Approximately 84% of the US' nearly 70 million acres of privately owned industrial forests changed hands between 1996 and 2007. The worldwide macro-economic forces that fueled these ownership changes have resulted in real challenges for those concerned about the environmental, economic and social benefits these forests provide. While the recent economic downturn has created a new set of challenges, it also creates opportunities for those working to conserve working forests. The following is an excerpt from an interview with Tom Tuchmann of US Forest Capital discussing the prevailing pressures in this new forestry market.
Tom, what is the future market for forest conservation?
Tuchmann: Before we talk about the future, we need to talk about the recent past because we’ve seen unprecedented changes in forest ownership patterns during the last 20 years. These changes are fundamentally altering the way lands are held and managed and will have a significant impact on forest conservation in the years ahead.
We are completing a study with researchers at Oregon State University and our preliminary conclusions show that between 1996 and 2007 roughly 59* of the nation’s nearly 70 million acres of privately-owned industrial forestland changed hands. Much of this land was sold by large forest products companies and it was purchased by TIMOs (timberland investment management organizations), which represent institutional and high net worth investors, and by T-REITs (timber real estate investment trusts), which are private and publicly traded operating companies. TIMOs and T-REITS own and manage forests as investments. This contrasts with the motivations of paper or solid wood manufacturers which often managed the same lands to maximize long-term timber growth so they could optimize the performance of their mills. In short, TIMOs and T-REITs directly manage forests for revenue and appreciation while integrated forest products companies traditionally managed them as production assets.
How is this shift changing the market?
Tuchmann: TIMOs and T-REITs have done a great job of demonstrating the enduring investment fundamentals of forests – not just as sources of timber, but also as sources of raw land for other uses. As a result, during the last decade, both small and large landowners have begun to value and sell off portions of their properties for development at an accelerating rate. This is leading to more forest fragmentation and conversion. For example, total forest area in the US is expected to decrease by approximately 23 million acres between 1997 and 2050. In the Puget Sound, WA area alone nearly 30,000 acres of private working timberland were lost over the last 3 years. This trend is not limited to urban areas. Rural areas also have experienced similar trends as a result of interest among recreational, second home and retirement buyers. Indeed, we are seeing new investors take 10,000, 30,000 and 200,000-acre chunks of their ownership and selling them off in smaller blocks.
Are you saying that these new landowners are to blame for all the forest conversion and fragmentation that is taking place?
Tuchmann: No, forest conversion and fragmentation are a function of global market forces and evolving competitive dynamics within the forest products industry. It no longer made sense for many companies to own forests as supply for their mills, so investors – including those with charitable and other public-spirited objectives like foundations, endowments and pension funds -- have bought them up. This new generation of forestland owner acquires the expertise necessary to invest in forests by purchasing shares in T-REITs and by engaging timber investment management organizations (TIMOs) to develop and manage dedicated forestland portfolios. T-REITs and TIMOs operate as fiduciaries on behalf of their shareholders and clients, which means they have a legal obligation to optimize the performance of their clients’ forest investments so as to generate competitive, market-based returns.
While traditional growing, harvesting and selling of trees is still a primary revenue generator, landowners are also responding to market demand for land, which forest products companies were traditionally reluctant to do because they tended to view forests not as financial assets but as part of their manufacturing infrastructure. Inevitably, the willingness of T-REITs and TIMOs to respond to this demand contributes to the estimated one million acres of forestland that is lost to other uses in the United States each year. The flip-side, however, is that it also makes a lot more land available for conservation purchases. My point is this – it is counter-productive to talk about assessing blame for the increased rate of forest conversion and fragmentation we are seeing. What is important is that we understand why it is happening and implement strategies that allow those who own lands with high conservation values to monetize them effectively – and enable those who wish to buy such lands to do so. That’s what US Forest Capital does. That’s why we exist.
You talk about a “New Forestry Market” emerging as a result of these trends. What does that mean?
Tuchmann: The bottom line is that TIMOs, T-REITs and high-net-worth investors control most of our private forestland. As these financially-oriented investors exit their holdings over the next 10 to 15 years, we believe that many of the 59 million acres sold since 1996 will either be parceled into small tracts (10 to 5,000 acres) and sold for real estate development, or they will be divided into relatively smaller timber operating units (20,000 to 100,000 acres), which will be sold to investors as pure timberland properties, but at higher per acre values. This is the “New Forestry Market,” we see emerging today and we believe it will present significant opportunities for both buyers and sellers for the next 15 to 20 years. We also think this market will present more opportunities to maintain and conserve the economic, environmental and social values that forests provide to society if we are able to integrate public, philanthropic and various forms of private capital.
Can you finance conservation values?
Tuchmann: Yes. The key to financing conservation values is knowing where philanthropic and unique forms of public and municipal funding can be used to leverage private equity; being creative in accessing non-traditional forms of debt; and, providing commercial returns for equity investors while lowering their environmental risk.
Can carbon, wetland mitigation banking and other ecosystem services provide real returns?
Tuchmann: It depends. Real money is flowing to ecosystem services opportunities and I believe there is significant potential in the future. However, the viability of any given situation is strongly dependent on the type of forest being conserved, the state within which it is located and the return expectations of the landowner or investor. Our job is to work with our clients to assess these variables and determine the viability of each opportunity.
What role will US Forest Capital play?
Tuchmann: We help clients structure and complete complex forest transactions by providing them with strategic counsel and project planning and management services. We place a particular emphasis on providing advice in relation to transactions involving landscapes that have strong conservation values and sensitive environmental characteristics. We also help clients develop and execute business strategies in the forest investment and conservation sectors. This combination of services and capabilities has positioned us to take advantage of the “New Forestry Market” as it takes shape.
Why are your services valuable in this context?
Tuchmann: Forestland transactions can be extremely complex on a number of levels. The level of complexity increases exponentially if you are talking about a property that also has environmental values that are of interest to the public. In that scenario, there are so many more variables that need to be considered. For instance: On what basis do you value such a property? How do you finance it? Can you certify and sell carbon credits? How do you engage and satisfy the public stakeholders who may care about the transaction? These are all challenging considerations. What we do is provide our clients with advice and a road map that helps them move through the process faster and more efficiently than they otherwise might. We add value by making complex forestland transactions easier for buyers and sellers.
With respect to forest investment and conservation focused business strategies, our experience and contacts in the natural resource sector can be invaluable to those who see opportunities to achieve both investment and conservation objectives by developing and executing new business concepts. In such situations, we operate as a sector-specific management consulting firm – helping clients with strategic and operational business planning, organizational development, financing and even marketing.
Why do your clients generally engage your services?
Tuchmann: We have experience and expertise in forestry, conservation, finance and public policy. Our clients hire us because we operate at the point at which those disciplines intersect – whether that is in a transactional or business development context. We understand natural resource and forest management issue. We have an informed perspective on the global and financial trends impacting land ownership patterns. We have extensive relationships with governmental authorities, conservation organizations, industry trade groups and industrial, investment and individual landowners. Finally, we have worked extensively with the financial community to develop and match financing options with the unique characteristics of clients’ transactions.
What was the nature of your work in the public sector?
Tuchmann: I served as staff lead to the U.S. Senate Agriculture Committee, which oversees federal legislation related to private forestry and the USDA Forest Service. In that capacity, I drafted the legislation that established the U.S. Forest Service’s Forest Legacy program, which has become one of the principal funding sources of private forest conservation in the country. I also served as director of the White House created office that was responsible for implementing President Clinton’s 24 million acre Northwest Forest Plan and its associated $1.2 billion economic assistance program. Both of these experiences were invaluable because they helped me acquire first-hand knowledge about how the government’s natural resources apparatus works and how it can be harnessed and leveraged to help my clients achieve their conservation and financial objectives.
What has been your involvement in the issue of using tax-exempt revenue bonds to finance forest transactions?
Tuchmann: Early in our existence we recognized that our clients in the conservation community needed improved access to capital at levels that exceeded the $1 million, $5 million and $10 million amounts that are typically available through public funding sources. These funds would allow conservation of large-scale forest transactions that are increasingly prevalent today. With this in mind we developed The Community Forestry Bond concept and the legislation that would make it actionable. Over time, we became known for pioneering the concept and we remain committed to seeing it become a common approach to financing conservation-oriented forest transactions. See New Products for more information.