Thursday, June 2, 2016

How Much Does Merchantable Timber Add To The Value Of A Property Sale?

When setting up a land sale that includes merchantable timber one of the first things that needs to be done is to conduct a timber cruise and timber valuation. This is often more complex than expected as the tract is usually comprised of  stands where the timber is of like kind in terms of timber type, specie, age, quality and value.

At this point stand mapping usually done by using GPS/GIS technology. It is typical for forested tracts to be considered as a tract of land that contains acres of some quantity but in reality the whole is managed by the parts or micro managed as the various stands can be different in many ways.
The techniques of timber cruising and valuation are not discussed at this point in the post. Once all the stands have been evaluated based on forest management criteria and valued the questions becomes a little more complex.

In a property sale, especially those properties that are recreation oriented or those with near term higher and better use potential questions arise as to the contribution of the timber assets in the sale of the whole tract. In my experience this becomes somewhat difficult as the timber cruise and timber appraisal is usually based on the concept of stumpage value, as of the date of the cruise/appraisal. Stumpage value is what the timber will sell for on the stump by a harvest within a relatively short period of time at market prices and specifications on the valuation date.

The market participants and real estate professionals should realize that product shifts can occur in the near term and just because some stands are merchantable doesn't mean that they should be thinned or harvested soon after the sale. What would the well advised, astute investor pay for the property with the current timber condition on a stand level basis? The answer to these questions may be more difficult and therefore can make a stumpage value estimate inadequate to measure the true contribution of the timber when associated with the other property components which include land, improvements, personal property, etc. that are usually part of a property sale.

A term in property appraisal called anticipation is ever present in land and forest investments. The value to an investor is not necessarily based on the spot or current condition but what the investor perceives as the present value of the future benefits to be produced by the property during their future period of ownership.

I have not nor will I attempt to answer the question posed in the title above as every situation is different. These differences may include variations in tract size, timber stand opportunities and obstacles, weather and site factors, internal and external access, location to first processing points, markets for the timber and the motivations of the typical buyer, given the highest and best use of the property.

In conclusion it is wise to look beyond a stumpage value estimate as the stands while capable of producing immediate value by being cut may not be financially or biologically be ready to cut. A timber valuation by a party that wants to buy the timber should also be looked at very carefully unless it can be audited by an independent third party. The seller or buyer who is most informed will ultimately win in the deal. I guess that if one of the parties in the sale did not think they knew more than the other there would never be a deal.
These comments indicate that agents and sellers and buyers should be better prepared !  What do you think?

2 comments:

  1. Stumpage value estimates should be heavily scrutinized when in acquisition mode. Pole markets in our area currently change weekly. I have lived in areas where markets for a particular species were limited. An astute investor is best served when inclined to perform their own due diligence with a team of forestry and land professionals who understand local market conditions. The timber component of value is affected by so many factors as mentioned in the post. Looking into the future, necessity for an increased understanding of the local logging force and how it could affect the liquidity of standing timber assets is a factor to consider.

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  2. Great detailed information, I ll be visiting you more frequently, here is very interesting information.

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