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Strategies for Conserving Private Working Forests Charles H. Collins The Forestland Group, LLC Cambridge, MA/Chapel Hill, NC
Timberland Market Trends • High volume of deals- driven by industry dispositions. • Growth of Institutional Investors (TIMOs) and other new participants • Significant pressure from rural/recreational real estate buyers • Supply of timberlands: Has been steady; pace expected to continue in the near future • Pricing of timberland expected to increase relative to timber pricing
US Large Tract Acres Traded and TFG Acres Purchased1997 - 2004 * *Estimates, year to date.
The TIMO Phenomenon • TIMO’s: Established in the early 1980’s • Trend: Sale of timberland to TIMO’s by forest products companies • Today: There are about 20 TIMO’s with about 13 million acres of U.S. timberland • Today: At least six TIMO’s have more than one million acres • New Trend: Private equity firms are buying timberland & mills from forest products companies
Trend toward Timberland Disposition by Forest Products Companies • Majority of Disposed Land: Acquired by TIMO’s and REIT’s • Some Immediately Acquired by “Traders”:Often parcelized and retailed into the marketplace • TIMO’s and REIT’s: Some participate in retail land marketplace. Question: What is ultimate disposition of TIMOs’ timberlands? • Potential Outcome: Increased fragmentation of timberlands and reduction in some forest ecosystem services • One Market Response: Purchase of conservation easements on some timberland
The Forestland Group, LLC (TFG) • TIMO formed in 1995 • Focus on naturally regenerating hardwoods, with some softwood forests • Five funds closed to date—Heartwood Forestland Fund V, L.P. launched in 2005 • Over 1.5 million acres acquired across 14 states in the first four funds—largest and most diversified hardwood portfolio in the nation • Investment fiduciary with long-term objective of achieving competitive returns while managing properties using sustainable forestry principles
Conservation EasementsTFG Track Record TFG has consummated working forest conservation easements in four states: -Michigan: 250,000 acres (150,000 acres closed) -New York (110,000 acres) -Maryland (22,000 acres) -Delaware (over 1,000 acres)
Michigan UP EasementKey Elements • Participants: State of Michigan, TNC and TFG • Combination: Sale of fee acreage and easement • Fee: 23,000 acres; Easement: 250,000 acres • Working Forest Conservation Easement: FSC Certification or Prescriptive Guidelines • Subdivision Restrictions: 25 No Development Units (NDUs) over 222,500 acres; 40 Restricted Development Parcels (RDPs) over 27,500 acres w/ 4,500 acres in Privacy Zones; RDP’s reduced easement price. • Public Access: Permanently provided on majority of land.
Perspectives on Easements • Preferred Scenario: Monetization of conservation attributes as an alternative to a higher-and-best use (HBU) sale; working forest conservation easement allows for forest management • Preferred Approach: Customization of features over national standards • Preferred Forest Management Guidelines: Certification or flexible guidelines rather than rigid standards • Preferred Monitoring Benchmarks: Adopt simple behavioral guidelines rather than “fuzzy” outcomes-based contractual features • Desirable Partner Characteristics: Professionalism, pragmatism, local knowledge, transparent objectives
Pricing of Easements Owners need to be compensated for the loss of options: -Option to sub-divide -Option to develop -Option to prescribe silvicultural practices at one’s discretion -Option to lease exclusive recreational rights
Conservation EasementsEcosystem Service Credits • Evolution: Toward increased separation, trading, and pricing of property right attributes • Ecosystem Services Examples: Carbon sequestration, wetlands mitigation, and water quality • Distinguish: Current markets for ecosystem services vs. perpetual rights
Observations on Structuring Land Deals • Movement toward the “stripping” of property rights for compensation—timber-cutting rights, recreational rights, ecosystem services (?) • Careful due diligence needed regarding potential conservation attributes • Communications and Partnerships needed among Timberland investors, public agencies, conservation groups
Conclusions: Monetizing Conservation Attributes • Strategic Consideration for Investors: Strip property of some layers of rights and concentrate capital allocation on “pure timber” play • Remember: Even “out-of-the-money” options have value when time remains—property rights are perpetual! • Financing Easements--Bridging the Monetization of Conservation Attributes: TIMO’s represent a likely source for short- and intermediate-term risk capital • Financing Easements—”Joint Capital” for Purchasing Timberland and Conservation Attributes: Wealthy conservation-minded individuals and selective foundations