North Coast forests can provide a wealth of products and services--from a variety of high quality wood products to clear running water, fish and wildlife habitat, and other ecosystem services.
Yet, because there are no existing markets for salmon habitat or clear running water, forest management tends to focus on producing wood fiber at the expense of other potential products and services. Thus, managing for ecological services, salmon fisheries, and other public trust values becomes a low priority--difficult for forest managers, who are responsible for providing returns to investors or owners, to prioritize.
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The basic concept behind working easements is simple: to compensate owners for property value lost through development restrictions or commitments to conservation oriented forest practices that enhance public trust values.
Today, at a time when the timber industry is facing a deep downcycle in forest product markets - and enormous pressure towards fragmentation - working forest easements not only encourage landowners to attain direct conservation objectives on the broad working landscape, they simultaneously support increased forest inventories, increased carbon storage, and ultimately maximize harvest volumes on some of the most productive timberland in the world--ensuring that California's forests continue to play a significant long-term role in meeting California's wood products needs.
In spite of the long term supply, security, and productivity advantages that accrue to the timber industry from the effective use of working forest easements, several criticisms have been levied at the use of public money to fund such easements in the past year--criticisms specifically aimed at conservation oriented non-profit forest landowners selling easements to protect working forests.
The following questions have been raised at the state Wildlife Conservation Board regarding the commitment of public funds towards working forest easements on the North Coast. The specific funds in question have already been committed to the purpose of securing forestland easements through the statewide initiative process and received public support. Nevertheless, these questions have future policy implications and require clarification:
Do non-profit organizations selling easements on working forest land have a competitive business advantage relative to for-profit organizations?
No. Non-profit and for-profit forest managers compete on a level playing field with regard to conservation easements.
The first thing that needs to be clarified is that any entity owning forestland, for-profit or non-profit, can sell an easement on their property. Any competitive business advantage inherent in a conservation easement is equally accessible to any business entity with a long-term commitment to meeting conservation objectives and maintaining forestlands as permanent working forests.
Second, non-profits are private corporations, not public entities. Non-profit forest managers pay property taxes, yield taxes, workman's comp and all the other regulatory fees and expenses associated with forest management. No competitive tax advantage accrues to non-profits in terms of management costs. Property tax receipts for local and state government do not decline.
Third, non-profit forest managers sell products into the same existing markets at the same prices as for-profit industrial ownerships. Non-profits have no motivation to sell product at below market prices. Any market advantage that accrues to non-profits meeting conservation standards through Forest Stewardship Council certification or other conservation labeling criteria is also equally accessible to any other form of business entity or an individual private landowner.
It is true that all of a non-profit's income above costs must be devoted to public benefit purposes, rather than the relatively smaller percentage a for-profit commits to state and federal income tax obligations. It is difficult to argue that this constitutes a net loss in public benefit. It is even more difficult to argue that restricting non-profit access to conservation easements does anything to change the relative competitiveness of non-profit and for-profit corporations. With regard to easements, the playing field is level.
Do non-profit easement sellers pay higher than market value for working forest land driving up the price for all industry participants?
No. While timberland prices are rising, the few timberland sales involving conservation non-profits do not drive timberland price trends.
The value of a conservation easement is set by conducting two valuations of the property in question. One estimates the value of future timber harvests and discounts that potential income to the present, the other estimates the potential net income if property were to be subdivided and sold for residential development. The difference between the two is the value of the development easement. If there is no potential for development sales, then there is no value to a development easement. It is important to note that the modeling tools used to develop valuations for conservation easements are the same due diligence tools and appraisal models used to establish values for timberland sales between for-profit timberland managers. State and Federal easement programs give specific guidelines to establish easement values and conduct their own appraisals. There can be no argument here. It is of critical importance to both sellers and buyers that easement valuations produce accurate, equitable, transparent, and verifiable results based on existing market values.
Yet the value of forested parcels is rising. Recent double digit increases in residential and exurban property values on the North Coast, coupled with historically low timber markets have forced many "cash poor" timberland owners to consider timberland sales for residential uses to augment their income. For others it is part of a business plan that returns greater revenues than could be recovered through timber management alone. But this is not simply an issue for mom and pop ranchers facing unexpected medical bills.
Well-financed and forward-thinking timber companies such as the Mendocino Redwood Company (MeRC) have made significant progress towards incorporating relatively high, FSC certified, stewardship values into an industrial business model. Yet, other more highly leveraged companies find themselves dependent on residential values; both to maintain positive asset valuations to access credit, and to provide sufficient cash flow to service debt and/or provide competitive investor returns.
For instance, the development value recently ascribed to Scotia Pacific timberlands by Pacific Lumber Company (PL) appraisers in the PL bankruptcy process was considered by many to be highly inflated. Deeply in debt, and without a high appraisal of development value, PL would prove unable to honor its debt obligations or maintain control of the company.
In response to Pacific Lumber Company's subdivision "kingdoms" proposal, the Humboldt County Board of Supervisors issued a moratorium on residential building permits for property zoned TPZ. For-profit timberland owners, and their lawyers, were among the most vocal proponents of the view that the removal of residential building entitlements on TPZ property constituted a significant taking of property rights and a reduction of TPZ property values.
To what degree development can be pursued within the constraints of the Habitat Conservation Plan on PL forests is unknown, but this much is clear: The development value of North Coast TPZ parcels currently exists.
Sales of conservation easements on working forest lands are a response to--not a driver of--the increasing spread between the present value of future timber harvests and comparable sales valuations that include embedded residential values on productive timberland. This trend is driven by market forces originating well beyond a few conservation transactions on the North Coast.
Do working forest easements enable non-profit owners of working forest land to reduce harvest levels and lead to forests that don't "work as hard" as forests managed under a more traditional for-profit business model?
No. Working forest easements enable forests to "work smart" by steadily restoring productive capacity, conservation values, and annual harvest volumes across the forested landscape.
Timberland acquisitions that pay fair market values to existing landowners and that maintain working forests in perpetuity forgo income from timberland sales. These projects require working forests to shoulder the Sisyphean burden of servicing debt or investor returns on the development value of the property in addition to the timber value. Forests taking on this burden may be working hard, but they aren't going anywhere. Servicing debt and/or investor returns on development value and timber value leads to biologically inefficient short rotation forest practices: marginal inventories, minimal conservation values, and perpetually low harvest volumes.
Temporary reductions in harvest volumes--such as the below growth harvest levels proposed in the Marathon/MeRC plan for the reorganization of Pacific Lumber Company--allow for the restoration of timber inventories, productive capacity, conservation values, and steady increases in annual harvest volumes.
The real issue here is maintaining sufficient supply to keep local mills open and maintain market share for North Coast wood products, particularly redwood, in national markets. From this perspective, MeRC's proposal, aimed at sizing PL milling capacity to available harvest levels, comprises a critically important step towards stabilizing declines in local mill employment levels--putting industry capacity and infrastructure on a firm foundation that will support stable, non-declining, future growth in the local forest products industry.
Relatively few for-profit managers have business models that enable purchase and retention of development values while rebuilding forest inventories and productivity, but these landowners offer no guarantee that North Coast forests will remain in production for coming generations or that they will manage for conservation values on the landscape. The ultimate sale of timber property at prices driven in part by escalating residential real estate values is a standard part of return on investment calculations for most timberland investors. And, there are many examples of timberland owners selling a portion of their land base into real estate development to maintain profitability over time--particularly in low points in wood product market cycles. It is difficult to assume that investors paying fair market value for timberland acquisitions will not expect a return on the capital invested in development value at some point in the future.
If the California's carbon credit program is successful, it can have a significant impact on the economic dynamics of forestland investments on the North Coast. Yet, the ability of timberland investors to participate in the California Climate Action Registry is dependent on placing an easement on the property sequestering carbon.
Working forest easements provide critical resources to support diverse ownerships in maintaining an economically functional, competitive, and sustainable forest products industry--any ownership that makes a direct verifiable commitment to maintaining the supply base for a sustainable North Coast timber industry. It is vitally important that access to publicly funded easement resources, approved by California voters, not be jeopardized by inaccurate assumptions about the economic dynamics affecting working forests on the North Coast.
For more information: www.newforestry.org
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TOC for Forest & River News, Spring 2008