C o n s e rv a t i o n Capital: S o u rces of Private Funding for Land Conserv a t i o n THE WILDERNESS SOCIETY Our Mission Since 1935, The Wilderness Society has worked to preserve America's unparalleled wildland heritage and the vast storehouse of resources these lands provide. From the threatened tupelo and cypress forests of the Southeast to critical grizzly bear and wolf habitat in the Yellowstone-to-Yukon corridor to the incomparable, biologically rich Arctic, The Wilderness Society has forged powerful partnerships with members and friends across the country to conserve interconnected landscapes for our nation. We want to leave a legacy rich in the biological diversity and natural systems that nurture both wildlife and humans alike. Headquartered in Washington, D.C., the Society also maintains nine regional offices where our staff address on-the-ground conservation issues linked to local communities. Since spearheading passage of the seminal Wilderness Act in 1964, we have been a leading advocate for every major piece of Wilderness legislation enacted by Congress, work that is supported by an active membership of more than 200,000 committed conservationists. Our effectiveness stems from a team approach to conservation, which links our scientists, policy experts, and media specialists to thousands of grassroots activists - creating a potent force to promote change. Building the case for land preservation with tactical research and sound science is the key to successful environmental advocacy and policy work. Nearly a quarter century ago, The Wilderness Society helped pioneer strategies that incorporated expert economic and ecological analysis into conservation work. Today, through focused studies, state-of-the-art landscape analysis - and diligent legwork by our many partners who provide us with on-site data - our Ecology and Economics Research Department is able to serve the needs of the larger conservation community. Legislators, on-the-ground resource managers, news reporters, our conservation partners, and - most importantly - the American people must have the facts if they are going to make informed decisions about the future of this nation's vanishing wildlands. The answers to the pressing legal, economic, social, and ecological questions now at issue are the stepping stones to that understanding and, ultimately, to achieving lasting protection for the irreplaceable lands and waters that sustain our lives and spirits. C o n s e rvation Capital: S o u rces of Private Funding for Land Conserv a t i o n By Ann Ingerson THE WILDERNESS SOCIETY CONSERVATION CAPITAL: SOURCES OF PRIVATE FUNDING FOR LAND CONSERVATION i Acknowledgments Thanks to all who had a part in gathering information for this report: To the Geraldine S. Violett Charitable Foundation, the Town Creek Foundation, the Geraldine R. Dodge Foundation, and the Overhills Foundation for the financial support that made this work possible. To The Wilderness Society's Julie Wormser and Spencer Phillips for support and critique. To a multitude of individuals who explained the details of forest land investments and conservation innovations, including - Bill Altenberg, Timberland Trails; Connie Best and Michelle Passero, Pacific Forest Trust; Rex Boner, The Conservation Fund; Robert Bonnie, Environmental Defense; Adam Davis, Solano Partners, Inc.; Kathy DeCoster, Trust for Public Land; Bill Ginn, Steve Lindeman, Kevin Schuyler, Paul Trianowski, and Barry Wilson, The Nature Conservancy; Matt Hancock, Hancock Land Company; Peter Howell, Open Space Institute; Nan Jenks-Jay and Connie Bisson, Middlebury College; Jim Levitt, Program on Conservation Innovation at the Harvard Forest, Harvard University Research Fellow, Rappaport Institute, Harvard's Kennedy School of Government; Michelle Manion, Union of Concerned Scientists; Will McDow, Environmental Defense; Doug Murray, Tennessee Forest Watch; Carl Powden, Vermont Land Trust; Steve Rohde, Sustainable Forest Futures; Keith Ross, formerly New England Forestry Foundation, now LandVest; Al Sample, Pinchot Institute for Conservation; Russ Shay, Land Trust Alliance; Peter Stein, Lyme Timber Company; Hank Swann, Wagner Forest Management; Tom Tuchman, U.S. Forest Capital, Bettina VonHagen, Ecotrust Forests LLC; Steve Weems, Coastal Enterprises Capital Management, LLC; Henry Whittemore, Maine Department of Conservation; and Jim Winder, Heritage Ranch. To Caroline Taylor for patient and thorough editing, to Rick Sawicki for diligent oversight of the production process, and to Mitchelle Stephenson for formatting the guide and especially for untangling and clarifying the New Markets Tax Credits dia- gram on page 12. Any errors or omissions in collating and interpreting the information in this report are ours alone. Editor: Caroline Taylor This citizen's guide is part of a series that stems from Design/format: conservation research studies conducted by The Wilderness Mitchelle Stephenson Society's Ecology and Economics Research Department. See also: - Conservation Capital: Sources of Public Funding © The Wilderness Society for Land Conservation November 2004 The entire series is available at The Wilderness 1615 M Street, NW Society's Web site and from Washington, DC 20036 The Wilderness Society, Communications Tel: 202-833-2300 Department, 1615 M Street, NW, Washington, DC Fax: 202-454-4337 20036 (202-833-2300 or 1-800-THE-WILD). Web site: www.wilderness.org ii Preface Troubled by rampant suburban sprawl and the loss of open space, millions of Americans share a common goal: land conservation. The hard-edged truth, however, is that land conservation costs money-and lots of it. The outlay begins with the original land purchase and continues through annual management expenses. In many cases, federal, state, and local governments can pay these costs, but the reality of tight public budgets demands creative approaches to conservation and conservation fund- ing. In The Wilderness Society's newest citizen's guide, Conservation Capital: Sources of Private Funding for Land Conservation, author Ann Ingerson, an economist based in our Vermont office, describes the latest techniques for stretching scarce conservation dollars. This guide is the perfect companion to her report on sources of public funding released in April 2004. The guide covers familiar strategies, including bargain sales and private philan- thropy, and it explains novel approaches, such as tapping new-markets tax credits and forming partnerships with a new generation of corporations that own forest lands. Throughout, Ingerson shows how these tools can make land protection both more affordable and more effective in an era of shrinking public dollars for conservation. These models and this guidebook will be particularly useful in places such as the eastern United States, which has little public land and where the turnover of forest ownership has increased dramatically during the last decade. Turnover raises the risk that large parcels of forest land will be divided into smaller lots or converted to other uses. When that happens, important wildland values may be lost. At the same time, a high turnover rate also presents opportunities by bringing land or development rights into public ownership-the surest way to protect the benefits of wild forest lands in the long term. Those benefits include ecosystem services, such as purifying air and water, places for recreation and personal renewal, and habitat for irreplaceable plants and wildlife. By applying the thinking and examples described in this citizen's guide, we can make great strides toward achieving our nation's sustainable land conservation goals. William H. Meadows G. Thomas Bancroft, Ph.D. President Vice President The Wilderness Society Ecology and Economics Research Department CONSERVATION CAPITAL: SOURCES OF PRIVATE FUNDING FOR LAND CONSERVATION iii Contents Acknowledgments..................................................................................................i Preface .................................................................................................................ii Contents ................................................................................................................iii Introduction............................................................................................................1 Philanthropy..........................................................................................................3 Foundations .....................................................................................................3 Program-Related Investments and Investments Related to Program Revolving Funds Gifts of Land or Interests in Land .....................................................................6 Bargain Sale Management in the Public Interest ...................................................................7 Government Incentives to Increase Private Conservation Spending......10 Federal Income Tax: Incentives to Donate Land or Easements .........................10 Federal Income Tax: Incentives to Make Conservation-Oriented Forestland Investments .................................................................................11 New Markets Tax Credits Tax-Exempt Community Forestry Bonds Federal Estate Tax .........................................................................................18 State Income Tax ...........................................................................................18 Use-Value Appraisal Property Tax ..................................................................19 Paying for Land Through Forest-Based Earnings ........................................21 Timber and Nontimber Forest Products ...........................................................21 Recreation .....................................................................................................22 Limited Development .....................................................................................24 Mitigation Funding ........................................................................................26 Wetlands Mitigating Banking Wildlife Habitat Mitigation Carbon Sequestration Dam Relicensing Through the Federal Energy Regulatory Commission Wind Power Licensing Partnering with Private Forest Investors.....................................................35 TIMOs as Conservation Partners .....................................................................35 FIMO or CTIMO ...............................................................................................37 Ecotrust Forests, LLC Socially Responsible Investment .....................................................................38 Mutual Funds Individual Accounts Unbundling Property Rights to Reduce Conservation Costs .....................41 Large-Scale Conservation Easements ..............................................................41 Separate Sale of Timber Rights ......................................................................42 Forest Bank ...................................................................................................44 Option to Buy or Right of First Refusal ..........................................................45 Conclusion.............................................................................................................47 References............................................................................................................48 Appendix A: Contacts .........................................................................................53 Appendix B: Helpful Web Sites ........................................................................54 Appendix C: Forestland Investments .............................................................56 PAGE 1 Introduction goals. Several foundations also help lower land purchase costs through In the crowded landscape of the east- revolving loan funds that provide rapid- ern United States, large uninterrupted response, low-cost capital for land pur- tracts of forestland grow increasingly chase. Beyond providing funds for land scarce. Yet large parcels offer the best purchases, individuals or organizations opportunities to manage for wildlife may also donate land or easements habitat, as well as for remote recreation directly, or may voluntarily commit to and commercial timber production. land management practices that protect Advances in conservation biology have important public values. moved us beyond the assumption that Several federal, state, and local tax isolated reserves can meet critical habi- policies increase the incentives for tax- tat needs and have instead underscored payers to donate land or easements for the importance of buffers, corridors, and conservation purposes or to commit to other broad landscape-scale protections. keeping their forestland intact. These Landscape-scale conservation means policies include income tax deductions thinking big, in terms of both acres and and credits at the federal and state lev- dollars. els, estate tax exemptions and use-valua- In the East, turnover of large forest- tion at the federal level, and use-value land parcels has accelerated over the property tax at the local level. Special past few decades. Each transfer increases federal income tax provisions facilitate the risk that large parcels will be con- two new tools for forest conservation verted to other uses or divided into financing: new markets tax credits and smaller lots. By the same token, land community forestry bonds. transfers present an opportunity to bring For "working lands" that buffer fully land or development rights into public protected reserves, revenue from land- ownership, thereby assuring the provi- based products and services can help sion of important public values far into nonprofit or public owners cover a por- the future. tion of land or easement purchase costs. Public funding at federal, state, and When land remains in private hands, local levels, described in Conservation diversification of land-based revenue Capital: Sources of Public Funding for allows landowners to reduce the intensi- Land Conservation (Ingerson 2004), will ty of timber harvest to comply with the continue to provide the bulk of funds for provisions of conservation easements. land protection. But paying for large- Some land-based products and services scale conservation projects requires cre- fill new niches within established mar- ativity in tapping many different sources kets: certified forest products, nontimber of funds. In many cases, private capital forest products, recreational leases, or can help stretch available public funds. limited conservation-compatible devel- This report describes a variety of opment. Other sources of forest-based approaches to using private funds to revenue depend on government regula- finance forest conservation. Foundation tory policies that promote markets for grants and private donations are the ecosystem services like habitat mitiga- most straightforward way to increase tion and carbon emissions offsets. funding for conservation land purchases. Given the overwhelming financial In addition to providing outright gifts, need for land protection funds, strategies foundations and individuals may provide that reduce the costs of conservation capital through investment-donation will be equally important as those that hybrids that earn a modest return while raise new funds. One way to reduce con- simultaneously advancing philanthropic servation costs is to cooperate with pri- CONSERVATION CAPITAL: SOURCES OF PRIVATE FUNDING FOR LAND CONSERVATION PAGE 2 vate investors on land purchases. Timber tecting vast forested acreages. These Investment Management Organizations approaches, which commonly involve (TIMOs) are proliferating, and many of less-than-full-fee ownership of property, them view development rights or public may separate timber rights, public access access easements as viable revenue rights, or development rights from own- sources. TIMOs with socially responsible ership of the underlying land to target investors (foundations, pension funds, conservation dollars to the highest prior- college endowments, or individuals) ity values. M might even forego maximum short-term As economists are fond of saying, returns to support public forest benefits " t h e re is no such thing as a free lunch." Landscape-scale and long-term forest productivity. Less costly conservation methods usual- conservation Few socially responsible investors are ly imply lower levels of protection or in a position to purchase and manage higher long-term monitoring costs or means thinking forestland directly or even to influence both. Each compromise aimed at lower- big, in terms of policy for an existing TIMO. These ing initial costs re q u i res careful thought both acres and investors need mechanisms to pool funds and a determination to learn from past and provide forest management services. experience. Along with examples illus- dollars. Conservation-based TIMOs (sometimes trating each financing tool, we have L called Forest Investment Management summarized some lessons learned along Organizations, or FIMOs) can specialize the way. in long-term sustainable approaches to Institutions and tools have doubtless forest management, including maximiz- continued to evolve since this report was ing revenue from nontimber services. completed, as practitioners adapt to new In addition to cooperating with forest obstacles and opportunities. We have investors and forming new investment provided contact information and Web entities, conservation organizations have sites for updates on the tools described also developed creative land transaction here. strategies that minimize the cost of pro- PAGE 3 Philanthropy source of funds for land conservation. The $29.7 billion given by foundations Conservation organizations often turn in 2003, although less than in 2002, was to philanthropic foundations and public- still twice the level of giving in 1996 spirited individuals to supplement public (Renz and Lawrence 2004), and giving funds for conservation purchases. These for environmental purposes grew even foundations and individuals act on faster. Furthermore, new foundations behalf of the public good, in effect sup- continue to emerge; 40 percent of exist- plementing public dollars with their own ing foundations with at least $1 million donations of dollars or interests in land. in assets were formed during the 1990s, with an additional 6 percent formed Foundations since 1999 (Renz and Lawrence 2004). Private foundation grants offer several The Foundation Center () provides regular sum- Foundations may be able to re s p o n d m a ry re p o rts about foundation activities. m o re quickly than government pro g r a m s McQueen and McMahon (2003, pp. and often allow greater flexibility in 119-133) also provide an excellent grants administration and re p o rt i n g . explanation and history of giving by Foundations support conserv a t i o n selected private foundations with a spe- M t h rough direct donations, investment- cial interest in land pro t e c t i o n . Private donation hybrids, and revolving funds to p rovide bridge financing. Program-Related Investments foundations will During the 1990s, charitable giving, and Investments Related likely remain an including donations for land conserva- to Program important source tion, increased dramatically in the Foundations (as well as individual United States. Unfortunately, founda- donors) typically use grants to support of funds for land tion endowments, as well as the net their goals. A separate department with- conservation. worth of individual donors, suffered from in the foundation makes income-maxi- the stock market slump of the late 1990s mizing investments to maintain endow- L and beyond. Independent foundations ment value and thus provide future grant tracked by the Foundation Center lost funds. Program-Related Investments 10 percent of their combined asset value (PRIs) bridge the gap between these two from 2000 through 2002 (Renz and functions by investing the foundation's Lawrence 2004). assets in a way that also advances its Faced with shrinking endowments, mission. many foundations have tried to stabilize PRIs come in a variety of form s , giving levels by increasing the percent- including guarantees of financing fro m age of assets distributed beyond the 5 other sources (that may lower intere s t percent required of charitable founda- rates by reducing lender risk), dire c t tions by federal regulations. Despite that loans (secured or unsecured), and equity stabilizing influence, however, total investments. Because they are classified grant volume of independent founda- as grants, PRIs count toward the mini- tions declined 3.3 percent in 2003. mum 5 percent of endowment that most Giving by corporate foundations also fell foundations must disburse each year. In in 2003 for the first time since tracking o rder to qualify, PRIs must create pro- began in 1987 (Renz and Lawrence grammatic benefits, not primarily pro f- 2004). its. When PRI funds are repaid, the Despite these recent trends, private foundation must grant its re q u i red 5 foundations will remain an important p e rcent of endowment in that year, plus CONSERVATION CAPITAL: SOURCES OF PRIVATE FUNDING FOR LAND CONSERVATION PAGE 4 regrant or reinvest the re t u rned funds, Revolving Funds in order to comply with federal law. Perhaps the most conventional way for PRIs can be tailored to the needs and a business or government to stretch strengths of individual projects and bor- funds is to use debt to leverage available rowers by negotiating such terms as capital. Many conservation buyers bor- interest charged, length of investment, row from commercial banks at market repayment schedule, loan or equity interest rates to avert possible land con- instrument, and whether and how much version through an immediate purchase security is required. Of most benefit to and then work hard to raise funds to the recipient and least administrative repay the loan as quickly as possible. cost to the donor are recoverable grants Rather than pay interest to commercial - essentially zero-interest loans. More banks, organizations with a large endow- common are below-market loans that ment and an established reputation can cover donor costs and return a modest issue their own bonds. Socially conscious profit that helps maintain endowment bond holders may accept lower interest value. This option might be particularly than warranted by the risk rating, attractive to a foundation when chroni- because they are eager to support a good cally low interest rates and a sluggish cause. The Nature Conservancy, for stock market drag down endowment instance, recently issued $325 million in value. bonds backed by its endowment No- or low-interest PRI loans might (Schuyler 2004, personal communica- be combined with conventional sources tion). of financing to reduce the overall cost of Few conservation organizations, how- capital for forestland investments, thus ever, have the scale or the expertise to reducing the pressure to generate high issue their own bonds. Foundations can cash returns to repay purchase costs. fill a similar function through revolving PRIs might also supply so-called "patient loan funds that provide the flexibility capital" that allows managers to make and speed needed to respond to immedi- the initial investment required to restore ate land sale opportunities. As conserva- depleted forests and establish a long- tion borrowers repay their loans through rotation approach to forest management. donations, grants, and resale of selected Investments at near-market rates of property rights, those funds become return are often called "investments available to back additional land pur- related to program." In the division of chases. responsibilities between program officers If foundations use PRIs to capitalize who award grants and fund managers revolving funds, their below-market who maintain endowments, investments returns can be passed on to borrowers in related to program rest on the endow- the form of low-interest loans. (Any ment management side. Although low-interest funding would provide simi- endowment managers might primarily lar benefits. See Tax-Exempt Commun- aim at protecting or growing total ity Forestry Bonds, page 15, for another endowment value, investment choices approach to low-interest funding.) might also help advance the foundation's A low-interest revolving loan fund can mission. See the section on Socially help a conservation organization speed up Responsible Investment, page 38, for repayment of the initial land investment, information on the potential to tap t h e reby lowering the total interest costs. these funds for forest protection. Several large land deals in the Nort h e a s t illustrate the significance of interest in total land purchase costs and thus how PAGE 5 critical low-interest funding can be in protect over 10,000 acres of New Jersey making a project aff o rdable. For example, open space. a single year's interest would add $2.1 Farther down the east coast, the Low million in costs to The Nature Conser- Country Conservation Loan Fund makes v a n c y 's St. John River project in nort h e rn land acquisition loans of up to $250,000 Maine and an estimated $1.26 million to to conservation organizations working in the Connecticut Lakes project in nort h- coastal South Carolina. The fund was e rn New Hampshire (Ginn 2003, person- established in 2001 with support from al communication). the Merck Family Fund and the Gaylord Several regionally focused revolving and Dorothy Donnelley Foundation. funds currently provide bridge funding or The program is administered by the longer-term financing for land conserva- Community Foundation Serving Coastal tion. The Northern Forest Protection South Carolina and targets lands with Fund is operated by the Open Space ecological, wildlife, scenic, and recre- Conservancy (an Open Space Institute ational value. In 2003, Doris Duke affiliate). The fund offers both grants awarded a $4 million three-year grant to and loans to promote sustainable the Low Country Forest Conservation forestry, protect ecosystems, and secure Partnership for conservation work in this opportunities for public recreation. In same region with $2.3 million of the April 2002, the fund made its first loan, grant capitalizing a revolving loan fund $2.5 million for the Connecticut with a goal of protecting 60,000 acres of Headwaters project in northern New land. Hampshire. The loan financed the ini- In the western United States, the tial purchase of 171,500 acres of land by Pacific Forest Trust manages the the Trust for Public Land from Interna- Strategic Opportunities Conservation tional Paper. The land was eventually Fund, launched in 2000 through a grant sold to the state of New Hampshire and from the Surdna Foundation. The fund to Lyme Timber Company, with conser- can be used in a variety of ways, includ- vation easements held by the state. A ing bridge loans that provide up-front second $2 million loan was made to The payment for easements while permanent Nature Conservancy to help finance the public funding is sought. The fund can Katahdin Forest Project, through which also provide working capital for the Conservancy purchased 41,000 acres landowners who forego current returns and obtained working forest easements to restore depleted timber stocks or on 200,000 additional acres near Maine's finance direct and indirect costs of certi- Baxter State Park. (See New Markets fication under Forest Stewardship Tax Credits, page 11, for information on Council standards. other financing for this project.) The Strategic Opportunities The Open Space Institute also admin- Conservation Fund illustrates broader isters the New Jersey Conservation Loan use of revolving funds beyond simply Fund, launched in 2003 with PRIs from facilitating land or easements purchases. the Geraldine R. Dodge and William Across much of the eastern United Penn Foundations. This fund provides States, second- or third-growth forests low-cost interim capital to enable con- are dominated by relatively low-value servation buyers to act quickly, while small trees, and revolving funds might providing time to coordinate complex finance up-front costs of forest restora- financing packages from multiple fund- tion. A revolving fund could, at low ing sources. As of January 2004, the fund interest, finance the costs of timber had loaned more than $3 million to stand improvement, property taxes, and CONSERVATION CAPITAL: SOURCES OF PRIVATE FUNDING FOR LAND CONSERVATION PAGE 6 simply the cost of waiting for trees to land for Baxter State Park, bringing his grow to their highest value. total gift to the state to more than A common rule of thumb in forestry is 200,000 acres, along with a trust fund of that forest growth will produce a real nearly $7 million to finance park main- rate of return of about 4 percent per year tenance and administration. although superior sites or intensive man- The Northeast Wilderness Trust agement may earn much higher rates of recently established a Wildlands return. When commercial interest rates Philanthropy Fund to allow individuals and stockholders' expected returns are of more moderate means to follow well above this level, the timber invest- Governor Baxter's lead. The fund com- ment manager will likely cut for higher bines smaller individual donations to immediate returns rather than wait for purchase priority wildlands or easements timber to reach high-quality sawlog or in a region from Maine to New York and veneer dimensions. Low interest financ- south to Connecticut. (See for more information.) financial incentives toward long-term In addition to individual philan- value and remove the pressure for quick thropists, large industrial or investor cash flow. Eventually, the harvest of landowners may also donate land or M large high-value trees would generate easements. In New York State in 2004, Individuals or sufficient revenue to more than repay International Paper donated an ease- the carrying costs that were financed at ment on the 15,810 acre Sperry- families...may low interest rates. Figure 2 on page 45 Whitney tract to establish a wilderness donate land or illustrates how a low-interest revolving park with accessible facilities designed fund, combined with an advance pur- for people with disabilities. By donating easements directly chase agreement, might generate rev- development rights, International Paper or may voluntarily enue to purchase conservation ease- will reduce its tax liability on the prop- ments. erty but retain ownership and continue commit to For more information about revolving low-impact forest harvest. The park was management that funds, contact Bill Ginn of The Nature created in honor of retired International Conservancy or Peter Howell of the Paper CEO John Dillon. protects public Open Space Institute. values. Bargain Sale Gifts of Land or As an alternative to donating land L Interests in Land outright, landowners may be willing to Like foundations, individual philan- bargain sell land or easements. With a thropists might make cash donations or bargain sale, the land purchaser (public below-market-return investments to sup- or charitable conservation organization) port land purchase. In other cases, indi- gains by acquiring land or easements at viduals or families with a strong conser- less than full market value. The seller or vation ethic may donate land or ease- donor accepts a below-market return and ments directly or may voluntarily com- receives the satisfaction of knowing that mit to management that protects public the land will provide public benefits in values. perpetuity. The state of Maine provides two well- Bargain sellers may be partially com- known examples of generous individual pensated through a tax deduction for the donors of public land. Maine's Governor difference between full market value and Percival Baxter bought nearly 6,000 the negotiated sale price. (See Federal acres near Mount Katahdin in 1930 for Income Tax: Incentives to Make Conser- $25,000 to give to the state. In 1962, at vation-Oriented Forestland Investments, age 87, Baxter acquired the last piece of page 11, for current proposals to extend PAGE 7 tax benefits, including credits as well as deductions for bargain sales.) Corporations, as well as generous indi- viduals, may choose to make bargain sales. In October, 2000, the Hancock Land Company made a bargain sale of easements on 3,280 forested acres near Sebago Lake, Maine. Public access and conservation easements on the land were sold for $280,000 less than their assessed value. In 1996, the Dupont State Forest was established in North Carolina's Blue Ridge Mountains through bargain sale of 7,600 acres to the state. The Conser- vation Fund worked with the Dupont Company and the state to facilitate the transaction, and the North Carolina Natural Heritage Trust Fund provided funding. When sellers make a bargain sale or other property donation, they may well reserve key parcels for their own use or for separate commercial sale. Those accepting the gift will need to consider whether future uses of those unprotected lands will affect conservation values on the protected acres. (This same caveat Baxter State Park is Maine's holds in the case of a full-market-value time. Strategic thinking about ultimate largest unit of public land, purchase although bargain sale recipients conservation goals is important; substan- including centerpiece, Mt. are likely to have less leverage to influ- tial up-front investments might save dol- Katahdin. The park was ence sale terms than would a full-price lars and aggravation in the long run. established through a generous purchaser.) donation from Governor In the case of the Dupont State Fore s t , Management in the Percival Baxter. a private company, Sterling Diagnostic, Public Interest Inc., also purchased some acreage fro m Some individuals or families hold for- Dupont and in 1999 put 2,200 acres in est land as a long-term investment and the center of the state forest up for sale. manage it to high standards of steward- This tract contains several waterf a l l s ship. Rather than donating land or an beloved by the public; and when the new easement outright or offering a bargain p ro p e rty owner threatened to deny access sale, these landowners make less direct and subdivide for development, the state gifts to benefit the public. They might invoked eminent domain and purchased voluntarily accept a lower or delayed the additional pro p e rty to add to the state return, for instance, in order to grow forest. See . larger trees, provide wildlife habitat, or This precautionary tale highlights the protect recreation access and scenic cor- fact that as land is successfully con- ridors along popular waterways. served, nearby lands become more Northern New England's tradition of attractive to developers, making addi- long-term family timberland ownership tional protection more difficult over provides a few examples: CONSERVATION CAPITAL: SOURCES OF PRIVATE FUNDING FOR LAND CONSERVATION PAGE 8 * The Pingree family has a 160-year his- land as open green-space." See tory and current holdings of more than < w w w. m t l f o rests. com/index.html>. 750,000 acres in northern Maine. * Hancock Land Company manages These public-spirited landowners often more than 40,000 acres in southern seek public recognition of their responsi- and western Maine. Managed since ble practices through forest certification. 1848 by six generations of the same The Forest Stewardship Council (FSC) family, the company's mission is "to system sets regional standards of ecologi- stay in business within and across gen- cally, economically, and socially sound erations - vigorously promoting forest management; verifies that prac- socioecologic forest systems" tices meet those standards; and provides (). (In addi- for a certified chain-of-custody that tion to managing its own lands, guarantees to consumers that FSC Hancock Land Company has recently labeled products are made with certified M begun contracting with outside wood. The Pingree, Hancock, Essex, and To ensure a high investors to purchase and manage Meadowsend ownerships are all certified forestland. See TIMOs as under the FSC system. Although mar- level of stewardship Conservation Partners, page 35.) kets for certified products are still young, over the long run, buyers in Europe, and increasingly in the Relatively new landowners are contin- United States, are beginning to demand conservation uing that tradition through new owner- certified product as a guarantee that easements that ships: their purchases support environmentally, * In northern Vermont, Essex socially, and economically responsible include forest Timberlands purchased of 84,000 acres forest practices. management of former Champion International Despite the best intentions of current guidelines can be paper company lands in 1999 as part owners, however, timberland ownership of a larger conservation package that is not forever; and future owners may placed on private involved land trusts, the state of not embrace the same high standards. To timber lands. Vermont, and the Silvio O. Conte ensure a high level of stewardship over National Wildlife Refuge. the long run, conservation easements L * Meadowsend Timberlands, Ltd. that include forest management guide- (MTL) is a family partnership with lines can be placed on private timber- about 30,000 acres in Ve rmont, New land. Funds for easement purchases, like H a m p s h i re, and Maine. Among the those for purchase of land in fee, can c o m p a n y 's principles are the follow- come from a variety of public and pri- ing: "be responsible stewards of the vate sources. land; provide opportunities for educa- The ownerships described previously tion; provide a variety of habitats for have also sold or donated easements on wildlife; maintain a healthy, prod u c- at least a portion of their lands. The tive, and aesthetically pleasing fore s t ; Pingree Family, for instance, sold conser- maintain or enhance the water quality vation easements on more than 750,000 of streams and wetland systems; main- acres to the New England Forestry tain the stability and integrity of the Foundation for about $37 per acre, with e n t i re ecosystem; meet the standard s the deal struck in 1999 and completed for `FSC' forest certification and con- in 2001. Funds for the purchase came tinued Tree Farm status; consider all from a combination of private founda- the elements of a natural fore s t tions and public programs. At the time, ecosystem during management deci- this project set a new record for the scale sions; uphold the concepts of enviro n- of conservation easements. mental conservation by keeping MTL Portions of Hancock Land Company PAGE 9 land are under easement. The entire are also protected by permanent conser- Essex Timberlands property is protected vation easements held by local land by easements negotiated in a complex trusts. public-private deal to purchase 132,000 For more information about easements acres in northeastern Vermont from as a strategy, including some of their lim- Champion International paper company. itations, see Unbundling Property Rights Nearly one-third of Meadowsend lands to Reduce Conservation Costs, page 41. CONSERVATION CAPITAL: SOURCES OF PRIVATE FUNDING FOR LAND CONSERVATION PAGE 10 Government Incentives to cent of income from agriculture and Increase Private forestry may deduct up to 100 percent of adjusted gross income, rather than be Conservation Spending limited to 30 percent. The Charities Bill considered during Although forestland owners may pro- the 2003-4 congressional session carried vide public benefits out of pure altruism, several suggested revisions to this aspect key tax code provisions provide signifi- of the federal tax code. One provision cant financial incentives to donors. Less would raise the deductions limit to 50 obvious than direct grants, these tax percent of adjusted gross income. expenditures nevertheless provide signif- Another provision increased carry-over icant public subsidies for land conserva- from 6 years to 16 years total (Shay tion. Because each taxpayer's situation is 2003, personal communication). unique, tax subsidies will not apply to Income from the sale of easements or every land transaction. In particular, land is already taxed at the lower capital wealthy individuals may be subject to gains rate. Proposed Charities Bill alternative minimum tax, and nonprofit reforms also included further reductions institutions - including pension funds to capital gains taxes (by 25 to 50 per- and endowments - do not benefit at all cent) on easements or land sold to a from tax credits or deductions. For spe- conservation organization. cific situations, however, tax benefits Other proposals not included in cur- can make an important financial contri- rent legislative initiatives would provide bution to a conservation project. The federal income tax credits (not just Land Trust Alliance is a good source of deductions) for donations and bargain current information about federal tax sales. Similar provisions already exist in provisions that affect conservation dona- many states (see State Income Tax, page tions. See , Tax Benefits for Many additional income tax provi- Conservation. sions also influence private forestland management through treatment of Federal Income Tax: Incentives expenses and timber revenue and to Donate Land or Easements through requirements for material partic- Several provisions of the federal ipation in management of forest opera- income tax code encourage private tim- tions. Although timber tax reform may berland owners to consider sales to con- provide some marginal public benefits by servation buyers when divesting land to encouraging long-term forest invest- achieve investment returns. Tax benefits ments, we focus here on forms of perma- may also encourage new investments in nent protection and will not describe timberland by individuals or firms those tax elements in detail. because of better after-tax returns. The impacts of tax incentives depend Section 170(h) of the federal tax code on the tax situation of the landowners. applies to donations or bargain sales of Private investors may be attracted to easements or land. The organization timberland investments because profits receiving the land or easement must be can be taken as capital gains on appreci- eligible to accept charitable gifts. For ated timber (taxed at a lower rate than gifts of appreciated property, a taxpayer ordinary income). If a tax-exempt non- can deduct up to 30 percent of adjusted profit (like a college endowment or a gross income, with a five-year carry-over pension fund) owns shares in a timber- (for six years of total deduction). land investment company, however, Individuals who receive at least 51 per- such tax subsidies as lower capital gains PAGE 11 rates or tax credits offer no incentive to Tax Credit is available at the donate land or easements. Pension funds Community Development Financial and other tax-free institutions that Institutions (CDFI) Fund Web site at invest in timberland can also be subject . to unrelated business investment tax if The CDFI Fund is a federal agency that the IRS deems that they are participat- is part of the U.S. Department of the ing in a profit-making business (Ginn Treasury. 2004, personal communication). Coastal Enterprises, Inc. (CEI), a For more information, contact Russ CDFI in Maine, successfully argued that Shay at the Land Trust Alliance. investments in forestland and easements should be eligible uses of the NMTC, Federal Income Tax: Incentives because a stable timberland base is cru- to Make Conservation-Oriented cial to future employment in disadvan- Forestland Investments taged areas of the Northern Forest Beyond general tax code provisions region (northern Maine, New that encourage individuals or for-profit Hampshire, Vermont, and New York). In organizations to make conservation 2003, CEI received an allocation for $65 donations, two new creative financing million of New Markets Tax Credit tools have recently emerged that also use investments, $40 million of which will M federal income tax incentives. New mar- be used for timberland investments Two new creative kets tax credits provide income tax cred- across the Northern Forest region. In its to qualified investors in special low- 2004, CEI received an additional alloca- financing tools have income target areas. Tax-exempt com- tion of $64 million, with a portion to be recently emerged munity forestry bonds boost after-tax targeted to forestland investments. returns for investors who finance the Information about CEI's New Markets that also use federal purchase of forests managed for public Tax Credit program is available at income tax benefit. . incentives. New Markets Tax Credits Program Details L Several New England organizations Only an approved Community have begun using a new tool for conser- Development Entity (CDE) can get an vation deals that is based on a special NMTC allocation. Prospective CDEs federal income tax provision. Although apply to the Community Development the program is not primarily designed as Financial Institutions (CDFI) Fund for a conservation incentive, it is described approval (existing CDFIs like Coastal here in light of the substantial subsidies Enterprises, Inc. are automatically it is providing for land purchases in the approved). Once approved, a CDE Northeast. applies for an allocation. After an allo- The New Markets Tax Credit cation is made, the CDE has five years (NMTC) was enacted in December to actually use the credits by soliciting 2000 as part of the Community Renewal loans or equity investments. Tax Relief Act. The program helps dis- Taxpayers (individuals or corpora- advantaged areas by providing federal tions) who invest in the CDE or a sub- income tax credits to encourage job-cre- sidiary claim a tax credit of 5 percent of ating investments in those communities. their investment for the first three years From 2002 through 2007, the program and 6 percent for the last four years, for authorizes tax credits sufficient to secure a total credit of 39 percent of the capital a total of $15 billion in equity invest- invested over seven years. Capital must ments targeted to low-income communi- remain committed for the entire seven ties. Information about the New Markets years. The CDE uses invested funds to CONSERVATION CAPITAL: SOURCES OF PRIVATE FUNDING FOR LAND CONSERVATION PAGE 12 help businesses in target communities, p e rcent poverty or with a median usually through loans. Because of the tax income less than 80 percent of the are a credits, the CDE can pay its investors a or state median. Forestland invest- lower return and pass those savings on to ments are eligible for financing when its beneficiaries. they are linked to wood products man- To qualify for a loan, equity invest- ufacturing or other forest-based jobs, a ment, or other assistance from the re q u i rement that limits the use of this CDE, a business must have a substan- tool to "working forest" conserv a t i o n tial presence in a low-income commu- p ro j e c t s . nity and must generate revenue and Figure 1 illustrates how New Markets jobs. Ta rgeted low-income communities Tax Credits would contribute to a typi- a re U.S. Census tracts with at least 20 cal land conservation transaction. FIGURE 1. Timberland Transaction Using New Markets Tax Credits 9. Taxpaying investors receive tax credits of 39% over seven years, plus other tax benefits and cash payments as necessary. Private Investors New Coastal Banks, other private enterprises, businesses, or Markets Enterprises, individual investors who pay federal income tax and can use tax credits. Tax Inc. (CEI) Credits 1. CEI applies a federally Other Investors (NMTC) for and certified 8. LLC investors and Others who cannot use tax at the receives a CEI Capital lenders receive "Community credits, or would prefer to New Markets Management LLC, income from timbering federal Development lend, can provide capital in Tax Credit a for-profit CEI sub- operations and other level Entity" the form of loans. allocation sidiary that manages forestland products from the and services. the NMTC program Nonprofit/ federal Public government. Lenders 3. Partners invest in forestland 7. Nonprofit/public through an Investment LLC. entities may receive 2. CEI passes a portion of its part of their return NMTC allocation to a through noncash special-purpose Community public benefits. Development Entity (CDE) Investment LLC Pools equity and loan funds from investors. 4. Investment LLC makes equity investment in Special-Purpose CDE Legend Tax Credit Capital Investment Special-Purpose CDE Finances forestland operations and returns operating Profits income and tax benefits to investors. Non-cash benefits 5. Special-purpose CDE uses funds to make an equity investment or loan as part of a forestland deal. 6. Income from forest operations generates cash to service debt or pay investors. FORESTLAND PAGE 13 When NMTCs are used to finance the credits. For forestland investments, the landholding " p a s s - t h rough" cor- entity must repay the initial capital at porate stru c t u re s the end of the seven-year tax credit peri- like limited part n e r- od and generate adequate future returns ships or real estate without a continuing subsidy. There are investment tru s t s , several possible exit strategies: passive loss ru l e s 1. The landholding entity might retain also restrict the ownership of the land with land- amount of cre d i t based revenue providing future each individual can returns to investors. In this case - take. On the other * The original NMTC-eligible hand for- p ro f i t investor might leave its capital banks are good can- invested and continue as a part didates for invest- owner, with returns now based on ments, especially earnings from forest products and ser- those seeking vices. o p p o rtunities to * The investor might sell its share comply with back to the landholding entity, C o m m u n i t y which refinances through a commer- Reinvestment Act cial loan or through new investors re q u i rements to Legend TNC Fee Lands who expect market returns. lend to the local TNC ­ Katahdin Paper Easement * The landholding entity might meet c o m m u n i t y. ) Appalachian Trail Corridor a portion of its capital repayment by For more informa- State Fee and Easement Lands selling easements to government or tion, contact Steve Other Private Conservation nonprofit buyers. Weems at Coastal Enterprises, Inc. 2. The land-holding entity might sell the land to a combination of public Timberland Areas of Interest and private purchasers, using the pro- Investment Example The Katahdin Forest Project ceeds to pay off loans and/or buy out C E I 's first NMTC allocation to be protected more than 240,000 acres of land south and west of investors. dedicated to timberland investments Baxter State Park in Maine in The ultimate goal for a conservation was applied to a project managed by 2002. The project was the first project would be to protect land through The Nature Conservancy (TNC). In use of New Markets Tax Credits permanent easements during the seven- August 2002, TNC negotiated a debt- to finance land conservation. year grace period. f o r- n a t u re swap with then Gre a t This approach does have import a n t N o rt h e rn Paper Company. TNC re t i re d limitations: (1) The complex arr a n g e- $14 million and refinanced $36 million ments and tracking of funds might of the company's debt at favorable inter- impose high transaction costs, which est rates (less than half what the compa- absorb some of the available funds. (2) ny was paying). In re t u rn TNC re c e i v e d Spending must occur in an eligible low- c o n s e rvation easements on 200,000 income area and must involve econom- a c res of company land and purc h a s e d ic activity (although there can also be a outright 41,000 acres of land in the p re s e rvation element to the deal). (3) Debsconeag Lakes region. The Nature Private investors need to be in a posi- C o n s e rvancy has sought funds to tion to use the credits. (They cannot be finance its $50 million commitment n o n p rofit entities, for instance, or f rom a variety of sources, including the wealthy individuals for whom the alter- Land for Maine's Future program, Fore s t native minimum tax precludes use of L e g a c y, and private donors. CONSERVATION CAPITAL: SOURCES OF PRIVATE FUNDING FOR LAND CONSERVATION PAGE 14 In partnership with CEI, Inc., TNC ensure that the program maintains its used the New Markets Tax Credit pro- focus on public benefit. gram to transfer much of the remaining For more information, contact debt it still holds. The project fits the William Ginn at The Nature Conser- requirements of the NMTC program vancy or Steve Weems at Coastal because it supports the continued opera- Enterprises, Inc. tion of paper mills in Millinocket and East Millinocket that provide high-qual- The Northern Forest Center's Forest ity jobs in an eligible low-income region. Economy Initiative In early 2003, Great Northern Paper The Forest Economy Initiative of the declared bankruptcy, and the land and Northern Forest Center, headquartered mills were purchased by Brascan, with in Concord, New Hampshire, promotes debts assumed by the new owner. TNC sustainable forestry and a sustainable for- transferred that debt to a special sub- est products economy in the Northern sidiary of CEI Capital Management, Forest region (northern New York, LLC. The subsidiary LLC received the Vermont, New Hampshire, and Maine). funds they needed to buy the debt from The initiative's goals incorporate the fol- a third-party private investor, GE lowing economic, ecological, and com- Capital. This investor received New munity components: to promote sustain- Markets Tax Credits (approximately able harvesting practices, achieve per- $11.7 million over 7 years) for an invest- manent land conservation, and support ment of $30 million in the project. the growth of innovative value-added As the special LLC receives debt pay- companies by building markets and ments from Brascan, those dollars will increasing access to risk capital. The ini- finance the agreed payments to GE tiative includes a loan fund to finance Capital, both at below-market interest both land protection and value-added rates. The tax credits make up the differ- forest products processing that supports ence between commercial interest rates sustainable forest management. (quite high given the risk) and the As part of this initiative, the Northern favorable rates agreed upon between Forest Center has entered into a con- TNC and Great Northern. Essentially, tract with Coastal Enterprises, Inc. to the tax subsidy helps purchase easements use New Markets Tax Credits to on 200,000 acres. enhance land conservation and other In general, only quite large-scale pro- mission-related objectives. (See New jects can take advantage of this funding Markets Tax Credits earlier for details source because transactions costs are so about how this federal program works.) high. Both TNC and CEI, for instance, CEI has earmarked $10 million of its take fees to cover the costs of setting up original New Markets Tax Credit alloca- financial arrangements for the Katahdin tion for this contract. CEI will review Forest Project. These costs are likely to and approve any projects developed by fall, however, for succeeding transac- the Forest Economy Initiative that use tions. The Nature Conservancy plans to New Markets Tax Credits as part of the work with CDEs nationwide to seek fur- financing package. ther NMTC allocations of $100 million Bridge funding might be one import a n t for forest conservation funding. function for the loan fund that is central To remain eligible for future tax credit to this initiative. New Markets Ta x allocations, TNC, CEI, and other part- C redits will provide incentives for bridge ners need to ensure public benefit from owners to hold land for at least seven their investments, and scrutiny of land years, thereby giving conservation org a- deals by conservation advocates can help nizations and public agencies time to PAGE 15 raise funds, conduct detailed inventories, U.S. Forest Capital hopes to tip the and negotiate permanent easements. balance in favor of conservation-orient- Because interim forestland owners will ed forest management. Tuchman and likely want to divest or intensify manage- Euphrat contrast three approaches to ment once the tax benefits end after forest management: intensive commer- seven years, the Nort h e rn Forest Center cial management, land conversion, and sees permanent easements as critical to conservation-based management. ensuring that good stewardship continues Intensive commercial management gen- on these lands. The center, with its land erates sufficient returns to repay the c o n s e rvation organization partners, will costs of raising capital through conven- t h e re f o re negotiate special management tional financial markets. Conversion to restrictions (such as certification under non-forest uses involves both higher cost the FSC system) and/or secure conserv a- and higher return - higher cost due the tion easements on pro p e rties purc h a s e d . increased risk of the investment and W h e re practical, the center will also seek higher return as land is sold for its "high- to provide opportunities for community est and best use." Both these options are f o re s t ry ownership and value-added pro- able to repay their capital costs through cessing of forest products linked to con- land-based profits. Conservation-based s e rved lands. management, on the other hand, will The original vision for this regional likely generate lower returns (for exam- dedicated loan fund involved capitaliza- ple, because of longer rotations, set-aside tion through PRIs and socially responsi- of sensitive areas, and other conserva- ble investments. Although the flagging tion measures) and thus cannot repay stock market reduced the likelihood of conventional capital costs. full funding from these sources, the fund The purpose of Community Forestry hopes to tap these sources in the future BondsTM is to lower the cost of capital so to increase its reserves. that conservation-based management For more information, contact Steve can compete financially with the more Rohde at the Northern Forest Center. intensive options. If funds for forestland purchase can be raised at a sufficiently Tax-Exempt Community low interest rate (e.g. 4 to 6 percent, Forestry Bonds compared to a 9 percent commercial U.S. Forest Capital's Tom Tu c h m a n rate), then conservation-based manage- and Joe Euphrat have been developing a ment can generate sufficient returns to d i ff e rent model for using federal income repay the lower acquisition costs. Those tax incentives to generate capital for low rates are provided through the tax- semi-public forestland investments. U.S. exempt bond market, with special tax F o rest Capital seeks to apply tax-exempt treatment justified by the public benefits revenue bond financing to fore s t l a n d provided through conservation-based acquisitions. The tax-exempt bond mar- management. ket is the only private capital market that A land transaction using Community was created to finance public benefits. For Forestry BondsTM would involve the fol- nearly 100 years, such private investment lowing steps: has financed the construction of nonpro f- 1. Identify for purchase priority lands it hospitals, educational facilities, and with both a willing seller and substan- other public works. Similarly, Community tial public interest in protecting that F o re s t ry BondsTM make private capital parcel. available for public purposes, in this case 2. Select or form a potential buyer. The to acquire forests for conservation and proposed landowner must be a private rural development purposes. nonprofit or quasi-public corporation CONSERVATION CAPITAL: SOURCES OF PRIVATE FUNDING FOR LAND CONSERVATION PAGE 16 (similar to a hospital or public utili- conservation purposes, as governed by ty). To ensure management for public the management plan and the conser- benefit and to provide confidence to vation easement. If the owner chooses capital markets that the debt will be to sell to a new buyer, the easement repaid, the board governing use of the will permanently protect these values. property should have wide representa- tion, including community, environ- The approach has several distinct mental, business, and timber represen- advantages: tatives. * Unlike land conservation bonds 3. Identify a third-party holder of the commonly used by states to pur- conservation easement. To assure that chase open space, this approach to public benefits are achieved, the fee land protection does not draw on buyer donates a conservation ease- the existing tax base. These are ment that complies with Section project-specific bonds, not general 170(h) of the Internal Revenue Code revenue bonds, and forest revenue, to a qualified independent third party. not general public funds, will The fee owner would pay the ease- cover repayment. Thus, there are ment holder to monitor and enforce no additional tax liabilities to the easement. local governments. 4. Develop a management plan for the * Because these lands receive a property that provides for bond repay- degree of protection in perpetuity ment over a reasonable term (perhaps without public ownership, this 40 years) through timber and other approach avoids the acrimony property revenue. over opposition to public owner- 5. Issue tax-exempt revenue bonds for ship in many rural parts of the the planned term through a state country. Substantial protection authorized "issuing authority" (usually can be negotiated by the multi- a municipality or state) already enti- party board so long as debt service tled to issue these bonds. In addition is maintained. The proposed to the easement holder, the IRS and 104,000-acre Evergreen Forest state bond issuing authorities ensure near Seattle, Washington would compliance with the community and have included approximately conservation purposes that justify use 20,000 acres in reserve status, the of tax-exempt bonds. The issuing largest contiguous private reserve entity will require public hearings and area in the state. proof of substantial public benefit to * Incentives provided through a tax justify foregone tax revenue related to credit last only as long as the cred- the bonds. it exists. A for-profit entity with 6. Use bond revenue to purchase land fiduciary responsibility to stock- and donate the permanent conserva- holders is likely to do only the tion easement. minimum required to qualify for 7. Begin managing the property to pro- the credit. In contrast, once tax- vide both cash returns to make bond free bonds are issued, the obliga- payments and the public benefits tion continues until the bond is identified in the management plan. repaid. The nonprofit community Continue oversight by a multi-party forest owner has a clear obligation nonprofit board. to the public, and the IRS, the 8. Once bonds are paid off, the nonprofit bond issuer, and public board rep- continues to operate in a manner that resentatives will provide continu- protects the defined community and ous oversight. PAGE 17 * Because the landowner is a non- ing and monitoring a conservation profit, there is no pressure to max- easement, negotiating a manage- imize returns. The goal is to pro- ment plan, and making financial vide public conservation benefits arrangements, land transactions and sustainable employment would probably need to be $10 opportunities in communities. million or larger. Thus, there is less pressure to max- * The process takes time, and few imize timber harvest. timberland sellers can afford the * Conservationists will share deci- wait. Therefore, Community sion-making authority on large- Forestry BondTM transactions are scale ownerships. more useful with sellers who are * Very large sums of money ($10 willing to undertake a negotiated million to $1 billion) can be sale versus an auction where a raised independent of state or fed- nonprofit would have to compete eral funding. with the for-profit sector that can work much more quickly. Once There are also significant obstacles or changes to the tax code are limitations to this approach: passed, U.S. Forest Capital expects * Because Community Fore s t ry future transactions to take 6 to 12 BondsTM extend tax-exempt status months. to a new realm, their use re q u i re s * This conservation approach does m odifications to the Intern a l not apply to public lands or to Revenue Code. Under the Cod e , lands purchased strictly for wilder- when pro p e rty is purc h a s e d ness purposes. t h rough use of unqualified Although the first pro p o s e d 501(c)(3) bonds, the buyer cannot Community Fore s t ry BondTM transac- use the pro p e rty for an "unre l a t e d tion was never completed, the pro c e s s trade or business." Selling timber illustrates the potential of this could be considered a use unre l a t- a p p roach to develop a conserv a t i o n ed to the community and conser- consensus among many parties. In vation purposes of a community 2002, We y e rhaeuser agreed in principle f o rest. The land manager must to sell the 104,000 acre Snoqualmie demonstrate that only net timber Tree Farm to the Everg reen Fore s t g rowth will be sold and that public Trust, a nonprofit formed for the pur- benefits, as defined by the conser- pose, for $185 million. U.S. Fore s t vation easement ahead of time, Capital worked with community lead- will be undiminished by that sale. ers and the Cascade Land Conserv a n c y * Legislation considered by Congre s s to stru c t u re the deal, form the in the fall of 2003 (part of the E v e rg reen Forest Trust, develop a "Charities Bill") would have autho- m u l t i - p a rty board and begin negotiat- rized this special use of tax-exempt ing a management plan. Because of bonds. The Senate version would delays in passing authorizing legisla- have allowed $2 billion in bonds tion, We y e rhaeuser sold the land to nationwide over 3 years, while the Hancock Timber Resource Gro u p . House version was limited to $250 Knowing that the financing can work, million in bonds, and only in the Trust looks forw a rd to undert a k i n g Washington State, over 3 years. another transaction once national * Because of the expense of forming authorizing legislation passes. an ownership organization, devel- For more information, contact Tom oping a multi-party board, convey- Tuchman at U.S. Forest Capital. CONSERVATION CAPITAL: SOURCES OF PRIVATE FUNDING FOR LAND CONSERVATION PAGE 18 Federal Estate Tax p e rcentage of total forest value. In these In addition to income tax incentives, cases, estate taxes remain high in spite of estate taxes also influence decisions easement restrictions, and without the about forest protection. Estate taxes are special provision there may be a perv e r s e paid by the heirs, with a portion of the incentive to cut valuable timber immedi- estate's value exempt from the tax. ately to pay the tax (Shay 2003, personal Because of revisions passed by Congress c o m m u n i c a t i o n ) . in 2001, the amount of an estate exempt Section 2032A of the Intern a l from taxation is increasing rapidly. In Revenue Code allows for special-use 2004 and 2005 the first $1.5 million of valuation of estate pro p e rt y. In cases estate value is tax-free, by 2009 the w h e re fair market valuation might forc e exempt amount will increase to $3.5 heirs to sell pro p e rty to generate suff i- million, and the tax will be abolished cient cash to meet tax obligations, this altogether for estates of people who die p rovision allows for continuation of a during 2010. In the absence of further f a rm or fore s t ry business without undue M congressional action, however, the tax tax burden. A series of complex Several states will revert to its pre-2001 level begin- re q u i rements determines whether tim- ning January 1, 2011. berland is eligible for this lower estate have increased Because of these scheduled changes, valuation. Heirs must commit to keep- conservation estate tax incentives to encourage land ing the land in timber production for at or easement donations face an uncertain least ten years, subject to re c a p t u re of incentives by future. As long as the tax still applies, the tax owed (Jacobson and Becker allowing direct however, estate tax provisions encourage 2 0 0 1 ) . conservation by excluding the value of For more information, contact Russ tax credits for donated easements from the estate. Shay at the Land Trust Alliance. donated land or Further provisions exclude a portion of nonrestricted timber value on land easements. under easement and allow the estate to State Income Tax L be assessed at its forest-use, rather than Many states allow income tax d e d u c- market, value. A lower estate value t i o n s similar to those in the federal tax means lower tax liability. c ode. Several states, however, have Donating an easement to a conserv a- i n c reased conservation incentives by tion organization is one accepted way to allowing direct tax credits for donated reduce the taxable estate. Under section land or easements. While a tax deduc- 2031(c) of the Internal Revenue Cod e , tion reduces the income to which taxes either a landowner or an heir (within a re applied, and credit is subtracted one year of the previous owner's death) d i rectly from the amount of tax owed. can elect to donate an easement and Nine states (North Carolina, Vi rg i n i a , hence reduce the estate tax. A furt h e r D e l a w a re, Colorado, Connecticut, South special exclusion allows 40 percent of the C a rolina, California, Maryland, and New value of the remaining pro p e rty unaff e c t- Mexico) currently provide tax credits for ed by the easement to also be excluded easements or land donated or sold to a f rom the taxable estate value, up to a qualifying conservation org a n i z a t i o n . maximum exclusion of $500,000. This Specific benefits vary from state to p rovision is useful for timberland where state. For example, Connecticut allows a the trees are much more valuable than credit at 50 percent of the donated value the land itself. In this case, the easement of land or interests in land, but only for has little effect on total pro p e rty value corporate donors. Delaware allows because the development rights encum- donors a credit of 40 percent of fair mar- b e red by easement constitute a small ket value for donated land or interests in PAGE 19 land, with the total credit capped at $50,000 per individual. South Carolina allows a credit of 25 percent for dona- tions to an approved conservation orga- nization, with a cap of $250 per acre and $52,500 per taxpayer (Shay 2003, per- sonal communication). Benefits from tax credits are limited by the tax liability of the donor. Conser- vation tax credits cannot be used, for instance, by an organization or individ- ual who wishes to donate land or ease- ments in a state where the donor owes no income tax. For those who do pay taxes in the state where the land is located, the credit might be limited by the size of the donor's tax bill. Consider a donor of an easement worth $300,000. A 50 percent tax credit entitles that who receive little or irregular forest Virginia's innovative transferable donor to $150,000 in tax credits. If that income. Landowners dedicated to pro- income tax credit encourages donor pays state income taxes of $5,000 tecting sensitive natural communities on landowners to donate land or per year, the donor's actual credit in a their land may find the carrying costs easements to protect forests like this one along the popular state with five-year carry-forward would prohibitive. Special property tax provi- Appalachian Trail. be limited to $30,000. Even when states sions can reduce this barrier to perma- address this limitation with generous or nent conservation. unlimited carry-forward provisions, A c c o rding to a survey by Hibbard et al. incentives shrink when they occur in (2001), the 50 states administer a total of the distant future. The donor just men- 66 programs that give special pro p e rt y tioned would need to wait 30 years to tax consideration to forestland. The goals receive the full tax credit value. of these programs vary from state to Both Colorado and Virginia recently state. Some programs re q u i re manage- addressed this limitation by making their ment for timber production to support a tax credits transferable. This modifica- f o rest products industry. Others focus on tion allows the donor to receive immedi- open space protection or public access. ate cash payment by selling the tax cred- T h i rty-six of these programs use "cur- it to another party who owes enough rent use" (the income-producing poten- income tax in that state to fully use the tial of the pro p e rty in forest prod u c t i o n ) credit. Brokers have emerged to manage rather than fair market value to assess this market, with up-front cash pay- eligible forest pro p e rties. Fifteen pro- ments for credits ranging from 50 to 90 grams use comparable sales (actual percent of full value (Hocker 2004, per- transactions involving land of similar sonal communication). quality), often reducing assessments to a For more information, contact Phil fixed percentage of that value. Nine Hocker at Conservation Service states have a fixed tax per acre, and Company, LLC. t h ree states totally exempt private f o restland from pro p e rty taxation under Use-Value Appraisal c e rtain circumstances (Hibbard et al. Property Tax 2 0 0 1 ) . High property taxes can discourage Enforcement of management standards long-term private ownership for those and goals also varies from state to state. CONSERVATION CAPITAL: SOURCES OF PRIVATE FUNDING FOR LAND CONSERVATION PAGE 20 Only 16 programs require a forest man- the value for each productivity class is agement plan, and only 19 impose determined by capitalizing average annu- penalties for noncompliance or with- al per-acre timber revenue statewide, drawal from the program. with 35 percent determined by actual The two examples that follow are market sales for comparable lands. derived from Hibbard et al. (2001). Standing timber is exempt from property taxes but is assessed at 100 percent of its Georgia fair market value at the time of harvest Georgia classifies land into ten cate- or sale, with property tax paid on this gories for property tax purposes. amount at the standard rate for that Forestland is generally classified as agri- jurisdiction. cultural property, conservation use prop- erty, or environmentally sensitive prop- New Hampshire erty. All three special classifications To receive reduced valuation under apply to ownerships of up to 2,000 acres. New Hampshire's Current Use Law, a State agencies determine land valuations parcel must be greater than ten acres, under each classification. able to produce an annual gross income The preferential assessment program of at least $2,500, or be a Certified Tree for agricultural property requires that 80 Farm. The program offers an additional percent of the owner's income be reduction in use value (approximately 50 derived from farming. Property under percent) if the owner practices "respon- this classification is assessed at 75 per- sible land stewardship," most often evi- cent of fair market value. denced by a management plan. The Conservation use land must be used state provides a further 20 percent primarily to produce timber, with up to reduction in the use-value if the half the land "dormant" at any given landowner allows year-round non-motor- time. ized public access. Environmentally sensitive land must A statewide Current Use Board deter- be certified by the Georgia Department mines use values annually, based on cap- of Natural Resources. Landowners for italization of timber income for four for- both conservation use and environmen- est types (white pine, hardwood, other, tally sensitive land classes must commit and unproductive). As in Georgia, to maintaining the existing land use for standing timber is not assessed for prop- ten years. Penalties for withdrawing from erty tax purposes, but at harvest the the program include rollback taxes plus landowner pays a yield tax of 10 percent interest on the entire parcel enrolled, of the stumpage value, under the state's even if only a portion is withdrawn. Timber Tax Law. Both these classifications value land An owner who changes land use to a partly at current use, based on the land's nonqualifying one pays a penalty of 10 productivity class, and partly at compa- percent of the fair market value of the rable sales value. Sixty-five percent of parcel. PAGE 21 Paying for Land Through the market continues to develop; and Forest-Based Earnings growing public awareness might eventu- ally produce more widespread price Although federal, state, and local pro- incentives. grams reduce the tax burden for Depending on forest condition, timber landowners seeking to keep their forest- revenue can cover a conservation land intact, some forest-based revenue owner's carrying costs, and perhaps - will be needed to fully cover carrying depending on purchase price, stocking costs. Many conservation organizations and ownership goals - contribute actively promote environmentally toward repaying a portion of the pur- friendly revenue sources that provide chase cost. A project in northern incentives for voluntary private forest Vermont illustrates the potential for conservation. These same sources can working conservation lands to partially help conservation owners to recoup pay their own way. some of their purchase costs through In 1997, the Vermont Land Trust and property-based revenue. The Nature Conservancy formed the Profit-generating activities on conser- Atlas Timberlands Partnership to pur- vation lands are bound to create contro- chase 26,789 acres of former investor- versy. Revenue that derives from ecosys- owned lands in northern Vermont. The tem services or carefully managed recre- partnership hoped to learn firsthand ation leases is compatible with a high about the challenges of managing large level of resource protection. Marketing timberland parcels, to cover landholding of timber or limited development, how- and management costs, and to increase ever, requires some compromises in the the asset value of the land over time. level of protection achieved. Even when The organizations agreed to hold major conservation owners set stewardship portions of the land for at least ten years, standards and channel development while using the remainder as a tool to away from critical areas to protect key advance conservation of other lands, values, land protection advocates will be possibly swapping land for easements on concerned about damage to critical priority parcels. resources. At the same time, commercial On land where the highest value tim- competitors might perceive unfair com- ber was already removed by the previous petition from public or nonprofit own- owner, current harvests include relative- ers. Yet future landscape scale conserva- ly small volumes of sawlog quality timber tion depends on innovation in this fer- as the resource is given time to grow. In tile and confusing arena. addition to some sawtimber, pulp, and firewood-quality material is being Timber and Nontimber removed to improve the ratio of accept- Forest Products able growing stock to unacceptable One way to generate land-based rev- growing stock in the residual stand. enue, while maintaining well-recognized Managing the forest for future produc- standards of ecological and social tion of quality sawlogs and veneer logs, integrity, is to sell certified timber. One while maintaining high harvesting stan- original intention of forest certification dards, requires patience and a tolerance under the Forest Stewardship Council for low current returns. As careful man- system was to increase returns for timber agement increases timber quality over produced in a way that also protects a the long-term, the owners will benefit variety of other forest values from biodi- financially from the increased value of versity to water quality to public access. the standing trees rather than from cur- Although current premiums are spotty, rent harvest income. The value of any CONSERVATION CAPITAL: SOURCES OF PRIVATE FUNDING FOR LAND CONSERVATION PAGE 22 parcels sold in future years will reflect revenue for private landowners. The today's investment in timber stand USDA Forest Service estimates that improvement. The Atlas lands have about 8 percent of private forestland in been certified under the FSC system, the United States is leased for some and the partners are hoping to further recreational use. Best and Jenkins increase wood value by pursuing value- (1999) estimate that hunting leases can added opportunities. generate $2 to $15 per acre per season, For more information, contact Carl especially in the South where such leases Powden at the Vermont Land Trust. are traditional. In Arkansas and Nontimber forest products, including Mississippi, Anderson-Tully, a forest medicinals, florals, and edibles, might industry landowner, receives $3 to $6 produce supplemental revenue for forest- per acre per year for hunting rights. In land owners without requiring timber Washington State, Champion harvest. Best and Jenkins (1999) esti- International has sold hunting permits mate that in the Pacific Northwest for $13 per day or $200 per individual landowners can earn $5 to $15 per acre per year (Best and Jenkins 1999). annually through sale of permits to har- Mississippi State's Forest and Wildlife vest nontimber forest products. In the Research Center recently surveyed eastern United States, such markets are landowners in the state with at least 40 limited although revenue might be acres of land about the 1986-98 hunting earned from leasing rights to harvest bal- seasons. Only 14 percent of landowners sam boughs for wreath-making, to tap surveyed charged a fee for hunting, with maples for syrup production, to harvest larger ownerships more likely to charge a wild blueberries, or to gather pine straw fee. Lease prices ranged from $1.50 to for horticultural mulch. Markets for fid- $25 per acre per year, and net revenue dleheads, ginseng, and mushrooms can from hunting leases averaged $3.91 per also be lucrative. In Maine, Hancock acre per year (Jones et al. 2001). Land Company has found a niche in In the northeastern United States, the sales of spring water to bottled water tradition of free public access makes paid companies (see TIMOs as Conservation recreational leases difficult to imple- Partners, page 35). ment. Snowmobile clubs, for instance, For more information, contact Matt do not typically pay landowners for their Hancock at the Hancock Land extensive use of private forestland (part- Company. ly to avoid possible landowner liability). Yet one northeastern company illustrates Recreation the potential for landowner income from Recreation and hunting leases might recreation. also supplement forestland returns, espe- Since 1995, Timberland Trails has cially where timber harvest or other operated a system of dispersed yurts on commercial uses have been restricted by private lands in northern New easement terms. Like timber harvest, Hampshire, Vermont, and Maine. The unmanaged recreation can damage pro- company first leased the Phillips Brook tected resources. Although certification Backcountry Recreation Area in north- of "ecotourism" enterprises has been pro- ern New Hampshire from International posed, the system to date is less well Paper (IP) in early 1997. When IP sold organized and widely accepted than FSC the majority of its New Hampshire lands wood products, especially within the to a combination of private and public United States. conservation buyers in 2001, it retained In some regions, income from forest the 24,000 acres at Phillips Brook and recreation is a well established source of continued to renew the Timberland PAGE 23 Trails recreation lease on an annual nent recreation easement as an alterna- basis. tive to a renewable term recreation The lease included the right to install lease. A permanent easement is more yurts for hut-to-hut touring and exclu- costly up front but provides the long- sive use of 75 miles of old logging roads term security needed to justify invest- and trails as mountain bike and cross- ments in permanent facilities. Timber- country ski trails. Recreational users did land Trails, as owner of the easement, not pay directly for land access, so the would assume the burden of managing landowner was protected from liability public access, maintaining trails, etc., through state laws favoring free public thus minimizing landowner costs. For access. Through cooperative agreements the seller of the easement, the up-front with a number of local guides and rental payment can companies, guests were offered a variety contribute to the of activities including fly fishing, canoe- costs of land pur- ing, kayaking, moose tours, tracking, chase. hunting, mountain bike tours, dog sled- Several key ding, cross-country skiing, and snow obstacles block cave building. wider use of this In November, 2003 IP canceled the model. Many cur- Phillips Brook lease, and Timberland rent-use property Trails must move its yurts and lose the tax programs, for considerable investment it has sunk in instance, prohibit this property. From a landowner perspec- charging for lodg- tive, the recreational lease brought too ing on enrolled little return and restricted operations properties. that might have affected the recreation Easements experience of visitors. Timberland Trails financed through Forest Legacy com- Outdoor outfitters like Timberland continues to offer yurt lodging on other monly prohibit overnight stays. New Trails lease recreation rights from private lands, including 900- and 1,500- Hampshire's Connecticut Lakes private landowners to expand acre properties in Vermont, and is Headwaters project developed the first opportunities for remote recreation. actively investigating new locations in Legacy-financed easement that allows New Hampshire and Maine. overnight stays on the land (Altenburg Bill Altenburg, Timberland Trails 2004, personal communication). entrepreneur, considers the five-year If these obstacles can be overcome, Phillips Brook experiment a successful recreation leases or easements might demonstration of the potential of fee offer conservation owners a significant recreation on private land. He believes source of nontimber revenue. Working that his approach fits both revenue with a variety of northeastern conserva- needs and goals of conserved lands. tion groups, Altenburg has calculated Since conservation owners have usually that, when recreation management is made a long-term commitment to forest- combined across multiple parcels, recre- land ownership and may harvest less ation leases can cover the full carrying intensively, they may be more willing to costs for conserved properties. He pro- offer long-term recreational leases. poses that smaller ownerships tap recre- Conservation-oriented landowners also ation potential by teaming up with local benefit from building public awareness of lodging businesses who might offer an wildlife when visitors spend a night out overnight stay in a local yurt as an addi- in the woods and can observe wild ani- tional option. mals that are active at dawn and dusk. For additional information, contact Altenburg has also developed a perma- Bill Altenburg at Timberland Trails. CONSERVATION CAPITAL: SOURCES OF PRIVATE FUNDING FOR LAND CONSERVATION PAGE 24 Limited Development Pennsylvania develop compre h e n s i v e As a last-resort source of revenue, a plans, zoning ordinances, and subdivi- portion of the land resource can be sold sion regulations that protect green space for housing or other developed uses, (Natural Lands Trust 2001). with proceeds used to finance protection Most limited or conservation develop- of the remainder. Because this limited ment projects are at the scale of single development approach involves develop- f a rms or subdivisions. Some pro j e c t s , ment of some portion of the land, the h o w e v e r, involve thousands of acre s . necessary compromises inevitably gener- L a rge-scale limited developments pre- ate controversy. Will designated open dictably draw both praise (for innovative spaces be rugged terrain unsuited to subdivision design that permanently pro- development or rich sites that best meet tects key ecological re s o u rces) and criti- wildlife needs? Will marketing appeal to cism (for developing at all in critical nat- up-scale buyers at top prices, or will ural areas, claiming golf courses as pro- potential revenue (and total acres pro- tected open space, and restricting access tected) be sacrificed to provide broad to those who can aff o rd expensive re a l public access? e s t a t e ) . Limited development approaches vary For small conservation subdivisions, a in scale. At the smallest scale, land residents' association typically manages trusts occasionally sell one or two lots common lands. Larger conservation from a conserved property to finance developments often establish an affiliat- development restrictions on the remain- ed nonprofit, funded by real estate trans- ing acreage. Because buyers appreciate fer fees, to manage their larger acreages the amenities of permanently protected of protected open space. The best mod- green spaces nearby, they are likely to els for these nonprofit trusts have inde- pay more for the developed property pendent boards, with respected environ- than they would have were there no pro- mental scientists represented to ensure tected areas nearby. that common spaces address ecological Rapidly growing suburban areas might priorities and not simply residents' recre- encourage developers to employ a simi- ational demands. lar strategy by clustering house sites on Here are some limited development a small portion of a pro p e rty and pro- examples across the country: tecting the remaining open space t h rough permanent conservation ease- Prairie Crossing ments. The cluster approach allows the Grayslake, Illinois, on the outskirts of same number of housing units as would Chicago. 677 acres with 350 acres pro- be permitted under standard zoning tected, including 90-acre Prairie Cro s s i n g (sometimes slightly more to provide an F a rm and more than 200 acres of re s t o re d extra incentive) but allows the develop- prairie, wetlands, and hedgerows, 10 er to group those units on one densely miles of trails and a 22-acre lake. 359 developed portion of the pro p e rt y. One homes starting at $350,000, on-site char- of the leaders in the promotion of clus- ter school. The nonprofit Liberty Prairie t e red "conservation subdivisions" is C o n s e rvancy manages education, stew- Randall Arendt, who founded the a rdship, and volunteer restoration activi- G rowing Greener program of the ties for Liberty Prairie Pre s e rve which Natural Lands Trust, south of includes 3,200 acres of conserved farm- Philadelphia. Growing Greener has land, nature re s e rves, and open space expanded into a statewide program that (including Prairie Crossing and neigh- helps communities thro u g h o u t boring public and private lands). Prairie PAGE 25 C rossing is an early model of conserv a- Santa Lucia Preserve tion development founded in 1992 Carmel region of Coastal California. ( < w w w. p r a i r i e c ro s s i n g . c o m / p c / s i t e / i n d e x . 20,000 acres with 18,000 acres protect- h t m l > ) . ed. 300 homes listed at up to $4 million with bare lots selling for $1 million, Hidden Springs gated community with extensive recre- North of Boise, Idaho. 1,844 acres ational facilities. The affiliated nonprofit with 800 acres of open space. 1,000 Santa Lucia Conservancy manages the homes starting at $219,000, walker- permanently protected acres for wildlife, friendly town center with club house, research, and recreation, supported by a post office, store, and school. Hidden $20 million endowment provided Springs and other recently built planned through land sales. See . communities priorities as walker-friendly Spring Island and Santa Lucia re p re s e n t retail centers, as well as permanently the exclusive gated-community extre m e conserved open space. See . Because of high real estate values, these Prairie Crossing and Hidden Springs m odels generate sufficient funds to pro- provide models for reducing the environ- tect large re s e rve acreages but at the cost mental impact of conventional suburban of reduced public access. These two subdivisions by designing for accessible examples illustrate the wide range of stan- community facilities and open space. d a rds within the limited development Such developments typically incorporate concept, with 40 percent versus 90 per- about 50 percent open space. Because cent protected open space. Design details these models often protect land in scat- also matter, as protected acreage may tered patches, interspersed with homes include extensive luxury golf courses or and retail services, they contribute little isolated patches of open space with limit- to biodiversity or wildlands protection. ed conservation value. Other limited development models aim to protect larger contiguous acreages. Heritage Ranch This organization, founded by Jim Spring Island Wi n d e r, manages more than140,000 acre s Coastal South Carolina. 3,000 acres (including 83,000 acres of federal and with 1,200 acres of open space. 400 state public grazing lands) on four work- homes listed at $1 to $4 million, gated ing ranches in central and southern New community with golf course and other Mexico. Grazing follows the Holistic recreational amenities. The affiliated Management model, using livestock to Spring Island Trust owns land or ease- achieve ecological restoration objectives ments on 1,000 acres of open space, and carefully monitoring for impact. employs naturalists who work with P o rtions of each ranch pro p e rty are subdi- landowners to ensure resource protec- vided for sale as housing lots, and build- tion, and makes recommendations about ings must comply with standards set by environmentally sensitive development Heritage. Revenue from lot sales finances design. See . s u p p o rts educational programs and volun- teer restoration work that involves re s i- dents in on-site conservation activities. CONSERVATION CAPITAL: SOURCES OF PRIVATE FUNDING FOR LAND CONSERVATION PAGE 26 House sites currently on the market start Heritage Ranch seems closest to the at $89,000. Acreages and number of lots limited development ideal. It conserv e s for each of the ranches are shown in private lands in large units, maintains Table 1 below: open spaces of high value to wildlife, demonstrates a substan- TABLE 1. tial commitment to Heritage Ranch Land Allocation ecological re s t o r a t i o n , is managed by tradi- Ranch Property Public Acres Private Easement Developed Number of tional ranchers who see (BLM, USFS, State) Acres Acres Acres House Lots themselves as guard i a n s Berrenda Creek 14,000 10,000 7,000 3,000 74 of local culture and bio- Cougar Mountain/Corona Ranch 21,000 9,000 6,000 3,000 75 d i v e r s i t y, sells pro p e r- Deer Canyon 0 12,640 6,320 6,320 316 ties at a re a s o n a b l e Lake Valley 48,000 4,000 1,800 1,500* 20 price, and involves re s i- * plus 700 miscellaneous acres. dents in sustainable Source: Jim Winder 2004, personal communication. design and education and restoration eff o rt s . Recognizing that much of the habitat Although limited development can essential to the survival of threatened potentially fully fund land protection and endangered species is in private efforts, it is best suited to staving off ownership, the Heritage Ranch man- imminent development of less conserva- agers are committed to range restoration tion-friendly design. Where no immedi- and biodiversity protection on their ate land conversion threat exists, direct properties. Heritage cooperated with public acquisition can better protect Defenders of Wildlife, for instance, to critical ecological values. Where land is offer a predator-friendly haven for the expensive and growth is rapid, however, Mexican gray wolf (Canis lupus baileyi) this tool can protect havens of precious and developed a pilot program to market open space in the path of encroaching predator-friendly Wolf Country beef. sprawl. Recent projects include reintroduction on the Heritage ranches of black-tailed Mitigation Funding and Gunnison's prairie dogs (Cynomys Beyond harvest of timber and nontim- ludovisianus and Cynomus gunnisoni) ber products, recreation fees or leases, or and Rio Grande chub (Gila pandora). limited development of portions of the See . land, a whole suite of forest ecosystem Heritage Ranch's conservation com- services can bring substantial supple- mitment was formalized in 2002 with the mental revenue to landowners. Markets establishment of an affiliated nonpro f i t , for these services are just beginning to the Heritage Ranch Institute (). T h e government regulations that protect institute cooperates with regional univer- public values. For example, environmen- sities and government agencies to pro- tal regulations prohibit actions that mote re s e a rch and education about harm wetlands, destroy threatened or human impacts on natural re s o u rces. The endangered species habit, or impair institute ultimately aims to extend lessons water quality. To allow some flexibility l e a rned about ranching methods that pro- for new highway construction, factories, tect biodiversity and will also pro m o t e and other development, government techniques of home and road constru c- agencies sometimes allow limited dam- tion that minimize the human footprint. age to a protected resource at one site in Of the examples included here, exchange for "mitigation" elsewhere. PAGE 27 Because mitigation costs money, those wetlands impacts of development pro- who provide the mitigation service can jects. Ecologists and wildlife biologists charge a fee to developers who benefit were skeptical about whether off-site from the service. mitigation that relied on isolated artifi- Although mitigation cannot yet gener- cial wetlands could replace the full range ate sufficient funds for an entire land of natural wetland functions. Developers purchase, it can supplement other public often hired inexperienced engineering and private funding or encourage exist- firms to design constructed wetlands, ing owners to accept conservation ease- and after initial installation these sites ments that limit land management prac- all too often failed to mimic the natural tices. When landowners receive revenue system that they had replaced (Roberts for protecting wetlands, providing 1993). wildlife habitat, maintaining river State agencies, with highway depart- buffers, or increasing carbon sequestra- ments taking the lead, began to develop tion, they may be more likely to accept more effective large-scale wetlands permanent limitations on timber har- "banks" that could provide functional vest, road building, or other activities wetlands to offset those destroyed by that affect the services provided by their public construction projects. In some lands. Limited-term contracts have been cases, private developers could also buy used, but many conservation advocates credits from a public mitigation bank to agree that high quality environmental compensate for damage (debits) to wet- services depend on permanent easements lands elsewhere in the state. Eventually, that allow natural processes to develop entrepreneurs began to develop mitiga- over long periods of time. Regulations tion banks as profit-making ventures. governing markets for these services can As noted by Shabman, et al. (1993), and should require permanent easements mitigation banks provide several advan- as a condition of participation. tages over ad hoc project-by-project mit- The National Mitigation Banking igation. Banks increase predictability Association, formed in 1998, publishes a and timeliness for developers by provid- newsletter and tracks legislation ing measurable mitigation services at a (). The lower per-unit cost because of economies Environmental Defense Center for of scale. Banking also provides long-term Conservation Incentives also researches maintenance of wetlands complexes, and and tracks mitigation programs the full functioning of these wetlands (). the promised mitigation actually occurs. Even private mitigation banks depend Wetlands Mitigating Banking on government policy for their existence Wetlands provide the most established and smooth functioning. The ability to example of mitigation markets. The ser- charge for wetlands services itself relies vice provided is relatively easy to docu- on tightly enforced wetlands protection ment and monitor, and newly construct- regulations. Regulatory agencies must ed wetlands have been allowed to also determine whether the wetland replace those destroyed by filling or con- functions and values provided by a bank struction. adequately compensate for the damage When the Army Corps of Engineers caused by a particular project. In set out to implement the policy of "no November 1995, five federal agencies net loss" of wetlands in the early 1990s, issued a joint "Guidance for the off-site mitigation offered a popular solu- Establishment, Use and Operation of tion to compensate for the unavoidable Mitigation Banks." Since that time, CONSERVATION CAPITAL: SOURCES OF PRIVATE FUNDING FOR LAND CONSERVATION PAGE 28 large-scale commercial wetland banks smaller-scale cases of mitigation for have emerged in anticipation of selling habitat damage. On January 19, 1996, an credits to future projects with wetland oil barge grounded on Moonstone Beach impacts. More than 300 wetlands miti- in southern Rhode Island after the tug gation banks now exist nationwide pulling it caught fire. The barge spilled (Davis 2004, personal communication). an estimated 828,000 gallons of home Most banks generate credits for re s t o r- heating oil, which destroyed shellfish, ing, expanding or constructing new wet- damaged piping plover nesting habitat, lands, but regulators may also allow cre d- and killed more than 400 loons and its for permanent protection of existing eiders. The Rhode Island Department of wetlands. Significant questions persist as E n v i ronmental Management, National to whether banks should be allowed to Oceanic and Atmospheric Administra- sell credits before their projects are fully tion, and U.S. Fish and Wildlife Serv i c e functional, how to measure wetland (the "Trustees") negotiated a financial function, and how to ensure perm a n e n c e settlement with the barge and tug owners. of constructed wetlands. The Trustees agreed that full compen- Early transactions tended to be mea- sation would require protecting sites for M sured in acres of generic wetlands, but 33 nesting pairs of loons and 315 eider Wetlands banking increasingly sophisticated techniques are nesting sites, among other actions. An being developed that measure specific environmental assessment estimated the could help wetland functions and will reward more full value of loon damages at $7.5 mil- compensate for effective management. Because high- lion, and the final settlement reached in quality wetlands restoration generates 2000 provided $3 million to fund loon easement more saleable credits, wetlands banking conservation. The Trustees agreed that provisions that entrepreneurs have an incentive to pro- on-site mitigation was impractical and vide truly effective wetlands protection. that loons would benefit most from pro- restrict an One-time off-site mitigators, on the tection of nesting habitat along investor's timber other hand, are more likely to expend lakeshores in northern New England. revenue. the minimum effort required and seldom The U.S. Fish and Wildlife Service provide long-term management. administers the North Cape Loon L Because forested wetlands tend to be Restoration Fund funded by the settle- patchy in distribution, a wetlands bank ment, which has protected lakeshore is unlikely to provide sufficient funds for loon nesting sites in northern Maine. large-scale forest conservation projects. The fund contributed $500,000 to the But for the right special situation, wet- Pingree easement purchase in northern lands banking could help compensate for Maine, completed in 2001, and also easement provisions that restrict an helped finance the West Branch of the investor's timber revenue. Penobscot River project, also in Maine, completed in early 2004. Wildlife Habitat Mitigation Aside from compensatory funding for As with wetlands mitigation, parties negligent actions, mitigation can also who harm threatened or endangered generate conservation funding through species may be required to compensate advanced planning for projects that will society for the damage caused by their affect critical habitat. Under section 10 actions. Initially, compensation occurred of the Endangered Species Act, the U.S. after-the-fact. The Exxon Valdez oil Fish and Wildlife Service can grant per- spill, for instance, drew widespread pub- mission to develop land of critical con- lic attention to cash payments by parties cern to endangered species only if the responsible for massive wildlife impacts. landowner agrees to mitigate the loss of The East Coast has seen lesser-known habitat. Wildlife habitat banks, like wet- PAGE 29 lands banks, manage for particular 1,500 acres of suit- environmental services in advance, then able habitat. IP's sell credits to projects that reduce habi- goal is to increase tat elsewhere. Habitat banking can suitable habitat to potentially apply to a much broader 5,000 acres sup- array of forest types than is the case with porting 25 to 30 wetlands banking. Red-cockaded In April 1995, California became the Woodpecker clus- first state to embrace conservation bank- ters. From 1998 to ing as a means of conserving endangered 2003, management species. Since then, many conservation of Southlands banks have been established throughout increased the the state, but especially in southern woodpecker popu- California, an endangered species lation there from 3 hotspot. For more information on males to 11 clusters California's experience with wildlife with 42 birds total. habitat banking, see . Southlands clusters In May, 2003, the U.S. Fish and increases, IP can Wildlife Service issued "Guidance for increase harvest on the Establishment, Use, and Operation other lands it of Conservation Banks." Nationwide owns, trading off there are now more than 60 endangered woodpecker clus- species habitat banks (Davis 2004, per- ters on a one-for- sonal communication). Unlike wetlands one basis. mitigation banks, which have tended to Public agencies involve constructed wetlands, most a re frequently part- habitat conservation banks protect and ners in mitigation Wildlife habitat mitigation funding manage preexisting habitat that harbors a p rojects. The North Caro l i n a from North Carolina's Department target species. The bank's saleable cred- D e p a rtment of Tr a n s p o rtation con- of Transportation helped purchase its result from permanent ownership by a tributed habitat mitigation funds to the Palmetto-Peartree Preserve conservation organization or deed establish the 9,700 acre Palmetto- that provides habitat for the Red- restrictions that perpetuate the critical P e a rt ree Pre s e rve in eastern Nort h cockaded Woodpecker. habitat. Although habitat mitigation C a rolina. The project involved a bro a d banks are still rare in the East, the exam- coalition of partners, including the U.S. ples that follow (highlighted by Envi- Fish and Wildlife Service, The Nature ronmental Defense at ) illustrate their use by both olina Wildlife Resources Commission, private and semi-public entities. and several local governments. In addi- International Paper (IP) followed the tion to being managed for Red-cockaded mitigation banking model in its 1998 Wo odpecker habitat, the pro p e rty will be Habitat Conservation Plan for the Red- used for limited timber harvest and eco- cockaded Woodpecker (Picoides tourism. See www. n c d o t . o rg / s e c re t a ry / borealis). Through this 30-year plan, e n v - s t e w a rd / p a rtnerships/> and . and Wildlife Service, IP agreed to inten- Mobile County, Alabama provides an sify management for woodpecker habitat example of a semi-public agency using on its Southlands Experimental Forest in habitat mitigation banking. In 2001 the Bainbridge, Georgia, which contains Mobile Area Water and Sewer System CONSERVATION CAPITAL: SOURCES OF PRIVATE FUNDING FOR LAND CONSERVATION PAGE 30 (MAWSS) established a conservation Carbon markets would be modeled on bank for the threatened gopher tortoise the "cap and trade" system of emissions (Gopherus polyphemus). MAWSS owns permits used by the EPA since 1995 to 7,000 forested acres that protect public allocate sulfur and nitrogen oxide emis- water supply sources and has agreed to sions among utilities (). Under this tortoises. Landowners who want to build system, regulators issue permits for the on tortoise habitat elsewhere in Mobile allowable quantity of emissions, and County can purchase credits from the these permits become transferable bank. As of January 2003, landowners among sources through a market (the had purchased 35 credits in the gopher EPA uses the Chicago Board of Trade). tortoise bank, and about 40 tortoises Market trades ensure that those with the were established on the MAWSS conser- lowest abatement costs perform most of vation bank site. the emissions reductions, selling their Perhaps the biggest challenge for miti- permit allocations to the high-cost emit- gation banks of all kinds is the cost of ters. The system theoretically achieves measuring and verifying the wetlands or targeted emissions reductions while min- habitat services provided. In particular, imizing the overall costs of compliance. effective mitigation depends on main- For carbon markets to function proper- taining benefits over time, so monitoring ly, the carbon purchased as an offset must extend into the indefinite future. must meet several standards. To clarify As for many other conservation finance each standard, a host of technical issues alternatives, transaction costs can be a must be resolved. deal-breaker. * additional: The offset must repre- For more information, contact Robert sent a real increase of fixed car- Bonnie at Environmental Defense or bon, compared to the status quo. Adam Davis at Solano Partners, Inc. What year constitutes the base line against which additionality is Carbon Sequestration measured? Should fixed carbon be Carbon sequestration is a third fore s t - additional to the legal minimum based ecosystem service that could pro- of carbon emitted, to past prac- duce cash re t u rns through mitigation tices of the land manager, or to markets. Despite U.S. rejection of the industry averages? Kyoto Protocol and lack of national * verifiable: It must be possible to commitment to reducing carbon emis- measure the fixed carbon to sions, both politicians and the business ensure actual compensation for community increasingly recognize the the carbon emitted by the pur- reality of global climate change and the chaser of the offsets. For forest car- need for effective policies to reduce emis- bon, would increases in biomass, sions of greenhouse gases. Kyoto Pro t o c o l woody debris, and soil organic negotiators discussed several options for matter constitute sufficient evi- flexible compliance, including carbon dence of sequestration? Because c redit markets. Carbon offset markets of the uncertainties involved in o ffer a flexible system for meeting re d u c- measuring sequestration, carbon tion targets and have gained some degre e offsets would most likely be traded of acceptance from utilities and other at a discount, compared to more i n d u s t ry sources. Fully functioning car- easily verified carbon emissions bon markets, however, depend on feder- reductions. ally enforced carbon reduction targ e t s * permanent: In order to function with penalties for noncompliance. as a true offset, carbon must PAGE 31 remain sequestered for at least as generated through management long as the carbon emitted by the changes secured by easements on 5,000 credit-purchaser remains in the a c res of forestland (Pacific Forest Tru s t atmosphere. Should forest-based 2000). Experience with voluntary trades carbon trades be backed by perma- allows carbon markets leaders like PFT nent easements guaranteeing that to work out the details of marketing x tons of carbon per acre be main- carbon from fore s t s . tained by all future owners? Pacific Forest Trust's efforts include a Could insurance or bonding cover multi-year research effort to document the risk of accidental or negligent carbon storage in forests under various release of sequestered carbon management regimes (ranging from under contract as an offset to reforestation to avoided deforestation to emissions elsewhere? lengthening rotations, promoting reten- * enforceable: Penalties for breach tion of coarse woody debris, and protect- of the carbon offset sales contract ing soil carbon stores). PFT modeling for must be severe enough to ensure land owned by MacMillan Bloedel compliance. Who will monitor the showed that silvicultural methods with forest management practices higher retention could store 14 to 111 required to ensure increased tons more carbon per acre than clear- sequestration? What responsibili- cutting. In the less productive forests of ty does the forest manager have to the northeastern United States, manage- compensate the buyer of carbon ment changes might increase carbon up- credits if carbon is released take by one-half to one and one-half because of forest fire or other nat- tons per acre per year compared to the ural disaster, and who will enforce status quo (Manion 2004, personal com- that responsibility? munication). * non-leaking: Leakage would occur PFT is also testing mechanisms for if the sequestration method caused marketing credits, including a carbon increased carbon releases else- credit bank called the Forests Forever where. If changes in forest man- Fund, which offers documented carbon agement reduce current harvest, credits from private forests in the Pacific for instance, do higher current Northwest for sale to utilities and other timber prices drive up the intensi- carbon producers (). PFT expects carbon payments to a consequent release of carbon or range from $5 to $40 per ton of carbon reduction in fixed carbon? sequestered. If financed through annual In spite of the lack of carbon re g u l a- rental payments, the shift to high-reten- tion, to date voluntary trades wort h tion silviculture studied on MacMillan $300 million have already occurre d , Bloedel land could generate about $50 with buyers purchasing carbon credits as per acre per year if offsets were priced at a public relations gesture and a hedge $10 per ton of carbon (Wayburn 1999). against future regulation (Davis 2004, Carbon purchase contracts might take personal communication). In 2000, for a number of forms. A utility might pur- instance, Green Mountain Energ y, a chase 200 tons of carbon one year for a renewable energy company, paid the one-time payment, leaving options open Pacific Forest Trust (PFT) $6,000 for for the best way to offset its future emis- 2,500 tons of CO2 c redits (appro x i m a t e- sions. Or a buyer might lock in an emis- ly 680 tons of carbon) to offset half the sions offset solution by up-front payment emissions resulting from corporate or guaranteed annual lease over five or administration. These credits were ten years, long enough to transition to CONSERVATION CAPITAL: SOURCES OF PRIVATE FUNDING FOR LAND CONSERVATION PAGE 32 alternative technologies that permanent- as nitrogen oxide, sulfur, and mercury). ly lower emissions. Massachusetts will allow forest-based Compared to documenting the carbon sequestration to offset a portion of utility impact of management changes on exist- emissions and is currently developing ing forests, planting trees in a deforested regulations to govern this market. At a area produces easily documented increas- broader regional scale, New York es in carbon uptake. Trees grow and take Governor Pataki is leading efforts of the up carbon fastest in regions with high northeastern governors to develop a car- rainfall and long growing seasons. bon cap-and-trade program for power Hence, most of the actual carbon trades generators in the region. The group in the United States thus far have been hopes to have a program in place by payments by utilities for tree planting in 2005. See . (with its affiliates Georgia Power, F o rest protection advocates should par- Alabama Power, and Mississippi Power), ticipate in the development of re g u l a t i o n s has been a leader in this effort. Through g o v e rning carbon, to ensure that docu- M the National Fish and Wildlife mented forest carbon offsets are consid- Foundation, the Southern Company e red. The Union of Concerned Scientists Thus far, carbon provides $1 million per year starting in is tracking carbon markets measures and trades are 2003 for long-leaf pine reforestation, has explored the potential to cooperate including land purchase. Each project with conservationists to develop fore s t motivated by must document an increase in o ffset markets. Although carbon off s e t good public sequestered carbon, and The Southern sales are unlikely to generate suff i c i e n t Company will secure those carbon cred- funds to buy land outright, such sales relations rather its through long-term easements. See could help finance purchase and monitor- than regulatory . ing of easements and/or make it financial- Like other mitigation funding, carbon ly feasible for landowners to comply with compliance. markets depend on regulations that easements that restrict harv e s t . L re q u i re remedial action by those causing For more information, contact e n v i ronmental damage. Thus far, carbon Michelle Manion at the Union of trades are motivated by good public Concerned Scientists or Michelle relations rather than re g u l a t o ry compli- Passero at the Pacific Forest Trust. ance, but this could change in the f u t u re. At the national level, in 2003 Dam Relicensing Senators John McCain and Joe Through the Federal Energy L i e b e rman sponsored the Climate Regulatory Commission S t e w a rdship Act (S. 139), that would Our final environmental mitigation have established a mandatory nation- example involves damage to waterways wide carbon dioxide cap-and-trade pro- caused by hydroelectric facilities. Dams gram and re q u i red emissions re p o rt i n g . are licensed by the Federal Energy After a close 43-55 vote in the Senate, Regulatory Commission (FERC) for a the bill was re - re f e rred to the Senate term of 30 to 50 years. Many existing Committee on Environment and Public dams were licensed before environmen- Works, but the sponsoring senators hope tal regulations applied and will soon to re i n t roduce it after building national require relicensing. Conservation groups s u p p o rt . who participate in the relicensing In the Northeast, both Massachusetts process have negotiated settlements that and New Hampshire have passed legisla- mitigate the impacts of dams through tion that requires coal-burning plants to both on-site land protection and funding reduce greenhouse gas pollutants (as well for off-site mitigation. PAGE 33 Dam owners must apply for relicensing holders of the conservation easements two years before their previous license will be selected by NEP, the expires. FERC uses one of three Conservation Law Foundation, and the approaches to the relicensing process: Appalachian Mountain Club through traditional, alternative, and integrated. unanimous decision. NEP will reimburse Each approach presents opportunities to the easement holder's reasonable costs participate at various stages of the for monitoring and enforcing the terms process, from advance scoping teams, to of the conservation easement and give formal intervenor status, to public com- the holders an option to purchase, at fair ments on Draft Environmental Impact market value, easement lands that are Statements. For details on relicensing not required for electrical generation procedures, see . American Rivers has been particularly Beaver River Settlement (New York) active in FERC relicensing, and its Niagara Mohawk will deposit $80,000 advocacy guide is available at within one year of FERC license accep- . The Mohawk will contribute at least $14,000 Property Rights Foundation of America, annually to the Beaver River Fund for Inc. () also pro- the first 15 years after license accep- vides information from a different politi- tance, and $20,000 annually for the fol- cal angle about how to participate in the lowing 15 years. All or part of the initial process, including a list of dams up for $80,000 will be used to facilitate the relicensing through 2010. state's acquisition of conservation ease- The following examples describe pro- ments and fee title to reservoir shore- visions of several recent FERC dam reli- line, sand, and gravel rights along a censing processes in the eastern United bypassed stretch of river and other States that involved purchase of land or Niagara Mohawk lands of special public easements. These settlements also interest. The remainder of the Beaver included a number of other provisions River Fund will be used within the (not described here) related to minimum Beaver River Basin for projects and ser- flow, restoration of riparian vegetation, vices including public education, ecosys- etc. These examples are provided by tem restoration and protection, natural American Rivers through its Web site. resource stewardship, facility mainte- nance, and additional public access to Deerfield River Settlement outdoor recreational resources. A coun- (Massachusetts and Vermont) cil made up of signatories to the settle- The New England Power Company ment will determine how these funds are (NEP) will grant term conservation allocated. easements for the length of the license to qualified government or nongovern- Penobscot River Relicensing (Maine) ment land management organizations to In its draft environmental impact provide for the continued preservation statement for the West Branch of the in a natural state of 18,335 acres of Penobscot River in Maine, FERC rec- riparian and watershed lands owned by ommended a 200-foot expansion of pro- the company. The intent of the conser- ject boundaries around all reservoirs of vation easements is to protect the aes- the Ripogenous and Penobscot Mills thetic quality, forest, and other natural Hydroelectric projects. The expansion resources of the lands from uses that would include a 200-foot building would conflict with preservation. The setback (prohibiting all residential CONSERVATION CAPITAL: SOURCES OF PRIVATE FUNDING FOR LAND CONSERVATION PAGE 34 and/or commercial development within habitat, fishery management, and public the area) and a 100-foot vegetative access in or near the Pigeon River and buffer (preventing clear-cutting and/or French Broad River Basins. Although vegetation removal in the proposed the most prevalent projects involve edu- area). These measures would preserve cation or pollution control, the fund has the wilderness character of the area for also been tapped to purchase greenway the 130,000 people annually who visit easements. Carolina Power and Light the Penobscot's West Branch for recre- made an initial contribution of $1 mil- ation or sightseeing. Riparian corridors, lion in 1996 with lesser annual payments bald eagle habitat, and water quality defined in the 1994 settlement. (See would also be protected. In addition, the for details about fund operations.) West Branch, located below the Ripogenous Project, would be expanded. Wind Power Licensing Many conservation groups are strug- Pigeon River, Walters Hydroelectric gling to develop coherent policies that Project (North Carolina and both support the use of renewable wind Tennessee) energy and protect pristine ridgelines Carolina Power and Light operates the from the roads, power lines, lights, and Walters Hydroelectric dam on the other development necessary for indus- Pigeon River. The generating facility trial-scale wind generation. Negotiations involves dewatering of a 12-mile stretch over wind farm permitting could follow of the Pigeon River, the basin of which the model of hydroelectric license nego- includes part of the Great Smoky tiations. Permits could require perma- Mountains National Park. After operat- nent protection of remote ridgelines to ing on annual license extensions from mitigate damage caused on-site. 1976 through 1994, Carolina Power and Technological advances, rising energy Light reached a settlement with FERC costs, and a federal production tax credit and intervenors. of 1.5 cents for each kilowatt-hour of In the settlement, Carolina Power and wind energy generated have recently Light agreed to release water from the changed the economics of wind power. project reservoir into the dry section of New wind farm proposals all along the the Pigeon as soon as dioxin levels in Appalachian chain invite development the 340-acre Waterville Lake reservoir of this mitigation option. Unlike drop to an agreed standard. Until those hydropower projects, the FERC has no releases can be made, Carolina Power jurisdiction over wind power facilities. and Light will make contributions to the In order for wind-power mitigation to Pigeon River Fund. This fund supports support land protection, public utility activities that provide direct benefits to commissions would need to develop mit- surface water quality, fish and wildlife igation procedures in each state. PAGE 35 Partnering with Private with the state compensating the 34 host Forest Investors towns for lost property tax revenue. Beyond working with industrial own- Ambitious landscape-scale protection ers, opportunities for conservation part- efforts are unlikely to generate sufficient nerships also exist with the Timber dollars through massive fund-raising Investment Management Organizations campaigns, low-interest loans, govern- (TIMOs) and Real Estate Investment ment incentives, and land-based revenue Trusts (REITs) (often lumped together as to purchase outright all the acres of institutional investors) that have interest. An effective strategy for the emerged as the primary buyers of large "working lands" that provide buffers forestland tracts. Many of these new around and connections between highly forestland investment firms present protected reserves involves working with themselves as responsible stewards eager existing private landowners who have to cooperate with conservation interests compatible goals. By purchasing only the to protect resources. As TIMOs purchase most critical resources or land rights, new acreage, or when they cash in their conservation dollars can protect a broad- investments after a typical 10- to 15-year er landscape. Depending on the specific holding period, many of them consider arrangements, working with industrial or easement sales to be a key source of investor owners can be viewed as a way income from the transaction. to raise new conservation dollars by For a detailed discussion of forestland broadening the base of partners, or as a investments, including ownership trends way to reduce costs by targeting avail- and timberland transactions, see able dollars to protection of only the Appendix C, page 56. highest-priority resources. Traditional forest industry landowners TIMOs as Conservation Partners increasingly see conservation partner- A conservation partnership with a for- ships as a way to increase financial liq- est investment firm requires research uidity and lower landholding costs with- into the firm's history and performance. out selling timberlands. One of the Not all TIMOs operate identically. Some largest transactions was announced in have a permanent staff of experienced April 2004 by International Paper (IP), foresters, while others contract out forest the Conservation Fund, and the state of management. Some have a long track New York. IP agreed to sell easements record of stable ownership, while others on 255,000 acres of its land in the have emerged recently and have little Adirondacks region to the state, with forest management expertise. If head- the Conservation Fund providing bridge office financial managers, rather than financing until state (Environmental on-the-ground foresters, direct forest Protection Fund) and federal (Forest planning, then immediate cash return Legacy) funds are secured. The purchase may take precedence over long-term for- is expected to occur over three years, for est condition (Best and Jenkins 1999). a total cost of about $25 million. The According to Best and Jenkins (1999), easement restricts future development, a forest investment company geared provides public access to important toward long-term sustainable manage- recreational sites, protects key river cor- ment and resource protection should ridors and wildlife habitats, and requires minimize debt, emphasize capital appre- adherence to Sustainable Forestry ciation over harvest income, manage for Initiative (SFI) standards. After the longer-term investment life, and mini- easement sale, IP will pay lower property mize tax obligations that put pressure on taxes because of the lower assessed value, the resource. Two examples from New CONSERVATION CAPITAL: SOURCES OF PRIVATE FUNDING FOR LAND CONSERVATION PAGE 36 England illustrate the potential for con- Department, with an easement held by servation interests to partner with the TNC. right timberland investor to achieve the Hancock Land Company (not related objectives of both parties. to Hancock Timber Resource Group) New Hampshire based Lyme Timber plans to fill a similar niche in Maine. Company is one TIMO that focuses on Although a typical TIMO attracts partnerships with conservation organiza- investors who own shares in a variety of tions. Lyme typically acts on behalf of a properties throughout a region, the group of investors who own shares in a country, or the world, Hancock Land forestland parcel, with ownership often Company plans to work with high-net- structured as a Limited Liability worth individuals who seek exclusive Corporation (LLC). ownership of forestland tracts. This Lyme Timber Company's participation approach involves higher risk for the in the Connecticut Lakes Headwaters landowner, but it appeals to investors project in northern New Hampshire pro- who like the idea of visiting, and influ- vides an example of how conservation encing management of, their own land. groups and TIMOs might work together. Hancock Land Company sees its niche This complex project involved the ini- in "mid-cap" investments of $200,000 to tial sale in 2001 by International Paper $1 million, purchasing forest parcels Company of more than 171,000 acres of from 1,000 to 10,000 acres in size. At forestland (about 3 percent of the state this scale, the entire purchase price can of New Hampshire) to the Trust for by raised by one individual rather than Public Land (TPL). Lyme participated by a group of shareholders. Yet the scale early in the project by lending bridge is sufficient to repay the transactions funds to TPL to cover its costs of hold- costs of conducting inventory, investi- ing the land during the two-year process gating property title and rights-of-way, of seeking public input, making plans for etc. the property, and putting together a per- After purchase, Hancock Land manent financing package. Company contracts with owners to man- Lyme Timber Company eventually age their property and earns revenue purchased roughly146,000 acres of work- from three sources: a 4 percent acquisi- ing forest, with an easement held by tion fee, a small annual maintenance fee New Hampshire's Department of for ongoing management, and a percent- Resources and Economic Development. age of timber harvest or other land-based The easement prohibits development, revenue. Certification appeals to many guarantees public access, and mandates socially responsible investors who want sustainable forestry practices. Funds for to be assured of responsible forest man- the easement purchase came from a agement for their land. Hancock is certi- combination of federal and state public fied under the Forest Stewardship funds, private foundations, a local bank, Council system as a resource manager, so and a variety of individual donations. By it can offer certification services on paying a lower price for land encum- lands it manages for other owners. bered by the state-held easement, Lyme In addition to managing for timber, Timber can provide an acceptable return Hancock Land Company develops a vari- to investors while following easement ety of nontimber revenue sources for restrictions. The remaining 25,000 acres lands it manages, from cell towers and of land, designated as a natural area, gravel pits to sale of conservation ease- were purchased by The Nature ments. Hancock has developed expert i s e Conservancy (TNC) and later resold to in the sale of spring water trucked to the New Hampshire Fish and Game c o m m e rcial bottling plants. Hancock sees PAGE 37 bottled spring water as a growing market ers across the country have suggested and water sales as an important future forming special-purpose for-profit revenue source for forestland owners. TIMOs, variously called a Forest In the future, Hancock Land Company Investment Management Organization expects to work with conservation gro u p s (FIMO) or a Conservation Timber on joint purchases. Hancock finds it Investment Management Organization challenging to involve outside investors (CTIMO). Socially responsible in these kinds of projects, which re q u i re investors, including foundations making substantial up-front investments for very program-related investments, are likely l o n g - t e rm re t u rns. Yet Hancock expects sources of capital for FIMOs. These that, as more projects succeed, investor investors might be willing to accept i n t e rest will incre a s e . lower initial returns to support the pub- Hancock Land Company's participa- lic values provided by this type of man- tion in the Tumbledown Mountain- agement. Mount Blue project in western Maine A FIMO/CTIMO might focus on provides a possible model for this type of long-rotation forests with low initial collaboration. In 1999, the Tumbledown returns leading to a potentially high pay- Conservation Alliance formed, with a off from harvest of large-diameter high goal of protecting from development quality timber. Long rotations might also 30,000 acres surrounding Mount Blue enable the FIMO/CTIMO to earn car- State Park and Tumbledown Mountain. bon credits or habitat mitigation pay- In 2001 Hancock Land Company pur- ments for species that depend on old- chased nearly 12,000 acres of land in the growth conditions. The Pacific Forest region from Hancock Timber Resources Trust characterizes some of the major Group. In 2002, the state of Maine pur- differences between a conventional chased conservation easements on 7,800 TIMO and a FIMO that practices what acres of this land, which Hancock Land PFT calls "stewardship forestry" as Company will continue to own and shown in Table 2: manage. The state also purchased 3,800 acres in fee, including the summit of Tumbledown TABLE 2. Mountain. Hancock Land Comparison of Conventional and Stewardship Forestry Company purchased an addition- Conventional TIMO FIMO/CTIMO al 3,300 acres of nearby land from * 60% of returns through timber harvest * 35% of returns through timber harvest the Trust for Public Land, with * 40% of returns through asset appreciation * 50% of returns through asset appreciation conservation easements held by * 15% of returns through ecosystem services the state, bringing the total acres * Simplifies forest * Restores forest complexity of protected land to 15,000. As a * Manages for maximum fiber output * Manages for multiple products result of this project, lands sur- * Emphasizes quantity * Emphasizes quality rounding Tumbledown Mountain, a popular hiking destination, and * Reduces volume of standing timber * Increases volume of standing timber Mount Blue State Park, will * Environmental protection is a cost * Environmental protection is a benefit remain forever undeveloped. The Adapted from and Best and Jenkins 1999 most fragile high-elevation areas will be reserved under state ownership, with future public access assured. Ecotrust Forests, LLC In the Pacific Northwest, Ecotrust FIMO or CTIMO recently launched a new company that Beyond partnering with existing will follow the FIMO/CTIMO model. TIMOs, the Pacific Forest Trust and oth- With headquarters in Portland, Oregon, CONSERVATION CAPITAL: SOURCES OF PRIVATE FUNDING FOR LAND CONSERVATION PAGE 38 Ecotrust is dedicated to building a before commencing forestland purchases. restorative economy in the region from The LLC expects to earn a 7 to 9 per- Alaska to California. Through its $20 cent return on capital, with 6 percent million Natural Capital Fund, Ecotrust from timber and 1 to 3 percent from invests in key restorative economy busi- ecosystem services, nontimber forest nesses, and $1 million products, recreation income, easement of this fund will help and conservation land sales, and other launch the new nontimber returns. Ecotrust Forests, LLC. In addition to Ecotrust Forests, LLC, Ecotrust Forests, similar conservation-oriented forest LLC will acquire investment firms have recently been Pacific Northwest established by Lowell, Blake and coastal rain forest in Associates in Boston (LBA Forest the United States and Stewardship Initiative, LLC and Canada, in parcels of Vermont Timber Associates, LLC) and at least 10,000 acres. by Forest Legacy Investments, LLC in Land will be managed Seattle and Portland. by Ecotrust Forest For more information, contact Bettina Management, Inc., a VonHagen at Ecotrust. wholly owned sub- sidiary of Ecotrust, Socially Responsible Investment which will charge a 1 TIMOs act in the interest of their percent management investors. When these investors demand fee. Consistent with maximum return on investment, the the Ecotrust emphasis TIMO has a fiduciary responsibility to on restoration, the deliver. This responsibility may limit the new LLC will target ability of the TIMO to enter into some purchase of second- kinds of land-protection partnerships. If, growth forest in on the other hand, investors hold nonfi- watersheds of high nancial goals as more important than ecological value, par- maximum return, those nonfinancial Ecotrust Forests, LLC will protect salmon habitat in the Pacific ticularly those of importance to Pacific goals open the way to conservation- Northwest through purchase, salmon (Oncorhynchus spp.). Timber friendly investments consistent with the restoration, and harvest of key management will follow an ecological FIMO model. This section summarizes tracts of forestland. forestry model that over time develops trends in socially responsible investment large-diameter high-value trees, retains (SRI) that point the way to sources of dead snags and downed logs, and mimics funding for conservation-based forest natural openings for landscape diversity. ownership. The last sentence of the prospectus sums Individual and institutional investors up the management philosophy of committed to environmental protection Ecotrust Forests, LLC: "Where others see may demand that their investments sup- timberlands, we see a forest." port the causes that they support. Ecotrust Forests, LLC is seeking According to Claros, a research firm in investors looking for long-term stable Great Britain that specializes in socially returns, including high-net-worth indi- responsible investing, property owner- viduals with a commitment to social and ship gives investors a great opportunity ecological sustainability and families and to control the impacts of their invest- foundations interested in mission-related ment. Claros points out that, because investing. A total of $8 million has been property management is at the core of raised so far toward the $12 million goal many debates about social and environ- PAGE 39 mental policy, pension fund managers million in its Balanced Fund (Green who ignore property management may Century Funds 2002). be putting future returns at risk. Specific Although it has no real estate invest- environmental factors flagged for SRI ments, sustainable forestry seems quite fund managers by Claros include climate compatible with Green Century Fund's change (need to offset CO2 emissions) mission. According to its prospectus, and protection of open space (). panies in which the Balanced Fund According to the Social Investment invests have clean environmental Forum (2001), socially screened portfo- records; many also make positive contri- lios in the United States exceeded $2 butions toward actively promoting a trillion in 2001, which constitutes more healthier environmental future". One of than 12 percent of total professionally its shareholder advocacy campaigns managed assets. Socially screened portfo- recently convinced British Petroleum to lio assets grew 35 percent since 1999, drop out of a lobby group promoting oil while total professionally managed assets drilling in the Arctic National Wildlife grew only 22 percent. There are two Refuge. basic types of socially screened invest- Portfolio 21, with about $22 million in ments: mutual funds (pool investments worldwide investments, is another mutu- from a variety of institutions and indi- al fund with a focus on environmental viduals) and individual accounts (man- sustainability. It is advised by the aged for an institution or person). Progressive Investment Management Corporation of Portland, Oregon. Mutual Funds According to its Web site "ecological More than 181 mutual funds through- pressures such as global warming, popu- out the country now offer socially lation, consumption, and resource deple- screened funds, with $136 billion under tion are having a real and increasing management (Social Investment Forum effect on business and the world. The 2001). Mutual funds generally use nega- classic response of business has been to tive screens (avoiding investments in view environmental initiatives as harm- tobacco or nuclear power, for example), ful to the economy and the bottom line. rather than positive screens that support However, a growing number of corporate responsible enterprises. However, "in leaders disagree ()." This fund owns shares in sever- portfolios have moved beyond selecting al Scandinavian forest products compa- companies that are working to halt their nies, in UBS (whose subsidiary, UBS negative environmental and social Timber Investments, owns timberland impacts to choosing companies that are worldwide), and in the British Land actively working to improve their social Company, a U.K. real estate developer and environmental performance" (Social and manager (Portfolio 21 2003). Investment Forum 2001). A third environmentally screened A few mutual funds do have a primary mutual fund has been developed by the commitment to environmental con- Sierra Club and San Francisco-based cerns. Green Century Funds was found- Forward Management LLC. In 2003, the ed in 1991 by a group of nonprofit envi- Sierra Club began supplying screens for ronmental organizations organized as two environmentally focused mutual Paradigm Partners (). Its funds are managed by Green Sierra Club Balanced Fund and Sierra Century Capital Management of Boston, Club Stock Fund. In exchange for this and it currently has slightly over $70 service, the fund manager pays the Sierra CONSERVATION CAPITAL: SOURCES OF PRIVATE FUNDING FOR LAND CONSERVATION PAGE 40 Club a royalty based on a percentage of colleges, insurance companies, corpora- management fees. tions, and individuals. Four of the eight priorities that make These accounts allow an institution or up the Sierra Club screen are "protecting individual to develop a customized the wildlands, stopping urban sprawl, investment screen consistent with its ending commercial logging on federal particular values. As one example, lands, and stopping global warming" Citizens Funds of New Hampshire finds (Sierra Club Mutual Funds 2003). The that many 401(k) pension plans are description of the fund states that "in requesting investment screens for fund the last century, there have been an options offered to employees. According increasing number of threats that have to Citizens Advisers CEO John Shields, contributed to the exploitation of our "Citizens is finding, particularly among natural resources. Pollution, logging, and the foundations and endowments, that mining are just a few. Our forests, moun- clients want to align their investments tains, deserts and wetlands are suffering, with the values of an organization, so and if we do not take more appropriate that, for example, the American Cancer actions now, we will eventually lose Society isn't investing in Phillip Morris" what remains today" (). have also become popular with clients of A mutual fund pools many small Citigroup Asset Management. investments to raise substantial capital. According to Linda Descano of Individuals interested in forest conserv a- Citigroup (2002) "a client's suitability tion can deposit modest amounts in funds test may rest principally on a company's like the three examples just cited, and put policies relating to clear cutting and their dollars to work to support their val- deforestation [for example]." ues. A fund with a clear social and envi- Within the general category of indi- ronmental mission might purchase share s vidual accounts, many college endow- in a conservation-based TIMO, for ments already have substantial forestland instance, or might even purchase land investments, and student and faculty outright and manage it to offset carbon advocacy might convince trustees to emissions from other investments. broaden college support for protection of special resources on those lands. Individual Accounts University of Maine Green Endowment Aside from a few specialized mutual Forests, Yale School Forests, and the funds, conservation-based investing Dartmouth Second Land Grant (dated might best focus on the $1.87 trillion in 1807) may serve as models for forestland individual professionally managed managed by college endowments. accounts, which grew 40 percent from Middlebury College has also received 1999 to 2001. Individual accounts are gifts of forestland and may consider new established by religious organizations, forest investments as a means of offset- municipal and state governments, ting carbon emissions from college oper- unions, foundations, universities and ations. PAGE 41 Unbundling Property New England Forestry Foundation in Rights to Reduce 2001 set a new precedent for scale of easements. Recent large-scale examples Conservation Costs include a 282,000 acre easement on the West Branch of the Penobscot purchased Partnerships with TIMOs or FIMOs by the Forest Society of Maine and a provide indirect funding for land protec- New York state planned purchase of tion by reducing the costs of conserva- easements on 255,000 acres of tion. These partnerships work by allow- International Paper land in New York ing purchase of partial land rights by State's Adirondack region. The four profit-making investors, with conserva- Northern Forest states of Maine, New tion dollars specifically targeted to criti- Hampshire, Vermont, and New York cal public values. The following exam- together had more than 2.5 million acres ples illustrate various ways of reducing under conservation easements by 2004 the need to raise funds up front by sepa- with over 1.5 million of those acres in rating ownership of individual land Maine (Kingsley et al. 2004). rights. Increasingly, institutional and forest industry timberland owners see sale of Large-Scale conservation easements as an integral Conservation Easements part of total financial returns to land Landscape-scale conservation tools ownership. Each time land changes include large-scale easements that may hands, transaction costs must be cov- be held by nonprofit organizations, by ered; and prices rise to cover these costs. governments, or by several entities joint- To minimize purchase costs, conserva- ly. Easements vary widely in their provi- tion buyers are increasingly seeking sions and thus in purchase and monitor- standing as partners with TIMOs in land ing cost. An easement involving only purchases, rather than paying a higher sale of development rights imposes few price through a later transaction (some- management burdens and would thus be times referred to as buying wholesale acceptable to the widest range of rather than retail). landowners. Public access easements Several organizations are exploring might add substantial management costs ways for forest certification to comple- and require flexibility to avoid user con- ment easements. The Forest Stewardship flicts (e.g. timing timber sales to avoid Council U.S. (Ervin 1999) suggests, for roads heavily used during hunting sea- instance, that easement language might son). More restrictive easements (for specify that forests will be certified by an example those designating no-harvest acceptable system so as to build public reserves, setting minimum forest stock- confidence in the standards of a working ing, or requiring management plan forest easement. Easement holders and approval) place more burdens on the certifiers might also achieve economies landowner and will thus cost more to by cooperating in initial site inspections, purchase and monitor. At some balance stakeholder involvement, management point (likely well short of wilderness-like plan review, and other information-gath- management), fee purchase will make ering and monitoring activities. More more financial sense than easements as a recently, the Rainforest Alliance protection strategy. (Newsome, 2002) suggests that certifica- Over the past several decades, conser- tion staff might review and approve vation easements have reached new lev- management plans required under con- els of size and complexity. The 750,000 servation easements and monitor ease- acre Pingree easement purchased by the ments on a contract basis, even for CONSERVATION CAPITAL: SOURCES OF PRIVATE FUNDING FOR LAND CONSERVATION PAGE 42 properties not currently certified. value land uses unrestricted by the ease- Frequent visits to neighboring properties ment. In this case, immediate full fee for assessments or certification renewals purchase may be the best option. would reduce the cost of this service. Substantially more public funds may be When easements are used to meet an required to purchase land in fee beyond immediate land-protection need, further the dollars already invested in an ease- protection through fee purchase remains ment. a future option as additional funds become available. To make efficient use Separate Sale of Timber Rights of limited funds, this approach must first Typical models of partial ownership by be affordable (easements must be much c o n s e rvation interests leave fee owner- less costly than fee purchase); second, it ship in the hands of forest industry or M must effectively achieve conservation timber investors, with conserv a t i o n When easements objectives; and third, it must be enforce- easements (essentially development able in the long term for a reasonable rights or restrictions on landowner use are used to meet cost. including fore s t ry practices) held by a an immediate The future option of full fee purchase n o n p rofit or public agency. Another has its own risks. Limited experience m odel developed in Te n n e s s e e 's land-protection with large-scale easements makes it diffi- Cumberland Plateau region reverses this need, further cult to predict their impact on the future m odel. In this case, the state owns the market price of land. Theoretically land underlying fee or surface rights, and a protection through under easement will always sell at a sub- TIMO owns timber rights, subject to fee purchase stantial discount below similar unen- restrictions included in a shared use remains a future cumbered property, because the sale a g re e m e n t . includes only a portion of the complete In 2003 the Conservation Fund, with option. bundle of land rights. In fact, if the assistance from the Nature Conservancy, L future brings a declining forest products Doris Duke Charitable Foundation, economy, land values may fall for prop- other nonprofits, and several govern- erty that cannot legally be converted to ment agencies, developed a complex and alternative uses. (The permitted "use ambitious plan to conserve 74,000 acres value" is a smaller and smaller percent- of land owned by International Paper on age of fair market value.) In this case, Tennessee's Cumberland Plateau. The conservationists have little to lose by Tennessee Wildlife Resource Agency using easements to stretch available now owns surface rights in the Sundquist funds across more acreage. The land Wildlife Management Area, and the remains as intact forest, and at some Conservation Fund purchased timber future date funds may be available to rights, which it later resold to purchase the remaining property rights Renewable Resources, LLC. Mineral for parcels of high public value at prices rights are controlled by another party little inflated over today's prices. through long-term leases that predate When easement costs approach the the conservation purchase. (When the cost of fee purchase, usually the case in mineral rights lease sunsets, the rights areas with substantial development pres- will revert to the state of Tennessee as sure, some conservation groups fear they surface rights owner). will essentially "pay twice" for the land, This approach to separate sale of sur- buying easements today and later pur- face and timber rights gives the public chasing remaining fee rights at much ultimate control over disposition of the higher prices. Future land prices may land and protects it from potential price well escalate, because of higher timber inflation by purchasing before the devel- values or the emergence of new high- opment value of the land increases. The PAGE 43 state also retains a right of first refusal lar practices occurred in subsequent should Renewable Resources choose to harvests (Murray 2004, personal com- resell the timber rights in future. Yet munication). With responsibility split because much of today's land value among the landowner (Tennessee resides in the timber, the sale of timber Wildlife Resource Agency), the rights greatly reduces the capital that owner of timber must be raised for land purchase. rights Timber rights contracts, like conserva- (Renewable tion easements, can reflect restrictions Resources, LLC), that protect important values. Each forest manager additional restriction reduces the cash (Fountain generated by the sale, however, and Forestry), The requires potentially costly monitoring. Conservation The Tennessee example is a case in Fund (shared-use point. Details are provided here in the agreement spirit of learning from experience. enforcer-of-last- When the Sundquist Wildlife resort) and the Management Area was formed, the state logging contrac- of Tennessee developed a shared-use tor, both over- agreement with the Conservation Fund sight and liability for damage are By separating fee, timber, and as initial purchaser of timber rights. unclear. The Conservation Fund is con- mineral rights, a broad-based Although the Conservation Fund has fident, however, that differences in partnership (including the since sold those rights to Renewable interpretation of on-the-ground stan- Tennessee chapter of the Rocky Mountain Elk Foundation) Resources, LLC, it retains the right to dards will be worked out over time, and protected 74,000 acres of intervene in case of violations. The that the Fund has the right to intervene Tennessee's Cumberland Plateau shared-use agreement specifies that for- if the agreement is violated (Boner from development. The new state est operations will follow Sustainable 2004, personal communication). lands will expand the potential Forestry Initiative (SFI) principles. SFI The following suggestions are included range of Tennessee's recently reintroduced elk (Cervus elaphus standards, developed by the forest prod- for any future project using this model: canadensis). ucts industry aided by an advisory board, * Clarify the forest management include protection of habitat and water standards governing timber har- quality and, under the aesthetics criteri- vest, (e.g. in this case whether on, set a limit of 120 acres on average protected riparian zones also count size of clear-cuts. Both standards and toward required buffers between monitoring procedures are weaker and clear-cuts). less comprehensive than those for the * Clearly define lines of responsibili- FSC system. ty. (The shared-use agreement Renewable Resources, LLC contracted stipulates that the parties will sup- timber management to Fountain port each other in case of third- Forestry, which has its U.S. headquarters party conflicts and will submit to in New Hampshire. Fountain Forestry is binding arbitration in case of dis- certified under the FSC system as a agreements among partners. This resource manager, but only for its New provision was added to assure sig- Hampshire operations. When timber natories that the Conservation harvest operations began under this Fund would not ratchet up stan- arrangement in 2004, Tennessee Forest dards subsequent to the initial Watch, a local advocacy organization, agreement. Once the Conser- reported several water quality violations. vation Fund resold timber rights, Fountain Forestry agreed to mitigate interested outside parties are left damage from the first harvest, but simi- uncertain as to who will enforce CONSERVATION CAPITAL: SOURCES OF PRIVATE FUNDING FOR LAND CONSERVATION PAGE 44 management standards.) wish to sell before the end of their lease * Provide continuous funding (per- period give TNC 60 days notice, and haps through an endowment fund) TNC may then purchase the timber at for oversight by a credible third its appraised value. In this case, TNC party. becomes full and permanent owner of For more information, contact Rex the timber rights. The landowner still Boner at The Conservation Fund or receives a royalty on any timber harvest- Doug Murray at Tennessee Forest ed, as a good-will gesture to acknowl- Watch. edge any inconvenience to the landown- er resulting from harvest activity. Forest Bank TNC has developed a manual to guide The Nature Conservancy's Forest forestry operations of forest banks and Bank approach also separates land from ensure protection of critical resources it timber rights. Although this strategy has inventoried on the land (Helm et al. does not finance conservation purchases, 2002). The goal is to manage for high it can achieve conservation objectives quality timber, as well as for a whole without the need to purchase land or suite of nontimber values from biodiver- easements. sity to water quality. By managing a clus- A Forest Bank leaves land in private ter of regional properties, TNC can ownership. Forest landowners essentially manage effectively for wildlife habitat, lease their timber rights to a regional coordinate supply, achieve economies of "bank" in return for a guaranteed annual scale, and develop specialty markets that payment (commonly 4 percent of the appeal to conservation-friendly con- initially deposited timber value per year, sumers. or the rate of return on five-year U.S. In concept, a forest bank's timber rev- Treasury notes). This lease fee acts enue will cover the guaranteed payments essentially as advance payment of timber to landowners plus all management revenue to forest bank depositors. Once costs. In reality, the initial organizational an agreement has been signed, the forest work requires substantial up-front invest- bank assumes full control over harvest ment. For future forest banks, these operations (guided by management plans establishment costs should be lower. developed in consultation with the Because of conservative harvest prac- landowner) and receives timber revenue. tices, however, timber revenue is likely When a timber sale occurs, the to lag behind payments to the landown- landowner receives payment for the tim- er for some years. In the long run, the ber, minus previous lease payments and a harvest of large high-quality trees in 5 percent administrative fee. The timber later years should repay this up-front value (the basis for calculating lease pay- investment. For these reasons, the forest ments) is reassessed every ten years or bank approach does require considerable after a harvest. initial capital investment, although Every ten years or after a timber sale, probably less than the cost of fee or ease- the landowner has an option to with- ment purchase. draw from the lease agreement, subject The Nature Conservancy has begun to a penalty for early withdrawal that organizing banks in the Clinch Valley of reimburses the forest bank for its invest- Virginia and Tennessee (called the ment in timber improvements. Along Conservation Forestry Program) and in with a lease agreement, The Nature the Blue River watershed of southern Conservancy also receives a right of first Indiana. The Clinch Valley Bank cur- refusal on timber rights should the rently includes two large parcels (Rich owner choose to sell. Landowners who Mountain Farm, 5,700 acres; and Clifton PAGE 45 Farm, 4,000 acres) owned by the Stuart vation purchase. Purchasing options on Land and Cattle Company and several property is another way to reduce the parcels purchased in fee by TNC. need for up-front funds. When the cur- Program staff have developed a manage- rent owner has no immediate develop- ment plan in consultation with the ment plans, a conservation group or landowners and have begun preparations public agency can forestall threats of for the first timber harvest. conversion or fragmentation by purchas- Indiana's forest bank has 1,400 ing an option or right of first refusal on enrolled acres, with parcels averaging 90 the land. Such an option buys time to acres in size and an average timber value raise funds from public and private of $1,000 per acre. Payments to sources to respond to the eventual resale landowners range from $11 to $199 per of that land. acre per year, with an average of $42 per Figure 2 illustrates one creative acre. According to its business plan, the approach to use of low-interest revolving Indiana bank is projected to break even funds and an option-to-buy to purchase within 12 to 13 years. If enrollment easements in partnership with a timber- reaches the planned 10,000 acres, the land investor. At the request of a conser- bank will require a total up-front invest- vation group, a revolving fund might ment of $3 to $5 million (Wilson 2004, provide low-interest financing for a por- personal communication), a cost roughly tion of a TIMOs purchase of land with comparable to the cost of purchasing high conservation value. For this simpli- conservation easements. fied example, assume that the TIMO For more information, contact Barry pays only interest for the term of the Wilson, The Nature Conservancy's oper- loan, with delayed repayment of princi- ations manager for the Southern Indiana ple at the end of the ten years. In return Forest Bank, or Steve Lindeman of The for an interest rate break, the TIMO Nature Conservancy's Clinch Valley conveys to the conservation organization Conservation Forestry Program. an option to buy easements on the prop- erty, at a guaranteed price, when the Option to Buy or land is sold in the future. Right of First Refusal The TIMO pays interest at slightly Purchase of easements reduces the below the full market rate (8 percent in immediate funding needed for a conser- this example), with interest payments FIGURE 2. Easement Purchase with Low-Interest Revolving Fund Financing Initial Loan Interest Paid Over 10 Years Total Financing Cost Standard Financing $4,000,000 at 8% $3,600,000 to commercial lender (9%) $7,600,000 Revolving Fund $4,000,000 Financing at 1% $400,000 to revolving fund (1%) $7,200,000 $2,800,000 to conservation group (7%), monthly payments over ten years earn interest at 4% $3,446,000 available for easement purchase Adapted from Ginn 2003, presentation. CONSERVATION CAPITAL: SOURCES OF PRIVATE FUNDING FOR LAND CONSERVATION PAGE 46 split between repaying the revolving that the current owner would limit har- fund at the subsidized rate (1 percent) vest in the most sensitive areas. and paying the remaining interest (7 Allowing the timber operation to occur percent) directly to a conservation orga- before purchase reduced TNC's purchase nization or depositing to an escrow cost (Ginn 2004, personal communica- account. Those interest payments them- tion). Historically, buying forestland selves will earn a return during the dura- with depleted timber inventory made tion of the loan (4 percent in this exam- public purchase affordable for establish- ple). ment of New York's Adirondack Park Depending on easement value, the and the eastern national forests. accumulated interest payments might be Right of first refusal can be combined sufficient to obtain easements at no fur- with other conservation approaches to ther cost when the land is finally sold. keep future options open. The state of This strategy eliminates the need for the Tennessee has right of first refusal on the conservation group to raise a large lump timber rights on the Sundquist Wildlife sum to purchase easements at the time Management Area, currently owned by the original land purchase is made. Renewable Resources, LLC (see page 42 Options-to-buy might include restric- for project description). The immediate tions on land management practices to conservation need was to forestall devel- protect significant resource values. The opment of the property at minimal cost, Nature Conservancy recently contracted with land management practices a lower with a timber buyer in Maine who typi- priority. If additional funds become cally heavily cuts land and then subdi- available in the future, the state has an vides for resale. TNC purchased an option to reunite surface and timber option on the land and an agreement rights under full public ownership. PAGE 47 Conclusion Only that assurance will guarantee suffi- cient financial support to meet the ever- Conservation innovation depends on increasing need. Conservation groups an optimistic can-do attitude. But future need to work together to carefully docu- success depends equally on a realistic ment the costs and returns, both initial assessment of results achieved in relation and ongoing, of each land protection to costs. The innovations presented here strategy. The work is not done when the have required a tremendous investment deed is signed. M of dollars, time, and creativity. New conservation finance tools The conservation Transaction costs, from organizational require a new set of skills seldom associ- meetings to lobbying for regulatory ated with land protection. Managing community needs to changes, can add substantially to the debt and investment capital requires dif- employ not only total costs of conservation. Long-term ferent skills from those needed to solicit monitoring of restrictive easements can donations or survey land parcels. A new creative new ways also impose a tremendous burden on the cadre of business and finance profession- to raise funds or easement holder. Less expensive conser- als has emerged to meet the need. In vation options require compromises in many cases, the individuals who invent- reduce costs, but the degree of protection achieved. ed the strategies outlined in this report also careful analysis The conservation community needs to have sacrificed personal gain to dedicate so as to ensure that employ not only creative new ways to their considerable skills to conserving raise funds or reduce costs, but also care- land for the good of others. As the east- funds are well spent. ful analysis to ensure that funds are well ern United States faces critical and irre- L spent. Public funders, private donors, versible decisions about maintaining our and investors need assurance that their last wild spaces, we are fortunate that so dollars are carefully marshaled to buy the many talented people are rising to the best possible conservation outcomes. challenge. CONSERVATION CAPITAL: SOURCES OF PRIVATE FUNDING FOR LAND CONSERVATION PAGE 48 References Altenburg, W. 2003. Timberland Trails. 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Forest Carbon in the United States (excerpt). Pacific Forests. Boonville, CA: Pacific Forest Trust. Whittemore, H. 2003. Maine Department of Conservation. Conference presentation (Northern Forest Leadership Exchange, Burlington, VT). Whittemore, H. 2004. Personal communication. Wilson, B. 2004. The Nature Conservancy. Personal communication. Winder, J. 2004. Personal communication. PAGE 53 Appendix A: Contacts Bill Altenberg Timberland Trails (603) 447-1786 waltenburg@aol.com or 1-800-TRAILS8 Connie Best Pacific Forest Trust (707) 578-9950 Rex Boner The Conservation Fund (770) 414-0211 (404) 202-1267-cell Robert Bonnie Environmental Defense (202) 387-3500 rbonnie@ed.org Adam Davis Solano Partners, Inc. (415) 454-8800 adavis789@sbcglobal.net Kathy DeCoster Trust for Public Land (202) 543-7552 kathy.decoster@tpl.org Bill Ginn The Nature Conservancy (207) 688-3333 wginn@tnc.org Matt Hancock Hancock Land Company (207) 627-7637 mhancock@hancockland.com Peter Howell Open Space Institute (212) 629-3981 phowell@osiny.org Jim Levitt, The Program on (617) 489-7800 james_levitt@harvard.edu Director Conservation Innovation at the Harvard Forest Steve Lindeman The Nature Conservancy,(276) 623-4007 slindeman@tnc.org Conservation Forestry Program Michelle Manion Union of Concerned (617) 547-5552 mmanion@ucsusa.org Scientists Will McDow Environmental Defense (919) 881-2601 Will_McDow/Environmental Defense@environmental defense.org Doug Murray Tennessee Forest Watch (423) 562-5934 forestwatch@aol.com Michelle Passero Pacific Forest Trust (707) 578-9950 mpassero@pacificforest.org x18 Carl Powden Vermont Land Trust (802) 635-7611 carl@vlt.org Steve Rohde Northern Forest Center (603) 715-1330 stevenrohde@hotmail.com Keith Ross LandVest (978) 544-5767 Al Sample Pinchot Institute (202) 797-6581 alsample@pinchot.org for Conservation Kevin Schuyler The Nature (703) 841-4588 kevin_schuyler@tnc.org Conservancy Russ Shay Land Trust Alliance (202) 638-4725 rshay@lta.org x305, Peter Stein Lyme Timber Company (603) 795-2129 peterstein@lymetimber.com x112 Hank Swann Wagner Forest (603) 795-2002 hank@wagnerforest.com Management Paul Trianowski The Nature Conservancy (423) 727-1294 Tom Tuchman U.S. Forest Capital (503) 220-8103 tuchmann@usforestcapital.com Bettina VonHagen Ecotrust (503) 467-0756 bettina@ecotrust.org Steve Weems Coastal Enterprises, Inc. (207) 882-7552 steveweems@ceimaine.org x150 Henry Whittemore Maine Department of (207) 287-4992 henry.whittemore@maine.gov Conservation Barry Wilson Southern Indiana (812) 738-2087 bwilson@tnc.org Forest Bank Jim Winder Heritage Ranch (505) 267-4227 jimwinder@heritage-ranch.com CONSERVATION CAPITAL: SOURCES OF PRIVATE FUNDING FOR LAND CONSERVATION PAGE 54 Appendix B: Helpful Web Sites American Forest Management http://www.americanforestmanagement.com/index.html American Rivers, Federal Energy Regulatory Commission http://www.amrivers.org/hydropowerdamreform/hydropowerreform. Hydroelectric Dam Licensing htm Appalachian Mountain Club http://www.outdoors.org Coastal Enterprises, Inc., http://www.ceimaine.org/nmtc.htm New Markets Tax Credit Program http://conservationfinance.org/ Conservation Finance Alliance (international focus) Ecotrust Forestry Program http://www.ecotrust.org/forestry/ Environmental Defense, Wildlife Habitat Mitigation Banking http://www.environmentaldefense.org/article.cfm?ContentID=151 EPA Clean Air Markets http://www.epa.gov/airmarkets/arp/overview.html Fall Line (on line newsletter for foresters and landowners) http://www.flash.net/~falline/news.htm Federal Energy Regulatory Commission, http://www.ferc.gov/industries/hydropower/indus-act/hl-over.asp Hydroelectric Dam Licensing Forest Capital Partners, LLC http://www.forestcap.com Forest Investment Associates http://www.forestinvest.com/ Forest Systems http://www.forestsystems.com Fountain Forestry, Inc. http://www.fountainforestry.com/ Friends of Dupont State Forest http://www.dupontforest.com/ Global Forest Partners http://209.50.232.155/index.html GMO Renewable Resources, LLC http://www.gmo.com/ Green Century Capital Management http://www.greencentury.com (environmentally screened investments) Hancock Land Company http://www.hancockland.com Hancock Timber Resource Group http://www.htrg.com/ Heritage Ranch http://www.heritage-ranch.com Heritage Ranch Research Institute http://www.heritageranchinstitute.org/ Hidden Springs (limited development) http://www.hiddensprings.com/ Land Trust Alliance (federal tax policy) http://www.lta.org/publicpolicy/index.html Lyme Timber Company http://www.lymetimber.com Meadowsend Timberlands, Ltd. http://www.mtlforests.com National Association of Real Estate Investment Trusts http://www.nareit.com National Council of Real Estate Investment Fiduciaries http://www.ncreif.com Natural Lands Trust (Growing Greener http://www.natlands.org conservation subdivisions) New Jersey Conservation Loan Fund (Open Space Institute) http://www.osiny.org/njclp.asp New Markets Tax Credit http://www.cdfifund.gov/programs/nmtc/ North Carolina Department of Transportation http://www.ncdot.org/secretary/envsteward/partnerships/ (red-cockaded woodpecker habitat mitigation) Northern Forest Protection Fund http://www.osiny.org/northernforest/home.asp Open Space Institute http://www.osiny.org PAGE 55 Pacific Forest Trust (carbon sequestration) http://www.pacificforest.org/policy/index.html Plum Creek Timber http://www.plumcreek.com Portfolio 21 (environmentally screened investments) http://www.portfolio21.com Prairie Crossing (limited development) http://www.prairiecrossing.com/pc/site/index.html Property Rights Foundation of America, http://prfamerica.org Hydroelectric Dam Relicensing Prudential Timber Investments, Inc. http://www.investmentmanagement.prudential.com/pim/page/ 0,2431,6067,00.html Resource Management Service, Inc. http://www.resourcemgt.com Santa Lucia Preserve (limited development) http://www.santaluciapreserve.com/ Sierra Club Funds (environmentally screened investments) http://sierraclubfunds.com/index.htm Socially Responsible Investment Forum http://www.socialinvest.org Spring Island (limited development) http://privatecommunities.com/visit/index.htm?community_id=149& community_name=Spring%20Island&link_location=top The Campbell Group http://www.campbellgroup.com/ The Conservation Fund (carbon sequestration, http://www.conservationfund.org/?article=2295 and ?article=2398> habitat mitigation) The Forestland Group http://www.forestlandgroup.com The Foundation Center http://www.fdncenter.org The Molpus Woodlands Group http://www.molpus.com The Nature Conservancy, Conservation Forestry Program http://nature.org/wherewework/northamerica/states/virginia/misc /art8136.html The Nature Conservancy, Forest Bank http://nature.org/initiatives/programs/forestbank/ Timberland Trails (backcountry recreation) http://www.phillipsbrook.org/ Timbervest http://www.timbervest.net UBS Timber Investments http://financialservicesinc.ubs.com/Home U.S. Forest Capital http://www.usforestcapital.com/ Wachovia Timberland Trust http://www.wachovia.com Wetlands Mitigation Banking http://www.epa.gov/owow/wetlands/facts/fact16.html Wildlife Habitat Mitigation Banking, California http://ceres.ca.gov/topic/banking CONSERVATION CAPITAL: SOURCES OF PRIVATE FUNDING FOR LAND CONSERVATION PAGE 56 Appendix C: Forestland Investments Ideally, cooperation between commercial timberland owners and conservation interests benefits both parties. Through public purchase of easements, for instance, land is protected from development at minimal cost, and principled forest managers and investors are rewarded for "doing the right thing" instead of being penalized through below-market returns. What do conservation groups need to understand about forestland investors and managers to make cooperation work? Here is a brief primer. Ownership Trends Beginning in the 1800s, forest industry firms in the United States began to acquire timberland to support their mills, eventually accumulating 75 to 80 million acres nationwide (Block and Sample 2001). For well over a century, these ownerships remained largely intact, with consolidation or dispersal merely transferring land own- ership (usually with associated processing plants) from one industrial entity to anoth- er similar owner. Over the past few decades, however, a new trend has emerged in the country that separates forestland ownership from processing capacity. In 2002 Hancock Timber Resource Group analyzed transfers of timberland parcels of 10,000 or more acres from 1999 through 2001 in the South, Northeast, and Pacific Northwest (Binkley et al. 2002a). Some of their conclusions: * 13 million acres changed hands during the survey period, including 5 million acres in the Northeast and 7.5 million acres in the South. * The forest industry lost about 8.5 percent of its timberland over this three-year period, while institutional investors gained a substantial presence. Forest indus- try acres fell by 5.7 million while investor acres increased by 6 million and con- servation group acres rose by 1.4 million. * Institutional investors paid the highest per-acre prices for timberland, and prices in the South were well over twice as high as in the Northeast. In the Northeast, investors paid $380 per acre, forest industry $377, and conservation groups $210. In the South, prices were $1,015 for investors, $899 for forest industry, and $729 for conservation groups. FIGURE 3. [Since this survey was conducted, average Forestland Ownership Trends, Northern Forest Region* Northeast timberland prices have risen, while those in the South have fallen (Binkley et al. 9 2002a).] 8 LEGEND When Hancock Timber Resource Group, one 7 I 1994 I 1999 I 2004 of the first TIMOs, was founded in 1985, institu- tional timberland investment totaled about $300 6 million in the United States. By 1999 the total 5 had risen to nearly $8 billion (Block and Sample 4 2001). Today, the total stands at $11 or $12 bil- lion and 9 million acres (Gilleland 2003). 3 Despite this rapid growth, institutional investors 2 nationwide still own less than 5 percent of the 1 value and less than 4 percent of the acres in pri- vate timberland ownership across the country. 0 Industrial Large Large State Federal (Gilleland 2003). In particular regions, however, Non-industrial NGO (statewide) (statewide) the trend is much more pronounced, as illustrat- *Northern Maine, New Hampshire, Vermont, and New York. ed by Figure 3 for the Northern Forest region PAGE 57 (northern Maine, New Hampshire, Vermont, and NewYork) (Kingsley et al. 2004). Analysts have identified several motivations for the shift from industrial to investor ownership. First, forestland returns can be higher for TIMOs than for forest industry landowners because of differing landowner objectives. Industrial timberland (i.e. that owned by a forest products manufacturing firm) is not generally managed to maximize timber value. Instead, it is managed for a stable supply of timber for a processing facil- ity. Or, it is managed as a timber reserve (hedge) against higher prices for timber from other sources. When timber prices are high, industrial land is likely to be cut more heavily; but instead of fetching the higher price on the open market, the material will go to the mill to keep mill costs down. Investment firms, by contrast, are less con- strained by the need to feed company mills but can instead time their timber sales to respond to market peaks. Second, the paper industry, a major holder of industrial forestland, has faced a glut in the increasingly global paper market, along with aging domestic manufacturing facilities. Timberland holdings are a relatively liquid asset that can generate capital for investments in equipment upgrades required to maintain competitiveness or even in expanded overseas operations. Third, forest industry corporations generate profits only through sales of timber or processed forest products. Accounting rules dictate that the balance sheet of these firms does not reflect appreciated timber value until the trees are actually cut. Both TIMOs and REITs, on the other hand, can reflect standing timber value in current returns. These types of timberland ownership can thus maintain shareholder value and liquidity (the ability to recoup an investment by selling shares) without actually cutting the timber. Finally, tax regulations have accelerated the shift of forestland ownership from industry (mostly "double-tax") to investor entities (mostly "single-tax"). Standard corporations (a structure that applies to most forest industries) pay corporate taxes on profits, and then individual stockholders also pay taxes on the dividends they receive. "Single-tax" entities like sole proprietorships, partnerships, and pass-through forms of organization like S corporations, limited partnerships, limited liability corporations, and real estate investment trusts distribute profits directly to investors, rather than pay dividends on stock. The business entity itself pays no tax; only the ultimate investor is taxed. Since single-tax entities can keep a larger share of forest profits, double taxation of corporate profits can accelerate the sale of timberlands to organiza- tions with lower tax liabilities. For all these reasons, holding timberland has become relatively more attractive for TIMOs and less so for industrial landowners. Because TIMOs can benefit from the value of standing timber and do not need to maintain a steady flow of material to sup- ply a manufacturing plant, conservationists were at first optimistic that emerging investor landowners would harvest their lands less intensively than the previous forest industry owners and would manage land for long-term value rather than short-term gain. With new TIMOs proliferating rapidly (see Forest Investment and Management Firms, page 61, for a relatively current list), the reality of investor behavior is in fact complex and variable. Characteristics and Expectations of Large-Scale Forestland Owners Different classes of landowner have different motivations for owning forestland. For several reasons, new investor-owners of forestland are likely to behave differently than traditional industrial owners. Wood products manufacturing companies own land pri- marily to supply the firm's processing facilities, and these firms traditionally hold land CONSERVATION CAPITAL: SOURCES OF PRIVATE FUNDING FOR LAND CONSERVATION PAGE 58 for several decades and manage for relatively steady wood flow. TIMOs and REITs, on the other hand, generate profits from both current sales of timber and other resources and from appreciation in land and standing timber value. These dual goals influence the way land is managed, the length of tenure, and the ultimate disposition of land. Appreciation of land and standing timber is based on expected future value rather than current revenue and is thus less stable than timber sales as a source of return. Over the past few decades, total returns to investments in U.S. forestland have aver- aged about 8 to 10 percent, but at various times and regions have ranged from -8.4 to +112.1 percent (Hancock Timber Resource Group 2003a). The National Council of Real Estate Investment Fiduciaries (NCREIF) timberland property index shows tim- berland operating EBITDDA ("earnings before interest, taxes, depreciation, deple- tion, and amortization" - a rough measure of profits from timber harvest) of about 8 percent in the early 1990s, falling steadily to about 4 percent by 2002. Returns due to appreciation were over 15 percent in the early 1990s but fell to 0 percent in 2000, -6 percent in 2001, and an estimated -2 percent in 2002 as expectations shifted from possible timber famine to a world glut of wood (Washburn 2003) (Figure 4). Because returns from capital appreciation are so volatile, TIMOs and REITs may buy and sell land more frequently than traditional forest industry landowners to take advantage of perceived market under- or over-valuation of land. Conservation groups may need to develop expertise in market valua- FIGURE 4. tion in order to anticipate and react quickly to Timberland Returns from Capital land sales that threaten conversion or fragmen- Appreciation and Earnings tation of key parcels. 25% Capital appreciation derives from the value of standing timber and the value of the land itself. LEGEND Standing timber increases in value because of 20% I Capital I EBITDDA* several factors. Growth in tree volume, influ- enced by site productivity and silvicultural prac- tices, contributes a fairly predictable and steady 15% 3-4 percent return. As larger trees enter higher value classes, price per volume also rises. Overall timber prices for most species also appreciate 10% faster than the rate of inflation (although this price trend is more volatile than tree growth as a source of returns and currently seems to be 5% dampened somewhat as inexpensive pulp flows in from overseas). Appreciation in the value of the land itself 0% may be based on expected future timber prices or on development value. Maximum return requires selling land for its "highest and best -5% use," which may well include forest conversion. Plum Creek, a publicly traded REIT1 that spe- cializes in timberland transactions, has an active -10% real estate development division. TIMOs and REITs will likely hold land for 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 shorter periods than have past industrial owners, * Earnings before interest, taxes, depreciation, depletion, and amortization. Source: Hancock Timberland Investor, Fourth Quarter, 2002. National 1 To confuse the categories a bit, Plum Creek also Council of Real Estate Investment Fiduciaries Timberland Property Index owns wood products processing facilities. PAGE 59 as a significant portion of profits is generated through appreciating land values. Conventional wisdom places the time horizon for most institutional timberland investments at 10 to 15 years (Block and Sample 2001). According to Wagner Forest Management's Hank Swann, timber investments are surging in popularity, and new firms without a long-term commitment to forest management may get in and out of the market within three or four years (Swann 2003, personal communication). Forest investment firms act on behalf of individuals or institutions who ultimately provide the funds for land purchases and determine investment objectives. TIMOs and REITs, like forest industry firms, have a fiduciary responsibility to increase share- holder value and in the case of publicly traded REITs must generate cash to make cur- rent distributions to shareholders. The federal Employee Retirement Income Security Act (ERISA) furthermore requires that pension funds be managed for the sole benefit of the retirees, and many TIMO investors are pension funds. TIMOs whose investors support clear conservation goals, however, might operate quite differently. (See Socially Responsible Investment, page 38.) The institutional investors who provide most of the funds for TIMOs find timber- land investments attractive not just for their high returns, but for their relatively low risk, ability to hedge inflation, and tendency to correlate negatively with stock market and bond returns (Hancock Timber Resource Group 2003b). As the stock market slumped over the past five years, many large institutions shifted substantial capital into timberland, fueling the growth in TIMO numbers. Two prominent institutional investors, each with about $1 billion in timberland, are Harvard University (about 5 percent of its endowment) and CalPERS, the California state employees pension sys- tem (about 1 percent of its assets before a 2003 decision to divest some of its timber- land assets) (Daly 2003). In 2003 CalPERS decided to divest some of its timberland, highlighting an institu- tional investing dilemma explained by Hank Swann of Wagner Forest Management (2003, personal communication). Because land sales often involve conversion of some parcels to "highest and best use" (usually meaning development), forestland protec- tion depends on keeping land under stable long-term ownership. Careful silviculture can maximize timber value and help forested uses compete with development. Yet good forestry also increases the book value of timberland, thereby tipping the portfo- lio balance and creating incentives to sell land. Permanent easements can protect fre- quently sold forests from conversion and, in some cases, from ownership fragmenta- tion, but easements are less likely to control the heavy cutting sometimes associated with ownership transfers. Aside from corporate strategy and investor goals, method of financing might also influence TIMO decisions. Timberland investments may be financed through equity investments by stockholders or venture capital investors (typically high net worth individuals, companies, and venture funds). Or they may be financed through debt or equity-like subordinated debt - debt that in case of bankruptcy would be paid only after primary creditors receive full value for their loans (Best and Jenkins 1999). Leveraging investments through debt financing or high-risk, high-return venture cap- ital might further increase pressure on the timber resource. Timberland Transactions and Prices Whether conservation organizations enter the land market to partner with large landowners or to compete with them, participation of conservation interests in the marketplace will influence, and be influenced by, land prices. Making the most effi- cient use of limited dollars requires understanding how land prices are set by that CONSERVATION CAPITAL: SOURCES OF PRIVATE FUNDING FOR LAND CONSERVATION PAGE 60 market. Many timberland properties are offered at auction, open to competitive bid- ding. The price offered by a potential timberland buyer relates to expected net returns made up of - EXPECTED REVENUE: L timber income (predicted stumpage price times expected volume) L expected appreciation in land and standing timber value L potential easement income L other nontimber income MINUS EXPECTED COSTS: M cost of capital (debt service or distributions to shareholders) M property taxes M management costs, etc. The predicted annual flow of net returns over time is capitalized into a present value, with future returns discounted based on the perceived risk and the return the investor would like to earn on the investment (adapted from presentation by Henry Whittemore 2003). A change in any of these factors will influence the current price offered. Factors that raise the typical purchase price per acre will make it more difficult for the public or nonprofits to purchase land. For instance, if timber markets anticipate a scarcity of quality wood supply, current timberland prices will be bid upward because expected timber revenue increases. Likewise, if institutional investors fully recognize the conservation value of a parc e l and are confident that they can sell easements for a favorable price, they may be will- ing to offer more per acre for that parcel. This is an advantage if the conserv a t i o n - o r i- ented buyer is competing with developers for the land. At the same time, the tendency to capitalize easement income into the land price means higher prices for land of con- s e rvation interest, meaning more public dollars must be spent to protect each acre . Similarly, if nontimber income raises expected returns on forestland, the immediate effect might be to reduce pressure for intensive timber harvests. Yet over time, these supplemental returns will allow timberland buyers to offer higher per-acre prices. As land prices rise, the pressure for higher timber revenue will again increase. If the cost of capital falls, then net expected returns from a timberland investment rise and the price offered rises as well. In the recent low-interest environment, "liq- uidators" (who purchase land for short periods, harvest heavily, then subdivide for sale) can readily and cheaply borrow funds, outbid longer-term investors, and cash in before debt payments eat into their profits. Elements of a land deal that lower expected returns or reduce flexibility, on the other hand, will lower the purchase price. The recent sale of MeadWestvaco lands in Maine and New Hampshire carried a 50-year supply contract that assures raw material for MeadWestvaco's paper mill in Rumford, Maine. Few buyers were willing to com- mit to such a rigid requirement, so the final transaction price was lower than it would have been for an unencumbered sale (Swann 2003, personal communication). According to Henry Whittemore of Maine's Department of Conservation (2004, per- sonal communication), such supply agreements help keep forestland intact, as conver- sion of acreage would threaten the new owner's ability to produce sufficient wood flow to meet contract obligations. Others fear that supply commitments will lead to overly intensive harvesting on the most accessible acres. PAGE 61 Heavy cutting in the years leading up to a sale will also reduce expected re t u rn s (especially in the early years less influenced by time discounting) and thus lower the p u rchase price of the land. Far-sighted conservationists can take advantage of this fact by purchasing inexpensive, cut-over acreage (following the example of the federal gov- e rnment for the White Mountain National Forest in New Hampshire and the state g o v e rnment for the Adirondacks in New York State) and watching it re g ro w. It may take decades or centuries to partially re s t o re these cut-over lands, so this approach will never fully substitute for the protection of intact forest ecosystems. Listed below are some of the major forest investment firms in the United States. Firms are listed by a p p roximate acres owned. Some acreage is double-counted as forestland owned by one investment firm may have management contracted to another. Forest Investment and Management Firms Company Holdings Headquarters Region Other Information Plum Creek Timber 8 million acres Seattle, WA 19 states Publicly-traded REIT, also owns medium-density worth $3.5 billion fiberboard and plywood processing facilities, real estate development division Hancock Timber 2.4 million acres Boston, MA Pacific Northwest Largest and oldest Timber Investment Management Resource Group worth $3 billion Northwest, Organization (TIMO), often contracts property Southeast, management to Olympic Resource Management, Northeast in US Resource Management Service, Wagner Forest Management Rayonier Nearly 2 million Jacksonville, FL Pacific Northwest Started as Rayonier Pulp and Paper Company, acres in U.S. U.S., Southeast converted to REIT structure in January 2004. U.S., and New Operates processing facilities as wholly-owned Zealand subsidiaries American Forest Over 1.5 million Macon, GA Southeast, Lake Formed from merger of Shaw, McLeod et al. and Management acres under States, international Canal Forest Resources. Investment, real estate sales, management and forest management services. Not an ownership entity The Molpus 1.2 million acres Jackson, MS Southeast Manages for high net worth individuals Woodlands Group worth $1.2 billion and families Forest Investment 900,000 acres Atlanta, GA Southeast to mid- Contracts property management to American Associates worth over Atlantic, including Forest Management, Natural Resource Planning, $1.3 billion Pennsylvania Bennett & Peters, and Forest Resource Consultants Global Forest 1.4 million acres West Lebanon, World-wide Formerly UBS. Contracts property management Partners worth $1.3 billion NH (+Chile, in U.S. to American Forest Management, Larson Brazil, NZ) & McGowin. Also manages some property directly Wachovia 900,000 acres Atlanta, GA Southeast, Mid- Contracts property management to American Timberland Trust worth $1.2 billion Atlantic and Lake Forest Management, Milliken Forestr y, F&W States Forestry Services Campbell Group Over 800,000 acres Portland, OR Pacific Northwest Manages property directly worth $1.6 billion The Forestland 600,000 acres Chapel Hill, NC Northeast, Mid- Contracts property management to LandVest, Group worth $300 million Atlantic, and Forecon, American Forest Management Wisconsin), hardwood focus Prudential Timber 400,000 acres Boston, MA Southeast Contracts property management to American worth $500 million and Hawaii Forest Management, Forest Resource Consultants Fountain Forestry 400,000 acres Pittsfield, NH Northeast to Affiliate of U.K. company. Investment services and worth $175 million Ohio, Tennessee, contract management for other TIMOs (including specializes in timber management for Renewable Resources in hardwood forest Sundquist Wildlife Management Area in Tennessee) CONSERVATION CAPITAL: SOURCES OF PRIVATE FUNDING FOR LAND CONSERVATION PAGE 62 Company Holdings Headquarters Region Other Information Forest Systems 300,000 acres North Easton, Southeast, Manages properties directly worth $410 million MA Northwest TimberVest, LLC 300,000 acres and Atlanta, GA 17 states, Works through regional foresters. Focus on $400 million in concentrated properties that can be subdivided for sale in timber assets in Southeast smaller tracts GMO Renewable $100 million Boston, MA Northeast, South- Part of Grantham, Mayo, Van Otterloo ("GMO"), a Resources east, Northwest privately held investment adviser. Contracts pro p e rt y management to Rayonier, LandVest, Fountain Forestry. Cooperated with Conservation Fund to p u rchase Middle Neches tract in Texas and Sundquist Wildlife Management Area timber rights in Cumberland Plateau of Tennessee. Both from International Paper Wagner Forest Lyme, NH Northeast Invests and manages for institutional and high net Management worth clients, and manages property for other TIMOs Resource Birmingham, AL South, upper Forest management and investment services Management Midwest Service, Inc. Lyme Timber 400,000 acres Lyme, NH New England, Specializes in lands of high conservation value. Company Midwest, Southeast Purchased Connecticut Lakes Headwaters lands in NH Hancock Land 40,000 acres Casco, Maine Northern New Investment and management services for direct Company England individual ownership of timber tracts. Participated in Tumbledown Mount Blue conservation project in Maine Source: Block and Sample, 2001; Gilsenam, et al., 2003. (See Appendix B: Helpful Web Sites.) [this page left intentionally blank] COVER PHOTOS: Left: Tumbledown Mountain, Maine (see p. 37) Photo © Jerry and Marcy Monkman/EcoPhotography.com Top: High Falls, Dupont State Forest, North Carolina (see p. 7). Photo by Jeff Jennings, Friends of Dupont State Forest, www.dupontforest.com THE WILDERNESS SOCIETY Ann Ingerson ann_ingerson@tws.org (802) 586-9625 Vermont Office P.O. Box 10 West Charleston, VT 05872