This very simple discussion is intended for the lay person to understand the very basics about timberland investments....call it Timberlands 101! Feel free to call Mr. Worl to set up an appointment and "walk throught the woods" to discuss forest investments.
(See the document on this website called Buying Acreage as many of the issues discussed there will apply to the acquisition of timberland. Issues like Property Boundaries and Corners, Access, and Permits all apply.)
Northwestern US timberlands vary by species in each region, by age class, by composition, quality and volume. Each geographic region of the world has different growing conditions, species diversification and growth rates. Most foresters in the world believe that the
Why do people Buy Timberland?
Profit—Investors might buy timberland for a short term profit, or for some profit in the foreseeable future. That "foreseeable future" could be considered as 1 year, 5 years, 10 years or even longer. Many tree farmers pass their property on to their families.
The profit motive is a primary reason to invest in timberlands.
As an example....an investor interested in short-term profit might buy a property that is say 80 acres in size with a house on it...with 40 acres of timber—some farmland and some Christmas trees on a separate lot. This particular investor would harvest the timber, clean up the land, fix up the house, maybe split off the lot and then re-sell the house to the buying public. This would be considered a short-term flip for profit.
Other investors might buy timberland with merchantable timber on it and no other asset other than the land. They would then harvest the timber immediately to recover some of their initial investment then manage the land for a couple of years or longer and then re-sell it to another investor for a profit.
Another type of investor might partition the land into smaller more salable units and then re-sell the property into the retail market.
The land portion of the sale—if held for the right time frame and if the federal rules are followed—could qualify a deferral on any capital gains taxes that would be paid upon its sale. If the investor wanted to continue investing in real estate then they should consider the IRC 1031 rules. To qualify for a 1031 tax-deferred exchange the asset should be held for a period of 1 year or more before it qualifies for long term capital gain treatment (see your accountant for particulars). I will discuss 1031 exchanges in another paper.
Short term profit investors need to have a very refined understanding of not only the timber market but all of the markets in which they intend to re-sell the residual land and/or improvements. I have done several of these deals and can help you with yours.
Longer term investors with a profit motive are interested in the growth potential of the forest. Longer term timberland investing is an interesting asset class in that it is a biological investment.
Timber stands can be purchased at any age and then grown for some expected profit. Simplifying it....trees are planted and over a period of 40 years can grow from an initial height of say 12 inches up to 130 feet or more depending on the soil type, aspect, management, species and geographic location(and for all you foresters out there—the site index).
Pension funds have made major investments in forestlands through TIMO's or Timberland Investment Management Organizations over the last 30 years. These are usually huge multi million dollar acquisitions. Some pension funds have invested in large timberland tracts to diversify their portfolios which might have stocks, bonds and other income producing real estate in them. The appeal is simple---young trees grow into older trees and grow from a value of almost zero to several thousand dollars per acre. The key is in determining how fast they grow and finding the right forest mix to produce the desired return. Pension funds have typically favored timber stands that are on high quality soils, close to markets—so the products can be sent to the export market, well roaded and on operationally favorable slopes in geographic areas with manageable risk.
Most larger long term investors are looking for a diversification in age class structure of their acquisitions so they can have an equal payout of income each year for their clients. Pension funds recognize the value of growth and cash in their analysis. If there is an age class gap in their forests, then they would need to go out and find additional acres to fill that gap or liquidate some of their properties to meet their client's needs. As part of the overall portfolio of the client, some funds may just let the asset grow for years without harvest and then liquidate the timber and/or the land at a certain time that they feel they can maximize their return to their client.
As previously mentioned, an appealing fact to the investor is that the tree resource grows in volume and value over time.... and when it turns a certain age—will grow each year financially at an almost an exponential rate.
As an example...a 15-20 year old forest, depending on the growing conditions, might be 3-10" in diameter at breast height. Basic forest products removed from the forest at that time might be 1"x 4" lumber, 2x4's, pulp logs and chips. However over the next 15-20 years, trees will grow not only in height but in diameter. At that point, some export logs might be sold but also 2 x8's ,2 x10's ,2x12's (lumber) might be produced from the timber. The logs are basically worth more. This is a major reason why people invest for the long term in timberlands. For the first 15 years of a forest there will be some costs in stand establishment and some maintenance. But...once it hits about 15 -20 years old it starts growing into forest products. As a first time investor in timberlands or a seasoned investor...this is what YOU want to be thinking about when you are considering a forestland investment. It applies to you in your investment decision as one seeking a long term profit whether it is a small parcel of say 20 acres or one that is 20,000 acres. It is precisely what large multi-million dollar investors think about as well.
Recreational- Some people want a large parcel of land to live on. They want to ride their quads or horses through the woods—see the timber grow over time---enjoy the creek or waterway that might be on it. Timberlands can be a great "get-away" and provide enormous peace and tranquility categorized as "psychic income". Many of us grew up in the era of the "Bonanza" television series and remember the large pines that the Cartwrights would ride their horses through. Freedom...space...the Ponderosa! Believe it or not this idea still lives in a lot of people and it may live in you! Thinning or pruning your forest, creating wildlife habitat or simply studying the ever changing earth can be a great way to "recreate".
Hunting-Some people want to own a large tract of land so they can improve the deer or elk population on their own property. In eastern
Wildlife management-In owning your own forest, you can manipulate the forest cover to improve the wildlife population and diversity of species. Wildlife requires 3 types of forest systems:
1) Feeding areas-Typically wildlife like to feed in open area or clearcuts where there is young vegetative growth, berries or grass. Notice all of the browsing activity in a 2 or 3 year old clearcut....or maybe all the digging that goes on in the same areas. Animals appear to like disturbed areas where the ecosystem is re-establishing themselves. I recall birds showing up above when a new fence line was being put in. When I was driving a bulldozer across some flat brushy ground a coyote was following behind me by about 100 feet. It appears that the dozer was shaking the ground and field mice were running around making it a nice meal for the coyote. In a clearcut—young vegetative shoots appear, bugs appear, then birds, then small predators, deer and elk will feed on the vegetative shoots, then larger predators might come through. Feeding areas can be created in the forests to improve the wildlife component.
2) Hiding Cover- Animals need to be able to hide from humans but also from other predators. Typically, smaller thicker stands of young trees with brush on the periphery will help provide this type of cover.
3) Thermal cover- In the winter and summer, animals need protection from the elements such as the wind, driving rain and hot summer sun. Typically, low level brush clumps, nestled among hiding cover provides a secure protected location for wildlife.
Investment Analysis:
When buying timber and timberland for profit...an investor will want to get an estimate of the volume of the timber resource on the subject property and an estimate of the value of the timber.
The volume estimate is typically called a "timber cruise" and is a technical statistical analysis or sampling of the various merchantable timber types on any given parcel of land. The timber types are sampled by taking either fixed or variable plots and within those plots data such as tree count, tree species, diameter, height, and log grades are inventoried. It is important to pay for enough "plots" on the property so that a sound statistical sample is achieved. There can be extreme variations in timber stands due to soils, aspect and slope. The timber types need to be stratified as clearly as possible to manage the variation within a stand. The timber cruise gives the landowner an estimate of the quantity and quality of the timber resource It does not give you an estimate of the value.
A timber appraisal will give you an estimate of the value of the timber resource at a given point in time. I say "given point in time" because delivered log prices can fluctuate dramatically in a calendar year or by season of the year. From the timber cruise, the volume in board feet or cubic feet will be tallied for the entire tract. In the timber appraisal the delivered log prices that one uses are derived by contacting all of the log buyers in a particular region. It is smart to shop around. Log buyers will give you the delivered log prices for a particular species delivered to their processing facility or to the port dock. Log prices will vary by size, length, species and quality. It is very important when conducting an appraisal to match the right log price to the volume cruised. I have seen major fundamental errors in timber appraisals for this reason.
A good timber appraisal will also include all cost elements involved in the timber harvesting enterprise.
Costs such as road building, culvert installation, surveying, timber falling, bucking, skidding and hauling costs all need to be included. In addition there is usually some kind of "timber harvest tax" on timber when it is harvested and sold to mills. Check with your respective forestry departments in each state to find out what that number might be for your forest. Finally, I include the cost to pile the logging debris, burn it and then purchase and plant trees for the new forest. Anything that is a "hard cost" needs to be included in the cost calculation of a timber acquisition.
Basically...once the delivered log prices are determined then the gross delivered value can be determined for the entire forest. Then, the costs are subtracted from the value of the merchantable delivered value of the timber and a "stumpage value" is determined.
The stumpage value would be considered the net value of the merchantable timber. From that value, you can deduct the time value of money for the investment, interest costs if you have borrowed money and attach a profit and risk factor for the activity. Many people have differing discussions about the level of profit and risk. Risks can be in the form of market changes of delivered log prices from the time you finish the appraisal, make the investment and harvest the timber or it can be a biological risk...like hidden defect or breakage from the falling and harvesting of timber.
The biological risk factor allowance is sometimes applied during the timber cruise phase and will be in the form of a defect % in the timber cruise. The market risk factors come from fluctuations in the supply and the demand in the timber market, weather shut-downs due to fire and other geographically specific factors.
There are so many statistical and technical components to the arrival of the stumpage value that is important for me to express to you that you should not take this process of timber appraisal lightly. I personally hire a professional forestry firm that I have used for 10 years to provide me with the volume and the log specifications that I want for a specific project. I know that I will get good volume information but I also know how to stratify the timber types myself using aerial photography and can come up with a good idea as to what the volume is by timber type. If the cruised data is consistent with mine then I am comfortable with the numbers. If not, then we would do more plots on the property.
I typically do my own timber appraisals and have been successful in managing timber acquisitions. I am happy to work with you on developing your own investment model for your particular needs should we do business together.
Making an offer on your Timberland Acquisition
There are different ways to structure a timber or timberland transactions. Many transactions are done with cash especially if they involve merchantable timber. However some properties are acquired via Land Sale Contracts or Notes and Deeds of Trust.
It is difficult, if not impossible to finance an acquisition through a conventional bank so sometimes creative financing is a good option. I have both bought and sold property on contract. Some sellers actually prefer a real estate contract as they like the interest rate and the payment structure which usually beats their alternative investment. I remember reviewing one buyers financial statement and he had 30 contracts paying him monthly income and most of them were at about 10% APR (annual percentage rate)! Not a bad cash flow! Structuring a timber or timberland transaction can be a bit tricky so give me a call and I can walk you through the possibilities once we discuss the basic elements of your deal.
Searching for your Timberland
I have provided you with two search locations to look for timberland. The RMLS search covers primarily Oregon and some Washington properties. The NWMLS search covers properties in the State of Washington. I know of properties that are not on the market and once you give your investment criteria, then I can get to work for you. Start doing your search and then call me for additional information on any property. I would like to represent you in your search and it is no additional cost to you as brokers commonly co-operate with each other. I can help you with aerial photos, topographic maps and other technical issues to manage your risk. I have all of the earnest money forms and other documentation to initiate a transaction.
I look forward to meeting with you. Give me a call and we can take this to the next step. Happy Hunting!
Jim Worl, Forester and Broker
James M. Worl Investment Real Estate LLC
james@RealtyInvestorsToday.com or jmacworl@aol.com
360-751-1440
PO Box 310
Colton, Or. 97017
