The debate

Larry Caldwell larryc at TELEPORT.COM
Mon Dec 8 18:03:47 EST 1997

Steve's appraisal formula finally showed up at my site, quoted in somebody
else's post.  If I don't have the full story about what Steve said, my
apologies.  I tried to locate the post on Deja News and failed, though
that may have been my bleary eyes.  Anyway:

> > Land Expectation Value (LEV) = Net Value in Year n / (1+i)to n power -1
> > Easy, huh?  Not for a minute....

Fairly simple.  Perhaps too simple.  I use a number of factors to calculate
my capital costs.  These are fairly easy to set up as spreadsheet formulae,
so you don't have to sit there and crunch numbers for hours.

Start with the purchase price.  Base amount = C
Interest rate, plus annual taxes and insurance = I

Add the CI times the summation from a=0 to n-1 of (2a + 1).  This gives 
the accumulated interest interest and tax costs, plus interest on the taxes,
between your initial outlay and the time you cash out.  

Note that I do not figure declining balance.  If you pay off the principle,
you can't invest your money elsewhere.

Management costs = M.
Management has capital costs too, so add M and the summation from 
a=0 to n-1 of M times (2a+1) times the interest rate .

On the bonus side, you have any living quarters or interim harvest or
income off the property, which you treat in a very similar manner.  You
not only add up the value of the rent, but you also add up the accrued
interest on the rent.  Any time money changes pockets you have to figure
capital costs or you will get screwed somewhere along the line.

You also add the residual, post-harvest value of the property, which can
be a substantial amount.  Another factor is the value of currency, which
is hard to compute.  Even in these "inflation free" times, the dollar
loses about 10% of its value every 3 years.  I've certainly seen times
when it lost that much value in 10 months.  When computing the interest
rate above, you should subtract the inflation rate from the interest
rate to get your true capital costs per annum.

That works out to six formulae just to calculate my capital costs.

I wish this email program let me import spreadsheet tables, I would show
you how it works out

The other half of the equation is more dogwork.  The growth curves of 
various species have been well established by researchers.  You can go
to a library and easily get the info.  However, the growth curve is
profoundly affected by the site classification.  You have to classify
your site.  The best way to do this is to get a baseline of growth
data on a representative sample of your trees and match that into the
published growth curve data.  You survey your plot, scale some trees,
then core them and count rings.  Tree count per acre lets you know
what your management expenses will be, and if you can figure on a 
commercial thinning.  Tree age lets you assign a harvest date, or
more likely a range of possible harvest dates.

You don't project a harvest scale, you manage for a harvest scale and
grade.  For figuring harvest values, use a range of current day prices.
You already adjusted your calculations for constant currency by subtracting
the inflation rate from your interest rate.  Don't bother to try to
second guess the market, just realize you will have to pick and choose your
harvest date.  That's why you want to leave a range of a decade or so
in your calculations.

Once you have all these calculations made, it boils down to boolean logic.
Is the projected return bigger than your capital costs?  If so, go for
it.  If not, make a counter offer that will pencil out.

> > That is why foresters earn their appraisals.  And go to school for a year or
> > two...and take lots of math.

Gosh.  Where does the math come in?  All the calculations I use I knew
by the time I was 12 years old, except I've forgotten what the closed
solution for sigma (2n+1) is.  Oh well, it runs fine on a spreadsheet,
and I don't really have to use the math anyway.

Sometime I'm going to have to find a collitch and see what all the fuss
is about.  Thanks for the book reference.  

-- Larry

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