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

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
 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 – no longer relevant
• Young timber
• Impacts of loans
 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 (1.05 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