Recently I had a question from a buyer relating to the standing timber on a property and how it affects the value of the parcel. Since many rural properties are wooded, I realized that others may have many of the same questions. Below is an excerpt of his question and my answer:

Jay,   .…my biggest problem is I still cannot get a handle on the ‘worth’ (based on return, not emotion) of timber property.  I’m familiar with farmland returns and projections, but I have no clue on timber. I’m having a difficult time figuring out what it is truly worth with the state and projections of the timber market.  I know you cannot ‘advise’ on ‘worth’ of timber, but do you have any websites, publications, or other sources you could direct me for me to educate myself?

Well, that’s a million dollar question! The quick answer is: No, I don’t have a good place for you to go to educate yourself to the extent needed to determine timber value on a given property. Also, some sources of information and websites have a hidden agenda so you don’t get the complete picture.

The longer answer is that the timber value of a property is variable based upon current markets, the stand (species and density) on the property, when it was last cut and how much the owner is willing to harvest (how does he/she want it to look when the cut is completed). It is also complicated by what any existing government contracts will allow you to do. In Wisconsin, we have Managed Forest Law that sometimes plays into this. To further confuse the issue, hardwood timber value fluctuates based on the whims of interior designers and the public as certain wood species come into style, then fade away only to come back into vogue a decade or two later.  Of course, the law of supply and demand dictates that the popular species are more valuable.

When I value a property to list it or advise a buyer client, I usually establish a baseline that assumes that there is a mix of hardwoods (which is what you usually find in the upper Midwest) and it hasn’t been logged heavily in the last 10 years. The key word is heavily as I don’t discount for a few trees harvested in that time frame as long as it hasn’t been decimated. For my purposes, if it is to be classified as wooded, then it has to have a various mix of trees of differing sizes. That is the baseline I use and I don’t add or subtract value if that is the case. Now if most of the mature trees were harvested recently and it will be more than 20-25 years before another harvest would be practical, I will subtract value. On the other hand if there hasn’t been a cutting in the last 20 plus years and there is an abundance of quality trees ready to be harvested, I will add value.  Bear in mind that very seldom does a property become available that has a large quantity of mature trees unless the seller is very aware of their value to the property and wants a premium price.

That being said; the only way I know of for the typical buyer to determine the timber value on a property is to hire a forester to do a current valuation and estimate that value 5, 10, 15 or 20 years into the future. Don’t forget, you can’t just add that value to the value of the land because you do need some amount of trees just to be at the baseline that I described. Be aware that what a forester does is just an estimate. When I was in the lumber industry, it was not uncommon for several foresters to cruise the same stand of timber and have their estimates vary considerably.

While timber can add significant value to a property, unfortunately, it’s not as easy to quantify as tillable land income. Since you may not be able to realize the income from timer for a number of years, it generally needs to be viewed as a long term investment and in the mean time appreciated for its aesthetic value.

If you have ever been involved in the marketing of timberland with mature timber on the property, you have probably faced the dilemma of deciding if you would be better off to cut the timber and then sell, or sell with the value of the timber built in. The solution to this dilemma will vary by property, location, species of timber, timing, goals, your tax situation, and many other variables. For example, in a market that shows strong recreational value in timberland properties, you are usually better off selling the property with the trees still standing up. However, this is not always true. It might be that the stand is so thick that one cannot easily navigate through it, and the recreational component of the property would benefit from a thinning. Lots of variables and several options could leave your head spinning and ultimately lead to inaction or a bad decision. It’s fair to say that this is a problem where two heads are better than one. Maybe three or four. I would suggest you and your agent work together on this decision. If the tract is large enough to warrant the expense, the services of a consulting forester will be extremely helpful in this process. You may also need the help of your accountant to help you sort out the tax consequences of your decisions.

Below, I will discuss some of the things you need to know in order to make the best choice financially, and then show you a mathematical approach to this decision.

1. What are your options for timber harvest? Treatments available might include: Clear-cut, thinning, partial-cut, or no-cut.
2. What is your financial timing? Timber harvest can bring in quick cash, but will probably delay final liquidation of the asset. Not cutting the property allows you immediate access to the real estate market, but sure does not guarantee a sale within a given time period.
3. What is the value of the timber that you will realize if you clear-cut, partial-cut or thin the timber? How much you thin the stand can have a big effect on this number. Any fees you will have to pay as a result of your decision to harvest the timber should be subtracted from your projected gross sales before application of the formula below.
4. If you cut any timber, how much will it cost you to make the property marketable again? Road repair, disposing of forest waste (limb piles), replanting, burning…etc. Many times the timber contract you negotiate can make the timber buyer responsible for these costs.
5. What is the tax liability incurred from the sale of the timber? This publication from Purdue Extension might be helpful in helping you calculate your taxable income from the sale.
6. What is your projected market value of the property after the elected treatment? What is your projected value of the property with no treatment (no-cut)? This is where an experienced agent will be helpful to you.
7. What is your projected tax liabilities for the sale of the property with and without the treatments? You might find this link on the IRS website helpful in determining this.

If you have decided that your financial timing could include timber harvest, below is a formula to help you break it down to a mathematical decision. You might need to run this calculation for any acceptable cutting treatment and then compare the results.

Projected Value of the property if you do not cut it
—
Projected taxes resulting from the sale of the asset at the projected value for not cutting
(If you are experiencing a loss on your investment at the projected market value, plug in the projected tax write-off here as a negative number)
—
Projected Value of the property after the elected treatment
+
Projected taxes resulting from the sale of the asset at the projected value after the elected treatment
(If you are experiencing a loss on your investment at the projected market value, plug in the projected tax write-off here as a negative number)
—
Projected net Income from timber sales
+
Cost to make the property marketable again
+
Taxes incurred from the sale of the timber
=
Positive Answer = Don’t Cut; Negative Answer = Cut
(A positive answer means that you are better off not applying the treatment in comparison to not cutting at all. A negative answer means that you are better off to apply the treatment in comparison to not cutting at all.)

Again, there are many variables that you have to account for along each step of the way. I hope this helps you to break down the process into a series of smaller, more logical decisions that add up to a better financial decision for you. This process is purely financial. Many other factors may play a role in your decision. Remember, lean on your agent for market advice that is specific to your property, a good forester for timber advice, and your accountant to help you understand your particular financial situation.

Timber that has commercial value as determined by local standards and local buyers is referred to as merchantable timber (“merch”). Trees that have no commercial value — due, perhaps, to their size, age, conformation, quality, species or location on inoperable acreage — are classified as, non-merchantable. Merchantable value in each trees varies according to its end use—veneer,  saw logs, chipandsaw (C&S), poles, ties, pallet wood, chips, pulp or biomass.

A landowner interested in selling his trees has to determine prior to any sale whether his woods contain merchantable timber, how much, of what end-use type and its estimated value.

Such determinations should be prepared for the landowner by a private-sector consulting forester in almost all cases. A state-employed forester or one employed by a mill may be used in some instances, but my experience has been that landowners are generally best served by retaining a private consultant with a substantial record of local timber sales and no particular ties to any one buyer.

Loggers often buy timber directly from landowners. Sometimes the landowner benefits from such an arrangement. But, again, my experience is that landowners almost always get less for their merch in this arrangement than they would through other sale methods.

My usual recommendation to a landowner is to retain a consulting forester to conduct a sealed-bid, competitive sale. The forester will provide the landowner with his estimate of the owner’smerch timber that is to be sold. This might be done through a forester walk-through, cruise or what’s known in my area when mixed-age, mixed-species (MAMS) hardwoods are offered, as a “marked sale.”

With MAMS hardwoods, the landowner’s forester typically paints stump and butt (two dots, about four feet apart) every tree that is to be sold. The forester then tallies the volume in every painted tree, grouping saw logs by species and diameter class with separate tallies and values for higher value veneer and low-value pulp. Lower value stumpage is generally sold by the ton; volume in higher-value stumpage is typically sold in board feet.

With even-age, one-species sales, like planted loblolly, the forester won’t mark individual trees to be sold. He will provide bidders with information on stand ages, thinning history and estimated tonnage. He will also comment on any quality issues in the stand and other matters that would affect harvesting.

The consulting forester will obtain current stumpage prices for the type of trees he’s marketing through contacting likely bidders and other buyers in the area. A consulting forester’s track record with these buyers counts for a lot. Foresters who are known to puff their inventories will not have many bidders or get good bids.

With a marked sale, the landowner knows exactly what he’s selling and has an estimate of what his forester thinks it’s worth in the current, local market. If the bids are too low, he can hold his timber and try again.

Bidders will visit the tract and make their own volume estimates and valuations.

I’ve generally seen the lowest sealed bids in a marked sale come from independent loggers who plan to cut and then sell to one or more mills. The high bid usually comes from a mill, but I’ve seen mill bids vary widely.

Each mill bids on the basis of its own market situation. A mill with low stockpiles and good orders for the timber being sold will bid high, because it needs the stumpage. High stockpiles and few orders will produce a low bid, or no response.

Competitive-bid sales are not the rule in every area. Buyers often prefer negotiated, bilateral sales, absent a competitive process. In many places, a landowner may only have one buyer for his timber.

Landowners can become knowledgeable about what selling their timber involves. But unless the sale is small or overwhelmingly simple, I would not sell my own timber without involving a consulting forester to represent my interests. My personal experience suggests — and the academic research confirms — landowners net more sale income after paying a consulting forester than they do through other methods available to them.

Landowners should research and question foresters they’re considering. Rosters are available from the Association of Consulting Foresters, Society of American Foresters and state forestry agencies. I favor using a forester who has had at least 10 years of recent experience representing private landowners in the sale area.  Landowners should make sure they understand exactly what a forester is doing (and not doing) for them, and what it will cost.

I like foresters, and I like working with them. I’ve come across a couple of duds, but my overall experience has been positive.

Acquire basic knowledge. Timberland buyers should think of themselves as consumers. Whether you’re a first-time timberland buyer or experienced, you should become familiar with the timber characteristics, markets and idiosyncrasies of the area that you are prospecting. Forest types differ, often within counties. So a timberland buyer must focus on learning about a particular area. Basic, general information can be obtained from:

Extension foresters in the area. These university-based folks can provide publications and general answers to your questions. They will not review a cruise for honesty. They can point out things to look for on tracts in a particular area, such as infestations and damage from fire or wind storms. Contact the county’s local office of the state’s cooperative extension service, or online through the forestry department at a state’s land-grant university. (www.naufrp.org, click on members for university contacts)

These departments also have forestry specialists on matters ranging from timber taxation to invasive species.

County forester. Most states have county (local) foresters who work with the public, primarily with landowners. They will not review a cruise, but they will be familiar with local conditions. (www.stateforesters.org)

Some states have begun a landowner mentoring program for new forest landowners that may be open to new timberland buyers as well.

County Soil Survey. This document provides soil maps for an entire county. It is free, and available either online or in hard copy. Each soil type is ranked for its productivity for growing local timber. The higher the “site index,” the more productive the dirt. The Soil Survey will show a land buyer what a property’s soils are and are not suited for. Contact the local office of the USDA’s Natural Resources and Conservation Service. (Local contacts through www.nrcs.usda.gov/sclocator.asp, and www.rcdnet.org, click on council directory, log in as guest.)

State’s timber market reports. Many states support a reporting service through their forestry division that tracks prices for stumpage, that is, recent prices paid for various species and types (veneer, sawlogs, pulp, etc.). These reports may lag current prices by a quarter or more, and they are averages for an area. Stumpage prices on state or federal lands are almost always lower than prices paid to private landowners owing to the requirements imposed.(www.srs.fs.usda.gov/econ/data/prices; www.tmart-south.com; www.forest2market.com; search for stumpage prices by individual states)

State forest-landowner groups. Many states have non-profit organizations of forest landowners who are actively involved in promoting private timberland interests.

A buyer might find a member in the area he’s targeted who’s willing to discuss local conditions and personalities. (National: www.woodlandowners.org)

Publications. A number of books and publications are available on managing timberland, forest health, harvesting techniques and issues and related topics. Sample contracts are available that provide a general approach for a landowner to hire a logger and a consulting forester. Relatively little material is available that explains how an inexperienced buyer should approach buying timberland and evaluate seller-supplied cruises. I devote several chapters to this subject in my book, How To Be a DIRT-SMART Buyer of Country Property, but my discussion is limited to deconstructing a hardwood sawtimber cruise. Different issues arise in northern hardwoods, pine plantations and West Coast timber.

Consulting foresters. Once a novice timberland buyer acquires basic knowledge through these sources, he should develop a relationship with a consulting forester who works the target area. PART VI will discuss how to find and work with a private consulting forester.

2. CPA.
A CPA can help you figure out the seller’s numbers—his basis, equity, remaining debt, appreciation and after-tax income from your offer. He can help you determine what the property is worth and whether it’s priced fairly in terms of itself and the current market. He can help you set up your purchase in the most tax-advantaged way. If you’re buying a working farm, he can help you analyze the seller’s financial information.

3. Surveyor.
It’s unlikely that you will need to survey the seller’s property before making an offer. But it may be advisable to have a surveyor walk the boundary lines with the seller’s deed in hand to make sure the lines on the ground match up with the language in the deed. A buyer should have his surveyor draw the deed’s boundary calls on a topographical map. This will determine both acreage and boundary closure.

4. Consulting Forester.
If your seller’s property contains more than five acres of woods, it’s worth asking a consulting forester to do a walk-through to determine its commercial value, if any. The consulting forester will determine the merchantable value of the seller’s timber, i.e., the likely current sales price in light of volumes, species and quality. You can use this number—or not, depending on what it is—in your negotiations with the seller. You can also use it to establish your basis in the timber for tax purposes.

5. Local advisor.
It’s always useful to know someone who is both locally knowledgeable and in your corner. Your local lawyer may be this person; the seller’s real-estate broker is not.

6. Property-specific consultants.
In addition, you may find yourself in need of advice from a soils engineer (if you have to find a septic-system site), physical engineer (if you have to build a bridge or construct a septic system), home inspector, architect, appraiser, environmental consultant (if you’re faced with a problem or liability), excavator, contractor, carpenter, farm consultant (to help evaluate a farming operation), farmer (if you have to evaluate farm buildings, systems and equipment), soils consultant (particularly if you’re going organic), neighbors (who can tell you a lot about your seller’s property and any claims or grievances they have) and environmental specialists (if you’re dealing with asbestos, mold, radon, water pollutants and the like).

Name one beach that does anything more than gives you sand itch.

Before Columbus, the 50 states had about one billion wooded acres, about 40 percent of our total land-and-water area. Today, the U.S. Department of Agriculture estimates that forests cover nearly 750 million acres.

America’s woodlands are increasing. Agricultural fields and pastures are returning to trees. Timber users and investors grow their own on plantations dedicated to fast-growing species, like loblolly pine.

Suburban development consumes woodland, but gain in fore st cover has exceeded loss in recent years.

Forests and urban trees together sequestered about 12 percent of the carbon dioxide released by fossil-fuel combustion in the U.S. in 2004, according to the U.S. Environmental Protection Agency.

About half of the Lower 48’s area is currently suited to forests, of which there are about 20 types. (Forest map at http://forestry.about.com/libary/tree/bltypdex.htm.) A map of currently forested land is at http://nationalatlas.gov/articles/biology/a_forest.html.

Significant global warming can change the geographic distribution of forest types.

The Midwest will be less suited to forests, and forest types will shift north. A long-term rise in temperature means America will be producing a different mix of tree species. This is not necessarily bad, but it will be different.

U.S. forest quality has declined over the centuries as a result of agriculture, certain logging practices, fire, disease and bugs.

Little virgin timber remains in either public or private hands. Most forested land has been logged several times during the last 200 years.

America’s production of timber products has been essentially flat since the mid-1980s, though consumption—met by imports—increased by 12 percent between 1985 and 2005.  We are substituting other products for those coming from freshly cut timber, and we are getting more product out of the timber we use.

U.S. per capita consumption of all timber products (lumber, plywood, veneer, pulp, miscellaneous) fell from 79 cubic feet in 1985 to 71 cubic feet in 2005 even as our population grew from 238.5 million to 296.7 million. (http://www.fpl.fs.fed.us/documents/fplrp/fpl_rp637.pdf: James L. Howard, “U.S. Timber Production, Trade, Consumption, and Price Statistics 1965 to 2005,” USDA, September, 2007.)

If timber production is not growing, why is timberland a sensible investment?

First, less of the total woodland base of 747 million acres is being used to produce timber. Less timberland in production means that timber grows more valuable.

An increasing number of individual owners don’t cut their timber for environmental or aesthetic reasons. Conservation easements that prohibit cutting use tax incentives to withdraw timberland permanently out of production.

A lot of timberland has been recast as higher-and-better use (HBU) property—mainly large lots and second homes. HBU status often backs out timberland from timber production.

As the privately owned timber base contracts, less timber is also being cut from federal lands as a result of opposition to logging’s environmental impacts.

Second, with the exception of plantations, less wood is being harvested per acre in many places than in the not-so-distant past. Hardwood trees with 40-inch diameters were common in my mountain county in the 30s; today, a 24-inch diameter is a dandy. Less timber cut per acre increases the value of the landowner’s stumpage, which is the current commercial value of his timber.

Third, timber prices have trended up over the long term. Stumpage price—what a timber buyer pays a landowner for trees he’s purchased—has increased for most, but not all, species in both federal and private sales.

Federal stumpage prices for all eastern hardwoods rose from $80.90 per thousand board feet in 1985 to $336.50 in 2005, expressed in 1997 dollars. The price of sugar maple increased five-fold. Douglas fir and southern pine rose, but ponderosa pine and western hemlock fell during that period. Federal stumpage prices are generally lower than private-sale prices.

Stumpage prices generally follow a wave cycle that has trended up over time.

Fourth, timberland value is appreciating because of increasing demand for rural second homes and recreational property. The closer the timberland is to a city, the stronger has been its appreciation, particularly when HBU-valued.

In many places, timberland is now too valuable as HBU property to be kept as timber-producing land.

Many investors look to buy timberland at timberland prices, divide and then sell at HBU second-home prices.

Population growth will continue to drive appreciation in timberland values.

The timberland market is also being pushed by demand from large investors–Real Estate Investment Trusts (like Plum Creek, Rayonier and Potlatch), pension funds, endowments, trusts and money managers. Most of the old-line industrial owners—like International Paper and Georgia-Pacific—have sold their timberlands to REITs or Timberland Investment Management Organizations (TIMOs), which manage them on behalf of institutional and individual clients.

It is the combination of timber-sale income and HBU-driven land appreciation that makes timberland profitable.

Fifth, many states offer property-tax breaks for timberland enrolled in their managed-timber programs. The requirements are usually minimal. The reduced valuation can cut annual property tax in half. Property tax is also deductible on a 1040.

Taxes—property and state–discount the value of timberland. New York is a high-tax state; Tennessee is among the lowest inasmuch as it has neither a severance tax on timber sales nor a state income tax on individual landowners. However, timberland is generally cheaper in New York than in Tennessee.

Enrollment in a state’s managed-timber program also helps to establish that a taxpayer is engaged in the business of timberland management and production. A business is afforded more favorable tax treatment than an individual owner who has not organized as a profit-seeking business.

Sixth, timber sold after a year’s ownership is subject to the federal capital-gains rate (now a maximum of 15 percent) rather than the usually higher ordinary-income rate. Federal conservation cost-sharing and reforestation incentives are also available.

Seventh, timber-sale revenue up to the taxpayer’s timber basis is free of federal income tax at the time of the sale. A well-counseled taxpayer can avoid some or all of the tax on both timber-sale gain and appreciation by folding his timberland into the tax-free portion of his estate.

Eighth, a landowner can donate a development-limiting, conservation-promoting easement on his timberland without limiting the use of the tract for timber production. Such conservation easements can bring the taxpayer substantial federal, state and local tax savings.

Ninth, timberland, even small parcels, may qualify in the future for trading on the Chicago Climate Exchange where a landowner would receive income for a certain amount of carbon his trees are storing. Carbon emitters would buy these credits.

This idea is still very much a work in progress. A typical timberland acre might be credited with storing about one-half ton of carbon dioxide annually, currently being purchased for about $3 to $4 per ton.

Anyone buying timberland should have a consulting forester do either a walk-through or a timber cruise before submitting a purchase offer. The forester will provide the buyer with a reasonably accurate estimate of the immediate commercial value of the merchantable timber, along with other valuable information.

Buyers can find local consulting foresters by going to the websites of the Association of Consulting Foresters (www.acf-foresters.org), Society of American Foresters (www.safnet.org/certified forester/CFdirectory.cfm) or the roster of private forestry consultants that individual state forestry departments maintain.

Finally, timberland provides solitude, recreation and family time. Name one stock or bond that does any of that.