From the desk:Timberland / Vineyards / Orchards

420 acre loblolly tract: paying full timber value for a stand that's mostly pulpwood

Appraisal came back at 2,850 an acre on a 420 acre pine tract, and the split inside it is where I'm stuck. Bare land 1,650, standing timber 1,200.

The cruise puts merchantable volume around 38 tons per acre across the whole stand, heavily weighted to pulpwood because about two thirds of the acreage went in around 2009 and 2010. Sawtimber share is thin. So most of what I'd be paying for on the timber side is the option to wait, which I do believe in. Per ton price steps up hard at each product break as stems move from pulp to chip-n-saw to sawtimber, and that step-up plus land appreciation is basically the whole return. I'm not underwriting to the long-run index number people quote, roughly 10.7 percent annualized since 1987 with a standard deviation near 6.9. I'm underwriting to mid single digits and asking whether the dirt carries me if timber does nothing.

What I can't settle is mill concentration. Two pulp mills inside reasonable haul distance, and one of them is plainly why the previous owner planted this heavily. If either shuts, delivered price collapses and my option to defer gets expensive, because I'm paying taxes and management for years on inventory nobody local wants to buy. I asked the consulting forester for a haul cost table by destination and a stumpage history and got a one-line email back.

Cash yield is close to zero until first thinning, which is maybe three years out on the younger blocks. The decision in front of me is whether I bid land value plus full appraised timber, or bid land plus a haircut on inventory and probably lose it to a recreational buyer who doesn't care about stumpage at all.

Has anyone underwritten a tract where mill count was the dominant variable, and how did you size the discount?

Answer

4brandonlee36Passive

The thing I'd nail down before the bid is the first thinning, because on a 2009 planting that revenue is close enough to matter and it's the only cash you see for a decade. Ask the forester for tons per acre out of the thinning by product, not just total, and a delivered price minus logging and haul so you get an actual stumpage number. If thinning nets you 300 an acre on the younger blocks, that's a year and a half of carry paid for. If it nets 90 because haul distance eats it, your mill worry is already showing up in the numbers and you can price the inventory off that instead of arguing about mill closures in the abstract.

Also get the property tax basis in writing. Many states have a current-use or forest classification that taxes standing timber land well below market, and the rules, the enrollment period, and the penalty for converting out all differ by state, so read the actual statute for yours or have someone who does that for a living read it. I've seen carry math built on the seller's tax bill where the classification didn't transfer automatically.

On the discount, I wouldn't try to size mill risk as a percentage. I'd run the same tract with the far mill as the only buyer and see what the delivered price does to your thinning and your final harvest. If that version still clears your hurdle on land plus modest timber growth, bid closer to the appraisal. If it doesn't, you're buying a bet on one mill's balance sheet.

420 acre loblolly tract: paying full timber value for a stand that's mostly pulpwood

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