Forest Valuation and Appraisal by Levone

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									Forest Valuation and
     Appraisal




   The major organization for consulting
     foresters who do appraisal work.
                 Valuation
• Calculating the value an “investor” places
  on “property”,
  – NPV
  – WPL (SEV) of buyer
  – Reservation price of seller
  – “Instinctive” value
• Uses of valuations
  – Offering price
  – Asking price
                   Appraisal
• Process of estimating “market value”
  – Average expected selling price for similar
    property
  – Goal is to obtain the “fair market value”
     • Def. – Price at which a willing seller and a willing
       buyer will trade, neither being under compulsion to
       trade, and both having access to all knowledge
       relevant to the transaction

                                          Source of
                                          technical literature
                                          and training
                  Appraisal
• Uses
  – Taxes
    • Assessment for property tax levy
    • Basis of property
  – Amount of loan collateral
  – Estimate damages for insurance or law suites
        Stumpage Valuation
• What buyers pay for standing timber ready
  for harvest
  – Possible buyers
    • Logger
    • Saw or veneer mill timber buyer
    • Broker of logs or standing timber
       – Broker – buy for resale
           » accumulate specific products for buyers
           » broker knows her/his customers
           Stumpage Valuation
          -- from buyer’s perspective
• Stumpage is a residual, or conversion return
  – Value of veneer or lumber
     • Less milling cost
     • Less overhead for procurement and working capital
  – Delivered log price
     • Less cost of logging and hauling
     • Less overhead for procurement and working capital, equals
  – Stumpage value
     • Might be called “willingness to pay” for stumpage, WPS
          Valuation Factors
• Price of lumber, veneer, or pulp
• Efficiency of processing plant
• Proximity of stand to mills or brokers’
  yards
• Price expectations of buyers
• Season of the year
                   Basswood Sawlog Stumpage by Conversion Return Method

        250


        200


        150
                                                                                          Prime
$/MBF




                                                                                          No. 1
        100
                                                                                          No. 2
                                                                                          No. 3
        50


         0
         57

              60

                    63

                         66

                              69

                                   72

                                        75

                                             78

                                                  81

                                                       84

                                                            87

                                                                 90

                                                                      93

                                                                           96

                                                                                99

                                                                                     02
        -50
                                                  Year
How can a log have a negative
     conversion return?
               Logging and Hauling Cost for Avg. Haul Distance of 53 miles

        250


        200


        150
miles




        100


        50


         0




                                                                                      2
         57

              60

                   63

                        66

                             69

                                  72

                                       75

                                            78

                                                 81

                                                        84

                                                             87

                                                                  90

                                                                       93

                                                                            96

                                                                                 99
                                                 Year
                    Black Cherry Stumpage by Conversion Return Method

        1400

        1200

        1000

        800                                                                               Prime
$/MBF




                                                                                          No. 1
        600
                                                                                          No. 2
        400                                                                               No. 3


        200

          0
          57

               60

                    63

                         66

                              69

                                   72

                                        75

                                             78

                                                  81

                                                       84

                                                            87

                                                                 90

                                                                      93

                                                                           96

                                                                                99

                                                                                     02
        -200
                                                  Year
          Stumpage Valuation
         -- from sellers perspective

• Reservation price
  – Price below which an owner won’t sell
    stumpage
• Why aren’t conversion return and
  reservation price always the same?
  – Unrealistic perception of timber values
  – Non-consumptive value given to timber in-situ
         Measures of Value
• WPL (bare land)
  – Even-aged management equa. 9-7
  – Uneven-aged management, equa. 8-5
  – Holding value of immature even-aged timber,
    equa. 7-14
  – NPV of uneven-aged forest, equa 8-6
• WPL is an investor’s maximum willingness
  to pay for an income-producing asset, but
  it’s not necessarily the market value
                       Loblolly Pine Pulpwood Forest Values

      $2,000

      $1,800

      $1,600

      $1,400
      $1,200
                                                                   Land value
$/A




      $1,000                                                       Liquidation value
       $800                                                        Holding value

       $600
       $400

       $200
         $0
               0   5       10       15        20       25     30
                                   Year
   Valuation of Large “Tracts”
           of Timber
• Old growth
• Young timber
• Impacts of loans
  Old-Growth Timber Valuation
• Consider timber only, not land
• Volume too large to harvest in one year
• Timber value in year zero is less than sum
  of future harvest values, as determined by
  “timber valuation factor” which equals,
     NPV of future timber harvests
     current stumpage value of entire volume
               Old Growth Valuation Factors
  RHVG – 6%, Inc. Tax – 38%, Infla. – 5%, Mgt. cost – 2% of harvest value


                              Real Interest Rate
Depletion       3            6             9           12           15
period, yr.
    2         0.947       0.888        0.835        0.788         0.746
    5         0.938       0.832        0.744        0.671         0.609
    8         0.939       0.791        0.677        0.587         0.515
    11        0.948       0.761        0.625        0.523         0.445
    14        0.963       0.738        0.583        0.472         0.391
    17        0.983       0.719        0.547        0.430         0.348
               Young Timber
• Collection of various aged thrifty young
  growth stands to be cut at different times
  – Timber’s NPV will likely exceed stumpage
    value
     • Not true if real interest rates are high and buyers
       are pessimistic about future stumpage prices
     Impact of Loan on Property
             Valuation
• Leverage – use of existing equity to
  borrow funds to purchase additional
  business assets
• Loans are denominated in current dollars
  – Payments not adjusted for inflation
  – Loan rate is adjusted by lender for expected
    inflation rate and risk
    • Example – 5% real rate (3% risk-free plus 2% risk),
      and inflation rate is expected to be 6%, nominal
      rate should be 91.05 x 1.06) – 1 = 0.113, or 11.3%
     Impact of Loan on Property
             Valuation
• Example cont. – Borrow $100,000 at
  11.3% for 10 years
  – Annual payment using capital recovery
    multiplier
       100,000 (0.113/(1-1.113-10)) = $17,194.31
     Impact of Loan on Property
             Valuation
• Impact of loan on NPV
  – Principal enters as a revenue
  – Payments enter as costs
    • Payments are discounted with risk free interest
      rate since payments are legal obligations
       – Continuing with example above, discount rate for loan
         payments would be (1.03 x 1.06) – 1 = 0.0918, 9.18%
  – NPV loan = principal less PV of payments
        $100,000 – $17,194.31 (1-(1.0918)-10 / 0.0918)
        $100,000 – $109,478.28
        -$9,478.28
     Impact of Loan on Property
             Valuation
• If investor had used a higher discount rate,
  say 14%, the PV of loan would have been
  $10,312.49
• This would overstate the PV of the loan by
  $19,790.77, which is
  – $10,312.49 – (-$9,478.28)
• Result would be overbidding for properties
• Impact reduced on after basis because
  interest payments usually tax deductible
     Appraising Market Value
• Appraisal methods
  – Comparable sales
  – Capitalized income
  – Replacement cost
• Goal of appraisal is estimation of most-
  likely selling price, not an average price
   Appraisal by Comparable Sales
• Use depends on availability of sales data
   – Data base is a valuable business asset
• Factors consider in making comparisons
   –   Species mix
   –   Quality
   –   Average diameter
   –   Product mix
   –   Terrain
   –   Date of sale
   –   Distance from mills
   –   Road building and logging costs
   –   Log scale used
   –   Type of harvest
   –   Size of sale
   –   Terms of sale – cash at closing, pay-as-cut, installments
   –   Liability for severance or other harvest tax
Adjusting Sales to Make Them Comparable

• Regression analysis
  – Unit price made a function of sale characteristics
  – Requires sales data for a relatively short time period
     • Or, use trend line as independent variable
  – The larger the number of factors (independent
    variables), the larger the data base required
• Adjustment factors, non-statistical method
  – Experienced appraisers make adjustments based on
     • Knowledge of market, or
     • Published factors
Appraisal by Capitalized Income
• Referred to as income appraisal or income
  approach
• It’s simply a NPV calculation, but based on
  most likely conditions, not the conditions
  for a specific person
• Used of necessity when no comparable
  sales are available
• Not useful if non-income benefits are the
  major output of a property
   Appraisal by Capitalized Income --
              Assumptions
• Use regional average yields
• Project prices with trend-lines for real
  prices
• Proper discount rate to use is difficult to
  estimate
  – Derived capitalization rate – discount rate
    used by average buyer in computing price
    paid for a property
     • Estimate like IRR for sample properties by
       assuming cash flows and finding r that results in
       observed sales price
Appraisal by Replacement Cost
• Useful if
  – Trees were planted within the last “few” (less
    than 6) years
  – Land with timber recently purchased
• Assumption is that market price reflects
  the initial costs, but the further out in time
  the valuation date is, the less likely it is
  that past costs affect market price.
  – Sunk costs don’t matter!!!!
Appraisal by Replacement Cost
• Calculate “Forest NPV”
      Ht + Lt              1-(1+r) -(t-y)
                 + (a-c)
      (1+r)t-y                  r

• Then, compound Forest NPV forward to
  valuation year, y, and add annual cost,
    Forest NPV (1+r)y + c ((1+r)y -1)/r

• This is more like the seller’s asking price
  based on her costs
Appraisal by Replacement Cost

• Guideline for income approach
  – When discounting enter incomes as positives
    and costs as negatives
• Guideline for replacement cost approach
  – When compounding historical costs, enter
    costs as positives and revenues as negatives

								
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