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
No. 1
100
No. 2
No. 3
50
-50
Year
02
99
96
93
90
87
84
81
78
75
72
69
66
63
60
0
57
$/MBF
Prime
How can a log have a negative
conversion return?
Logging and Hauling Cost for Avg. Haul Distance of 53 miles
250
150
100
50
Year
2
99
96
93
90
87
84
81
78
75
72
69
66
63
60
0
57
miles
200
Black Cherry Stumpage by Conversion Return Method
1400
1200
1000
Prime
No. 1
600
No. 2
No. 3
400
200
-200
Year
02
99
96
93
90
87
84
81
78
75
72
69
66
63
60
0
57
$/MBF
800
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
$/A
$1,200
Land value
$1,000
Liquidation value
Holding value
$800
$600
$400
$200
$0
0
5
10
15
Year
20
25
30
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
period, yr.
3
6
9
12
15
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 mostlikely 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”
1-(1+r) -(t-y)
Ht + Lt
+ (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