Forests worth more than 'Fair Market'

Paul D. Spllers, President
Louisiana Forestry Association
Special to The Journal

Timberland owners frequently ask, “What’s my land worth?” The question usually leads to a discussion of “fair market value,” and the hiring of a professional consulting forester/appraiser to render an opinion of your forest’s fair market value. But, is “fair market value” the full worth of your forest?

The “mother of all definitions” of fair market value is set forth in a 1959 ruling of the Internal Revenue Service. “The price at which the property would change hands between a willing buyer and a willing seller, when the former is not under any compulsion to buy, and the latter is nor under any compulsion to sell, both parties having reasonable knowledge of the relevant facts.”

The definition is mandatory for all appraisals for federal tax purposes. (Rev. Rul.50-60, 1959- 1C.B. 237). This definition, or some variant, is also used in private business valuations and by the Courts. This standard definition has received general acceptance in the business and tax communities. Fair market value is certainly a good indicator of what the property is worth in the market. Although fair market value is the standard for valuing land and timber, it may not measure the full value of your forest. The definition of fair market value fails to take into account a multitude of factors, called “environmental services,” that may contribute a great deal of worth to your forest.

• Environmental Services

Fourteen million acres of diverse Louisiana forestland provide a wide variety of environmental services from air and water purification to flood control and even health care. These are public services. These public services have no easily observable market value. There is no technology to package and sell the clean air generated by your forest, unlike the trees growing on your land. Thus, these public services are not included in any discussion of the “fair market value” of a forest. Their public services simply are not measured by the market. Therefore, the value of forestland may be undervalued if we focus only on “fair market value.” A more realistic estimate of a forest’s full worth includes a contribution for environmental services.

• Water

A few interesting facts about water include:
1. A person can survive without food for over a month, but less than a week without water.
2. About 97 percent of the water on earth is unpotable sea water.
3. Ground water makes up about 95% of the fresh water in the United States.
4. Although water is the most common substance found on earth, only a tiny fraction (2%) is potable. A forest acts as a giant “sponge.” Forests absorb rainwater into groundwater during the wet season, and then gradually release the groundwater during the rainy season.

Underground aquifers, such as the Sparta Aquifer, are recharged by our forested landscape. Our forests contribute clean water for drinking, fishing, boating, and numerous commercial purposes. Forests minimize flooding during the wet season, and during our increasingly frequent 500-year storms.

During the dry season, the forest gradually releases a flow of groundwater to minimize the effects of drought. Nature works 24/7 to regulate the flow of groundwater, without taxpayer cost and without intervention of man. Nature provides these services. But does that mean clean water has no net worth?

• Air

A constant source of clean air is essential to life. Forests provide clean air. Trees cleanse polluted air by removing harmful greenhouse gases. During photsynthesis, trees intake harmful carbon dioxide and convert it to life sustaining oxygen, clean water, and energy. Photosynthesis works during daylight hours, without the intervention of man and without the expenditure of any funds. Nature provides this essential service without taxpayer cost. But does that mean clean air has no worth? Or is it priceless?

• Carbon Sequestrartion

Carbon in the atmosphere is generally recognized as a very harmful greenhouse gas that contributes to global warming. Trees remove harmful carbon dioxide from the air we breathe and then store (sequester) the carbon in the tree’s woody plant material (biomass).

The carbon remains sequestered and harmless, if the tree is cut and converted to lumber or other forest products. Tree growth is responsible for carbon sequestration. Sequestration results in the scrubbing of carbon from our atmosphere. This cleansing continues 24/7 without the intervention of man and without taxpayer cost. But does that mean carbon sequestration has no worth?

• Academic Studies

The U.S. Forest Service and several highly respected universities have expended considerable effort and resources in an attempt to measure the value of Southern forests’ environmental services.

(Trees at Work: Economic Accounting for Forest Ecosystem Services in the U.S. South; Erin O. Sills, et al, Nov. 2017)
The Research efforts were conducted by prestigious universities such as Yale, University of Florida, University of Georgia, and Texas A&M. The research efforts were not coordinated, and thus different research criteria led to different valuation results. However, the range of the annual values of the environmental services generated by an average acre of southern forestland varied from a low of $151 per acre per year in Florida to a high of $1,700 per acre in Georgia. The research results are summarized below:

There are no similar studies in Louisiana. However, if we use a conservative value one at the low end of the annual value range, then the environmental services add over $3,000 to the value of an acre of forestland. An annual benefit of $151 per acre, capitalized at a 5% interest rate, equals $3,020. The 14 million Louisiana forested acres add $2.1 billion of environmental worth annually to our state.

• Conclusions

1. Forest land has worth far greater than its “fair market value.”
2. Forest land provides public environmental services for which there is no established or easily determinable market price.
3. Forest land provides public services for which the private landowner is not compensated.
4. Private forest landowners make an annual transfer gift to the public equal to the annual value of the environmental services. The annual value has been estimated to be between $150 per acre per year and $1,709 per acre per year. Louisiana forest landowners transfer a conservative $2.1 billion annual environmental benefit to our fellow citizens.
5. Fairness and equity suggests that forest landowners be compensated/rewarded for the value their forests contribute to the public good.
6. An alternative to the payment of compensation is to exempt forest land and forest products from taxation, including income and ad valorem taxes.
7. Our entire forest industry (landowners, loggers, and mills) can take great pride in our environmental record. We leave the world a little “greener” each day,