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Forbes
Money Guide
June 17, 1996
The
Draft horse makes it into Forbes' 1996 Money Guide! Forbes is
considered the Cadillac of business publications. It deals with smart
money and big money. In brief, it is not exactly the most likely place
on earth to find a big three-column picture of a logger dragging out a
big black cherry log with a team of Belgians. But that is exactly what
you'll find on page 135 of their June 17, 1996 issue.
The article, reprinted by permission of Forbes magazine, Forbes
Inc.,1996, deals with hardwood forest lots as long term investments
with a kindly word for horse logging. Want an inflation hedge that
grows? Consider acquiring a few hundred acres of hardwood trees.
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This Asset Grows to the Sky
by William Baldwin
Paul
Lyons is a patient investor. He has to be. He invests in cherry trees,
which take 80 years to grow.
In 1933 Lyons, then age 22, paid $500 for a 237-acre woodlot with some
black cherry on it. The land is in western New York, far enough from
population that the development value is just about zero. Even in the
Depression, $2 an acre was cheap. How did he get the deal? Loggers had
cut the parcel heavily, leaving nothing but skinny trees of no
immediate value. Other potential buyers saw no assets there, only
liabilities. Whoever owned the land would have to pay property taxes
for a long, long time before collecting a dividend.
Lyons (and now his four sons, to whom he has deeded the property) has
paid a lot of property taxes over the years, but he has something to
show for it. In the early 1960s the family sold $40,000 worth of mature
trees from the lot. The forest is ready for another cut now that will
yield a much bigger dividend. Lyons just turned down an unsolicited
$500,000 offer for the land.
This is farming - but without planting or harvesting costs. Hardwood
forest owners usually spend no money on reforestation since these trees
reseed themselves. Sawmills vie for the right to send in loggers and
cut trees marked for sale.
So long as the owners pay careful attention to what they take out, the
mixed hardwood forest will shift more heavily toward valuable cherry
and oak and away from less desirable species like beech and birch - and
the harvests will go on indefinitely.
"I own a lot of stocks and bonds", says Lyons, 85, "but I don't think
there's anything in the world you can invest in as good as land with
wood growing on it."
Own a forest? Why not? Real estate makes a sensible diversification for
any investor whose portfolio is heavy with financial assets. Its
principal advantage is that it stands up to inflation. Its chief
disadvantage is that it is illiquid. That's not a problem if you can
afford to buy and hold, and hold and hold. Paul Lyons' astute 1933 buy
is going to help put his four great-grandchildren through college.
If
you want to diversify into investment real estate, you have a lot of
choices: apartment buildings, commercial properties, farmland, raw land
with development potential and resort properties. Hardwood
acreage has its own set of risks and rewards that makes it very
different from these other options. What it has in common with them is
this: It is unforgiving of naive buyers. In this respect real
estate is very unlike securities. A monkey picking stocks
could
do pretty well, thanks to an auction market kept efficient by the
incessant trading by professionals. Not so forest land.
"There's
a tremendous difference between the values of two tracts of timber that
to the layman look very much the same," says David Roby, a lawyer in
Lyme, NH, who started investing in timberland 19 years ago and now,
with three partners, owns parcels in five eastern states.
"Tract
A is predominantly cherry worth $1,500 a thousand board feet.
Tract B Is predominantly red maple worth $75 a thousand."
Paul
Lyons was born with a wooden spoon in this mouth. His father
owned a mill that made tool handles out of ash. During the
Depression all those WPA workers needed a shovel to lean on, and that
provided the cash to buy land. By the time he quit buying in
1965, Lyons had accumulated 12 tracts of land in Pennsylvania and New
York, comprising 2,000 acres.
Paul
Lyons' offspring are not woodsmen. They all live in Florida
and
pursue unrelated careers, like selling marine supplies. How
do
they manage their forest properties? Like a lot of absentee
landowners, they have arranged for a consulting forester to handle
sales. In return for a fee of 10% to 15% of the proceeds,
these
agents select trees to be harvested, take bids from sawmills and make
sure the loggers take only the trees they're supposed to take.
The
Lyons family uses Mark Webb in Union City, PA. Webb, 45, is a logger's
son who forsook the dangerous chain saw in favor of a forestry
degree. Last winter Webb was out in the woods on snowshoes,
cruising a 40-acre Lyons parcel and marking 526 trees for sale.
The
bids that came in from sawmills ranged all the way from $36,226 to
$61,450. Besides submitting the high bid, the winner promised
to
use a team of horses to haul the logs out of the woods.
Horses,
says Webb, do less damage to the forest than diesel-powered skidders.
That
makes a big difference in this case because the Lyons clan is going to
leave behind 80% of the wood on this parcel to keep growing.
That
way, says Webb, the Lyonses can come back every 10 to 15 years for
another cut. If you can afford to refrain from a heavy cut
you do
so because, as trees age, they not only add board feet but also become
more valuable per board foot. (A board foot is an amount of lumber that
when rough-cut is a foot square and an inch thick.)
A
spindly cherry tree 14 inches in diameter might be worth 30 cents per
board foot on the stump and yield 40 board feet. Two or three
decades later it's a 20-inch tree worth four times as much per board
foot and containing five times as much usable saw timber.
That
is, by waiting 25 or so years you collect 20 times the dividends
compound annual return of 13%.
Wait
long enough and you will get an occasional trunk straight and fat
enough to be worth turning into veneer. This is the tree that
money grows on. Veneer cherry logs are worth as much as $6
per
board foot.
Here's
another reason to wait: Nominal prices go up. The better
hardwoods have comfortably beaten inflation over the past
decade.
Call this a growth commodity. It's like owning an oil
reservoir
that gets bigger every year.
You
have risks, though, that you don't have with oil. Gypsy
moths,
elm span worms or fall canker worms mi hi attack, forcing you to shell
out $15 an acre for spraying. Deer munch on saplings, destroying
natural regeneration of the stand. But you can get even with
these pests. Many landowners are able to lease out the hunting rights
for $3 to $5 an acre, which in Pennsylvania is just about enough to
cover your property taxes.
Theft
is occasionally a problem. A veneer-quality tree worth $3,000
is
mighty tempting. The government is another worry.
The Bill
of Rights forbids the confiscation of private property, but there is an
exception for timberland. All the government has to do is
find an
endangered species in your forest, and it picks up a de facto National
Wildlife Refuge for free. This is a hazard in conifer stands
in
the Pacific Northwest and in the Southeast. It is not a
problem
on Pennsylvania's 12.5 million acres of privately held forest land-not
yet, that is.
Interested?
Spend a year or two shopping before you buy your first acre.
You
can hire a consulting forester to cruise a parcel that is up for sale,
for a fee of about $5 an acre. Landowner Roby says he and his
partners look into 100 properties for every 20 they inspect closely.
They may bid on five and acquire one.
Hardwood
forest ranges all the way from inaccessible scrubland with nothing on
it to mature parcels containing $6,000 an acre in readily salable
sawtimber. Your best strategy is to aim somewhere in the
middle. No matter how cheap it is, the vacant land is likely
to
be a bad investment -because (a) it's hard to earn back 80 years of
property taxes, compounded, and (b) you can't be sure what kind of
trees will grow well in that soil.
At
the other extreme, the costliest land, you have this problem: You are
competing with sawmill owners, who have a very precise idea of what the
wood is worth. The mills often buy when they can get bank
financing and quickly recoup most of their outlay with a heavy cut.
Do
what Paul Lyons did with that 1933 purchase. Buy a parcel
that is
30 years away from a good harvest. If you are patient and
willing
to bid on a fairly large tract (500 acres and up), you might be able to
buy at $400 to $600 an acre. Against that investment, your
botanical dividend-150 to 250 board feet per acre per year, averaged
over a long holding period-is pretty attractive. A good mix
of
species could easily average 60 cents a board foot at today's prices.
Tax
treatment: Not too bad. You can write off the property taxes
against your salary, says William L. Hoover, professor of forest
economics at Purdue University. Write-offs for spraying and other
maintenance costs may have to be postponed until your harvest years
later, but hopefully your maintenance costs will be small.
When
it's time to thin the stand, your dividend is treated as a capital
gain. Maybe by then we'll have a capital gains tax cut.
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