A forest land trust is an effort to solve several problems relating to forest land owned by private land owners. These problems include:
- Lack of financial incentives to improve forest stands through sound selective thinning and multiple use methods especially for small landowners.
- No planning or short term planning (1-5 years) rather than long term planning for optimum forestry utilization.
- Low employment of foresters, loggers, etc.
- General poor use of the forests as a renewable resource.
Generally, a forest land trust attempts to overcome these problems by pooling the forest holdings of private land owners and exploiting certain income tax advantages rather than exploiting the forests.
At least two methods could be utilized in forming a forest land trust.
One of these is to establish a corporation (non-profit or for profit) owned by all the landowners who want to be involved in a given region. The region should not be larger than one which a forester can handle from his home within reasonable driving distance. The tracts of forestland however do not need to be contiguous nor equal in size. Perhaps a limit of twenty to thirty landowners would be the best number, and a total of five to ten thousand acres (or whatever is reasonable for a forester to manage). If more landowners want to be involved, a second forest land trust could be established and so on.
Under Securities and Exchange Commission (SEC) law, up to 35 shareholders are permitted in a corporation (or a limited partnership) without registration. Beyond that number the corporation (or limited partnership) is required to register, the cost of which could be as high as $50,000.
Under this method, the corporation would lease the forest land on a long term basis from each forest land owner. The lease fee paid to the landowners would be equal to the income of the corporation so that the corporation would not show a profit.
A second method would be to establish a limited partnership, in which the limited partners would be the landowners and their share of the partnership equal to the value of the forests (not the land). Under this method a general partner could be a local nonprofit corporation which would be the management arm of the partnership and receive a fee for its management.
Whichever method or corporate structure would be employed, the following procedures would be involved:
- A professional forester would be hired (by the corporation or forest land trust limited partnership) on a salaried basis to manage each separately owned tract and to work out a long-range forestry plan with each landowner.
- Each land owner would be requested to either put the forest tract into a conservation easement or to sign a long term lease agreement in order to insure long range planning of the forests.
Financial Advantages of the Plan
For those landowners in a position to take advantages of income tax deductions, the most important tax advantage would be the conservation easement. In most cases this will amount to one half of the going market value on each acre of land (for example; if market value is $400 per acre and use value $200, a deduction of $200 per acre is legitimate). However, a conservation easement must be “given” to a specific non-profit organization (or governmental entity such as a town). Therefore, a cooperating organization with a conservation purpose and 501(c)(3) charitable status under IRS is necessary. In this region this organization could be the Ozark Area Regional Land Trust now forming. (See below on conservation easements for details.)
Other income tax advantages for those able to utilize them would be deductions of all expenses or costs associated with the development of logging roads, bridges, equipment, etc. In addition, income from a stand of marketable logs can sometimes increase a single landowner’s income in one year above the usual tax bracket, and result in a large tax bite. This would not happen in a forest land trust because yearly income would be fairly constant— low but not suddenly large because the income would be spread between all land owner members.
Note: A key factor in establishing the relative income to each landowner is the use of a formula for determining the value of each landowner’s forest holdings. This formula, which has been worked out by foresters working with the Society for the Protection of New Hampshire Forests, is not based on land value but entirely on the value of the forests themselves, or their potential. It is obviously not simple, because it must take into account different qualities of not only mature stands but also immature stands and their future value. Different foresters may have slightly different views on this formula, but the key point is that the same formula is applied to all stand s and if it seems to favor one type of stand today, future changes in prices might favor a different stand. In any case it is as equitable as possible.
Each landowner will not only have a different number of acres in the pool, but also a different value applied to different acres within his/her total acreage. But a total dollar value will be established for his/her input into the corporation or limited partnership and he/she will receive a proportionate percentage of the total shares in the company— as in any stock company. Thus, if total outstanding shares equal $500,000 and one landowner holds $100,000 of value as determined by the forester(s) he/she holds 20% of the total outstanding stock and will receive 20% of net income.
Perhaps most important is the fact that because of the larger scale operations and because of intensive management, several aspects of forestry practice can be optimized. These include:
- Use of selective thinning by-products (that is, develop a market for the so called “junk” trees);
- Better marketing as a whole; and
- Consistent upgrading of the quality of the forest stands.
In order to maximize the energy potential from waste wood and all wastes in the area including sawdust and shavings from local mills, it will be necessary to connect this waste through the use of new technology. Here is where a pyrolytic converter might be utilized to turn waste wood into energy in the form of methane, charcoal, or electricity. The major advantage of the pyrolytic converter is its efficiency (about 85% as opposed to wood stove at between 40-60%) in energy conversion. Thus, by converting the methane and charcoal to electricity at competitive rates, a market for waste wood products is immediately available.
A separate company or corporation might be set up to produce electricity from waste wood — or the same corporation, or limited partnership, which composes the forest land trust could be utilized in developing an energy producing company.
Practical Steps for Organizing a Forest Land Trust in the Ozarks
It seems clear to me that most of the elements needed for establishing a forest land trust exist in the area. One of the principle assets here is the fact that Ella McDonald who is committed to the concepts, holds significant forest holdings which could become the core of the forest land trust with other smaller land holders able to join and enlarge the total acreage beyond the 5,000 or more acres needed for the first forest land trust.
Further, through the Ozark Area Community Congress network, many potential members of a forest land trust can be reached and where confidence in the concept will be generated. It would seem a logical program for the forestry committee of OACC to promote, encourage, and provide technical assistance to establish.
Steps in Organization:
- A first step would be for the Forestry Committee of OACC to call a meeting of interested landowners, and others with practical skills such as foresters, loggers, perhaps lawyers, and outline the concept and plan.
- A second step would be to offer the landowners an opportunity to obtain an evaluation of their forest stands by a professional forester at a low cost. (This plan was adopted in southern New Hampshire where the Society for the Protection of New Hampshire Forests sponsored the development of a Forest Land Trust). The usual per acre cost of such data may run $5 or more and is necessary in any case as the base for a forestry plan. But in New Hampshire a forester agreed to do it for $2.50 or $3 per acre. At this point no commitment to join the Forest Land Trust would be required of the landowners, but the data collected would be the necessary first step towards establishing the Forest Land TrustNote: Because of the number of acres involved, landowners would be in a position to take advantage of a bargain price per acre for accumulating data which will be of permanent value to them whether or not they join the Forest Land Trust later. The forester may set a higher price per acre for the small tracts rather than the larger ones. I would suggest, however, that the organizers place either the same price per acre on all tracts, or a slightly higher price on the large tracts and a lower price on the small tracts. Thus the more wealthy landowners can encourage the poorer landowners to join them.
- Establishing the corporation to manage the Forest Land Trust. An existing corporation such as New Life Farm, or the newly forming Ozark Area Regional Land Trust, could be utilized to manage the Forest Land Trust, or a whole new corporation established. Such a determination would be both political (desires of boards of those organizations and perception by land owners of the organization’s capability of keeping both ecological interests and the interests of the land owners in mind) and legal (whether a separate for profit, or non-profit corporation, or limited partnership would be the best vehicle). Note: I favor the limited partnership for its tax advantages to land owners, but see the corporate form as workable.
- Conservation easements would be written up following Section 170 h of the IRS tax laws for all land owners’ forest holdings. The development rights would then be “given” to a tax-exempt organization, the landowners retaining the fee simple title to the land. The tax-exempt organization could be the newly forming Ozark Area Regional Land Trust whose purposes would allow such a receipt of development rights. In the case that such a gift of development rights on a large piece of land from one donor would be too substantial for such a small organization (relatively speaking) — the gift of development rights might first go to a national conservation organization such as the Nature Conservancy or the Audubon Society. These organizations act in such a capacity frequently and are established to do so. They would then turn over the role of periodic inspection of the land to a local group like the Ozark Area Regional Land Trust, and in fact would probably not accept a gift of development rights without the presence of a local conservation trust (such as the Ozark Area Regional Land Trust) to do the monitoring.In case a land owner does not wish to give away the development rights on a piece of forest land, the Forest Land Trust company could write a long term (30 year minimum) contract with the land owner wherein the land owner would guarantee that the forest would stay under trust management for the designated period and would not be developed for other purposes. Such a contract would have to be binding in the event of a sale of the land.
- A forester appointed, probably the same forester who did the original data collection since he/she would be familiar to all the landowners at this point. Final plans for managing the forests drawn up with approval of each landowner. Plans could include participation of the land owner in the forest work, the setting aside of a particular section which would be untouched, the establishment of walking trails, etc.
- Legal papers for the limited partnership or corporation, drawn up and signed by all participating.
Conservation Easements: What they are and IRS requirements
A conservation easement is a gift of “development rights” (like mineral rights, water rights, or other rights). “Development rights” can be separated from the “bundle of rights” which lawyers refer to as composing the fee simple title. While this concept is a relatively new legal concept, it is now being used widely by conservation organizations and states which can and do in some cases, purchase the “development rights” from farmers as a means of protecting farm land. The value of the development rights on land is determined by subtracting the use value from the market value. Thus, if the market value, as determined by appraisers is valued at $1,000 per acre for a given tract of land, and the use value as forestland is $200, the development right value is $800. A land owner who makes a gift of the development right (as in a conservation easement) is then eligible to deduct from her income tax amount equal to whatever her tax bracket permits, using the $800 as the base.
From a legal point of view Congress has recently revised the IRS tax code under section 170 h to require that to be eligible for the deduction the conservation easement documents must provide for some public benefit such as: public access, scenic value, watershed protection, wildlife protection, etc. A sample copy of such an easement is attached.
As far as the non-profit, tax exempt organization is concerned (an organization such as the newly forming Ozark Area Land Trust), once it has accepted the gift of a conservation easement, its only role is to “monitor” the land, which means being sure that nothing is done by the land owner which is contrary to the easement agreement. In the case of a Forest Land Trust, such monitoring is virtually automatic for the 501(c)(3) organization because the purpose of the Forest Land Trust is to ensure proper care of the forests. It may well be that it is the tax-exempt organization itself that sets up the Forest Land Trust, so that the monitoring and management are both “in house”.