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Conservation Finance: Framework & Basic Concepts. Brad Gentry and Deborah Spalding Yale/Working Lands Investment Partners. What Will We Cover In This Session?. 1. An organizing framework For thinking about the “costs of money” Across the different sources/“pots” now being used

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Conservation finance framework basic concepts

Conservation Finance:Framework & Basic Concepts

Brad Gentry and Deborah Spalding

Yale/Working Lands Investment Partners

Conservation Finance Camp


What will we cover in this session
What Will We Cover In This Session?

1. An organizing framework

For thinking about the “costs of money”

Across the different sources/“pots” now being used

2. Some key financial concepts

Particularly for working with private investors

3. Layering different sources of funding

Into individual projects by availability/cost

Start you thinking about the group projects…

Conservation Finance Camp


Conservation without money is just conversation…

John Forgach

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Necessity is the mother of invention…

Plato

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No Money is Free…

Life

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An organizing framework
An Organizing Framework

Sources/Pots

Characteristics

  • Thanks to:

  • Katherine Birnie, MCHT/EIP

  • Chris Larson, Patrick Holmes, Yale School of Forestry & Environmental Studies

  • David Batchelder, Kittery Land Trust

The “Cost of Money” matrix

  • Summary (3 pp) + details on seven main sources/pots (13pp) on class website

Conservation Finance Camp


Cost of money tradeoffs across pots
“Cost of Money” Tradeoffs Across Pots

Increasing volumes, costs, complexity, risk, return, etc…

Go for the cheapest/simplest money first!

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Conservation finance pots of money
Conservation Finance Pots of Money

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Cost of money characteristics
“Cost of Money” Characteristics

How much can your

organization handle?

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Cost of money characteristics1
“Cost of Money” Characteristics

Conservation Finance Camp


Cost of money characteristics2
“Cost of Money” Characteristics

Conservation Finance Camp


Cost of money characteristics3
“Cost of Money” Characteristics

Conservation Finance Camp


Cost of money characteristics4
“Cost of Money” Characteristics

Conservation Finance Camp



Layering example guilford ct
Layering Example: Guilford, CT

  • 780 acres open space protection 2007-2009

  • Broomstick Ledges (141 acres) acquired by Guilford Land Conservation Trust

    • $2.15 million

      • $500,000 from Town of Guilford

      • $600,000 from State

        • 1998 Open Space and Watershed Acquisition Program

      • Balance from private donors

Conservation Finance Camp


Layering example guilford ct1
Layering Example: Guilford, CT

  • East River Preserve (640 acres) acquired by Town

    • Deal brokered by Guilford Land Conservation Trust

    • Multi-conservation organizational effort to preserve tidal headwaters of the East River in Guilford

      • Adjacent to 240 acre Audubon Salt Marsh Sanctuary

    • $3,000,000 NOAA grant

      • Coastal and Estuarine Land Conservation Program

    • $5,000 FWS grant to write property management plan

    • 2009 town referendum for $15.4 million

      • $27 per $100,000 in property value

      • Passed by a 5:1 margin (2645 / 486)

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The role of private investors
The Role of Private Investors

  • Why do we need private investors?

    • Many sources of public capital have dried up

    • Easy transfer of protected lands to state/federal agencies is no longer assured

    • Most economically productive lands remain unprotected

  • To effectively utilize private capital it is important to understand their values and objectives

Conservation Finance Camp


Investor interest in working lands
Investor Interest in Working Lands

  • Stable, “real asset” in turbulent markets

  • Mix of income and capital appreciation

  • Inflation hedge

  • Diversification and low correlation to other assets

  • Desire to demonstrate sound land stewardship ethic

  • Longer term drivers:

    • Scarcity value of arable land and water

    • Farmland loss / population growth

    • Use of technology to increase productivity

    • Growth in markets for ecosystem services

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How private investors see the world
How Private Investors See the World

  • Not necessarily avoiding risk but balancing risk and return

  • Seen in both financial and conservation terms

Conservation Finance Camp


Delineating risks and returns
Delineating Risks and Returns

  • Returns

    • Market rates vs. mission rates of returns

    • Timing of cash flows

    • Liquidity and holding period

    • Optimal capital structure (debt/equity/public sources)

    • Ecological “uplift”

  • Risks

    • Financial performance and capital losses

    • Time value of money

    • Lock up

    • Leverage

    • Achievement of conservation goals

Conservation Finance Camp


Investment performance metrics
Investment Performance Metrics

  • Internal Rate of Return (IRR) (%)

    • Annualized effective compound rate of return

    • Used to compare different investments

  • Total Return (%)

    • Cash yield/income plus asset appreciation

  • Investment multiple (x)

    • What you get back vs. what you put in

  • Opportunity Costs

    • Forgone returns that might otherwise be realized

Conservation Finance Camp


Irr vs investment multiple
IRR vs. Investment Multiple

  • Some investors prefer one or the other but best to evaluate both in combination

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Discounting time value of money
Discounting / Time Value of Money

  • $1 today is worth more than $1 in five years

    • “Present Value” (PV) = current value of future payments discounted to reflect the time value of money and risk

  • Ways to determine discount rate:

    • “risk-free rate” PLUS some risk premium to pay investor for the risk that cash flows do not occur as expected

    • Investment “cost of capital” (mix of debt/equity/other)

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Things to watch out for with private investors
Things to Watch Out for With Private Investors

  • Strongly value “information advantage”—everything is proprietary

  • Greater due diligence since one’s own capital is at risk

  • Return on investment may trump landscape priorities

  • Look at a variety of deal flow to find the best transactions

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Sample project pathway
Sample Project Pathway

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Sample project pathway example
Sample Project Pathway: Example

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Sample project returns irrs
Sample Project Returns: IRRs

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Key questions to ask
Key Questions to Ask

  • Who controls the deal and its terms?

  • Who determines the conservation trade-offs?

  • What happens if the deal fails?

  • Who bears the risk? How do each parties’ risk profiles differ?

  • What is driving the price of land, the appraisal or the expected IRR?

Conservation Finance Camp


Questions
Questions?

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