FIVE MILE RANCH LLC
Michael Mastagni
B.S., University of California, Davis, 2007
PROJECT
Submitted in partial satisfaction of
the requirements for the degree of
MASTER OF BUSINESS ADMINISTRATION
at
CALIFORNIA STATE UNIVERSITY, SACRAMENTO
SPRING
2011
FIVE MILE RANCH LLC
A Project
by
Michael G Mastagni
Approved by:
_________________________________________________ , Committee Chair
Jerry Estenson, Ph.D.
_________________
Date
ii
Student: Michael G. Mastagni
I certify that this student has met the requirements for format contained in the University
format manual, and that this project is suitable for shelving in the Library and credit is to
be awarded for the project.
_____________________________________________
Monica Lam, Ph.D.
Associate Dean for Graduate and External Programs
College of Business Administration
iii
_____________________
Date
Abstract
of
FIVE MILE RANCH LLC
by
Michael G. Mastagni
STATEMENT OF PROBLEM: To write a ten year business plan for Five Mile Ranch
LLC. The ten year plan will outline a course of action aimed at reducing operating cost,
developing additional revenue sources, positively impacting the environment, and
improving land value. Current operations are earning an internal rate of return of
negative 20.02 percent and the payback period is 42 years. Success will be determined
by achieving a positive internal rate of return and a payback period equal to or less than
ten years, the duration of the business plan.
SOURCES OF DATA: Data was collected using online research, interviews with
industry professionals, and publication information.
CONCLUSIONS REACHED: According to the ten year business plan, Five Mile Ranch
LLC will achieve a 4.19 percent internal rate of return and a payback period of 7.9 years.
Therefore, the business plan should be executed.
_______________________________________________ , Committee Chair
Jerry Estenson, Ph.D.
________________
Date
iv
ACKNOWLEDGEMENTS
I would like to acknowledge Dr. Jerry Estenson and Dr. Larry Bienati for their time and
support. Jeanie Williams for her guidance through the Masters program.
v
TABLE OF CONTENTS
Page
Acknowledgements………………………..…..............………………………….......... v
List of Exhibits…………………………..…...…............………………………......... viii
List of Graphs……………………………..…............………………...…………........ ix
List of Calculations……………………………...........……...………….…...…….…… x
Chapter
1. PROJECT INTENT.……….....…………………………………………….………... 1
2. EXECUTIVE SUMMARY………............……...…...……………………………… 2
3. FIVE MILE RANCH HISTORY……............…….…………………………............ 3
4. FIVE MILE RANCH INCORPORATED……............……..……….……...………. 6
5. DEVELOPMENT PLAN …………............………..……………………………… 10
Five Mile Ranch LLC – Year One…………………………………..………... 10
Five Mile Ranch LLC – Year Two…………………………………..………... 17
Five Mile Ranch LLC – Year Three………………………….…….…………. 21
Five Mile Ranch LLC – Years Four through Nine………………..…………... 24
Five Mile Ranch LLC – Year Ten…………….………………….…………… 25
6. ENVIRONMENTAL IMPACTS …….........…………….…….……..……………. 26
7. LAND VALUE APPRECIATION.…… .............………………………………….. 29
8. CONCLUSION.…….….............…………………………..……………..………… 31
Appendix A. Cash Flow Pre-Development.……..………….………………………… 32
vi
Appendix B. Cash Flow Post-Development.……..…….…………………………….. 33
Bibliography………………………………………..……………………………....… 49
vii
LIST OF EXHIBITS
Page
Exhibit A.
Five Mile Ranch…………………………………………………..……. 5
Exhibit B.
Five Mile Ranch LLC Existing Internal Fencing…………………..….. 7
Exhibit C.
Five Mile Ranch LLC Equipment…………………………………...... 34
Exhibit D.
Five Mile Ranch LLC Proposed Cross-Fencing…………………….... 11
Exhibit E.
D&D Logging Cruise Finding……………………………………...…. 35
Exhibit F.
Five Mile Ranch LLC Location of Farm Field A…………………….. 14
Exhibit G.
Kerns Irrigation Wheel Line Quote……………………………….…… 36
Exhibit H.
Five Mile Ranch LLC Location of Cinder Pit…………………………. 16
Exhibit I.
Five Mile Ranch LLC Location of Farm Field B……………………… 18
Exhibit J.
Kerns Irrigation Pivot Quote……………………………………..…… 37
Exhibit K.
Five Mile Ranch LLC Location of Farm Field C………………..….... 22
viii
LIST OF GRAPHS
Page
Graph A.
Timber Prices, 2005-2010 ………..…..…………………………………….... 13
Graph B.
Average Hay Prices for the Klamath Basin, 2000 to 2010…...……….. 20
ix
LIST OF CALCULATIONS
Page
Calculation 1.
Fence Cost…..………………………………………………… 38
Calculation 2.
Timber Prices…………………………..………………...…… 39
Calculation 3.
Logging Field A………………………..…………………..…. 40
Calculation 4.
Logging area surrounding Field A………..……………..……. 40
Calculation 5.
Stump Removal on Field A………………..……………….…. 40
Calculation 6.
Putting Field A into Hay Production………..……………....... 41
Calculation 7.
Cinder Pit Development……………………..…………........... 42
Calculation 8.
Logging Field B……………………………..………...……… 42
Calculation 9.
Logging area surrounding Field B…………..……………..…. 42
Calculation 10.
Stump Removal on Field B…………………..……………..… 43
Calculation 11.
Putting Field B into Hay Production ………..………………... 43
Calculation 12.
Estimated Production of Field A……………..…………..…… 43
Calculation 13.
Field A Hay Harvest…………………………..……………… 43
Calculation 14.
Field A Hay Surplus…………………………..………………. 44
Calculation 15.
Five Mile Ranch LLC Hay Savings………..……………….… 44
Calculation 16.
Estimated Production of Fields A & B……..………………… 44
Calculation 17.
Field A & B Harvest Cost…………………..………………… 44
Calculation 18.
Field A & B Hay Surplus……………………..………………. 45
Calculation 19.
Logging Field C……………………..………………...……… 45
Calculation 20.
Stump Removal on Field C………………..…………….……. 45
x
Calculation 21.
Putting Field C into Hay Production……….………………… 45
Calculation 22.
Estimated Production of Field C……………..……….………. 46
Calculation 23.
Field A, B & C Hay Surplus………………..………………… 46
Calculation 24.
Field A, B & C Harvest Cost………...……..………………… 46
Calculation 25.
Estimated Timber Value of Remaining Tracts of Land…..…... 46
Calculation 26.
Summit Reality Consultation…………………………...…..… 47
xi
1
Chapter 1
PROJECT INTENT
The intent of this project is to develop a business and land development plan that
will reduce the cost of current operations, maximize resource utilization, create
additional revenues, positively impact the environment and increase land value. Five
Mile Ranch LLC is an operating entity and currently profitable, however, profitability is
not currently maximized, and the property is undeveloped. Furthermore, Five Mile
Ranch LLC currently has a negative internal rate of return (IRR) over a ten year period
and would require 42 years to payback the investment.
The focus of this project is to determine what courses of action should be taken
to reduce current operating cost in order to increase profitability in livestock sales,
maximize rangeland utilization, and develop alternate revenue sources. The goal is to
reduce operating costs and increase incremental cash flows in order to achieve a positive
rate of return with a payback period equal or less than ten years, the duration of the
business plan, while positively impacting the environment and land value.
The inspiration to reduce operating costs, explore alternate revenue sources and
pursue land development stems from a desire not only to meet financial goals, but also to
develop an asset; that is, enhance its value and earning power while fostering habitat and
sanctuary for fish and wildlife for future generations to enjoy.
2
Chapter 2
EXECUTIVE SUMMARY
Five Mile Ranch LLC is an agricultural business operating on undeveloped land.
The only source of income is horse, mule and cattle sales. Operations are currently
earning a negative 20.02% IRR over a ten year period, and the payback period on the
capital invested in real estate is 42 years.
Three areas on the ranch afford better than average grazing but could be
developed into productive hay fields which would reduce livestock sales operation cost
and create additional revenue. The rangeland is cross-fenced such that proper grazing
management cannot be exercised. An undeveloped rock source which has commercial
value lies on the ranch.. Commercial timber is also available to harvest, and the overforestation of Five Mile Ranch LLC has negative environmental impacts. Five Mile
Ranch LLC needs a comprehensive land development plan that will reduce the operating
cost of the horse, mule and cattle business, provide additional incomes to the ranch and
address the environmental concerns, as well as, increase land value. The objective of this
project is to satisfy the above criteria and illustrate an increase in incremental cash flows
that will result in a positive IRR over a ten year period, reducing the payback period on
initial capital invested in real estate to eight years.
3
Chapter 3
FIVE MILE RANCH HISTORY
Five Mile Ranch LLC is situated in Bly, Oregon. It is approximately 5000 acres
of high desert and mountain terrain ranging from 4300 feet to 4800 feet in elevation. The
ranch consists of three small improved pastures, one dormant cinder pit, and a variety of
ground consisting of a mix of timber and sage brush.
The owners of Five Mile Ranch LLC, David, Kathleen and Michael Mastagni,
have only been the sole property owners since April 2009. Prior to April 2009, David
and Kathleen Mastagni owned a half interest in approximately 4400 acres of Five Mile
Ranch. Seventeen absentee owners owned the other half interest and would not consent
to any improvements or permit any good management practices, such as reducing fire
hazards and working to combat erosion. Their extreme environmental views dictated that
the ranch not be altered. David and Kathleen Mastagni’s partnership with the seventeen
co-owners began in 2003 when they bought out a frustrated previous fifty percent owner
of Five Mile Ranch. His experience with the seventeen co-owners was the same as the
Mastagni’s. The original owners were two partners, Murrary and Mead. Neither of the
men practiced any management and viewed the already distressed Five Mile Ranch as
merely a place to occasionally hunt. Mead sold his fifty percent interest to one person,
and Murray gifted his interest to seventeen relatives. As a result of these transitions in
ownership, Five Mile Ranch was neglected for nearly fifty years.
4
The lack of rangeland management and the practice of over-grazing decimated
feed. The stocking capacity of 5000 acres was reduced to only supporting approximately
fifty cow calf pairs for three months annually. Depletion of the range ground and
pastures adversely affected the deer, elk and antelope populations as it afforded them
little feed. The zero management of timber resulted in a beetle kill, an infestation of
beetles which kills trees and spreads rapidly. In addition to beetle kill, the lack of
forestry management resulted in too many new growth trees which encumbered the
growth of adolescent and old stands, resulting in unhealthy timber and too much
deadfall. According to Tom Collum, Klamath District Biologist of Oregon Department
of Fish and Wildlife (ODF&W), unhealthy timber stands are a fire hazard and also
prohibit the growth of grass and shrubs. The lack of grass and shrubs causes a decline in
stocking capacity and wild game habitat. Grass and shrubs also prevent erosion. When
little vegetation exists, soil runs off with spring snow melt and seasonal precipitation.
Consequently, Five Mile Creek, the creek which the ranch was named after, was overloaded with silt, negatively impacting the fish population.
In 2009 David and Kathleen Mastagni were able to buy out their partners and
broker the sale of an additional 600 acres of the historical Five Mile Ranch which was
owned entirely by the seventeen co-owners. Michael Mastagni purchased the 600 acres.
As a result of that purchase, by April 2009 one family owned the entire 5000 acres that
comprises Five Mile Ranch. In 2010 the ranch was incorporated and is now treated,
operated, and managed as one entity, Five Mile Ranch LLC.
5
Exhibit A
Five Mile Ranch
Shaded Acreage Depicts the Original 50% Acquisition of Five Mile Ranch
Outlined Area Depicts the Additional 600 acres Acquired in 2009
Source: Rhine-Cross Group, 2011, Klamath County, 2010
6
Chapter 4
FIVE MILE RANCH INCORPORATED
In spring of 2009 Five Mile Ranch assumed new ownership and management.
Horse, mule and cattle sales were the only source of income, and after operating costs
and expenses, the sales revenue only netted on average $40,000 annually. Operating
costs and other expenses, including road maintenance, general equipment maintenance,
the salary of employee Colin Supenia, necessary asset acquisitions, tools, supplies, fuel,
as well as, insurance and utilities for two dwellings are factored into the profit margin of
horse, mule and cattle sales and will be excluded from this business plan. Over the
course of the year, the nearly thirteen miles of fence that make up the perimeter were
refurbished to a state of good condition. Additionally, both sides of Five Mile Creek
Road, a public access road that passes through the western side of the ranch were fenced
and a one half mile section of fence was installed between a boundary point and a
natural barrier. The result was an approximate 600 acre piece fenced to the west of Five
Mile Creek Road, and the southern portion of the ranch fenced off between a western
boundary and an eastern rock shelf which constitutes a large plateau.
7
Exhibit B
Five Mile Ranch LLC Existing Internal Fencing
Five Mile Ranch existing fence
Source: Rhine-Cross Group, 2011, Klamath County, 2010
In 2009 the original dwelling was remodeled, and in 2010 a guest house
completed. This area, referred to as the headquarters, was also fenced off because two
paltry farm fields which had been developed in 1903 lay between the infrastructure to
8
the east and the public road to the west. Also, in the northern boundary of this partition
lays the ranch’s rock pit.
In 2008 Five Mile Ranch LLC hired one full time employee, Colin Supenia, as a
mechanic and general ranch hand responsible for assisting with daily operations,
maintaining equipment, maintaining roads and assisting with general ranch projects and
heavy equipment.
Equipped with a fleet of equipment and machinery (see Exhibit C), Five Mile
Ranch LLC is capable of maintaining its roads and undertaking most of the dirt work
required for infrastructure development and operating the horse, mule and cattle
business. However, it is not prepared to complete major farming developments. The
farming equipment is old and inefficient. The tractors have poor fuel economy, and the
implements are small, requiring more passes to cover a specified area. The maintenance
cost of operating with older, substandard equipment is high, and more employees would
be required to operate. With more employees, comes more management duties and
higher workers’ compensation insurance rates. Furthermore, forecasting exact cost is
impossible as fuel consumption rates will vary depending on loads and speed, as well as
the variable price of fuel itself. The level of difficulty associated with developing ground
will vary based on soil composition in a given area. Difficult areas will require more
time to work the ground, increase fuel consumption and wear and tear on equipment.
Therefore, Five Mile Ranch LLC would benefit from hiring third parties to complete
desired developments. By contracting the work to licensed contractors, Five Mile Ranch
LLC will avoid the cost of more employees, workers’ compensation insurance and
9
unforeseen break-downs. Also, by contracting the developments, Five Mile Ranch LLC
will have security in knowing the precise cost of said developments to a specified state.
The refurbishing of perimeter fence significantly reduces the risk of losing
livestock, and the newly constructed internal fence affords some pasture rotations and
rangeland management but is not maximizing the rangeland’s potential utilization. Five
Mile Ranch LLC purchases 300 tons of grass and alfalfa mix hay to winter its horse,
mule and cattle herds. This helps to preserve foliage on rangeland in the fall so that feed
is available in the spring. Feeding through the winter is necessary as snow will cover any
available foliage.
10
Chapter 5
DEVELOPMENT PLAN
Five Mile Ranch LLC – Year One
The first two years of development will be the most costly and most crucial. The
cost will be high because multiple activities will be in progress simultaneously, and the
preliminary developments are crucial because they will help organize and facilitate
subsequent developments.
The existing hay fields are already fenced off; however, the majority of the ranch
is not cross-fenced. The lack of cross-fencing makes proper rangeland management
impossible, as well as, farm land development. Without fencing, overgrazing will occur
on the ranch on the rangeland, and with the presence of livestock, virgin farm fields
would not have the opportunity to grow. Additionally, the smaller, more manageable
areas created by cross-fencing would be convenient to log. While virgin crops are being
established and rangeland grasses are re-growing, loggers could thin timber in what Tom
Collum prescribes as a “good forestry logging practice,” without the liability of livestock
in the area. Good forestry logging practice, according to Collum, “Is opening up the
forest canopy allowing timber, grass and shrubs to grow.” This involves thinning the
commercial timber and removing unhealthy timber and deadfall. A large plateau
surrounded by rim-rock sprawls through the center of the ranch, affording convenient
natural boundaries which minimize fence building while maximizing land use, and an
approximate thirteen miles of cross fence can be constructed by EJ Builders, an
independent contractor, at a cost of $60,732.09 (see Calculation 1). This approximate
11
thirteen miles of strategically placed fence will result in eight divisions of land that are
not necessarily similar in size, but that are similar in resources, excluding the two areas
which will encompass the future farm fields.
Exhibit D
Five Mile Ranch LLC Proposed Cross-Fencing
Existing fence
- - - - - - - - Cross-Fencing
Source: Rhine-Cross Group, 2011, Klamath County, 2010
12
At the same time the fence construction is underway, the original twenty acre
farm field, Farm Field A, which was irrigated with four big gun sprinklers previously,
should be logged about its perimeter to expand the field to sixty acres. According to a
D&D Logging, an estimated 162 MBF are predicted to lie within the forty acres to be
clear cut for a land use conversion (see Exhibit E). Contractor, D&D Logging, will
harvest the timber and clear the future farm field of everything but stumps. The local
mill, Thomas Lumber, will pay $380 per MBF. This value is $14.38 below average
timber prices from 2005 to 2010; however, $380 per MBF is forty dollars above 2010
average (see Calculation 2). D&D Logging will receive $195 per MBF for services
rendered, and Five Mile Ranch LLC will retain $185 per MBF. The approximate 162
MBF to be harvested will yield $29,970 (see Calculation 3).
13
Graph A
Timber Prices, 2005-2010
Source: Dave Swingle, Log Buyer at Thomas Lumber (JELD-WIN),
www.oregon.gov/ODF/STATE_FORESTS/TIMBER_SALES.logpage.shtml, 2011
14
Exhibit F
Five Mile Ranch LLC Location of Farm Field A
Source: Rhine-Cross Group, 2011, Klamath County, 2010
An additional 300 (+/-) MBF lies in the vicinity of the farm field A (see Exhibit
E), but is not easily irrigable and is excluded from Farm Field A. This section will not be
put into production, and therefore does not require stump removal. Approximately one
third of the total volume will be harvested. This is regarded as a good forestry practice as
it will allow old growth trees to grow larger and promote the growth of young trees, as
ample water and nutrients will be available in a less dense forest. Any defective trees
15
with split tops or those infested with beetles will also be removed. This will allow grass
and shrub growth, combat erosion, promote wildlife and stock feed, and reduce silt runoff into the creek. A more open forest canopy will also promote wildlife habitat such as
bitter brush and mahogany. The estimated 100 MBF will also yield an additional
$18,500 profit (see Calculation 4).
Upon completion of logging the perimeter of Farm Field A, stumps must be
excavated in the expanded sixty acre field. John F Richmond Contracting Inc. will be
hired to remove the stumps at an hourly rate. The cost of excavating the stumps will be
$4,257.50 (see Calculation 5).
Once Farm Field A is cleared, it will be planted in orchard grass and alfalfa.
Orchard grass and alfalfa hay are excellent horse, mule, and cattle feed and has a high
retail value should a surplus be available. A custom farming contractor, Knoch Inc. will
be hired to prepare and plant Field A at a fixed cost per acre. Putting sixty acres of
orchard grass and alfalfa into production costs $5,400 (see Calculation 6).
Finally, Farm Field A will require a wheel line to irrigate the crop. A refurbished,
used line from Kerns Irrigation, of Klamath Falls, OR, will cost $12,652.20 (see Exhibit
G).
As sections of the ranch are being fenced, timber harvested, and farm fields
expanded, the cinder pit also needs to be developed. Weathers Crushing Inc., an
independent contractor, will perform the development at his own cost. A royalty of
$0.60 per ton and a 25,000 ton annual minimum will be paid to Five Mile Ranch LLC,
but not until year two of operations.
16
Exhibit H
Five Mile Ranch LLC Location of Cinder Pit
Source: Rhine-Cross Group, 2011, Klamath County, 2010
17
Five Mile Ranch LLC – Year Two
In year one Weathers Crushing Inc. will put a cinder pit into service. The primary
market for cinder is to California and Oregon state and county road departments for
cinder road construction projects and graveling to provide traction on icy roads during
the winter season. Due to the uncertainty of government projects and available funding,
Weathers Crushing Inc. will only commit to producing 25,000 tons of product annually.
The regional industry standard royalty on cinders ranges from $0.60 to $0.80 per ton.
Weathers Crushing Inc. is willing to pay $0.60 per ton which will yield $15,000 annually
at no cost to the ranch (see Calculation 7).
While the independent crusher works, D&D Logging will clear cut Farm Field B.
Farm Field B was previously sixty acres of flood irrigated ground. By clear-cutting the
area, the field will triple in size. Field B’s timber density is similar to Field A’s density,
but approximately three times larger. The estimated timber harvest will yield 729 MBF
(see Exhibit E) equating to $134,865 (see Calculation 8).
18
Exhibit I
Five Mile Ranch LLC Location of Farm Field B
Source: Rhine-Cross Group, 2011, Klamath County, 2010
The surrounding timber ground that is not irrigable contains an additional
estimated 500 MBF (see Exhibit E). According to the previously described timber
management plan, approximately one third of the total volume will be removed. The
estimated 166.66 MBF will yield $30,832.10 (see Calculation 9). Upon completion of
19
logging, this ground will not be put into hay production; therefore, no stumps will be
removed.
After logging the timber surrounding Field B, John F. Richmond Contracting,
Inc. will remove all stumps in the farm field at a cost of $19,147.50 (see Calculation 10).
Clear of all stumps, Field B will encompass 180 tillable acres; Kerns Irrigation will
install a one mile long irrigation pivot at a cost of $289,500 (see Exhibit J). This
irrigated area will only encompass 160 acres of alfalfa and orchard grass even though
180 acres was cleared because a one mile long pivot is the largest available and will only
cover 160 acres. Therefore, Knoch Inc, will only plant 160 acres in orchard grass and
alfalfa at a cost of $14,400 (see Calculation 11). The outer twenty acres of natural, dry
land grasses will benefit from sub-irrigation and run-off.
An independent contractor, Pat Nord Farm & Hay, will harvest the previous
year’s crops from Field A. The yield from Field A will be approximately 360 tons of
grassy alfalfa (see Calculation 12). Pat Nord Farm & Hay charges a per ton rate to
harvest the hay crop. The cost of contract harvesting will be $18,000 (see Calculation
13). According to Pat Nord Farm & Hay electricity costs to operate a wheel line should
be similar to those costs incurred and already accounted for in horse, mule and cattle
operations, as Field A was previously irrigated with four big sprinklers. The wheel line
will irrigate more area than four big gun sprinklers but requires less line pressure. Pat
Nord Farm & Hay therefore predicts similar, potentially lower, electricity costs under
wheel line irrigation. Five Mile Ranch LLC only requires 300 tons of hay to feed
livestock through the winter. Since Field A produced 360 tons of hay, there is a sixty ton
20
surplus. The savings to Five Mile Ranch from producing its own hay source, versus
purchasing hay, is $39,369.00 (see Calculation 15). The 2011 OSU Extension Service,
OR Estimates Ag Commodities reports that, based on a ten year average, retail or horse
quality grass and alfalfa mix hay is valued at $131.23 per ton. Therefore, Farm Field A
produced a surplus of hay valued at $7,873.80 (see Calculation 14). Fence divisions
make restricting livestock to one area possible and affords other sections on Five Mile
Ranch undisturbed growth, creating a surplus of range grass.
Graph B
Average Hay Prices for the Klamath Basin, 2000 to 2010
Source: Oregon State University Extension Service, Oregon Estimates Agricultural Commodities, 2011
Five Mile Ranch LLC – Year Three
21
By year three both Fields A & B will be in full production, cumulatively
producing 1,320 tons of hay annually (see Calculation 16). The cost of Pat Nord Farm &
Hay harvesting the crop will be $66,000 (see Calculation 17). Pat Nord Farm & Hay
predicts similar, possibly lower, electricity costs under pivot irrigation, as pivots are low
pressure systems that use approximately one third the water volume required to flood
irrigate. Therefore, irrigating three times the acreage under a pivot should have similar
electricity pumping cost of flood irrigation. Five Mile Ranch LLC still only needs 300
tons of hay to support their livestock, leaving 1,020 tons of surplus hay from Fields A &
B. The value of 1,020 tons of surplus orchard grass and alfalfa hay is $133,854.60 (see
Calculation 18).
With both Farm Fields A & B in production, logging and clearing of Farm Field
C will commence. Unlike Farm Fields A and B, which are located inside the fenced area
which contains the ranch headquarters, Field C is in the center of Five Mile Creek Ranch
LLC. The prospect of running power to utilize irrigation equipment is not economically
feasible, as the field is four miles from a power source. However, Field C lies in a
natural drainage and will self-irrigate adequately from spring runoff and any
precipitation throughout the year. The field is approximately fifty acres and can be
expanded to approximately 200 acres by clear cutting the surrounding area which is rock
free and comprised of good, fertile soil. The 150 acres to be clear cut by D&D Logging
contain an estimated 607 MBF (see Exhibit E), which should yield $112,295 (see
Calculation 19).
22
The remainder of this tract of land consists of juniper and a large portion of rocky
plateau that sprawls through the center of the ranch. There is no significant timber value
in the balance of acreage that Field C lies in.
Exhibit K
Five Mile Ranch LLC Location of Farm Field C
Source: Rhine-Cross Group, 2011, Klamath County, 2010
John F Richmond Contracting Inc. will remove stumps in Field C at a cost of
$15,941.25 (see Calculation 20). The cost of Knoch Inc. putting orchard grass and alfalfa
23
into production in Field C is $18,000 (see Calculation 21). Planted in grass and alfalfa,
Field C will produce as high of a yield as Fields A & B, but the lack of irrigation will
limit the field to one cutting and one grazing annually. The one annual cutting will yield
600 tons (see Calculation 22).
Production and income generated by the cinder pit will remain constant at
$15,000 annually.
24
Five Mile Ranch LLC – Years Four through Nine
In year four no major land development must occur. Field A and B are already in
production and yielding 1020 tons of surplus hay. Field C will only sustain one cutting
per season because it lacks irrigation. The expected yield is 600 tons, which will result in
a 1620 ton surplus. The value of the surplus hay produced by each field is $173,223.60
(see Calculation 23). The cost of Pat Nord Farm & Hay harvesting all three fields is
$81,000 (see Calculation 24).
The cinder pit is still operating at a minimum of $15,000 annually in royalties,
and all land clearing projects are completed.
Merchantable timber is still prevalent and issues concerning lack of foliage and
erosion and silt in the creek still exist due to over-forestation. The ranch was sectioned
into eight pieces in year one to allow for better pasture management, but these divisions
also lend themselves well to timber management. Each division ranges between 600 and
700 acres. Farm Fields A and B lie in one division, and Field C is a second division. This
leaves six more divisions of timber which need to be thinned in a manner that will
promote timber and grass growth. This thinning will combat erosion and increase
volume of feed available to livestock, as well as, improve wild game habitat and
ultimately improve land value. Each of the remaining six divisions of land is estimated
to have approximately 3000 MBF of timber per acreages (see Exhibit E). According to
good forestry practice, only one third of the timber will be removed, along with any
defective trees and deadfall. Each division should yield approximately $185,000 on an
annual basis until the remaining six tracts have been logged (see Calculation 25).
25
Five Mile Ranch LLC – Year Ten
In years four through nine, Five Mile Ranch LLC will receive income from
farming activities, logging activities and cinder pit royalties. In year ten farming
activities and cinder pit royalties will still produce income; however, logging will
terminate as the entire property will have been logged. It is possible that some logging
may occur in lesser volume in the area containing Fields A & B, as a more open forest
canopy promotes timber growth and the stand will have had nine years growth by year
ten. Growth rates are dependent on seasonal water sheds and temperatures that cannot be
forecasted over a ten year period. The industry standard allows logged timber stands ten
to fifteen years of growth before re-entering an area; therefore, logging in year ten is
assumed to be zero.
26
Chapter 6
ENVIRONMENTAL IMPACTS
Year nine of the development plan will conclude commercial timber thinning.
According to wildlife biologist Tom Collum, it is reasonable to assume that native grass
will regenerate in one to two years and shrub establishment will require five to ten years.
Both grass and shrubs are necessary components to re-establish wildlife populations.
What Collum refers to as “good forestry practice” is thinning the forest so that healthy
adolescent and older growth trees can thrive by opening the forest canopy and allowing
in sunlight. This thinning consists of both merchantable timber and non- merchantable
timber. Any timber with defects or beetle infestation will be removed and dead fall will
be piled. With the forest canopy open and the forest floor groomed, photosynthesis can
occur and nutrients in the soil will be more available to individual trees, grasses, shrubs
and foliage as less competing organisms will be present. In our discussions concerning
wildlife feed and habitat restoration, Collum referenced a photograph from the early
1900s. The photograph is of local woodland, and it depicts a healthy forest with a strong
grass and shrub population. According to Collum, the area captured on film is quite
different today. Very little grass and shrubs are present, as the forest is too dense and
plagued with over-growth trees. Collum attributes this phenomenon to fire control. Prior
to human intervention, fire would naturally cleanse the forest. Modernly, with fire
controlled, people must assume a stewardship role. Industry professionals, such as Dean
Davis of D&D Logging, would call the good forestry logging prescription a stewardship
plan. It is impossible to quantify the rate of game population recovery, but the Oregon
27
Department of Fish and Wildlife asserts that any movement in a positive direction is
progress. Five Mile Ranch LLC is located in Oregon’s Interstate Unit which has
deficient deer populations. Although elk, antelope, and all other species of game are a
concern, deer are a major point of interest to ODF&W. The Interstate Unit has an
estimated 7,000 deer but should have 14,000. Although grass is important, unlike elk and
antelope, deer are more reliant on shrubs. Collum suggestions, if properly implemented,
shrub habitat will regenerate in as little as five years, and grass should re-grow in as little
as one year. According to this schedule, by year ten of the development plan, all three
areas in hay production and the closely logged tracts of land should recover
significantly. By the end of year ten, the entire ranch should have improved grass. The
improved grass is expected within the first one to two years, according to ODF&W
observations, and the cross-fencing will accelerate grass development as the areas being
logged will be secluded from livestock.
A by-product of the rangeland and timber stewardship plan is improved fish
habitat. Fishing on Five Mile Creek is poor and the reason is silt contamination. Michael
Bashkov, a graduate of Humboldt State University holding a Bachelors of Science
degree in Fish Biology, has examined the creek. Five Mile Creek’s water holds steady
around 7 PH, German Brown Trout require a PH of 6-8. The water temperature of Five
Mile Creek does not exceed 78 degrees Fahrenheit, nor does it fall below 33 degrees.
This is the temperature range which German Brown Trout survive. Bashkov also found
an adequate food supply in the depths of Five Mile Creek. The only issue he noted was
silt.
28
The over- forested hill sides surrounding Five Mile Creek do not have enough
grass and shrubs to withstand seasonal runoff and precipitation. As a result, silt runs-off
into the stream. Silt not only buries the German Brown Trout’s gravel spawning habitat,
but also kills eggs. Silt accumulation reduces stream flow by filling in low areas and can
even cause stream flows to deviate over time. By implementing the previously described
stewardship timber thinning plan, erosion will be reduced and fish habitat restored.
29
Chapter 7
LAND VALUE APPRECIATION
Another by-product of implementing this ten year business plan is appreciation
of land value. Bob Bacon, a local real estate agent owns and operates Summit Reality in
Bonanza, Oregon. Bacon sold Five Mile Ranch, so he is very familiar with the ranch.
He also specializes in selling recreational ground, ranches and timber lands. According
to Bacon, the fence construction has little to no positive effect on the re-sale value of
Five Mile Ranch LLC in the current market. However, Bacon feels that the utility the
fencing provides, as well as the improved rangeland, will make the ranch more
marketable and would reduce time on the market should resale of the ranch be pursued.
His feelings in regard to the timber are similar. The business plan includes the removal
of one third of total timber volume which will contribute positively to livestock stocking
rates and fish and game habitat. This too is perceived to be an element of increased
marketability with little or no quantitative dollar amount associated. Due to the fact that
the timber ground is being logged by one third the volume, the timber value associated
with the ranch should not significantly change because the majority of merchantable
timber will still be present upon completion of the ten year plan, and the remaining
timber will be healthier, more correct stands that should physically grow and monetarily
appreciate at a faster rate than previously. Bacon also sites a potential increase in
marketability due to the reduced fire hazard associated with the completed timber
harvest. The only improvements resulting from this business plan that will add value to
the ranch from a monetary perspective is the development of farm ground. According to
30
Bacon, farm ground under wheel line irrigation in the Bly, Oregon area appraises and
sells for $2,500 per acre and farm ground under pivot irrigation appraises and sells for
$2,700 per acre; whereas, irrigated pasture with good drainage is only worth $2,200 per
acre, and irrigated pasture that does not drain well resulting in standing water is only
worth $1,600 per acre. Pasture irrigated by seasonal runoff is valued at $1,000 per acre
and dry land crops that only receive water from seasonal runoff are valued at $1,500.
Bacon also asserts that the fair market value of rangeland in the Bly, Oregon area
appraises and sells for $500 per acre. These values indicate that Five Mile Ranch LLC
will benefit from a 19.02% appreciation in land value which equates to $504,000.
31
Chapter 8
CONCLUSION
The ten year business plan should be executed. Oftentimes, decision- making in
business involves weighing costs and benefit. When benefits exceed costs to a
satisfactory level, the decision to execute the plan is made. Five Mile Ranch LLC is
operating at a negative 20.02% IRR over a ten year period and currently requires 42
years to payback the capitol invested in real estate. This plan will result in a positive
4.19% IRR over a ten year period and payback on the real estate investment capitol in
only eight years. The costs associated with this plan result in the desired benefit. The
IRR is projected to increase 24.21% and the payback period is projected to be 34 years
earlier than it would be under current operations. Furthermore, there are no negative
implications to this plan. No element of compromise exists in executing this plan. A
higher level of efficiency will be met, financial goods will be met, the environment will
be aided and restored, and the land value of Five Mile Ranch LLC will rise. All data and
findings from this business plan suggest that it should be executed.
32
APPENDIX A – Cash Flow Pre-Development
33
APPENDIX B – Cash Flow Post-Development
34
EXHIBIT C – Five Mile Ranch LLC Equipment
35
EXHIBIT E – D&D Logging Cruise Finding
36
EXHIBIT G – Kerns Irrigation Wheel Line Quote
37
EXHIBIT J – Kerns Irrigation Pivot Quote
38
Calculation 1 – Fence Cost
13 miles of 4 strand barb wire fence with 6 ft tall heavy duty T-post on 16 ft intervals.
Rock jacks every 300 ft, consisting of 5 ft tall No Climb wire and 2 T-posts.
Prices according to Heaton Steel on 3/1/11
Heaton Steel & Supply Inc
428 South Spring Street
Klamath Falls, OR 97601
541-882-3426
T-Posts Needed for fence:
13 miles X 5280 ft per mile = 68,640 ft of fence
68,640 ft of fence / 1 T-post every 16 ft = 4,290 T-posts
2 additional posts will be needed to construct a rock jack every 300 ft:
68,640 ft of fence / 1 rock jack every 300 ft = 228.8 rock jacks – rounded up = 229 rock
jacks
2 posts needed per rock jack = 229 rock jacks X 2 = 458 T-posts
Total T-posts needed 4,748
T-post cost $6.07
$6.07 X 4,748 posts = $28,820.36
No climb wire needed to build rock jacks:
4 ft diameter rock jack
Diameter of a circle = πr²
π(2)² = 12.57 ft of No Climb wire to build a 4 ft diameter rock jack
12.57 ft of No Climb wire X 229 rock jacks = 2,878.53 ft of No Climb wire needed
2,878.53 ft of No Climb wire / 100 ft per roll of wire = 28.79 rolls of wire needed
28.79 rolls of wire – round up to 29 rolls of wire needed
29 rolls of No Climb wire X $140.53 per roll = $4,075.37 in No Climb wire
68,640 ft of fence
68,640 ft X 4 individual strands = 274,560 ft of wire
1 roll of wire is 1320 ft
274,560 ft of wire needed / 1320 ft per roll = 208 rolls of wire needed
208 rolls of wire X $79.77 = $16,592.16 for wire
Clips needed to secure wire to T-post:
39
4 clips per T-post
Total T-posts = 4,290
4,290 posts X 4 clips = 17,160 clips needed
1,000 clips per box
17,160 clips needed / 1,000 clips per box = 17.16 boxes – rounded up = 18 boxes
18 boxes of clips X $46.90 per box = $844.20
Total Material Cost:
T-post
$28,820.36
No Climb wire$4,075.37
Wire
$16,592.16
Clips
$844.20
Total
$50,332.09
Labor Cost:
Contract labor by:
EJ Builders
300 Quintara Street
San Francisco, CA 94116
415-724-9103
4 laborers at $10 per hour = $40 hourly for 1 crew
10 hours daily X $40 per hour = $400 per day for 1 crew
1 crew can construct ½ mile of fence daily or 1 mile of fence every 2 days
13 miles of fence will require 26 days of labor
26 days of labor X $400 per day = $10,400
Total fence building cost = $60,732.09
Calculation 2 – Timber Prices
Klamath Falls, OR (Region 5) – Ponderosa Pine Log Prices
Dave Swingle
Production Manager/Log Buyer
JELD-WIN Components Division – Thomas Lumber
Information acquired at:
www.oregon.gov/ODF/STATE_FORESTS/TIMBER_SALES.logpage.shtml
Average timber price from 2010 – 2005 = $394.38 MBF quarterly
40
Average timber price in 2010 is $340
Thomas Lumber will pay $380
Calculation 3 – Logging Field A
Contract Labor by:
D&D Logging
PO Box 293
Bly, OR 97622
541-353-2496
D&D Logging will log Five Mile Ranch LLC according to a prescription which falls
under good logging practice.
D&D Logging cost is $195 per MBF
The seller, Five Mile Ranch LLC, will receive the $185 per MBF directly from Thomas
Lumber
$380 / MBF
- $195 / MBF
$185 / MBF
Paid on merchantable logs by Thomas Lumber
D&D Logging
Five Mile Ranch LLC
162 MBF X $185 per MBF = $29,970
Calculation 4 – Logging in area surrounding Field A
300 MBF is available, only 1/3 is harvested = 100 MBF harvested timber
Contract between D&D Logging, Thomas Mills and Five Mile Ranch LLC states the
ranch receives $185 per MBF
100 MBF X $185 per MBF = $18,500
Calculation 5 – Stump Removal on Field A
Contract Labor by:
John F Richmond Contracting Inc.
PO Box 27
Bly, OR97622
541-891-0745
41
30 logs to one truck load
4.2 MBF to one truck load
4.2 MBF per truck / 30 logs per truck = 0.14 MBF per log
2 logs per tree  0.14 MBF per log X 2 = 0.28 MBF per tree
162 MBF removed / 0.28 MBF per tree = 578.57 – rounded to 579 trees/stumps
A Cat 330 Excavator can excavate and pile 17 stumps per hour
579 stumps / 17 stumps per hr = 34.06 hrs
Richmond Contracting will excavate stumps at $125 per hr
$125 per hr X 34.06 hrs = $4257.50 to remove stumps in Field A
Calculation 6 – Putting Field A into Hay Production
Contract labor by:
Knoch Inc
PO Box 790
Fall River Mills, CA 96028
530-336-5795
$25 per acre to chisel field
$20 per acre to disc field
$15 per acre to roller harrow field
$15 per acre to plant field
Total Field Preparation and Planting Cost = $75 per acre
Seed costs are according to D&D Seed on 3/1/11
D&D Seeds and Farm Equipment Sales, Inc
7343 South 6th Street
Klamath Falls, OR 97603
541-882-7799
Seed Cost – Hallmark Alfalfa @ $0.90 per lb
10 lb per acre X 60 acres = 600 lbs
600 lbs X $0.90 per lb = $540
Seed Cost – Orchard Grass Seed @ $1.20 per lb
5 lb per acre X 60 acres = 300 lbs
300 lbs X $1.20 per lb = $360
42
Total Seed Cost = $900 for 60 acres
$900 / 60 acres = $15 per acre to seed in Orchard Grass and Alfalfa
$75 planting cost + $15 seed cost = $90 per acre to plant Orchard Grass and Alfalfa
Total Cost per acre to put Orchard Grass and Alfalfa into production = $90 per acre X 60
acres = $5,400.
Calculation 7 – Cinder Pit Development
Contract Labor by:
Weathers Crushing Inc
6070 Rock Way
Central Point, OR 97502
541-664-4360
Contract guarantees Five Mile Ranch LLC a minimum production of 25,000 tons of
product annually. Weathers Crushing will pay a royalty rate of $0.60 per ton for every
ton of product harvested.
25,000 tons minimum X $0.60 per ton royalties = $15,000 minimum annually
Calculation 8 – Logging Field B
Contract between D&D Logging, Thomas Mills and Five Mile Ranch LLC states the
ranch receives $185 per MBF
729 MBF harvested X $185 per MBF = $134,865
Calculation 9 – Logging area surrounding Field B
500 MBF is available, only 1/3 is harvested = 166.66 MBF harvested timber
Contract between D&D Logging, Thomas Mills and Five Mile Ranch LLC states the
ranch receives $185 per MBF
166.66 MBF X $185 per MBF = $30,832.10
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Calculation 10 – Stump removal on Field B
Contract Labor by:
John F Richmond Contracting Inc.
According to Calculation 5:
1 tree = 0.28 MBF per tree
729 MBF / 0.28 MBF per tree = 2,603.57 trees removed – round up to 2,604
trees/stumps
2,604 stumps / 17 stumps per hr = 153.18 hrs
153.18 hrs X $125 per hr = $19,147.50 to remove stumps from Field B
Calculation 11 – Putting Field B into Hay Production
Contract labor by:
Knoch Inc
According to Calculation 6:
$90 per acre X 160 acres = $14,400 to put grass and alfalfa into production in Field B
Calculation 12 – Estimated production of Field A
Estimations according to Pat Nord Farm & Hay
60 acres under wheel-line irrigation
2 cuttings at 3 tons per acre  total of 6 tons per acre X 60 acres = 360 tons
Calculation 13 – Farm Field A Hay Harvest
Contract Labor by:
Pat Nord Farm & Hay
PO Box 39
Beatty, OR 97621
541-892-2338
$50 per ton to cut, rake, bale and stack hay in the barn
$50 per ton X 360 tons = $18,000
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Calculation 14 – Field A Hay Surplus
Five Mile Ranch requires 300 tons of hay to feed all livestock through the winter
Field A produced 360 tons of hay
360 tons – 300 tons = 60 ton surplus feed
Figures according to the OSU Extension Service, OR Estimates Ag Commodities
Report, averaging hay prices in the Klamath Basin from 2000 to 2010.
$131.23 per ton for Horse/Retail hay
$131.23 X 60 tons surplus = $7,873.80
Calculation 15 – Five Mile Ranch Hay Savings
According to Calculation 14:
$131.23 X 300 tons = $39,369.00 hay savings
Calculation 16 – Estimated Production of Fields A & B
Field A – 60 acres
Field B – 160 acres
Total acreage to be harvested = 60 + 160 = 220 acres
Estimations according to Pat Nord Farm & Hay
220 acres under irrigation
2 cuttings at 3 tons per acre  total of 6 tons per acre X 220 acres = 1320 tons
Calculation 17 – Harvest Cost of Fields A & B
Contract Labor by:
Pat Nord Farm & Hay
According to Calculation 13:
$50 per ton to harvest hay crop X 1320 tons of hay = $66,000
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Calculation 18 – Fields A & B Hay Surplus
Five Mile Ranch requires 300 tons of hay to feed all livestock through the winter
Fields A & B produced 1320 tons of hay
1320 tons – 300 tons = 1020 ton surplus feed
Figures according to the 2010 USDA Agriculture Commodities Report
ams.usda.gov/mnreports/lsamlgr313.pdf
$131.23 per ton for Horse/Retail hay
$131.23 X 1020 tons surplus = $133,854.60
Calculation 19 – Logging in Field C
Contract between D&D Logging, Thomas Mills and Five Mile Ranch LLC states the
ranch receives $185 per MBF
607 MBF X $185 per MBF = $112,295
Calculation 20 – Stump Removal on Field C
Contract Labor by:
John F Richmond Contracting Inc.
According to Calculation 5:
1 tree = 0.28 MBF per tree
607 MBF / 0.28 MBF per tree = 2,167.86 trees removed – round up to 2,168
trees/stumps
2,168 stumps / 17 stumps per hr = 127.53 hrs
127.53 hrs X $125 per hr = $15,941.25 to remove stumps from Field C
Calculation 21 – Putting Field C into Production
Contract labor by:
Knoch Inc
According to Calculation 6:
46
$90 per acre X 200 acres = $18,000 to put orchard grass and alfalfa into production in
Field C
Calculation 22 – Estimated production of Field C
Estimations according to Pat Nord Farm & Hay
200 acres without irrigations yields one cutting @ 3 ton per acre
200 acres X 3 tons per acre = 600 tons annually
Calculation 23 – Fields A, B & C Hay Surplus
Five Mile Ranch requires 300 tons of hay to feed all livestock through the winter
Fields A, B & C produced 1620 tons of hay
1620 tons – 300 tons = 1320 tons surplus feed
Figures according to the 2010 USDA Agriculture Commodities Report
ams.usda.gov/mnreports/lsamlgr313.pdf
$131.23 per ton for Horse/Retail hay
$131.23 X 1320 tons surplus = $173,223.60
Calculation 24 – Harvest Cost of Fields A, B & C
Contract Labor by:
Pat Nord Farm & Hay
According to Calculation 13:
$50 per ton to harvest hay crop X 1620 tons of hay = $81,000
Calculation 25 – Estimated Timber Values of Remaining Tracts of Land
Estimations according to D&D Logging
3000MBF is available on each tract, only 1/3 is harvested = 1000 MBF harvested timber
Six tracts of land remain for logging
47
$185 per MBF X 1000 MBF per tract = $185,000 per remaining tract of land
Calculation 26 – Summit Reality Consultation
Consultation from;
Summit Reality
PO Box 347
Bonanza, OR 97623
541-545-1510
Five Mile Ranch LLC Unimproved
5,000 acres
– 20 acres
irrigated pasture with good dialogue
– 60 acres
irrigated pasture with poor drainage
– 50 acres
irrigated pasture from seasonal runoff
------------4,920 acres of rangeland
20 acres of irrigated pasture with good drainage X $2,200 per acre = $44,000
60 acres of irrigated pasture with poor drainage X $1,600 per acre = $$96,000
50 acres of irrigated pasture from seasonal runoff X $1,000 per acre = $50,000
4,920 acres of rangeland X $500 per acre = $2,460,000
Total unimproved value $2,650,000
Five Mile Ranch LLC Improved
5,000 acres
– 60 acres
– 160 acres
– 200 acres
under wheel line irrigation
under pivot irrigation
dry land crops dependent on seasonal runoff
--------------4,580 acres of rangeland
60 acres under wheel line irrigation X $2,200 per acre = $132,000
160 acres under pivot irrigation X $2,700 per acre = $432,000
200 acres dry land crops dependent on seasonal runoff X $1,500 = $300,000
48
4,580 acres of rangeland X $500 per acre = $2,290,000
Total improved value $3,154,000
Five Mile Ranch LLC
Total unimproved value $2,650,000
Total improved value $3,154,000
Difference = $504,000
Percent Increase = 19.02%
Note: Five Mile Ranch LLC was purchased for an average of $333 per acre. The
acquisition was under market value because a one half interest was purchased and the
other one half interest later purchased. A half interest is not valued equal to one half of a
whole value.
49
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50
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