Forest estate owners or managers often separately engage the services of land and forest valuers to assist in the provision of an independent fair value opinion of their plantation estate (land plus trees). Inconveniently, land and tree crop values are not simply additive. Forest valuation standards place the responsibility to provide an aggregate estate value opinion with the forest valuer. In the absence of clear land value definitions and land valuation processes, the valuation process for the forest estate as a whole may become frustrated, at worst risking a misstatement of fair market value.
Land valuers rely on sales comparison evidence in developing an opinion of the fair market value of land. The mix of transaction evidence in the sales comparison basket is an important consideration. The number of pure plantation land transactions in any given market may be limited, hence sales comparison evidence may be skewed towards the inclusion of agricultural land transactions, as a common example. These properties are typically traded in a pastured, fenced and watered (PFW) state, unlike plantation forest land which is typically in a planted or cutover condition (i.e. poorly fenced or unfenced, with stumps, no pasture improvements and no or limited water infrastructure for livestock). In this circumstance, the land valuer needs to take improvements into consideration by deducting the costs associated with achieving a PFW state from the sales comparison derived value to estimate the fair value of plantation forest land (Figure 1).
Figure 1: Determining the Fair Value of Land – Broadacre Grazing Example
In valuing properties, valuation standards call for the valuer to consider the highest and best use (HBU) of the land. It is likely that some plantation estates may include a mix of HBU, where plantation forestry is the HBU for some properties whereas another use (e.g. grazing livestock, horticulture, residential) is the HBU for other properties. The valuation process for the estate needs to take this detail into consideration. In the event that forestry is not the HBU, a decision needs to be made as to the likely timing for HBU conversion. This needs to be considered from a market perspective. Where land is to be converted to another use immediately, the current fair value of the land needs to take conversion (or reversion) to HBU condition into consideration. In the broadacre grazing example the adjustment formula may be fair value = PFW agricultural value less the cost of conversion or reversion.
Tree crops must “pay” for its use of the land to account for opportunity costs through the application of a notional land rental to be applied by forest valuers. Notional rent should be based on market evidence as provided by the land valuer. In a situation where forestry is the HBU, the notional land rental is derived by applying a commercial rate of return to the plantation land value. In situations where forestry is not the HBU and where the land is not to be converted immediately to HBU, the value in its HBU is to be used as the basis for applying the rental calculation and the future treatment of conversion / reversion costs needs to be considered.
A commercial rate of return for land (economic rent) has in the past ranged from 3-6%, but market rental or lease evidence can be difficult to obtain as it is often confidential. A time allowance to market and sell the land must also be considered in the cash flows.
Through the application of a notional land rental, tree crop and land values become additive in developing an opinion on the plantation estate value.
In summary, the forest valuer needs to obtain the following specific information from the land valuer to bring tree crop and land values together in expressing an opinion about the fair value of a plantation estate as a whole:
- basis of the land valuer’s sales comparison valuation. What is the composition of the comparative sales evidence and does the derived land value represents an opinion on agricultural land value(s) or plantation forest land value(s)
- applicable market-based land rental rate(s)
- the estimated current cost of PFW restoration works
- the HBU status of each property being valued and conversion/reversion assumptions where appropriate
- assumptions on the time required to market and sell land.
For further insights or if you would like to comment, contact Margules Groome.