Strategies for Conserving Private Working Forests Charles H. Collins The Forestland Group, LLC Cambridge, MA/Chapel Hill, NC

Timberland Market Trends High volume of deals- driven by industry dispositions. Growth of Institutional Investors (TIMOs) and other new participants Significant pressure from rural/recreational real estate buyers Supply of timberlands: Has been steady; pace expected to continue in the near future Pricing of timberland expected to increase relative to timber pricing

US Large Tract Acres Traded and TFG Acres Purchased 1997 - 2004 * *Estimates, year to date.

Timberland Price Indicators 1997 - 2004

The TIMO Phenomenon TIMO’s: Established in the early 1980’s Trend: Sale of timberland to TIMO’s by forest products companies Today: There are about 20 TIMO’s with about 13 million acres of U.S. timberland Today: At least six TIMO’s have more than one million acres New Trend: Private equity firms are buying timberland & mills from forest products companies

Trend toward Timberland Disposition by Forest Products Companies Majority of Disposed Land: Acquired by TIMO’s and REIT’s Some Immediately Acquired by “Traders”: Often parcelized and retailed into the marketplace TIMO’s and REIT’s: Some participate in retail land marketplace. Question: What is ultimate disposition of TIMOs’ timberlands? Potential Outcome: Increased fragmentation of timberlands and reduction in some forest ecosystem services One Market Response: Purchase of conservation easements on some timberland

The Forestland Group, LLC (TFG) TIMO formed in 1995 Focus on naturally regenerating hardwoods, with some softwood forests Five funds closed to date—Heartwood Forestland Fund V, L.P. launched in 2005 Over 1.5 million acres acquired across 14 states in the first four funds—largest and most diversified hardwood portfolio in the nation Investment fiduciary with long-term objective of achieving competitive returns while managing properties using sustainable forestry principles

Conservation Easements TFG Track Record TFG has consummated working forest conservation easements in four states: -Michigan: 250,000 acres (150,000 acres closed) -New York (110,000 acres) -Maryland (22,000 acres) -Delaware (over 1,000 acres)

Michigan UP Easement Key Elements Participants: State of Michigan, TNC and TFG Combination: Sale of fee acreage and easement Fee: 23,000 acres; Easement: 250,000 acres Working Forest Conservation Easement: FSC Certification or Prescriptive Guidelines Subdivision Restrictions: 25 No Development Units (NDUs) over 222,500 acres; 40 Restricted Development Parcels (RDPs) over 27,500 acres w/ 4,500 acres in Privacy Zones; RDP’s reduced easement price. Public Access: Permanently provided on majority of land.

Perspectives on Easements Preferred Scenario: Monetization of conservation attributes as an alternative to a higher-and-best use (HBU) sale; working forest conservation easement allows for forest management Preferred Approach: Customization of features over national standards Preferred Forest Management Guidelines: Certification or flexible guidelines rather than rigid standards Preferred Monitoring Benchmarks: Adopt simple behavioral guidelines rather than “fuzzy” outcomes-based contractual features Desirable Partner Characteristics: Professionalism, pragmatism, local knowledge, transparent objectives

Pricing of Easements Owners need to be compensated for the loss of options: -Option to sub-divide -Option to develop -Option to prescribe silvicultural practices at one’s discretion -Option to lease exclusive recreational rights

Conservation Easements Ecosystem Service Credits Evolution: Toward increased separation, trading, and pricing of property right attributes Ecosystem Services Examples: Carbon sequestration, wetlands mitigation, and water quality Distinguish: Current markets for ecosystem services vs. perpetual rights

Observations on Structuring Land Deals Movement toward the “stripping” of property rights for compensation—timber-cutting rights, recreational rights, ecosystem services (?) Careful due diligence needed regarding potential conservation attributes Communications and Partnerships needed among Timberland investors, public agencies, conservation groups

Conclusions: Monetizing Conservation Attributes Strategic Consideration for Investors: Strip property of some layers of rights and concentrate capital allocation on “pure timber” play Remember: Even “out-of-the-money” options have value when time remains—property rights are perpetual! Financing Easements--Bridging the Monetization of Conservation Attributes: TIMO’s represent a likely source for short- and intermediate-term risk capital Financing Easements—”Joint Capital” for Purchasing Timberland and Conservation Attributes: Wealthy conservation-minded individuals and selective foundations