Marketing Timberland – The Dilemma

If you have ever been involved in the marketing of timberland with mature timber on the property, you have probably faced the dilemma of deciding if you would be better off to cut the timber and then sell, or sell with the value of the timber built in. The solution to this dilemma will vary by property, location, species of timber, timing, goals, your tax situation, and many other variables. For example, in a market that shows strong recreational value in timberland properties, you are usually better off selling the property with the trees still standing up. However, this is not always true. It might be that the stand is so thick that one cannot easily navigate through it, and the recreational component of the property would benefit from a thinning. Lots of variables and several options could leave your head spinning and ultimately lead to inaction or a bad decision. It’s fair to say that this is a problem where two heads are better than one. Maybe three or four. I would suggest you and your agent work together on this decision. If the tract is large enough to warrant the expense, the services of a consulting forester will be extremely helpful in this process. You may also need the help of your accountant to help you sort out the tax consequences of your decisions.

Below, I will discuss some of the things you need to know in order to make the best choice financially, and then show you a mathematical approach to this decision.

1. What are your options for timber harvest? Treatments available might include: Clear-cut, thinning, partial-cut, or no-cut.
2. What is your financial timing? Timber harvest can bring in quick cash, but will probably delay final liquidation of the asset. Not cutting the property allows you immediate access to the real estate market, but sure does not guarantee a sale within a given time period.
3. What is the value of the timber that you will realize if you clear-cut, partial-cut or thin the timber? How much you thin the stand can have a big effect on this number. Any fees you will have to pay as a result of your decision to harvest the timber should be subtracted from your projected gross sales before application of the formula below.
4. If you cut any timber, how much will it cost you to make the property marketable again? Road repair, disposing of forest waste (limb piles), replanting, burning…etc. Many times the timber contract you negotiate can make the timber buyer responsible for these costs.
5. What is the tax liability incurred from the sale of the timber? This publication from Purdue Extension might be helpful in helping you calculate your taxable income from the sale.
6. What is your projected market value of the property after the elected treatment? What is your projected value of the property with no treatment (no-cut)? This is where an experienced agent will be helpful to you.
7. What is your projected tax liabilities for the sale of the property with and without the treatments? You might find this link on the IRS website helpful in determining this.

If you have decided that your financial timing could include timber harvest, below is a formula to help you break it down to a mathematical decision. You might need to run this calculation for any acceptable cutting treatment and then compare the results.

Projected Value of the property if you do not cut it
—
Projected taxes resulting from the sale of the asset at the projected value for not cutting
(If you are experiencing a loss on your investment at the projected market value, plug in the projected tax write-off here as a negative number)
—
Projected Value of the property after the elected treatment
+
Projected taxes resulting from the sale of the asset at the projected value after the elected treatment
(If you are experiencing a loss on your investment at the projected market value, plug in the projected tax write-off here as a negative number)
—
Projected net Income from timber sales
+
Cost to make the property marketable again
+
Taxes incurred from the sale of the timber
=
Positive Answer = Don’t Cut; Negative Answer = Cut
(A positive answer means that you are better off not applying the treatment in comparison to not cutting at all. A negative answer means that you are better off to apply the treatment in comparison to not cutting at all.)

Again, there are many variables that you have to account for along each step of the way. I hope this helps you to break down the process into a series of smaller, more logical decisions that add up to a better financial decision for you. This process is purely financial. Many other factors may play a role in your decision. Remember, lean on your agent for market advice that is specific to your property, a good forester for timber advice, and your accountant to help you understand your particular financial situation.