“Getting Smart” in Forest Finance

17 10 2012

What opportunities exist for “getting smart” in forest finance?  I field versions of this question regularly from students seeking work in the timberland investment sector and from forestry professionals looking to broaden their skills and offerings to current clients.  To me, the opportunity is to be and remain knowledgeable and strong in at least one of the following areas in addition to forestry.

  1. Understand taxes.  You can make a lot of money and lose a lot of money based on what you know or don’t know about timber taxes.  Taxes matter.  For example, tax laws encourage ownership changes.  Issues associated with tax efficiency facilitated the movement of timberlands to institutional investors, Real Estate Investment Trusts (REITs) or subchapter S Corporations.
  2. Understand financial statements.  They are the language of investors and executives.  At the end of the day, the results of managerial business and capital allocation decisions get translated through audited financial statements which, like haikus and box scores, require interpretation and translation.
  3. Understand ownership structures.  At a minimum, be able to explain a C-corporation vs. a REIT vs. the range of other single-tax entities (LLC, S-corporation…)
  4. Understand true risks (and accounting for them).  Timberland investment and forestry novices ask first about fire, bugs, disease and hurricanes. Forest investment professionals can help them put these into perspective and understand more about markets. Part of getting comfortable with timberland risk results from being familiar with available information on physical, operational, financial, and regulatory risks.  The long investment horizons associated with forestry investments increase the interest in understanding the frequency and severity of potential risks.  Forest analysts should be prepared to think about and answer “how should we think about timberland risks?”
  5. Understand markets and forestry data.  Know current prices and industry trends.  Wood prices provide a key signal in understanding the economics of a given wood basket today and historically in an easily communicated form.  Be familiar with indices and data sources such as NCREIF, the FTR Index, and the US Forest Service.  Remember, all forestry data is a sample…..
  6. Understand how to communicate with a range of individuals.  In person and in writing.  I wrote a book – Loving Trees is Not Enough – and speak on this topic because my mentors, starting with my parents, have long emphasized its central importance to success.  Forestry and investment analysts communicate with a broad range of groups and individuals, including researchers, clients, private consultants, executives, our bosses and colleagues. Our analysis has little value if it cannot be easily communicated, either by us or by others, as part of a presentation or in writing. We owe it to them to be able to explain our findings, our assumptions, how we came to these conclusions, and how they could help or affect them.

Click here to learn about and register for “Applied Forest Finance” on February 7th in Atlanta, Georgia.

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