How to think about price for timberland?

[Garrik]

Looking for some rules of thumb to help me price a piece of timberland.  Assume timber production is the highest use for this land, and that it has standing timber on it that is valuable, but nothing else of value (no home or other improvements).

Some suggestions that I have seen, and would love comments/suggestions on:

1) Be willing to pay 60% of the (net?, ie after logging and trucking costs?) value of the standing timber on the property.  (not sure where this comes from, and whether it only applies if you can log immediately).  In my world we can only log 30-40% of the standing timber every 10-15 years.

2) Take the value of the future harvests (which are known, again, assume I should use net revenue), and discount them back using a discount rate of e.g. 5% to get a net present value.  Pay that.

3) Your rule of thumb here...

Thanks much!

[mike_belben]

Can the land be converted to other usage or is it forest locked in perpetuity?  

That dictates a lot of the questions of mine that would follow.. 

Road frontage?  Existing roads or trails?  Mineral rights? Field stone?  Utilities on the road?  Divisible parcel? 

[Tacotodd]

Is it something that you'd even "want" to subdivide? Just askin.

[Roundhouse]

Interesting question. I'm a small player so I haven't been in a position to try and set the price on any of the timberland I've bought. Where I live is too close to a metro area and the per acre price wouldn't make sense for logging. Instead my logging and milling is done a couple hundred miles away from this (or any other) metro area. For the size parcels I've bought, 10 acres and under I've had to shop based on the going rate for the area I was looking. In the western UP the rule of thumb of $1000 an acre has been pretty consistent for the last 20 years or so (excluding land with "features" such as waterfront, frontage on a river, or on the edge of one of the few cities). What I find interesting is that the quality of the timber on any given property almost never has any bearing on the sale price. The people buying parcels 10 acres and under are buying them for recreation/hunting and even though a lot with a solid stand of mature trees could "pay for itself" with one harvest there is very little premium on such a stand just as there is very little penalty on the asking price for a parcel that was clear cut two years prior.

That said, my experience may not be relevant but here is my experience in buying 3 properties:
14 years ago, my dad has a camp 3 miles down the road from where I noticed a for sale sign on 10 acres. 10K and it included a 24' camper in decent shape. I liked the area so I walked the lot, aside from the access road and a parking spot there were no other developed trails on the lot, no recent logging and a stand of mature (but unmanaged) woods consisting primarily of hard maple and some hemlock, birch, a couple cherry and a couple spruce. With the gentle slope almost the whole 10 acres are accessible and usage with the camper worth at least 2K I figured it was a good deal and wanted to own some woods. I didn't want to have the property logged but liked the idea of milling my own wood from my own trees. In 2016 I took the plunge and bought a new mill and started milling timber onsite. Before long I was building with my own lumber. I didn't want to cut all the softwood off my property so I casually started keeping an eye out for other lots. 

One place where land seemed to be available at a discounted price was the property tax reverted sale. In 2018 a confluence of events worked in my favor. A tax sale property of 10 acres came up for auction 3 miles down the road from my first lot. There was also one of those 500 year storms that struck a week before the auction advertising company was to visit the property and washed out the road. Inaccessible to vehicles I visited the lot on my four wheeler to survey the terrain and timber. I was impressed with what I saw, the lot is heavy on the types of mature softwood that my first lot is short on. I was at the auction and picked up the lot for $3900. Hard to go wrong at that price and a week after the sale the road was repaired and open again. 

Last year a lot a half mile from my first lot where the sawmill is came up for sale. Again, I walked it and liked the species mix and tree size. It also has a cabin shell and a great spot to place it and open up a hilltop view. Online only auction this time and I bought it for roughly 10K. Between the 3 lots I now feel like I can cut whatever I need to feed the sawmill without running out or wrecking the aesthetics of the lots. Compared to the timber value I feel as though it is at least equal to what I've paid for these 3 parcels and I would likely be money ahead if I had the 30 acres logged tomorrow (based on what my dad made when he had 10 acres logged nearby). Fortunately I don't need to cash out now and can take my time in improving the timber quality on these lots and make my own lumber at the same time.

I'd be interested to hear the general area you are looking and how much land we're talking about, likely apples to oranges relative to my situation. A cold call on land that isn't posted for sale? I'm always afraid to do that since folks tend to see dollar signs as soon as someone is interested. YMMV

[Tom King]

Your 60% question leaves a lot up in the air.  I would buy all I could get at 60% of net, but wouldn't look at a piece less than a hundred acres.

Around here, cutover goes for $1,000 an acre, but no one will buy timberland parcels much less than a hundred acres for growing timber.

[Ron Wenrich]

What you need is a bare land value.  That involves having a timber inventory and appraisal on the land you're looking at.  I've seen land sell for less than the timber value, and some sell for a whole lot more.  That's the first part of judging whether it is good value.  The timber appraisal will come in handy at tax time when you have a harvest.  

Other than that, you can find what type of site you have and how productive it is.  A bog area won't be as productive as a site sitting on good soil.  Soil maps help.  Some sites are better to grow pine, some better to grow walnut.  You can project growth, but sometimes nature dictates growth rates on it's scale.

[mike_belben]

A  search this week for a friend revealed that anything listed online is selling at 5 to 20x higher than it was when we got a parcel for my dad maybe 2 years ago. 


The covid has made a refugee migration train into the rural south and prices are adjusted at capturing the sale proceeds of the urban/suburban yankee housing bubble sales.  So basically "right now" the rules are on hold for land buying until the next hard recession. I personally would be a seller rather than a buyer at this moment.  We went from $2k per acre to $10k minimum and up to $40k per acre for anything that is a nice place for a home site. Thats a yankee pricetag. 


I never see timberland advertised and suspect its big players and industrial selling agents direct marketing.  Quarries sell that way among old buddies. 

[WDH]

Here is how the Professionals determine the value of timberland. They cruise and appraise the current value of the timber on the land.  To that timber value, they add the value of the bare land.

Timber Value + Bare Land Value = Total Tract Value.  

The bare land value is determined by taking the property as is and developing a management plan for the current timber crop, if any, plus the next two timber crops into the future.  A model is developed that takes all the cash flows over the entire future period into account.  Future costs to achieve the management plan like ownership costs such as annual taxes, management costs and treatment costs like reforestation, site prep, TSI, fertilization, etc are added in the year they are expected to occur.  All revenues from future timber sales or harvests are added in the year that they are projected to occur.  All these costs and revenues are discounted back to the present using an after tax discount rate that the buyer would target to achieve.  The net present value (NPV) of these cash flows at that targeted rate of return is the bare land value of that property to grow that targeted timber regime.

Another way to say it is that the bare land value is that amount that you can pay per acre to grow that timber regime beginning with what you have on the property now and through the next two full crop cycles (rotations) and achieve the rate of return that you used to calculate it.  

When I was in the land acquisition group for the large timber company that I worked for, that targeted rate of return was 6% after tax. This is not something that you can calculate on your cell phone  .  This is where a professional forester can help you estimate the future cash flows, both costs and revenues, from these timber crops.  The assumptions that you use to calculate future costs and future timber values have everything to do with the answer you will get.  They depend on your key bets about the future and on whose crystal ball you want to use.  One guide is historical performance, but you get to decide what you believe will happen in the future.  100 years from now, somebody, not us, will know if you were right or not. 

[alan gage]

My formula for buying land isn't quite that complex. It's more of a sliding scale based on 3 factors:

1: How excited do I get when I walk the land?

2: How well am I able to justify the purchase to myself?

3: How much money is in my checking account?

The first two are easy to achieve. The third one keeps me honest (and keeps me from having very much land).

I'm heading to northern Minnesota in a month and will be putting #1 and #2 to good use but because of #3 I know I'll have to wait a couple years if things go right. I find I can have an awful lot of fun with just #1 and #2 though. I've bought some real nice property in my head.

Alan

[WDH]

What I shared is how pension funds, forest products companies, and investors evaluate timberland.  There are other less financially focused ways to look at it, and many of us as private individuals place value on non-financial factors like aesthetics, recreation, and family enjoyment. 

[peakbagger]

In my region a big extra that factors in on purchases is potential income from selling one time conservation easements. If its the right land with the right sort of terrain (usually ridgeline) within the viewshed of federal lands there are couple of non profits that will write checks to buy the development rights to prevent the land from being broken up. The downside with selling these easements is that someone has to fund the long term cost to have a third party oversee that the easements are being followed "forever". That rarely happens for small parcels unless there is a land trust with donors willing to fund this long term cost with an upfront investment. Generally this is voluntary thing between owner and seller but underlying the public benefit aspect is that some investors practice "greenmail" by threatening to develop the land as a means of attracting conservation dollars. There is one investor in my area that bought former paper company timberlands that contained the top of a ridgeline and one side of the ridge that happened to contain the Appalachian trail. There was no marketable timber on the ridge and the upper slopes but he developed a preliminary plot plan that contained spaghetti lots (long thin strips) with frontage on the AT. Various organizations stepped up and got federal funds to purchase the AT corridor outright and then after he cut any viable timber he let it be known that the National Guard might be interested in buying the cut over land for a mobile artillery range. The same groups stepped up and bought the development rights.  After clear cutting the remaining land it was resold to the Yale pension fund who will hold it for the 40 or 50 years its going to take to have the trees grow back. We are a couple of hours of the east coast and there is lots of money to "protect" woodland within driving range. Most remains in timber management so at least some local jobs are protected long term. The current administrations goal is step up land conservation efforts significantly and that favors folks with large blocks of land.

A far more scary concept is the owners selling carbon rights, In this case a company in California buys carbon sequestration rights of mature timberland and that effectively pulls the land out timber production as the standing timber is sequestered carbon. If the land has Sugarbush on it they then lease it for maple sugaring. The locals that made money working the woods are out of work and then they get to transition to the tourist economy which is major step down in pay and they get to have the "talk" with their kids to get the heck out of town when they graduate as there is nothing for them in town anymore. Large swaths of inland Maine, Northern NH and Northern VT are all in this mode.

[mike_belben]

Biting my tongue on that one but thanks for sharing PB.  And for the detailed explanation of commercial timber sales WDH.  I bet those appraisals cost more than any parcel i will ever own when its all typed up and delivered to the bigwigs. 

[SwampDonkey]

 And for the detailed explanation of commercial timber sales WDH.  I bet those appraisals cost more than any parcel i will ever own when its all typed up and delivered to the bigwigs.

You'll never find land that cheap unless it's inherited. Basically the appraiser is getting a wage out of it. 

[WDH]

My company did all that work in-house. However, we bought and sold land with the goal of maximizing the value (NPV) of the land base.  

It is the same way that one would evaluate a business if one was interested in buying it.  

[Garrik]

Here is how the Professionals determine the value of timberland. They cruise and appraise the current value of the timber on the land.  To that timber value, they add the value of the bare land.

Timber Value + Bare Land Value = Total Tract Value.  

The bare land value is determined by taking the property as is and developing a management plan for the current timber crop, if any, plus the next two timber crops into the future. ... discounted back to the present using an after tax discount rate that the buyer would target to achieve.  The net present value (NPV) of these cash flows at that targeted rate of return is the bare land value of that property to grow that targeted timber regime.

Another way to say it is that the bare land value is that amount that you can pay per acre to grow that timber regime beginning with what you have on the property now and through the next two full crop cycles (rotations) and achieve the rate of return that you used to calculate it.  

Ok, so this is what I was looking for - exactly.  But I am not quite understanding, despite being fairly sophisticated about such things.  Perhaps we can talk through an example....
For context, the properties that I am looking at are all zoned for timber production, and have an approved perpetual harvest plan (what we in Cali call a Non-Industrial Timber Management Plan) in place.  The NTMP specifies the current timber inventory in detail, as well as the future harvest schedule and quantity by species.  Around here there are only two commercial species of interest, Coast Redwood and Douglas Fir.  I am only interested in appraising/valuing the land based on its value as timberland, just like your Professionals.
So using the NTMP's harvest schedule, growth rates and inventory, it is pretty easy to come up with a value in today's dollars at today's prices of the future two (or three, or four) harvests.  And I understand how to build a schedule of cash flows that includes expenses like taxes and management costs as well as the harvest revenues, and I understand how to discount those future cash flows back to the present day using a discount rate like your 6% target rate of return.
What I am not understanding is the part about adding the output of that NPV calculation to the "Timber Value".  Why would I add anything to the output of the NPV calculation?
So for example.
Suppose I can harvest $100k worth of timber in 4 years (net of logging and trucking expenses), and then again in 14 years.  And my expenses all in are going to be $5k/year.  Discounting that back by 6% will give me a current value of those future cash flows.  Fine.  I could just be willing to pay that or less for the property - that would make sense to me.
But you are suggesting adding some kind of current Timber Value to that number - can you please explain why you would do that, and/or how you would calculate that Timber Value?
And how do you factor in the fact that log prices will presumably rise roughly with the consumer price index in the future?  ie the future cash flows are inflation protected, to at least some extent...
Thanks much.  Asking this here, rather than in a private message, because I figured that others might be interested in the answers...

[stavebuyer]

Its rare(and becoming more so) to see land sell at a low enough price per acre for timber growth to be the sole consideration. The major exception is large tracts(1000s of acres) with limited access. Those deals in the not too distant future will also be judged from recreational/development potential. Decreasing supply(won't be any more produced coupled with increased demand from a growing population. Demand from recreational buyers almost always "outpays" the timber producing aspect on any tract small enough for a working person to afford.

However, since the 100 acre parcel has a much higher "bare land" component that is unrelated to its timber production its valuation needs to be viewed from a different perspective. Water frontage, road frontage, utilities, zoning, sub-dividable, community growth etc. all need to be factored in for the real world rate of return. The over-priced 40 acres on the river might compute to be a "bad  investment" when viewed from its timber growth potential and also be the "deal of a life time" from real estate dwindling to non-existent land supply/demand appreciation perspective.

TIMOs and REITS have plenty of professional procurement staff evaluating the big timber deals. Go to land auctions and have the courage to follow through. Just about every 7 figure sale can find someone in the background saying they had the chance to buy that tract 20 years ago when it sold for an "insane 6 figure price". "If I only knew" Its no secret. Everybody wants the buy today for a below market price. With the advent of the internet the rare deal has become extinct. Buy 10 miles from the outer loop and wait. Grow trees/rent pasture and town will come to you.

[SwampDonkey]

Lots of cheap land around here, that's why the Amish are moving in. One community bought 500 acres at $1200/acre. There will never be a city or urban anything there, just a farm community that has existed for 160 years. No idea where the money came from with little gardens and off and on carpentry work. Always close to the US border, I mean 100 % of the time. ;D Glassville for instance is a farming area, but 25 miles from the border. No Amish or Mennonite will ever settle there, not close to the border. ;)

Farmland prices here increased mainly because of retirement income and amalgamations of farms. There are fewer and fewer farmers. Woodland on the farms is priced quite low because most of it has already been harvested in the last 30 years. That's the first thing that gets done 'before' a sale. ;) Otherwise they are cutting 30 year old trees after the sale, fence post size pulpwood, with not much money to divide up between logger and owner. Our grandfather's never clear cut, but that is not to say they never high graded, mainly just cut what was close by and easy. I know one landowner I have worked with over the years, thinning with clearing saws. He said his father never cut much wood. But he has made up for it and has probably clearcut 500 acres.

[Ron Wenrich]

But you are suggesting adding some kind of current Timber Value to that number - can you please explain why you would do that, and/or how you would calculate that Timber Value?
And how do you factor in the fact that log prices will presumably rise roughly with the consumer price index in the future?  ie the future cash flows are inflation protected, to at least some extent...
Thanks much.  Asking this here, rather than in a private message, because I figured that others might be interested in the answers...

You figure the timber value because you are buying the timber and the land.  You should have that value when tax time comes around because you only want to pay taxes on what grows.  It ends up being timber value sold minus original timber value.  The growth could be in the increase of volume, and/or the increase in price due to inflation or demand.  
A competent consulting forester should be able to give you a timber inventory and appraisal.  It's an expense.  I did one for a land buyer and the timber was worth more than the asking price for the land.  The realtor had no idea the value of what he was selling.  I also know loggers that have bought land for less than timber value.  Knowledge is king.

[barbender]

In Minnesota, Potlatch had large tracts of timberland. At first I think they managed it with a strictly timber production philosophy (at that time they had a stud mill in addition to 3 OSB mills). Over time, the corporate strategy shifted to "highest return" which meant that a lot of those tracts, and especially in Central Minnesota where land values are higher, were sold off. The current situation is that Potlatch sold all of the OSB mills about 20 years ago, and now they are completely out of the property business. They sold all of their remaining land to a timber production minded conservation group whose name escapes me at the moment. I think the bottom line is that any property in a populated area is too expensive to just grow trees on, if that is the sole income source.

[mike_belben]

man you nailed that one right to the wall stavebuyer.  I got out of the .1 acre urban housing life and moved to the 200 to 3000 acre intact farm and forest plots.  When i got here it was $2k per acre or 10k for a building plot and we are seeing the same blah parcels asking 10k per acre or 40k for a small homesite... Been shopping this county just 9 years.  My mother said the same about southern alabama.  "We shoulda gone broke buying the other lots when we could have."

The only good deal is the one you sniff up yourself by old means, knocking on doors and chasing leads. there are none on the internet unless it comes with major burdens like a demolition or big cleanup.


Every new driveway i see makes me cringe a little.  I found my heaven and the people i got away from musta followed my oil leaks. Town will come to you.

Lynyrd Skynyrd - All I Can Do Is Write About It - YouTube

[WDH]

Garrick,

You are right.  If you include the original timber asset in the cash flows, you end with with one NPV for the property and that is the number you are looking for.  

If you started with a clear cut tract, then timber value = 0.  Planting and modeling the growth of future timber crops would provide you with the "bare land value" and that would be the total value of the tract since there is no beginning timber value.