TIMBER VALUATION October 2008

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1 Introduction TIMBER VALUATION October 2008 Timber is an important component of value on forestland properties. In many cases, the value of the timber can be several times the value of the land. This can be true on properties where the highest and best use is for timber production and for properties that have some other highest and best use. An essential knowledge of forestry and the timber market can help an appraiser understand how the value of the timber contributes to the overall value of a tract of forestland. It is not necessary for an appraiser to be a forester, nor is it the purpose of this article to provide a crash course in forestry. When a valuation assignment involves land that contains trees, the appraiser can always consult with a registered forester and possibly involve the forester in the appraisal assignment if there is significant merchantable timber on the property. However, it is a good idea for the appraiser to have a basic understanding of tree species, timber products, forest management, and the timber market unique to the region of the United States where the property is located. That way, the appraiser and forester can better communicate and the forester can understand what information the appraiser needs in order to properly complete the appraisal assignment. The major timber producing regions of the United States include the northeast, southeast, Gulf States, Great Lakes region, Rocky Mountains, and the Pacific Northwest. Each of these regions has forest characteristics that are unique and different from the other regions, and subsequently, the forest products and timber markets differ as well. While the author has spent his entire career in the southeastern United States, this article will cover principles that are applicable to all of the regions. The first thing the appraiser and forester must agree upon is which timber value is appropriate to the appraisal. The timber values I will discuss here are market value, contributory value, and excess timber value. Market value of timber is similar to the definition of market value stated in The Appraisal of Real Estate, but it applies to the timber only. This is the amount a timber buyer will pay a landowner for the right to cut and remove timber in a competitive timber sale. Contributory timber value is the contribution that timber makes to the overall value of a tract of timberland (land and timber). Contributory value can be greater than, less than, or equal to the market value of the timber. The appraiser will normally use contributory timber value when the highest and best use of the subject property includes timber production. Excess timber value is the amount of timber that can be removed from a forested tract by a selective cutting without significantly damaging the aesthetic value of the property. This value is applicable when valuing tracts of forested land where the highest and best use is for residential or commercial development. An important timber expression for the appraiser to know is the definition of stumpage. Stumpage relates to the value of the standing tree, in the woods, uncut. Stumpage value differs significantly from the value of logs delivered to the mill, as the delivered log price includes stumpage, the cost of cutting and hauling the timber to the mill, and the profit 1

2 realized by the timber buyer. Stumpage is real property whereas logs are personal property. Stumpage value can be extracted from log value, as will be shown later. The Timber Cruise The timber cruise, or timber inventory, is the starting place for timber valuation. Until the appraiser knows the volume of timber on a property, he cannot know the value of the timber. Timber volume is expressed either in tons, cords, board feet, or cubic feet. I will not define the different units here, as that is beyond the scope of this article. However, it is important that the appraiser know what units are typical for the particular timber market he is working in. A forest inventory is the procedure for obtaining information on the quantity and quality of the forest resource and many characteristics of the land area on which the trees are growing. A complete forest inventory for timber evaluation provides the following information: estimates of area, description of topography, ownership patterns, accessibility, transportation facilities, estimates of timber quantity and quality, and estimates of growth and drain [removals]. 1 Foresters use a number of different timber cruising methods, including strip, fixed-plot, variable radius, and 100% cruises. The first three methods measure only a small percentage (sample) of the trees on the property. A conversion factor based upon a ratio of the total timbered area to the area in the sample expands, or blows up, the sample in order to compute the total volume of timber. A forester may perform a 100% cruise on a small tract of high-value timber. With a 100% cruise, the forester measures each tree on the property, resulting in a tally of 100% of the trees. The most common timber cruise is a systematic sample. In a systematic sample, plots are laid out in a grid fashion, evenly distributed, so as to sample all of the different timbered areas. I like to compare the timber cruise to a public opinion poll. As long as the polltakers cover the a broad spectrum of the overall population, the results of the poll will be relatively accurate. If the pollster questions twice as many Democrats than Republicans, then the chances are good that the polling results will be significantly skewed. Therefore, a poorly designed timber cruise will result in unreliable timber values. The forester should specify the type of cruise he performed and should include a field map or sketch showing the location of the sample plots in his timber cruise report. This will help the appraiser to judge the reliability of the timber volumes. The forester will tally the trees by product based upon their size, species, quality, and the timber markets in the region in which the property is located. Forest products can include sawtimber, pulpwood, chip-n-saw, plylogs, poles, veneer, super pulp, and others. The forester should provide the appraiser with definitions of the various forest products found on the property, and the size and specifications of each product. Table 1 shows specifications for typical forest products found in the southeast. 2

3 Table 1: Forest Product Specifications Product DBH Limits Minimum Top Minimum Length Diameter Pine Sawtimber or merchantable 16 feet Pine CNS feet Pine Pulpwood feet Hardwood Sawtimber or merchantable 16 feet Hardwood Pulpwood feet Timber value also depends on tree species. For instance, in the south, pine is more valuable than sweetgum; in the northeast, cherry is more valuable than poplar; in the Pacific Northwest, Douglas fir may be more valuable than western hemlock, and so on. While an appraiser should not be expected to be able to identify all of the trees in the forest (and few foresters can, either), when inspecting the subject property, it is helpful to know what products and species have the highest value in the subject property s market area. Trees of North America: A Guide to Field Identification, Revised and Updated, (St. Martin s Press, 2001), is an excellent field guide for tree identification. The statistical accuracy of a timber inventory can be improved by increasing the number of sample plots, up to a certain point. Once a cruiser has tallied a sufficient number of sample plots, additional plots add little to the accuracy of the timber cruise. The level of accuracy needed for any timber inventory depends upon the type and value of the timber, the size of the area, the cost of performing the timber cruise and the purpose of the timber cruise. An area of fairly uniform timber will require less plots to obtain the same level of accuracy than an area that has a great deal of variance within it. A confidence interval (CI) states the level of certainty one has in saying that the estimated average volume or value per acre will fall within certain limits. For instance if I were to state that at the 95% CI, the estimated average timber value of $500 per acre will be within + or - 10%, I am saying that 19 times out of 20, the actual average timber value will not be less that $450 per acre and will not be greater than $550 per acre. Furthermore, at the same time I am also saying that at the 66% CI, or two times out of three, the average estimated volume per acre will fall within + or - 5%, or will be within the range of $475 per acre and $525 per acre. Both statements would be true. The range and confidence intervals necessary depend upon the factors discussed above. In performing a timber inventory, it is important to decide what accuracy requirements are desired and how many sample plots will be needed in order to achieve those results. Once the cruiser has achieved those results, taking additional plots becomes unnecessary. Forest Management Basics The Society of American Foresters (SAF) has defined forest management as The application of business methods and technical forestry principles to the operation of a forest property. Historical management practices on a forest can have a direct influence on timber value. Forest management can vary from little or no management at all to very 3

4 intensive management. Forest management affects tree growth, species composition, and timber quality. In a forest, the basic management unit is the stand. A stand is a contiguous group of trees sufficiently uniform in species composition, arrangement of age classes, and condition to be a homogeneous and distinguishable unit. 2 On smaller forest properties, the entire tract may comprise one stand, while large industrial forests are usually made up of many different stands of varying sizes, ages, species, etc. Timber volumes and values can vary considerably from stand to stand, and a good timber cruise will separate the sample plots by stand and compute timber volumes on a per-stand basis, which is called a stratified sample. Forest stands can originate by either natural or artificial (planted) means; can be even-aged (all trees the same age +/- a few years) or uneven-aged (many different age classes growing side by side), premerchantable or old-growth, healthy or stagnant, comprised of high-quality high-value timber or undesirable tree species. It all depends on management. Forest landowner objectives will dictate the management and ultimately the value of the timber on a forest property. Factors Affecting the Value of Timber The market for timber on any given tract of land is determined by a number of factors including both the physical characteristics of the land and timber, and the economic conditions that exist at any given time. The strength of the overall timber market is constantly changing due to supply and demand. Supply is the amount of raw material, sawtimber or pulpwood, that is available to primary wood using plants such as sawmills and paper mills. This supply can be dramatically affected by weather. In the wet winter months supply is usually down because of the limitations that wet weather places on timber harvesting activities. In the drier months of summer and early fall, mill inventories will be up because of little or no weather-related problems with logging activities. Demand relates to the demand for finished wood products such as lumber and paper. The total price that the timber on a given tract will bring on the open market depends on the quantity and quality of the various products, the unit rates associated with those products, and the nature of the land. The unit rates relate to three different categories of variables: 1. The nature of the timber; 2. The nature of the tract on which the timber is located, and its market access; and 3. The circumstances surrounding the sale Variables within these categories are summarized in the following table. Many combinations of variables are possible. This information can be used to compare one timber sale to another by subjectively assigning poor, fair, good, or excellent ratings to the sales in proportion to the occurrence of poor and excellent characteristics. 4

5 Table 2: Factors Affecting the Value of Timber I. THE DESIRABILITY OF THE TIMBER CHARACTERISTIC POOR STAND EXCELLENT STAND 1. Timber volume per acre Low High 2. Total Volume in tract Low High 3. Size of trees Small Large 4. Frequency of limbs and knots Multiple limbs Merchantable length generally clear of limbs. II. THE DESIRABILITY OF THE TIMBER STAND LOCATION CHARACTERISTIC POOR STAND EXCELLENT STAND 1. Exterior Access Intermittent Road All weather road touches property. 2. Interior Access No log roads Log roads within 1/4 mile of all of tract. 3. Average number of months loggable per year. Four months or less due to: a. soil trafficability b. obstructions c. severe slopes Year round except during severe weather; no obstructions which block skidding or hauling. 4. Distance to delivery point Lack of proximity to: a. rail transportation b. concentration yards Close to wood using facilities III. QUALITY OF THE TRANSACTION FACTOR PRICE WEAKENING PRICE STRENGTHENING 1. Number of bids Only one Many 2. Buyer & Seller Seller: poorly informed or under financial duress. Buyer: facing facilities shutdown due to low wood supply 3. Bid results Wide spread between high and second bid 4. Adequacy of time allotted Hurry-up sales cutting contract of six months or less Seller: knowledgeable and under no duress. Buyer: knowledgeable and under no supply problems. Narrow spread between high and low bids Wide exposure of sale to market and adequate cutting time 5. Involvement of middleman Sales to middleman Sealed bid from forest products firm 6. Form of payment Below-market interest rate on deferred payment All cash transaction 5

6 Sources of Timber Price Information There are three primary sources of timber price information: 1. Comparable timber sales 2. Timber price reporting services 3. Extraction from delivered log prices Comparable timber sales are usually the most reliable source of timber price information. Consulting foresters are a good source of comparable timber sales. Most consultants handle timber sales for forest landowners so they are usually knowledgeable about current timber prices. They can provide the appraiser with sales of timber that is comparable to the subject property s timber. The Association of Consulting Foresters (ACF) is a national organization of consulting foresters located throughout the country that promotes a high degree of ethical standards and competence among its members. ACF foresters can be found on the ACF website ( Sealed-bid clearcut timber sales provide the best indication of timber value. Sealed bid sales are competitive and represent a transaction between willing and knowledgeable sellers and buyers. A timber sale with more than one bid and a small spread between the first two bids provides a good indication of what buyers are paying for timber. There are several sources of published timber price data including: The Timber Market Report, Forest2Market, Timber Mart-South, various university extension services, the U. S. Forest Service, and State Forestry agencies, to name a few. Some of these published sources will report prices for individual timber sales and others just report average timber prices for a given period of time. The appraiser should use caution in relying on any published timber price information. The most reliable timber price publications are based exclusively upon data reported by sellers rather than buyers. It is believed that some timber buyers will understate timber prices in an attempt to give forest landowners the impression that timber prices are lower than they actually are. A third source of stumpage price information is the price that forest products companies are paying loggers and timber buyers for logs delivered to their mills. These prices will fluctuate with mill inventories and the lumber or paper markets. In order to extract the stumpage price, the appraiser must subtract the cut and haul cost and the timber buyer s profit from the delivered log price. Both delivered log prices and logging costs can be difficult to obtain, as timber companies are reluctant to disclose what they are paying for logs and because logging costs can vary significantly with the difficulty associated with harvesting the timber and the haul distance to the mill. How Timber Value Relates to Overall Real Estate Value Market Value: Market value of timber is the selling price of the timber only. Timberland buyers and sellers will sometimes add the market value of the timber to the bare land value to arrive at the overall value of the real estate. This is particularly common on small tracts 6

7 of land or in cases where the buyer plans to purchase the land and immediately harvest all of the timber. On large tracts, however, this method may overstate the value of the property as it violates the unit rule: the "...aspect of the unit rule is that different elements or components of a tract of land are not to be separately valued and added together. For example, the value of timber, as an independent component, cannot be added...and this sum further added to the value of the land. Such a procedure results in a summation or cumulative appraisal, which is forbidden in appraisals for federal acquisitions, as it is in general real estate appraisal practice." 3 Market value, however, is the starting point for computing contributory value and excess timber value. Contributory Value: As mentioned above, the Uniform Standards for Federal Land Acquisition ( Yellow Book standards) require that the appraiser consider the contributory value of timber when performing appraisals used in federal land transactions. Contributory value is the appropriate value to use if the highest and best use of the subject property includes timber production. What is contributory value of timber and how is it computed? This question has confounded many appraisers, as there are no published guidelines on the subject. Both appraisers and foresters seem to be unsure of what contributory value of timber is. The principle of contribution states that the value of a particular component is measured in terms of its contribution to the value of the whole property. 4 The contributory value of timber (CVT) is the contribution the timber makes to the overall value of a tract of timberland. The contributory value can be greater than, less than, or equal to the market value of the stumpage on a tract of timberland. I will explain one method of getting at CVT. No doubt, there are other valid methods as well. This method use comparable timberland sales to estimate CVT. I have analyzed nine timberland sales that took place in south Georgia that have a highest and best use of timber production and recreation (hunting). I have also verified merchantable timber volumes for each sale; and spreadbacks on how each sale price was allocated amongst land, premerchantable timber, and merchantable timber. I then compared the allocated price for merchantable timber in each transaction to the market value of timber derived from timber sales that occurred around the same time that each timberland sale took place. In other words, how did the price allocated to timber in each land sale compare with what timber was selling for at that time? I also compared the ratio of sawtimber to pulpwood, the percentage of land in premerchantable plantations, and the percentage of land in bottomland swamps for each sale. Table 3 summarizes the elements of comparison for each timberland sale: 7

8 Sale Table 3: Contributory Value of Timber for Nine Timberland Sales % Market Value of Timber Ratio Sawtimber to Pulpwood Area of Premerch Plantations (%) % Bottomland Swamp IP to HTRG 113.3% 36/64 48% 0% RII Timberland Partners to JW Langdale 89.7% 25/75 16% 17% MONY 11B to Weyerhaeuser 81.3% 55/45 42% 13% MONY 11B to J. Elliot Carter 87.6% 44/56 58% 12% VFI to FIA 82.5% 25/75 67% 45% VFI to The Langdale Company 129.5% 27/73 69% 28% East Coast Traders to Sea Island 118.3% 0/100 42% 37% International Paper to J. M. Dudley 85.7% 26/74 49% 22% Rayonier to VFI 79.4% 23/77 53% 33% As the table shows, the ratio of the allocated timber price to actual market value of the timber, expressed as a percentage, for the nine timberland sales ranges from 79.4% to 129.5%. This means that timberland buyers were paying anywhere from 79.4% to 129.5% of the actual market value of the merchantable timber when purchasing these timberland tracts. Timberland investors may be willing to pay more than market price for timber on a tract if the property has a high percentage of pulpwood or premerchantable timber that in a few years will grow into chip-n-saw or sawtimber and increase in value substantially. Timberland buyers may also discount the market value of the timber if the tract contains a high percentage of mature slow-growing trees that the buyer does not plan to cut in the near future. There is an increased risk that the older timber is more susceptible to being lost to disease, insects, and normal mortality. Timberland buyers who plan to liquidate all of the timber immediately after purchase, are more likely to allocate the timber at market value. As shown in the above table, the three sales that had timber allocations that were higher than market value contained anywhere from 64% to 100% pulpwood, had a high percentage of premerchantable plantations that were also rapidly increasing in value, or had a relatively low percentage of swampland that could not be converted to pine plantations. The remaining sales range from 79.4% to 89.7% of allocated timber price to market value. Therefore, it can be surmised that the CVT for a tract with a high percentage of pulpwood or premerch timber in the market area of the comparable timber sales will be anywhere from 113.3% to 129.5% of the actual market value of the timber. Likewise, the CVT for a tract with a high ratio of sawtimber to pulpwood, a smaller percentage of premerch timber, or 8

9 with a larger percentage of bottomland swamp will range from between 79.4% to 89.7% of the market value of the timber. It is important to understand what is happening in the market between buyers and sellers in order to know how contributory value relates to market value. As explained earlier, buyers and sellers of small timberland tracts often add the market value of the timber to the bare land value in order to arrive at the value of the tract of timberland. The nine timberland tracts shown in Table 3 range in size from approximately 1,900 acres to 55,000 acres, which suggests that buyers and sellers of large timberland tracts may be doing something other than just adding the market value of the timber to the bare land value. Excess Timber Value: Many forested tracts in the United States are no longer timberland, but timbered land. That is, the land has a highest and best use of something other than timber production (usually residential or commercial development) but it also contains significant merchantable timber. A potential buyer of such a property can selectively harvest and sell some of the timber without disturbing the aesthetics or development potential of the tract. This is taking place in many areas that were considered rural just a few years ago, where population growth and development pressure has now changed the highest and best use of the property to residential or commercial development. Many of these areas still have a significant infrastructure of forest products mills in close proximity to the property, which makes timber harvesting feasible. This timber can be harvested using what is commonly referred to as a real estate cut. A real estate cut is not a proper silvicultural 5 term, but it refers to harvesting all but approximately 20 to 30 well-spaced trees per acre, so as not to damage the aesthetics of the property. After the real estate cut, the property is suitable to be developed for some use other than timber production, such as residential development. The objective of a real estate cut is to remove as much of the high-value timber from a property without altering the aesthetic value of the property for development. In stands of mixed pine-hardwood timber in the southeast for example, a real estate cut would leave large-crowned hardwood trees and remove the better quality pine timber. In planted pine stands, a real estate cut would focus on leaving a well-spaced pattern of trees similar in appearance to a shelterwood cut. The appraiser (and forester) must know the total volume of timber on the property and be able to estimate what will be left as leave trees. The difference is the volume of timber that can be harvested, or the excess timber. The unit prices derived when estimating market value should be applied directly to the excess timber volume, as the appraiser assumes that the typical buyer of the property will cut the timber as soon as it is practical and then develop the property. The appraiser should use timber prices derived from comparable timber sales of real estate cuts or selective cuttings, as the stumpage value may be less for a real estate cut than a clearcut, due to higher logging costs. Depending on the timber, excess timber value can range anywhere from 50% to 90% of the market value of the timber. 9

10 Conclusion Timber value is an important component of the value of forested property, regardless of the highest and best use of the property. The appraiser should understand the difference between market value, contributory value, and excess value of timber and know which value is appropriate when appraising a forested property. Most foresters are not appraisers, but they do understand forest management and the timber market. An appraiser should consult with a forester when the appraiser suspects that the property he is appraising may contain merchantable timber. An understanding of some of the issues and principles discussed in this article will enable the appraiser to communicate effectively with the forester and will improve the appraiser s ability to properly value any forested property. 10

11 Notes 1 Bertram Husch, Charles I. Miller, and Thomas W. Beers, Forest Mensuration, 3 rd Edition (1982), p Smith, David Martyn, The Practice of Silviculture, 7 th Edition (1962), p Interagency Land Acquisition Conference, Uniform Standards for Federal Land Acquisitions (Washington, D.C.: Appraisal Institute), pp The Appraisal Institute, The Appraisal of Real Estate, 12 th Edition (Chicago: Appraisal Institute, 2001), p Silviculture is the art of producing and tending a forest; the application of silvics in the treatment of a forest; the theory and practice of controlling forest establishment, composition and growth. Smith, David Martyn, The Practice of Silviculture, 7 th Edition (1962), p. 1 11