BATTLECALL GUEST EXPERT: Robert J. Abalos, Esq., InvestingInLand.com

Investing in timberland is not only a realistic but extremely profitable option for land investors everywhere, not just for people in rural areas as many might think. This is a basic tenet of my philosophy. You can make money with land no matter where you live.

Timberland is an essential part of the global economy, supplying all sorts of forest products from lumber to paper to a world hungry for them. Timber is a renewable crop that can be harvested time and time again, meaning a virtual guarantee of a steady and predictable cash flow from a raw land investment. Plus the appreciation value of existing timberland continues to rise given environmental restrictions on logging on public lands and other political pressures that limit the creation of new timberlands. All in all, shrewd investors everywhere through a wide variety of investment vehicles can make money owning and managing timberland.

Why Timberland?

Timberland is a great investment for five reasons.

First, it offers investors a current yield. When timber is cut, people buy the wood. This means timberland can be managed to provide a steady and predictable cash flow off raw land. Put another way, the timberland owner can assure themselves of a cash flow stream without paying to put up a building, manage tenants, handle repairs and improvements, or all the other burdens of rental property ownership. Timber can be harvested by professional forest management firms so the owner does not even need to dirty their hands or know much about timber cutting to yield a respectable cash flow through timberland ownership.

Second, timberland offers investors the chance to earn free or discounted land through the sale of timber purchased on the land. This is the classic case of buying an undervalued asset and selling part of it to reduce or eliminate the investment basis in a land purchase, in this case the trees on the land. The process is relatively simple. Timberland is purchased and the timber is sold when conditions are right to offset in whole or in part the entire purchase price of the land.

Third, timberland offers not only inflation protection but above average appreciation rates on a historic basis. Good timberland is not exactly scarce but it is getting rarer. If you own some it will go up in value if properly managed.

Fourth, since timberland is by definition rural land it can provide investors with multiple other cash flows aside from direct timber sales. Some common examples include leases on hunting rights, hiking and camping permits, the licensing of mining operations, campsites for permanent or temporary housing, and other agricultural uses like pine straw harvesting. These ancillary cash flows should not be treated as insignificant or petty. Many publicly traded timberland corporations and master limited partnerships report these non-timberland cash flows are between 4-10% of their total income each year.

Fifth, timberland offers all the benefits of any other type of equity investment, including professional management if desired. You don't need to be a rural farmer or live in the wilderness to make huge profits investing in timberland. As a timberland investor you can choose to make your investment directly in actual land or through a number of investment vehicles which offer instant liquidity along with high dividend yields and cash flow payouts.

How To Make Investments In Timberland

Obviously most people think of investing in timberland as actually buying timberland. Direct investment in timberland allows investors to control not just the timing and predictability of cash flows but also gain from future appreciation benefits just like any other type of landowner. But timberland management is very time and energy intensive. Unless you have experience in this area you will need the services of a professional forestry consultant who can advise you on what land to buy, how and when to harvest timber, and especially on the replanting of depleted land. There are many such consultancies around the country, large and small, from huge firms that manage millions of acres for pension funds and other institutional investors to one-man kitchen table companies that service the individual small farmer or mill operator. An Internet search under "timberland management services" will reveal dozens of such firms and more than one can be found in any area where timber is grown.

Another alternative for investors is to buy into master limited partnerships which buy and manage timberland. Real estate investors are familiar with this syndication model. This is a passive investment strategy where all an investor has to do is buy partnership units and sit back and collect royalty payments. An example of a timberland master limited partnership is Pope Resources LP (ticker symbol POPEZ) which trades on the NASDAQ. Pope Resources LP owns and manages 115,000 acres of timberland and 2,600 acres of development land in the Seattle, Washington area and has over 150 years of experience making money with timberland for investors.

There are a number of publicly traded corporations that invest in timberland as well. The primary difference between the master limited partnership and corporate model is merely one of taxation. Some companies wish to be taxed as REITs while others prefer the partnership format. An example of a public company that specializes in timberland investments is Plum Creek Timber Company, Inc. (ticker symbol PCL) a REIT which owns and manages 8.1 million acres of timberland in 21 states and is the second largest private owner of timberland in the United States. The annual dividend yield at the time of this writing is a very respectable 3.92%.

Large and institutional investors can directly hire the services of timberland investment managers who make capital decisions on behalf of their clients in timber projects, private company placements, partnership interests, publicly traded shares, and even the direct purchase and management of timberland. These managers can be found at insurance companies, pension funds, bank trust departments, and where other professional money management services can be hired. Think of this option much like hiring a mutual fund manager to deploy capital sent by contributors, although here the goal is timberland investments. An example of a timberland investment manager is Forest Investment Associates of Atlanta, Georgia, a registered investment advisor which provides services to pension funds, charitable trusts, and endowment funds.

Suggestions For Timberland Investors

Investing in timberland is just like investing in development land except you are selling wood and not homes or building sites. You still need to know your markets, supply and demand numbers for not just the timber but for the land itself, and all the rest you would normally expect in order to perfectly time, value, and price your purchases and sales.

Some of the variables unique to timberland investments are as follows:

• The geographic location of the timberland under consideration. Obviously diversification is important when making such investments because a forest fire, drought, or a natural or manmade disaster in one area can destroy a great deal of timber very quickly. In the timber industry this is known as "stand-alone risk." In reality very little timberland is destroyed by fires and disasters but it does happen even to the largest of firms.
• The age of the timber being purchased. Mature timber is more valuable than freshly planted trees.
• Species of the timber. Hard woods like northern red oak or black cherry sell for twice that of soft woods like yellow popular or pine. As a general rule hard woods are much preferred over soft woods by investors, hence the land grown on them has more value.
• The productivity of the timberland being purchased. In other words, how many trees can be grown on any given acreage. This is really common sense. Timberland near a good source of water with much sunlight and a high soil quality will yield more wood than dark dry land without many nutrients. More trees means more harvestable wood and more profits.
• The available of saw mills and under logging operations. Timber is only valuable if it can reach a mill to be processed. Some timberland is so rich and productive that mills are constructed just to be near them but most privately owned timberland will rely upon established milling operations to yield cash profits. What good is owning hundreds of acres of trees without the roads, equipment, and expertise of mill operators to make boards and other products out of wood and then ship them to markets worldwide? Timberland needs support operations to make the land valuable so due diligence requires some knowledge of these local assets.
• Supply and demand issues for grown timber. When hard maple, for example, is in high demand, timberland owners cut hard maple. When prices are falling they restrict supply to stabilize prices. It is crucial to know not just the current value of the timber being purchased but supply and demand trends for the wood both short and long-term. It is foolish to buy acres of even a high quality hard wood and then see the value of those acres fall as wood prices decline.
• How easy is it to convert the timberland into a "higher and better use" such as residential or commercial development? Some timberland is so isolated that it will never have development potential while other land is close enough to current development that it will soon have greater value as a non-timber producing asset. Here an assessment of local zoning issues and the supply and demand of development land will determine the value of timberland. It is very common for timber production to act as a "taxpayer" or to pay the property taxes and mortgage payments due on land while it is primed and made ready for future development.
• Does the land have alternative non-timber uses that can add to its income such as through the licensing of campsites, hunting permits, or other transitory and non-capital intensive uses? Hunters and fishermen, for example, will often pay good money to stalk wild game and rare fish on timberland. These non-timber streams of income were discussed above and should not be neglected. One timberland owner I know licenses the streams on his land for gold panning right out of the 1840s California Gold Rush and makes thousands of dollars every month servicing the tourist trade who are touring the area and dreaming of finding gold nuggets just like the pioneers did.
• What are the tax rates on the timberland? Some areas tax timberland as raw land, others use agricultural or even commercial rates. The higher the tax, the lower your profits selling wood or holding the land.
• The activity of environmental activists in the area. Cutting down trees seems like heresy to many in the environmental movement and literally millions of acres of super high quality timberland has been lost due to the actions of such zealous and well-intentioned but also naive individuals. Most timberland owners I know are the ultimate environmentalists since they depend on the conservation and protection of their land in order to make a living but abuses do happen, such as the clear cutting of forest land and inevitable soil erosion which clogs streams with silt and kills fish and wildlife. Some geographic areas are timber friendly, others are not. It pays to know which are which.
  The location and quality of roads near the timberland. As a general rule, the harder the road leading to the timberland, the better. What good is owning acres of timberland without a road to haul the cut trees or boards on?
• The location of other timberlands in the area. Think monopoly. If you own the only site for black cherry within a hundred miles, you own this local market.
• Diversification issues. You want to own diversify both geographically but also along wood types. Owning multiple stands of multiple wood types protects against stand-alone loss but also market price declines.
• Seller requirements for sale. Quite often timberland is subdivided by large land, paper, wood, forest product or other timber owning concerns and sold to the public or equity investors to increase the number of eligible buyers. A common example would be a 5,000 acre tract divided into 50-acre timber farms. Here any buyer is paying retail prices for timberland whatever the quality of the wood being offered or the other variables described above. The goal is ALWAYS to be a wholesale buyer and a retail seller of land and not the other way around.

The Bottom Line On Timberland

This article is not intended to be a complete primer on making timberland investments but only to put the idea into your head. Timberland ownership is not a fad or trendy way of making money with land. This investment strategy literally has a track record of success that goes back thousands of years. One of the strengths of timberland ownership is that it can encompass all aspects of investment, active and passive, and can be as liquid as a stock purchase if you desire.

My best advice for those who want to get involved in timberland investing is as follows:

1. Read everything you can on the subject. The best book by far I know on this topic is TIMBERLAND INVESTMENTS by F. Christian Zinkhan, et al., published by Timber Press, 1992. The ISBN is 0-88192-218-8. The Internet is filled with tons of free information on this subject, starting with this free article here I guess.
2. Buy stock in some publicly traded timber, paper, and forest product companies so you can receive the annual reports, proxies, and other publications for owners. You will learn a great deal about the timber business by understanding how these very large companies make money and most of these lessons you can easily duplicate for yourself as an individual investor in timberland. You do not need to buy large amounts of stock in each company, a few shares will do. I make it a common practice when I want to learn about a new industry to buy ten shares of stock in each of the largest ten firms in the industry just to receive all the annual and quarterly mailings automatically. You can get all these reports for free as well but having even a small amount of money at risk will motivate you to pay closer attention.
3. Speak to timberland investors even if you plan a totally passive investment strategy like buying partnership shares or stocks. The wealth of knowledge these active managers and landowners have on timber and generally are willing to share with you for free is staggering. Take advantage of industry contacts at conferences, newsletters, even by talking to sellers of timberland. Network all you can for information. People are basically friendly and like to talk about things that interest them.
4. Learn about the ancillary industries related to timber like paper, lumber, and construction. When these industries are strong, timberland prices rise and vice versa. Do not settle on one single timberland investment strategy. It is acceptable to mix-and-match, to buy land, buy shares, and also buy partnership interests simultaneously. Each alternative has strong advantages and disadvantages so prudence would require a wide diversification.

I'm very hot on this area. Who would not be? You can buy land that pays for itself and then you can sell the same land later for development purposes and make an additional series of profits and cash flows all with little or no capital invested in this land.

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