New Partnerships in Forest Ownership

Mik McKee, The Climate Trust
As published by TriplePundit – June 8, 2016

On May 10^th the World Forestry Center hosted the Northwest Community Forest Forum (NWCFF). This group was created to address the increasing pressure on northwest forests from population growth, fragmentation, and development, and is united by the belief that: “long-term, secure community control and tenure of local forests, leads to enhanced stewardship and multiple public benefits.”

The following week, a number of conservation finance experts convened for two days of discussion and networking at the Conservation Finance Network’s Practitioners Roundtable. While more broadly focused than the NWCFF, the general belief that sustainably managed working lands provide direct ecological and economic benefits to the communities in which they are located, was a key element of their conversation.

The intersection between these two groups is clear, and in several instances conservation finance practitioners have partnered with local organizations to establish community forests. However, there is a degree of tension in this partnership. Communities and organizations working to acquire forestland and establish community forests need low-cost capital in order to achieve the community management and economic development goals they seek. Conservation finance practitioners, on the other hand, need projects capable of providing the returns their investors expect.

While both groups have worked hard to find ways to collaborate, successful partnerships have not been as common as either would like. However, changing trends in forestland ownership may present an opportunity to change this paradigm.

Starting in the early 1980s, many large, vertically integrated timber companies began selling off their lands and focusing solely on manufacturing forest products. Concentrating on manufacturing proved to be more efficient and profitable than owning and managing both forestlands and manufacturing facilities.

Timberland divestment created an opening for a new type of forestland owner called Timberland Investment Management Organizations (TIMOs). In the most basic sense, TIMOs manage timberland investments for institutional investors and high-net worth individuals, with the primary objective of maximizing investor returns.

A number of different factors, including significant tax benefits, make TIMOs an attractive option for investors, and over the past 25 years TIMOs have played a large role in forestland ownership and management. Transactions in the U.S. peaked at about 8.5 million forested acres in 2006, but have fallen to approximately 2.5 million acres annually for the past 6 years following the great recession.

While increasing global demand for forest products, mostly from Asia, continues to fuel investments in the Untied States, and new manufactured wood products like cross laminated timber and research into biofuels derived from woody biomass represent promising opportunities for investors, small cracks are starting to appear in TIMOs’ investment strategy.

The National Council of Real Estate Investment Fiduciaries (NCREIF) tracks quarterly returns on timberland investments made by tax-exempt institutions, primarily pension finds. The long-term trend on these investments is negative, suggesting that the size of returns is decreasing. This is partly due to the fact that there are fewer integrated timber companies selling off land, and so it has become common for TIMOs to sell to other TIMOs. These transactions are increasingly sophisticated, and TIMOs have learned to get maximum value out of the deal. In response to these trends, a report produced by New Forests suggests that while North America will remain a significant region for timberland investment, investors will start looking towards emerging forestry markets in South America and Asia.

If these cracks continue to expand, there will be real opportunity for conservation finance practitioners to partner with organizations seeking to establish community forests. These two groups already share a similar vision about the benefits locally owned and managed forests provide to their respective communities. Low-cost financing mechanisms, like access to State Revolving Fund Loans, payments for working forest conservation easements, and financing based on the future value of carbon offsets, are new tools that support these partnerships. The remaining question is whether these groups will be creative enough to seize this opportunity during times of changing forest ownership.

Image credit: Flickr/Jeongho Daniel Cha