Lender (foundation)
Program-related investment, concession
investor
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The Yuba Project Partnership Legal Framework and Fund Flows
The Yuba Project partnership arrangement is built on a series of contractual agreements among six operating
entities and four investment providers. USFS and the NFF, as the implementation partner, are the core pillars
around which the Yuba Project is built. The SPV is the interfacing entity through which the contractual
relationship among the parties are established and private capital investment is made available for the project.
A comprehensive look at the legal contracts, interaction of project sources and uses, dedicated revenue streams,
and payment obligations that support the Yuba Project are outlined in Diagram 3.
Diagram 3: Legal Agreements and Cash Flows
Tahoe National Forest - Yuba Project
Legal Agreements and Cashflows
Market Lenders
(Calvert; CSAA)
Foundation Lenders
(Moore & Rockefeller)
Legend
Bond Proceeds
*
Revenues Streams
Repayment Streams
Yuba Water Agency
(Service Recipient,
Service Payer)
CA Dept of Forestry &
Fire Protection
(Service Recipient,
Service Payer)
Forest Restoration
Agreement
$1.5m five-year
revenue commitment
FRB Loan Agreement
$3.7ni FRB proceeiSs
FRB Principal pkis interest
payments l$15ti-2Q0k|
FRB Yuba
Project, LLC
(SPV, Bond
Issuer)
CAL FIRE-NFF Grant 52.6m cal fire
Agreement Gra""
Loan and Services »
Agreements
$2.6m Joan; $1.1 mn grant
Loan repayment, interest-free
National Forest
Foundation
(Project Developer,
Implementation
Partner)
Oj»f-3tlng fit/
Rssiduals
(SlW-MXJk)
Blue Forest
Conservation
(FRB LLC Owner,
Operator)
Tahoe NF SPA USFS in-kind
JS Forest Service
(Land Steward)
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Legal Agreements Supporting the Transaction
In order to undertake the project work, the Yuba Project required two standing agreements between the USFS
and the NFF. The primary controlling agreement is the Master Stewardship Agreement (MSA) entered into with
the USFS Pacific Southwest Region, Regional Office. The MSA covers all national forest lands and surrounding
areas within USFS Region 5 (California is EPA's Region 10). The second agreement is the Tahoe National Forest
MSA Supplemental Project Agreement (SPA). Both agreements were already in place prior to establishment of a
Forest Resilience Bond.
The MSA establishes the respective responsibilities of the USFS and NFF with respect to project collaborations in
the USFS Pacific Southwest Region. Under the MSA the USFS responsibilities include:
• Designating the Regional Forester to approve all stewardship project proposals;
• Ensuring all necessary NEPA requirements are completed prior to project implementation;
• Coordinating with NFF to develop SPAs under the MSA; and
• Completing all project design, layout, and preparation for SPAs that are not conducted by NFF and is
required for stewardship projects.
NFF responsibilities include:
• Maintaining the institutional, managerial, and financial capabilities to ensure proper planning,
management, and completion of projects, including funds sufficient to pay for the non-federal share of
project costs, as applicable;
• Coordinating with USFS to develop SPAs;
• Coordinating with involved agencies and organizations in planning and implementing project work;
• Exploring opportunities for additional support from other parties for projects; and
• Providing qualified personnel and contractors to implement SPA tasks.
The SPA includes a financial plan that identifies the project contributions that will be made by each of the
parties. It also incorporates a Statement of Work (SOW) that must be developed by the parties and reflects the
project scope approved by the corresponding NEPA documentation.
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For the Yuba Project, the SPA financial plan identifies the funding sources, project scope, and costs. The funding
sources and uses identified are the State of California's Climate Investment grant program administered by CAL
FIRE, the FRB payment commitment (secured by the agreement entered into between the FRB and Yuba Water),
and non-cash contributions from USFS. These payment streams are integral to the SPA Financial Plan. The
agreements that collectively assure the availability of these payment streams are the Grant Agreement between
CAL FIRE and NFF, the Loan and Services Agreements entered between the FRB and NFF, and the Forest
Restoration Project Agreement between the FRB and Yuba Water. The Supplemental Project Agreement
between USFS and NFF commits, with conditions, the USFS to in-kind contributions (e.g., land, staff-hours,
materials, etc.). Each of these agreements are highlighted in the subsequent section.
The CAL FIRE - NFF Grant Agreement - CAL FIRE provided $2.6 million in a reimbursable grant award to NFF for
the Yuba Project. The Yuba Project is one of several projects covered by the CAL FIRE-NFF Grant Agreement. The
terms of the agreement establish stipulations that brings an element of state control to the projects covered
including:
• Project work started earlier than agreement execution is not eligible;
• State review and approval of budget specifications and project description;
• All data/information developed must be made available for public use;
• Project changes require state approval;
• Project SOW complies with applicable local, state, and federal laws/regulations including state and
federal environmental laws; and
• All project payment invoices approved by the state.
Each party may terminate upon 30 days written notice. Among the Agreement's provisions that can impact
covered projects and present risk to third party investors is the Budgetary Contingency Clause establishing the
state's right to reduce funding or terminate the Agreement if the state legislature reduces or eliminates funding
for the program. In the event of termination, NFF must take steps to minimize further costs to the state and the
state must remain responsible for all reasonable and non-cancelable obligations incurred by NFF. In addition,
the Agreement may be terminated by the state for cause if the grantee fails to comply with its terms. Such
failure could result in the suspension of all state obligations, at the discretion of the state. The state may set
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aside any amount required to settle "any irrevocable obligations properly incurred." Final grant payment is not
made until the state determines that the Project conforms substantially to the terms of the Agreement.
The FRB Yuba Project I, LLC - NFF Loan and Services and Grant and Services Agreements - The Loan and
Services Agreement establishes the terms for a $2.6 million non-recourse loan from the FRB to NFF. This means
the loan is not secured by the general credit of NFF. The loan amount matches the $2.6 million reimbursable CAL
FIRE Grant. Loan terms set the interest rate at zero percent, establishes a maturity date of November 1, 2023
and limits repayment to proceeds received from the CAL FIRE grant. Loan draw availability matches the FRB-
Lender agreements. In addition to the Loan Agreement, a Grant and Services Agreement provides for additional
project funding of approximately $1.1 million. The $2.6 million loan and the $1.1 million grant comprise the core
funding for the project. USFS in-kind contributions account for the balance of project costs.
Although the loan is non-recourse to NFF there is not an assignment provision that would direct CAL FIRE grant
proceeds to be paid directly to insulate the FRB, as creditor, from other NFF creditor claims, including
bankruptcy. To limit the FRB's financial exposure to NFF, the Loan and Services Agreement imposes limitations
on NFF indebtedness, requires that NFF ensure that grant proceeds are not subject to encumbrances or other
security interests of creditors and establishes a requirement that CAL FIRE grant proceeds be reimbursed within
five business days of receipt. The indebtedness limitation restricts NFF to debts incurred (a $1 million bank line
of credit) and future obligations that are secured by mortgages or are subordinate or pari passu with the loan
(i.e., other unsecured collaborative partnership loan obligations).
The Loan and Grant Agreements incorporate the scope of work, types of treatments to be undertaken, and
reference the specific NEPA Record of Decision for the Yuba Project, linking investments to project-level
outcomes. By creating project specific SPVs that can reference NEPA decisions and cooperative agreement work
plans, Blue Forest has found that the FRB creates transparency and accountability for utility beneficiaries,
investors, and all project stakeholders.
The FRB Yuba Project LLC - Yuba Water Agency Forest Restoration Agreement - This agreement contractually
engages the Yuba Water Agency to support the Yuba Project by committing to annual payments of $300,000
installments over a five-year period to support the FRB-NFF project collaboration. Annual payments are payable
November 1, 2019 through November 1, 2023. There are two major conditions that, if triggered, could result in
a reduced payment obligation or termination. First, is Yuba Water's right, with at least 30 days' notice, to defer
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up to 50 percent of its annual payment obligation (the "Deferred Amount") if revenues for the prior fiscal year
were below 65 percent of expected revenues. Deferred Amounts are subject to a 4 percent annual interest
charge and are payable on the next payment date. This deferral right expires on the fourth annual payment date
and does not apply to the final payment due on November 1, 2023. The second condition is a Termination Event
defined as (a) a bankruptcy or insolvency of either party, (b) by mutual written consent of the parties, (c) a Yuba
Water termination for cause, (d) termination rights exercised by the FRB "in the event that a major fire or a
large-scale tree mortality event occurs... that the USFS determines would substantially hinder or imperil..." the
Project, or (e) a Force Majeure Event. If the FRB exercises its termination rights based on a USFS determination,
Yuba Water is obligated to pay the FRB "an amount equal to the full payment due for the year plus any portion
of amounts due from prior years including any Deferred Amounts." Either party may also terminate if a Force
Majeure Event, which includes fires, continues in excess of six months. Agency termination for cause includes
defined violations of the Agreement, insolvency, or a bankruptcy that has not been dismissed. If exercised for
cause, Yuba Water remains obligated for a pro rata portion of the annual payment due based on costs of
restoration services performed versus budgeted for the year, plus any prior amount due, including any Deferred
Amounts.
In committing to its pledge of revenue to the Project, Yuba Water determined that its pledge was consistent
with its authorized statutory powers to fund projects that protect water quality and enhance water supplies. The
payment obligation is unsecured, which places it in a junior position to any outstanding debt-related payment
obligations.
Lender Agreements between the FRB and Debt Holders - The proceeds of the debt issued to institutional
investors pursuant to the terms of a consolidated lender agreement between the investors and the FRB
provided the project funding. Although investors are represented by two classes of buyers, market return
investment funds and not-for-profit foundations, the agreements are identical as to legal protections and the
rights of the respective parties. They differ with respect to interest rate and commitment fees. The market rate
investors, Calvert Impact Capital and CSAA Insurance Group, receive a 4 percent interest rate. The two
foundations, The Moore Foundation and The Rockefeller Foundation, receive a 1 percent interest rate.
The loan is structured as a delayed draw term loan, which lets a borrower withdraw amounts of a total pre-
approved loan amount. As a drawable loan, the loan allows up to eight withdrawals and a draw minimum of
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$100,000 or $25,000/lender. Interest is payable only on amounts drawn. Market rate lenders also receive a
commitment fee payable on committed, but undrawn, capital. The commitment fee payable to the market rate
investors on undrawn balances is 50 basis points per annum. With the one exception related to an initial draw
(the draw on the Moore Foundation loan was in full at the outset), all draws are required to be pro rata among
investors. The FRB has an annual right to reduce lender commitments on a pro rata basis. Should the FRB
exercise this right and the initial draw lender's outstanding loan balance exceed that of the other lenders the
FRB must prepay the initial draw lender to meet the pro rata requirement. Before each draw can be made for
the purpose of paying project contractors, the FRB is required to make proper representations and warranties
that NFF is in full compliance with the CAL FIRE Grant Agreement. These representations and warranties mirror
those found in the FRB-NFF Loan and Grant Agreements. This is a protection that minimizes lender's exposure to
repayment risk.
In addition to the mandatory prepayment requirement related to the pro rata draw requirement, there is a
mandatory prepayment requirement related to quarter ending FRB cash balances. A quarter ending cash
balance in excess of $250,000 requires the FRB to make a mandatory prepayment plus accrued interest on the
amount prepaid to the investors. The FRB also has an optional prepay option without any prepayment penalty.
Investors made loan commitments for $4 million. The expected pro rata draw is $3.7 million. Interest payments
to investors are made quarterly. The loan matures December 1, 2023. At closing, it was determined that should
the Sierra Nevada Conservancy (SNC), a California state agency under the Natural Resources Agency, commit
grant dollars to the project, the full amount of the loan would be expected to be drawn. This would require SNC
to enter into a grant agreement with NFF for a grant of up to $300,000. This grant was ultimately awarded to
another project partner and the lender capacity was reduced in 2020.
The agreements highlighted above provide a synopsis of the sources and uses of funds that support the Yuba
Project as well as the contracted revenue streams that support operating expenses and timely repayment of the
debt drawn. These funding relationships are summarized in the tables that follow:
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Table 2. Yuba Project Sources and Uses (Based on Commitments)
SOURCES USES
Forest Resilience Bond
$4.0 million
National Forest Foundation
$4.0 million
USFSTahoe National Forest
$0.6 million*
Tahoe National Forest
$0.6 million
Total
$4.6 million
$4.6 million
*in-kind forest contribution
Table 3. Revenue Streams and Payment Obligations
CONTRACTED REVENUE STREAMS FRB PAYMENT OBLIGATIONS
CAL FIRE Grant
$2.6 million
Forest Resilience Bonds
$3.7 million
Yuba Water Agency
$1.5 million
Forest Resilience Bond Interest
$0.15-.2 million
Blue Forest Opex
$0.15-.2 million
Total
$4.1 million
$4.1 million
Cashflows Prescribed by Legal Agreements Contingent on Risk Factors
The cashflows presented in Table 2 and Table 3 above assume normal project operations and performance
obligations of the involved parties. However, there are risks to normal operations and funding commitments
that can interrupt, alter, or terminate these cashflows. Risks, though interrelated, fall along the following lines:
credit, appropriation, and project delivery.
Credit risk - arises with respect to the lenders, YCWA and NFF. Lenders contractually deliver funding under draw
rules promulgated by loan agreements with the FRB, the Yuba Project LLC, and YCWA pursuant to its negotiated
terms with the FRB. The credit quality of the participants mostly mitigates the lender funding risk.
Yuba Water is a small municipal water and electric utility with no publicly issued debt outstanding. The Agency's
water revenue is currently pledged to a Yuba Levee Financing Authority, a joint power agency (JPA) payment
obligation that is rated AA by Standard & Poor's (S&P).23 Yuba Water's contractual obligation to the FRB is an
unsecured claim on surplus revenues that is subordinate to its JPA payment obligation. The Agency's credit
23 See Official Statement, dated December 13, 2016. https://emma.msrb.ore/ER1004345-ER786075-ER1187348.pdf
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strength and ability to support its FRB payment obligation is bolstered by the Agency's electric and power
revenues generated by hydroelectric generating facilities with nameplate capacity of more than 400 megawatts,
including the recently acquired 12-megawatt Narrows 1 facility. The hydropower revenues are not pledged to
the JPA bond but account for more than 80 percent of Agency revenue.
Funding defaults by any one of the Lenders or payment defaults by Yuba Water could impair project completion
and FRB debt holder repayment.
NFF presents credit risk to the Lenders due to the CAL FIRE prohibition on assignment of grant payments to the
FRB for the purpose of securing the financing. Should NFF ever be in a creditor receivership status these grant
payments could be at risk to the claims of other creditors. This risk is mitigated by the five-day payment
requirement included in the FRB-NFF Loan and Services Agreement.
Appropriation risk- arises from the timing of payments based on legislative appropriations to the State's Forest
Health Climate Investment Grants Program (CCI grants allocated through CAL FIRE) under the terms of its Grant
Agreement with NFF. FRB lending is, in part, secured by grant payments. The Lender Agreements are subject to
the Grant Agreement being in place. The Agreement's standard budget contingency language stipulates that
funding availability can be impaired by reduction in state funding to the grant program and that appropriation
reductions could cause the CAL FIRE-NFF grant to be reduced or cancelled. This risk has been fully mitigated by
state legislative action to make the appropriation and state action to award the grant under the Agreement.24
Project risk- arises with respect to execution and funding sufficiency. Under the collective agreements, each of
the parties that have obligated to make financial commitments have termination rights that may be invoked if
the other party is not meeting their obligations, including the project scope of work. The agreements further
establish contingencies that protect the respective financial interests of the parties in the event of project
execution failure. The CAL FIRE Grant Agreement establishes that if the state exercises its termination rights it
must provide for irrevocable obligations made by NFF prior to CAL FIRE invoking its termination rights. This
assures that loan and grant dollars provided by the FRB under the Loan and Services and Grant Agreements
24 The CAL FIRE-NFF Grant Agreement funded multiple NFF projects, including the $2.6 million allocated to the Yuba Project, from SFY
2017-18 legislative appropriations of over $1.5 billion in Greenhouse Gas Reduction Fund revenues, including $293 million to CAL-FIRE.
https://ww2.arb.ca.eov/sites/default/files/classic//cc/capandtrade/auctionproceeds/detail appropriation 10 15 2019.pdf? ea=2.9843
2411.521087263.1594915644-1032838357.1587405464
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remain covered by state commitments. Likewise, an Agency termination for cause, which may be project
related, requires the Agency to continue to provide payment, pro rata, based on work completed through the
termination date, including any Deferred Amounts owed.
The table below provides a breakdown of the major financial risk allocations among the parties:
Table 4. Risk Allocation Among Parties
RISK CATEGORY RISK ALLOCATION DESCRIPTION
Project Completion
Risk
CAL FIRE/Yuba
Water
Payments are structured to occur at the end of the work season
(May-Oct/Nov) when seasonal work in process can be measured.
Termination of the FRB-Yuba Water Forest Restoration
Agreement for cause may include failure of the FRB to enforce
contract performance against NFF or misallocation of Agency
payments. Termination requires pro rata payment requirement.
Project Performance
Risk
Yuba Water
Payment obligation is not contingent on delivery of expected
project benefits. The FRB has made no representations or
warranties with respect to project outcomes and has no
obligation or liability to the Agency in regard to Services having a
particular level of results. Yuba Water was offered a
performance-based contract.
Yuba Water
Credit/Payment Risk
FRB Lenders
The payment obligation from the Agency is unsecured and paid
from net revenues after operating expenses and secured
obligations. The Agency can defer 50% of annual payment if
Agency revenues (water and electric) drop to less than 65% of
budgeted. Deferred Amounts will be interest-bearing to match
liabilities related to deferral of the FRB Yuba Project LLC loan
principal payments.
Yuba Water Payment
Default
FRB Lenders
The FRB has right at law or in equity to pursue payment. Forest
Restoration Project Agreement imposes 6% default rate on Yuba
Water.
Appropriation Risk -
NFF fails to apply CAL
FIRE Grant to
reimburse Lenders
FRB Lenders
Grant proceeds cannot be assigned by NFF to the FRB for benefit
of the Lenders. CAL FIRE prohibition on assignment of grant
proceeds to other parties. NFF works under a 5-day cash flow
sweep to send dollars to investors. FRB-NFF Loan Agreement
grants the FRB recourse thru rights in law and equity.
Cal Fire Grant non-
payment to NFF
FRB Lenders
Mitigated by the FRB loan draw timing and Yuba Water payment
obligation.
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Force Majeure Events
Yuba Water
Agency retains a limited obligation to pay if services cannot be
performed. Force Majeures lasting more than six months is an
event of termination subject to YCWA payment obligations
through the end of the year plus any Deferred Amounts owed
due to prior revenue shortfalls (see Yuba Water Credit/Payment
Risk, above).
FRB Lender Funding
Default
FRB
FRB Lenders' failure to fund draw requests reduces/eliminates
the FRB capacity to accelerate and/or meet funding
commitments to the Project. CAL FIRE and Yuba Water payment
obligation offsets substitute Yuba Water credit and CAL FIRE
appropriation risk for lender credit risk.
Collaborative Forest Restoration Partnerships: Piloting New Models
One response to a persistent undersupply of a public good is
for those stakeholders or communities with a particularly
high demand for the good to form a collaboration that seeks
to directly provide a better local supply. The USFS itself
strongly encourages cross-boundary collaborative planning
and management through its Collaborative Forest Landscape
Restoration Program (CFLRP) and Shared Stewardship
strategy. This final section of the report discusses how the
FRB and the pilot project on the Tahoe National Forest could
inform the design of next generation forest collaborative
partnership models.
Prior Municipal-USFS Collaborative Models
The Forest Service has experience piloting collaborative
models in response to downstream impacts from severe
crown fire events, such as the Buffalo Creek and Hayman fires
in Colorado (see Denver Water inset) and the Schultz fire in
Denver Water's Forest to
Faucet Partnership
After the Hayman and Buffalo Creek Fires, Denver
Water spent over $40 million repairing the Strontia
Springs reservoir. In 2010, Denver Water signed a $33
million deal with USFS ($16.5 million each) and
expanded that agreement to include the Colorado State
Forest Service and the Natural Resources Conservation
Service in 2017 for five more years. USFS will conduct
forest health restoration treatments on more than
38,000 acres of National Forest lands in northern
Colorado and the goals include reducing wildfire risk,
restoring areas recovering from past wildfires, and
minimizing erosion. This is viewed as a "proactive step
to invest in the future, by keeping our watershed
healthy rather than paying for impacts from a
catastrophic crown fire in the future." In June of 2018, a
wildfire broke out in Silverthorne, Colorado. With red
flag drought conditions, a wildfire in the area would
have caused $913 million in damages from the loss of
homes and infrastructure. Instead, firefighters were
able to aggressively combat the flames from fuel breaks
implemented through From Forests to Faucets funding.
No homes were lost from the wildfire.
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Flagstaff, Arizona (see Flagstaff inset).25 Both Denver Water and the City of Flagstaff entered into cost-sharing
partnership agreements with USFS in the wake of catastrophic fires that damaged watersheds and threatened
the future integrity of public water supplies. Both municipalities chose to take action to remediate damage and
invest in mitigation to avoid the far greater costs of unmitigated fire risk. Denver Water financed its forest
restoration investment with net system cashflow after providing for annual operating and maintenance costs
and annual debt service obligations. The City of Flagstaff took the additional step of funding their shared costs
with the issuance of general obligation bonds, secured by the full faith and credit pledge of its general tax
base.26
How the FRB Yuba Project Pilot Differed from Initial Concept
The initial intent and expectation of Blue Forest and its development partners
was that the FRB investment model would be tethered to performance
benchmarks. Performance measures were to be the basis for returns on
investment that would either supplant traditional payment streams tied
directly to a borrower's contractually established payment obligation or be a
component of project related revenues payable to investors. Applying
performance metrics, investors would have been paid in whole or in part
based on the benefits derived from the project work. It was determined in the
course of discussions with Yuba Project stakeholders, including Yuba Water,
that historical data was sufficient for it to conclude that project benefits
would result from the work.27 Consequently, the Forest Restoration Services
Agreement negotiated between the Agency and the FRB provided for
25 https://www.fs.usda.gov/detail/r2/news-events/?cid=STEI_PRDB5195008
https://www.denverpost.com/2017/02/26/denver-water-forest-health-plan/
https://in.nau.edu/wp-content/uploads/sites/212/Flagstaff-Watershed-Protection-Proiect-2014.pdf
http://flagstaffwatershedprotection.org/about/background/
26 On December 21, 2018, President Trump signed Executive Order 13855 "Promoting Active Management of America's Forests,
Rangelands, and other Federal Lands to Improve Conditions and Reduce Fire Risk." EO 13855 declared that it is the policy of the United
States "to promote healthy and resilient forests, range lands, and other Federal lands by actively managing them through partnerships
with States, tribes, communities, not-for-profit organizations, and the private sector." The EO directed the USDA and DOI Secretaries to
adopt the following policies in furtherance of partnership engagements with stakeholders: shared management priorities, coordination
of federal, state, tribal and local assets, remove hazardous fuels and increase active management, and support rural economies.
27 This involved extensive data gathering and expert analysis, which was provided by Sierra Nevada Research Institute (SNRI) at University
of California, Merced and the Natural Capital Project and Water in The West at Stanford University.
Flagstaff Watershed
Protection Project
Following the Schultz Fire in 2010,
there was severe and repeated
downstream flooding causing tens of
millions in damage surrounding
Flagstaff, Arizona. In 2012, the City
issued a $10 million tax-free municipal
bond to fund forest restoration in the
Coconino National Forest and
surrounding lands to avoid damage
over the next 8-10 years. By
September 2019, FWPP has thinned
nearly 5,500 acres of forest in and
around Flagstaff. Through the many
collaborative partners, FWPP has
brought in an additional $8M dollars
through in kind and cash leverage.
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payment based on the project work but not be based on measured outcomes. In other words, the repayment
obligation was linked only to project performance in its most traditional sense - in relation to the investment
made in the project work. To the extent that third party investment dollars have flowed to the project, project
beneficiaries are obligated to make good on their scheduled payment obligations. The result was a cost share
approach not unlike the Denver Water-USFS and Flagstaff, AZ-USFS cost share collaboratives (see insets), but
with an added element of financing that could accelerate the pace and scale of treatments and enable more
widespread participation by a broader set of utilities that may not have the capacity to commit to large upfront
investments. Recognizing the future potential for financing terms that would include performance metrics, the
Forest Restoration Services Agreement contains a requirement to collect and provide data to Yuba Water which
can inform performance benchmarks for future agreements.28,29
Data Collection, Aggregation and the Development of Future Revenue Streams
Blue Forest and its development and research partners reviewed all the environmental benefits associated with
forest restoration and decided to focus on water quality and quantity as the most quantifiable and reliable
benefits to monetize, in addition to the more obvious benefits of fire risk reduction. Future iterations will
continue to capitalize on standardized methodologies and high-tech applications, which make data gathering
more efficient and/or more reliable (e.g., the Sierra Nevada Research Institute, an FRB research partner, is
already using satellite imagery for data collection30). These sorts of data collection methods and technologies
allow for expedited scaling opportunities as well as the potential for "stacked" monetization of environmental
benefits beyond increased water quality resulting from proper forest maintenance that is paid for by multiple
beneficiaries. Further refinement and standardization of outcomes such as reduced fire probability and liability,
improved forest health, increased community resilience, carbon emissions stability and sequestration, or
protected air quality could all become monetizable factors for projects. Once these factors are consistent and
measurable, introducing performance outcomes could potentially factor into determining investor
compensation in "pay-for-performance" model FRBs. The key consideration will remain the ease with which
28 Article 4, Section 4.02 of the YCWA-FRB Forest Restoration Agreement requires the FRB to provide the Agency with an annual Water
Quantity Benefit Report showing estimated positive or negative change in water quantity in the watershed against baseline.
29 An early example of pay for performance-based financing is the October 2016 Washington, D.C. Environmental Impact Bond which
established both upside and downside adjustments to investor returns that was contingent on green infrastructure project performance.
For more information see https://www.epa.gov/waterfinancecenter/dc-waters-environmental-impact-bond.
30 For more information, see https://snri.ucmerced.edu/
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such benefits can be monetized versus transaction complexity - one of the core FRB development tenants,
highlighted above. Also essential will be the role played by stakeholders to establish well documented and
standardized methods to quantify benefits.
Table 5: U.S. State Department's examples of outcome- and output-based metrics for different types of forest
finance projects.
Project focus
Explanation
Revenue
Outcome
Outcome
Output
Source
Metrics
Metrics
Metrics
(Example)
Example 1
Example 2
Example 3
Water
Forest conservation or
Water utility
Sedimentation
Water quality
Hectares of
restoration projects
payment for
degraded forest
that seek to enhance
service or
in watershed
the quality or
payment for
improved
availability of water for
performance
downstream users
Climate
Forest projects that
Carbon emitter
Net GHG
Carbon stocks
Deforestation,
seek to reduce
purchase of
emissions
reforestation,
greenhouse gas
carbon offset
forest cover
emissions from
credits
(proxies)
deforestation or forest
degradation, or
enhance the
sequestration of
carbon through
reforestation, forest
enhancement, or
better forest
management
Biodiversity
Forest projects that
Government or
Hectares of
Number of
Hectares of
and
seek to protect or
NGO payment
forest
indicator or
forest under
ecosystem
restore the habitat of
for services or
conserved
target species
legal protection
health
key species, or
payment for
(protected) or
status
preserve and enhance
performance
restored
ecosystem health
Fire
Resilience/
flood
management
Forest projects that
seek to reduce the
incidence of
catastrophic wildfire
Forest projects that
intend to enhance the
resilience of
Parties that
benefit from
avoided cost of
catastrophic
fire risk
Parties that
benefit from
avoided cost of
Number of
fires in a given
area over a
specific period
of time
Number of
hectares of
mangrove,
Average fuel
load in a given
area
Number of
communities
experiencing
Number of
hectares where
prescribed
thinning has
occurred
Number of
hectares of
mangrove,
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communities to
catastrophic
coastal forest,
damage from
coastal forest,
extreme events such as
flood risk
steep slopes
extreme
steep slopes or
floods, landslides,
or flood plain
events in a
flood plain
storm surges, or sea
protected or
given location
protected or
level rise
restored
over a specific
period of time
restored
Productive
Productive forest
Government,
Quantity of
Total value
Hectares of
forestry
projects may include
NGO or
timber
per hectare of
forest under
standard production
company
extracted
the
forest
metrics as well as other
payment for
(e.g., Board
sustainably
management
metrics of sustainability
services or
performance
feet or
roundwood
volume)
managed
forest
certification
Economic
Forest projects with an
Government,
Increase in
Value to
Number of
value
objective of increasing
NGO or
revenue from
communities
hectares of
the economic benefits
company
additional
from
forest under
generated by the
payment for
tourism
payments for
management
forest, including for
services or
environmental
plan
local communities
performance
services,
including
carbon
Risk/cost
Some forest projects
Government,
Net
Firefighting
Value per
reduction
seek to avoid an
NGO or
greenhouse
costs
hectare of a
outcome they are often
company
gas emissions
compared to
sustainably-
measured against such
payment for
measured
average costs
managed forest,
as a baseline that
services or
against a BAU
over a prior
compared to
reflects the status that
performance
baseline
period
neighboring
would have been
forests
expected in the
absence of action
(known as a Business
As Usual, or BAU).
Source: Background Paper for 2nd Brazil-U.S. Forum on Innovative Forest Investment, Sao Paulo, Brazil, July 30-31, 2019. U.S.
State Department
Federal Support in Place to Expand on the Forest Resilience Bond Public-Private Partnership Model
In 2019, the USFS National Partnership Office initiated the Innovative Finance for National Forests grant program
to support the development and implementation of innovative finance models that leverage private capital to
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The Forest Resilience Bond: Structural Design and Contribution to Water Management in Collaborative
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invest in the resilience of the National Forest System and surrounding lands. The program objective is to deliver
environmental, social, and financial outcomes on National Forests and adjacent state, private, or tribal lands in
partnership with local communities and stakeholders. The program is jointly administered and funded by the
USFS National Partnership Office, the National Forest Foundation, and the U.S. Endowment for Forestry and
Communities.
As of August 2020, $1.8 million in grants have been awarded to 10 recipients, including Blue Forest.31 The
funding provided to Blue Forest will allow them to refine and replicate the FRB model with the launch of four
additional National Forest initiatives in California and the Pacific Northwest. It is a stated goal of the grant award
to expand beyond water to incorporate new ecosystem co-benefits into repayment revenue streams.
Grants have also been awarded for emerging, related models. Quantified Ventures, LLC, has been awarded
funding to create and establish a Wildfire Environmental Impact Fund to address wildfire risk to watersheds and
communities in Southwest Colorado. The Fund will leverage federal resources, private landowner contributions,
and revenues from the sale of biomass. The Fund is expected to function as a revolving fund. The Nature
Conservancy has been awarded funding to demonstrate a link between ecological forestry practices at scale and
the price of property and casualty insurance. A successful demonstration is expected to provide the data
necessary to incentivize stakeholders to monetize premium savings and finance forest restoration projects that
deliver severe wildfire risk reduction benefits.32
A Role for State Revolving Funds
In the future, there is the potential for alternative funding sources to be the Lenders in FRBs. The federally
sponsored and state-administered State Revolving Funds (SRFs) have statutory authority to provide financial
assistance at or below market rate to eligible recipients in the form of loans, the purchase of debt obligations,
and the provision of financial guarantees to support Clean Water Act (CWA) eligible projects. Depending on how
31 Funding for Round 1 grants through the Innovative Finance for National Forests program came from the US Endowment for Forestry
and Communities ($500K) and USFS ($1.3M). Funds are pooled and dispersed by the US Endowment (Nathalie Woolworth, USFS
Partnership Office, July 28, 2020 email).
32 https://www.nationalforests.ore/grant-proerams/innovative-finance-for-national-forests-erant-proeram
andhttps://www.usendowment.ore/new-erant-proeram-seeks-private-investment-in-our-national-forests/
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states use the CWA additional subsidization authority, loan principal forgiveness may also be available. The CWA
establishes broad categories of eligibility and includes projects that address non-point sources of pollution.
Projects may be publicly or privately owned and must address non-point sources of pollution identified in the
state's 319 Plan or 320 Estuary Plans, which are operational in each of the nation's 20 national estuaries. The
Yuba Project falls within the San Francisco Bay Estuary suggesting that it could be SRF eligible depending on
categories of eligibility established by the plan. In addition, the 2014 amendments to Section 122 of the CWA,
included in the Water Resources Reform Development Act identified watershed partnerships, defined as:
"Efforts of municipalities and property owners to demonstrate cooperative ways to address nonpoint sources of
pollution to reduce adverse impacts on water quality." CWA, Section 603 (c) (7) establishes such watershed
partnerships as eligible financial assistance recipients. Criteria set forth in Section 122 establishes that eligible
projects can be publicly or privately owned but limits such assistance to a municipality or municipal entity.33 In
2016, the State of California enacted new legislation (Bill AB240) that recognizes watersheds as part of statewide
infrastructure making it easier for water utilities to invest in watershed restoration.
States will determine how and to what extent their SRFs support forest restoration efforts, consistent with
federal SRF authority and state project priorities. Key to effective participation is the continued optimization of
SRF financial assistance through the strategic use of balance sheet strengths including liquidity to fund short-
term lending vehicles and credit capacity to leverage SRF balance sheets or to introduce capital efficient
guarantees each of which could serve to accelerate the market scaling of private capital investment in forest and
watershed health.34
Conclusion
The Forest Resilience Bond is an investment vehicle designed to finance forest restoration projects across the
western United States to decrease the risk of severe wildfire that threaten the public goods derived from our
forest resources. The financing serves to provide upfront capital in advance of committed public funds and to
enhance available resources necessary to scale projects and benefits. By participating in the Yuba Project, Yuba
Water committed to improving forest health in their upper watershed. Yuba Water contributed $1.5 million to
33 https://www.epa.gov/sites/production/files/2016-07/documents/overview of cwsrf eligibilities may 2016.pdf
34 https://www.epa.gov/cwsrf/overview-clean-water-state-revolving-fund-eligibilities and
https://www.epa.gov/sites/production/files/2017-05/documents/financing options for nontraditional eligibilities final.pdf
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the FRB, but the benefits they will get from the project far outweigh the costs, according to WRI's economic
analysis. The forest restoration work will decrease the risk of severe wildfire and protect the utility's water
infrastructure and prevent water quality degradation, caused by post-wildfire woody debris flooding that can
have significant impacts on reservoir capacity and water treatment costs. Additionally, because of the forest
characteristics, Yuba Water is expected to see additional streamflow and hydropower revenue due to the
removal of small diameter trees from the landscape. Yuba Water has further determined that increased stream
flows would support current and future commitments to provide a share of the required environmental flows
needed to protect environmental integrity of the Sacramento Delta.
The financing model piloted on behalf of the Yuba Project is scalable. There are additional revenue streams that
can be secured to further the flow of private investment capital into the forest restoration and public goods
protection space. To the extent that public good beneficiaries can be identified and can recognize their
economic self-interest in supporting investment in public goods, or can be incentivized via public policies, the
corresponding revenue stream expansion would enable larger project undertakings. This, in turn, will yield
greater forest resilience and greater certainty with regard to sustainability of the quality and quantity of public
goods provided by the nation's forest lands. Reduced risk of wildfire also yields direct benefits to local
economies and business interests that would face reduced liabilities and their related costs. Also, revenue
streams might be better timed to the benefits expected to be delivered. With well documented and market
accepted measurement methods and high confidence in the data, annual revenue payment requirements might
be lowered in favor of longer payment periods that could be matched by longer financing terms.
In addition, it is possible to scale the existing FRB product in several ways. In this case, Blue Forest assembled all
the pieces of the FRB through negotiations with all parties. In the future, there is potential to separate the data
collection and financing pieces to accomplish two goals: greater independence and standardization in metrics, as
previously discussed, and a commodification of the financial product. This financial independence could allow
the FRB to become a tradeable bond as opposed to the private placement debt model it currently resembles. In
addition, centralized independent financing would allow for a more sophisticated capital structure that could be
adapted for various investors' risk tolerance.
As the market develops and data reliability improves, the addition of pay-for-performance parameters to
transactions should attract impact investors that cannot participate based on the initial design due to impact
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investment constraints. This model could be highly valued by beneficiaries that see the linkage between
measurable project performance and payment obligations as key to community buy-in and participation. This
aspect has a precedent of success (DC Water's Environmental Impact Bond Issue) and could readily be
incorporated to the existing structure with willing participants - especially the water quality and quantity
metrics.
Blue Forest's role as partnership and financial intermediary establishes a model baseline for future efforts to
deliver investment capital in all its forms. The FRB model, as described herein may be replicated in its current
form or, as is likely, match attributes cleaved from the Yuba Project with new model elements that are
responsive to the needs of new project collaboratives and their stakeholders. Blue Forest expects that SPVs will
be core to all collaborative project funding models that serve rural watersheds.
If the model can create a repetitive pathway for private capital investment, it could accelerate the pace of
restoration work which is critically needed to address the public forest restoration investment gap, improve
forest management conditions, and reduce risk. With long-term restoration planning, restoration could be a
source of stable and safe employment that further contributes to the economic resilience of local communities.
U.S. EPA Water Infrastructure and Resiliency Finance Center
The Water Finance Center is an information and assistance center, helping communities make informed decisions for drinking
water, wastewater, and stormwater infrastructure to protect human health and the environment. Through its technical
assistance to states, local government, and non-governmental entities the Water Finance Center helps communities
understand their financing options, improves the effectiveness of federal funding, and supports local decision-making for
resilient water infrastructure.
If you have any questions, please contact the Water Finance Center at:
¦ waterfinancecenterPepa.gov
¦ www.epa.gov/waterfinancecenter
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