Article written by Jim Ed Brown, founder of Brown Land & Timber Company. He developed a way to compare a CRE investment\\’s Cap Rate with Commercial timber growing on transitional land. He developed the Accretion Rate, Acc Rate, to compare to Cap Rate.

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2. By Jim Ed Brown
Special to Realtor® ‘Rightings
www.brownlandandtimber.com
of Brown’s clients who recently pur- make 2x6s and larger lumber.
chased timberland for his self-directed An investor can realize 10 percent
individual retirement account (IRA). growth, and more, from a southern pine
“When I saw the dramatic differ- forest located on the proper site. When
ence in the accretion rate of timberland you add timber growth to the continu-
compared to the capitalization rate of ing increase in unit value, the annual
good commercial real estate, it made returns can add up to 30 percent to 50
me want to learn more,” Burrell said. percent
“The cash flow was not important be- Most investors ask Brown why ac-
N
ow commercial real es- cause I knew I wasn’t going to need my cretion rate, or total average annual
tate investors can compare retirement money for about 15 years. return for timberland, is generally 15
timberland to other com- But having the opportunity to end up percent to 25 percent, while the total
mercial real estate. with over twice as much money when average annual return for timber alone
Accretion rate, or acc rate, is a fi- I got ready to retire was very important runs about 30 percent to 50 percent.
nancial measurement developed by Jim to me.” The answer is simple – timberland is
Ed Brown to identify the financial re- Brown said that calculating the po- two investments; land, and timber.
turn and optimum holding period for tential return for timberland differs in
a timberland investment. Brown is the two ways from other commercial real Timberland and agricultural land
owner and chief executive officer of estate. First, Timberland accretes value are similar in value. Therefore, they in-
Arkansas-based Brown Land & Timber similar to a zero coupon bond, while crease in value at a similar rate. This
Company. other commercial real estate generates allows us to use the United States De-
Accretion rate is comparable to cash flow in the form of rent. Second, partment of Agriculture published land
capitalization rate (cap rate), a com- timber value increases from year to year values and calculate the average annual
mon tool used to identify how fast an as it grows into more valuable products, value increase over the most recent
investment will pay for itself. Both ac- while cash flow from traditional com- 10-year period. We use this number
cretion rate and capitalization rate are mercial real estate generally remains for making future projections of land
very similar to internal rate of return constant. “Timber starts out as value.
(IRR) which uses the beginning and reproduction, a non-performing asset Add the USDA’s average land val-
ending values to determine the annual that has no commercial value,” Brown ue increase to the actual growth rate of
percentage of increase. said. “However, reproduction has a very trees according to the US Forest Ser-
Up to now, commercial real estate real economic value. This value per ton vice, and voila – you have a reliable
brokers had no way to present the in- will increase as these small trees grow projection to calculate the accretion
vestment potential of timberland to cli- into sellable trees called pulpwood, rate. The only other considerations are
ents. Therefore, they left this mysteri- which is used to make paper. the weighted averages of pine versus
ous asset to the Wall Street timberland Pulpwood trees are 6 inches to 8 hardwood, and land versus timber.
investment management organizations inches in diameter measured 4 ½ feet And remember, calculating tree
(TIMOs). above ground level. The value per growth is not an educated guess. Tree
“But now, I can show any commer- ton will increase again in a few years growth can be accurately determined
cial real estate investor how simple it is as the pulpwood trees grow into chip- by measuring a tree. Anyone can mea-
to compare timberland to office build- n-saw trees, which are used to make sure a tree and use those measurements
ings, apartments, shopping centers, or 2x4s. Chip-n-saw trees are 9 inches to – along with the US Forest Service ta-
virtually any commercial real estate,” 11inches in diameter, measured 4 ½ bles – to accurately determine the cur-
Brown said. feet above ground level. Finally, chip- rent and projected growth for any for-
Lee Burrell, owner of Light Pro- n-saw trees grow into sawtimber trees est for the next 20-years.
ductions Inc. in Little Rock, is one 12 inches and larger, which are used to Here is another question commer-
12 • FEBRUARY 2009 REALTOR® ‘RIGHTINGS
february mag.indd 12 2/6/2009 2:58:03 PM

3. cial investors ask – is the accretion rate Mart land is already in the highest class
based on the owner having little or no of real estate, which is commercial. The
cost; similar to a triple-net lease where land under a forest is in the lowest class
the tenant of a commercial building of real estate, which is timberland.
pays the insurance, maintenance and So the opportunity for a real estate
taxes? “jump in class” is very good for the tim-
In the case of Brown Land & Tim- berland owner. He can’t predict a jump
ber, the company pays clients to man- in class, but he has the opportunity for
age property. The company leases the his land to jump from timberland to
hunting rights for the cost of annual residential land, or even to commercial
property taxes and furnishes an annual land. But the current holder of com-
report on the property. Each year the mercial real estate has no opportunity
company pays the taxes and mails a for an increase in value due to a “jump
copy of the receipt and an annual report in class”.
to each client. Finally, most new-timers want to
Also, the company does not recom- know how return rates are actually
mend or promote selling timber during calculated. All three rates – accretion,
the investment holding period unless it capitalization, and internal rate of re-
is necessary to improve the growth of turn – are calculated by using a simple
the remaining trees or to improve the formula, with EV = ending value (pro-
total forest value. Therefore, Brown’s jection), and BV = beginning value:
clients do not spend any time or money
on intensive forest management. If a Accretion Rate = EV-BV/BV x
timber thinning is necessary, all cost 100 (to convert to %) divided by
and fees are deducted from the pro- years
ceeds of the sale; this way timberland
owners never have out-of-pocket ex- The actual calculation is done by
penses, Brown said. So yes, owning subtracting the beginning value (cost)
timberland IS comparable to owning a from the ending value (projection), di-
building with a triple net lease. viding the difference by the beginning
Investors also want to know how value, then multiplying by 100 to con-
timberland compares to other com- vert it to percent, and dividing by the
mercial investments when it comes to number of years. This will give you the
risk? projected annual increase in value – ac-
“The risk is significantly less with cretion rate.
timberland,” Brown said. “It is much Remember, the higher the rate,
better than owning a building and leas- the shorter the time it takes for commer-
ing it to Wal-Mart. Everyone knows cial property to pay for itself. If your
there is a high probability Wal-Mart cap rate or acc rate is 15 percent – the
will require a different location in 20- lowest Brown recommends to investors
years, or at least require a renovation of for timberland – it will take 6.66-years
the existing building, because all build- for the investment to pay for itself. If
ings depreciate. There has never been a the acc rate is 20 percent, the invest-
20-year period in history when a pulp- ment will pay for itself in 5-years, and
wood forest didn’t grow into a sawtim- so on.
ber forest worth four or five times more Brown hopes his timberland real
per ton. estate investment measurement will
“Therefore, a timberland owner can have a lasting effect on timberland
anticipate a 10 percent to 15 percent as an asset class for the commercial
growth from his forest plus big jumps real estate community. For more in-
in unit value as the product class goes formation about the real estate invest-
from pulpwood to chip-n-saw to saw- ment management, visit Brown Land
timber.” & Timber Company on the Internet at
In addition, Brown said, that Wal- www.brownlandandtimber.com
MAGAZINE OF THE ARKANSAS REALTORS® ASSOCIATION FEBRUARY 2009 • 13
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