Part I
Conservation Investment Banking
1
Partnering with Big Timber
The record clearly shows that conservation canât succeed by charity alone. It
has a fighting chance, however, with well designed appeals to self interest.
The challenge now is to change the rules of the game so as to produce new in-
centives for environmental protection, geared to both societyâs long-term well-
being and individualâs self-interest.
âGretchen Daily and Katherine Ellison, The New Economy of Nature
When rumors of a gigantic sell-off of forestlands by International Paper (IP) reached the state capital in Concord, New Hampshire, it set off alarm bells in Governor Jean Shaheenâs office. At nearly 4 percent of the entire state, such a land sale was bound to get attention, and New Hampshireâs fragile North Country economy was already suffering. Months before, the paper mill complex in Berlin and Gorham had filed for bankruptcy and was shuttered. For the first time in a hundred years paper machines stood idle, putting one thousand mill and forest workers out of jobs and undermining the local economy. The timing of a sell-off could not have been worse.
Working quickly, the governor and the stateâs powerful senior U.S. senator, Judd Gregg, arranged for high-level meetings at IPâs Stanford, Connecticut, offices. Still a major land and mill owner in the Northeast, IP recognized that the political fallout of not working with the state would be significant so they gave their grudging agreement to a few monthsâ stay. A consortium of conservation groups, led by the Trust for Public Land (TPL), was designated by the state to lead the negotiations.
Figure 1.1
IPâs Connecticut Headwaters Property, New Hampshire.
At a property valuation of over $30 million, no conservation group had nearly enough money to buy the land alone, and certainly the state, embroiled in an intense debate over education funding, was in no position to front the money. Whatâs more, the communities in the region were wary of conservation groups that might undermine the already suffering forest economy by reducing forest productivity or reversing the long history of public use for snowmobiling and hunting.
What could have been a protracted conflict over the future of the property, however, evolved into a remarkable partnership that met both the needs of the local community for a solution honoring the long tradition of a forest-based economy, and the interests of the conservationists in protecting the propertyâs biodiversity values. The key partners in this effort were a private investment group managed by Lyme Timber Company; the Society for the Protection of New Hampshire Forests, a savvy and capable statewide conservation group; The Nature Conservancy (TNC) with its focus on reserves and biodiversity; and the TPL, with its long experience in developing recreation access and insuring sustainable management of working landscapes.
TPL proved a good choice for managing the exhausting negotiations. Working with the community was at the heart of the challenge in northern New Hampshire. For the past decade the TPL under the leadership of Will Rogers has been shifting its focus from âdoing dealsâ to embracing land conservation as a way to strengthen and heal divided communities. As Rogers observed, âWe need to realize that the work is not about conserving places. It is about conserving people and our fellow species in the web of life. It is about helping people find a different way to live.â1
Community members were conflicted. On one hand, they desperately wished the whole thing would go awayâthey had become comfortable with the status quo and feared that all of this outside interest would cause them to lose control over their livelihoods. On the other hand, they recognized that change was inevitable and the communities had a golden opportunity to shape their future. TPLâs capable north country manager David Houghton and a bright, articulate forester, Charlie Levesque, hired on as the local project manager, lived and breathed this project for nearly a year, developing a relationship of trust with all of the parties. This investment in understanding the community went a long way in keeping the political coalition together that ultimately resulted in a multimillion dollar legislative appropriation and $12 million in forest legacy funding.
When the deal closed in March 2003, Lyme had put up $12 million in private capital to purchase one hundred and forty-two thousand acres of working forest; TPL had secured a working forest easement over the property, at a cost of about $15 million; and TNC had purchased twenty-five thousand acres as a wildlife management area for over $5 million for later transfer to the State with TNC retaining a conservation easement. The needs of the stakeholders for a sustainable solution that incorporated conservation shaped the transaction, and each of the partners benefited from the wholesale price negotiated with IP. But above all, the private capital investment by Lyme made the economics of the deal work.
Engineering the financial components of the deal proved challenging for TPL, the partnershipâs leader. Because of IPâs timeline, the forest easement could not be negotiated before the deal needed to close. At that point Houghton convinced Lyme to provide its money upfront as a loan, with an agreement that the fee purchase price would be adjusted up or down once the final easement was appraised. This proved beneficial because it took nearly two full years for the details of the easement to be negotiated and for a final transfer of the easement-encumbered land to Lyme. This saved TPL the cost of commercial borrowing, and bought time in what otherwise would have been a nearly impossible schedule to meet. For its part, Lyme had the comfort of knowing its inventory of trees was growing and that it would receive forest harvest revenues during the loan period.
The Connecticut headwaters transaction is not an isolated example of working with private capital. Opportunities for conservationists to create these partnerships are significant and growing. An unprecedented sea change in corporate ownership of working forests has resulted in millions of acres of land that have suddenly become available for purchase. In some states, the challenge has been extreme. In dozens of huge transactions in Maine, over 35 percent of the entire state has changed hands in the last five years. This crisis of opportunity has been the crucible in which many interesting new conservation agreements with private capital have been forged. The strain on the resources of conservation groups and government has made working with private capital an imperative, not an option.
Figure 1.2
Connecticut Headwaters: Unbundling the land rights.
Since the early 1990s another reality has emerged. Over $20 billion has been invested in timber investment and management organizations (TIMOs) and real estate investment trusts (REITs). In 2003 alone, these new alliances invested $4 billion, largely from pension funds and endowments, to purchase 5.2 million acres of timberland in the United States.2 The creation of these investment vehicles is a fascinating bit of financial history. Until the 1980s integrated paper and pulp companies owned most of the large commercial forest estates in this country. The land was viewed as essential to the supply of fiber to their nearby mills. A few major companies began to realize that they had a huge asset in their timberlands, yet they were being managed by mills interested only in reducing the costs of operating the forest holdings, not in increasing their profitability. IP and Georgia Pacific were among the first to set up their forestland holdings as separate business ventures and to expect both the mills and the forests to make a profit.
Two significant trends emerged with this seemingly subtle change in management strategy. First, forest managers could no longer look to the mills for investment cashâthey had to manage the forests to make money. Quietly, some began to sell off nonstrategic assets that were too far from markets or unproductive as tree-growing land. And, of course, selling land, especially lakeside property, to developers also generated profits without cutting significantly into the harvestable wood supply.
Secondly, mill managers, freed of buying fiber from themselves, began to find that in a global marketplace, pulp from overseas and fiber from other landowners were often cheaper. Senior managers at the major forest products companies began to question openly whether maintaining their own fiber supply made any sense. Why not buy fiber or pulp from the cheapest source and thereby increase company profitability and shareholder value?
When Hancock Life Insurance Company put together the last piece of the puzzle, the ownership transition began in earnest. The insurance company formed Hancock Timber Resources, thus putting its financial stamp of approval on a new way of owning timberlandsâlimited partnerships. The genius behind this idea was the recognition that the traditional paper companies pay high taxes ...