Revised article from the Arkansas Realtor Rightings article published in Feb/Mar 2009, Sometimes money does grow on trees.

1. Printed Monday, May 04, 2015, 10:18 AM
Published February 2009 Realtor’s Rightings, Magazine of the Arkansas Realtors Association 1 | P a g e
Sometimes money does grow on trees
By Jim Ed Brown
Special to Realtor Rightings Magazine
February 2009
Now commercial real estate investors can compare timberland to other stocks, bonds,
mutual funds and commercial real estate.
Accretion rate, or Acc Rate, is a financial measurement developed by Jim Ed Brown
to identify the financial return and optimum holding period for a timberland
investment. Brown is the owner and chief executive officer of Arkansas-based Brown Land & Timber
Company.
Accretion rate is comparable to capitalization rate (Cap Rate), a common tool used in commercial real
estate to identify how fast an investment will pay for itself. Both accretion rate and capitalization rate are
very similar to internal rate of return (IRR) which uses the beginning and ending values to determine the
annual percentage of increase.
Up to now, commercial financial advisors and real estate brokers had no way to present the investment
potential of timberland to clients. Therefore, they left this mysterious asset to the Wall Street, who has
placed billions of dollars of timberland into institutional investment portfolios.
“But now, I can show any advisor or investor how simple it is to compare timberland to stocks, bonds,
mutual funds, office buildings, apartments, shopping centers, or virtually any investment,” Brown said.
Lee Burrell, owner of Light Productions Inc. in Little Rock, is one of Brown’s clients who recently
purchased timberland for his self-directed individual retirement account (IRA).
“When I saw the dramatic difference in the accretion rate of timberland compared to the return I was
getting from mutual funds, it made me want to learn more,” Burrell said. “The cash flow was not
important because I knew I wasn’t going to need my retirement money for about 15 years. But having the
opportunity to end up with over twice as much money when I got ready to retire was very important to
me.”
Brown said that calculating the potential return for timberland differs in two ways from other investments.
First, Timberland accretes value similar to a zero coupon bond, while many investments and commercial
real estate generates cash flow in the form of dividends, coupons or rent. Second, timber value increases
from year to year as it grows into more valuable products, while cash flow from traditional investments
generally remains constant.
“Timber starts out as reproduction, a non-performing asset that has no commercial value,” Brown said.
“However, reproduction has a very real economic value. This value per ton will increase as these small
trees grow into sellable trees called pulpwood, which is used to make paper.
Pulpwood trees are 6 inches to 8 inches in diameter measured 4 ½ feet above ground level. The value per
ton will increase again in a few years as the pulpwood trees grow into chip-n-saw trees, which are used to
make 2x4s. Chip-n-saw trees are 9 inches to 11inches in diameter, measured 4 ½ feet above ground level.

2. Printed Monday, May 04, 2015, 10:18 AM
Published February 2009 Realtor’s Rightings, Magazine of the Arkansas Realtors Association 2 | P a g e
Finally, chip-n-saw trees grow into sawtimber trees 12 inches and larger, which are used to make 2x6s
and larger lumber
An investor can realize 10 percent growth, and more, from a southern
pine forest located on the proper site. When you add timber growth to
the continuing increase in unit value, the annual returns can add up to 30
percent to 50 percent.
Most investors ask Brown why accretion rate, or total average annual
return for timberland, is generally 15 percent to 25 percent, while the
total average annual return for timber alone runs about 30 percent to 50
percent. “The answer is simple – timberland is two investments; land,
and timber.
Timberland and agricultural land are similar in value. Therefore, they
increase in value at a similar rate. This allows us to use the United States
Department of Agriculture published land values and calculate the
average annual value increase over the most recent 8-year period. We
use this number for making future projections of land value.
Add the USDA’s average land value increase to the actual growth rate of
trees according to the US Forest Service, and voila – you have a reliable
projection to calculate the accretion rate. The only other considerations
are the weighted averages of pine versus hardwood, and the ratios of
land versus timber.
And remember, calculating tree growth is not an educated guess. Tree
growth can be accurately determined by measuring a tree. Anyone can
measure a tree and use those measurements – along with the US Forest
Service tables – to accurately determine the current and projected
growth for any forest for the next 20-years.”
Here is another question commercial investors ask – is the accretion rate
based on the owner having little or no cost; similar to a triple-net lease
where the tenant of a commercial building pays the insurance,
maintenance and taxes?
“In the case of Brown Land & Timber, the company pays clients to
manage their property. Our company leases the hunting rights for the
cost of annual property taxes and furnishes an annual report on the
property each year. We pay the taxes and mail a copy of the receipt and an annual report to each client.
Also, the company does not recommend or promote selling timber during the investment holding period
unless it is necessary to improve the growth of the remaining trees or to improve the total forest value.”
Brown’s clients do not spend any time or money on intensive forest management. If a timber thinning is
necessary, all cost and fees are deducted from the proceeds of the sale; this way, their timberland owners
never have out-of-pocket expenses, Brown said. “So yes, owning timberland IS comparable to owning a
building with a triple net lease.”
Investors also want to know how timberland compares to other investments when it comes to risk.

3. Printed Monday, May 04, 2015, 10:18 AM
Published February 2009 Realtor’s Rightings, Magazine of the Arkansas Realtors Association 3 | P a g e
“The risk of total loss is significantly less with timberland,” Brown said. “It is much better than owning
an A-Rated Security or a building leased to Wal-Mart.
Everyone found out during the 2008 Financial Meltdown that an investor can lose all their money from an
A-Rated Stock; but you can never lose all your money with timberland, because if all your trees are
destroyed, you still have your land that can be used to reestablish a forest, real estate development or sell.
The commercial real estate building investor with a net lease to Wal-Mart knows that Wal-Mart may
require a different location in 20-years, or at least require a renovation of the existing building, because all
buildings depreciate. However, there has never been a 20-year period in history when a pulpwood forest
didn’t grow into a sawtimber forest worth four or five times more per ton.
Therefore, a timberland owner can anticipate a 10 percent to 15 percent
growth from his forest plus big jumps in unit value as the product class
goes from pulpwood to chip-n-saw to sawtimber.”
In addition, Brown said, that Wal-Mart land is already in the highest
class of real estate, which is commercial. The land under a forest is in
the lowest class of real estate, which is timberland.
So the opportunity for a real estate “jump in class” is very good for the
timberland owner. He can’t predict a jump in class, but he has the
opportunity for his land to jump from timberland to residential land, or
even to commercial land. But the current holder of commercial real
estate has no opportunity for an increase in value due to a “jump in
class”.
Finally, most new-timers want to know how return rates are actually
calculated. All three rates – accretion, capitalization, and internal rate
of return – are calculated by using a simple formula, with EV = ending
value (projection) and BV = beginning value:
Accretion Rate = EV-BV divided by BV x 100 (to convert to %)
divided by Years
Remember, the higher the rate, the shorter the time it takes for
commercial property to pay for itself. If the Cap Rate or Acc Rate is 10
percent – it will take less than 8-years for the investment to pay for
itself. If the Acc Rate is 15 percent, the investment will pay for itself in
about 5-years, and so on.
Brown hopes his timberland real estate investment measurement tool
for financial advisors and commercial real estate brokers will have a
lasting effect on timberland as an asset class for the investment
community.
For more information about timberland investment, visit JEBCON™ ~ Jim Ed Brown Consulting on the
internet at www.jebcon.com or email Brown at jeb@jebcon.com