Cutting trees to save the forest
Leveraged buyouts are the newest tool in forest restoration
GARCIA RIVER WATERSHED, CALIFORNIA - Chris Kelly is having an Al Gore moment. As he eases his truck down a rugged logging road on California's North Coast, the state program director for The Conservation Fund, a nonprofit environmental group, is talking about global warming, carbon offsets and the fate of the planet.
While he talks, a forester named Scott Kelly, who is running a logging operation here, and I have our eyes peeled out the windows for a more immediate peril: A redwood tree that a logger, somewhere up the hill, is about to drop in our direction. There's a final snarl of the chainsaw, followed by the butt-puckering sound of the tree's heartwood cracking and the redwood beginning its fall toward whatever lies below.
Chris snaps out of his reverie and hits the accelerator. Scott, who's spent two decades in the woods, softly chides, "That never works."
"You run right into it?" Chris asks.
Chris Kelly has a lot on his mind. The Conservation Fund has recently become the proud owner of some 40,000 acres of forest in Mendocino County. Now, Chris' job is to log it. It's a counterintuitive proposition, but also one that is helping to leverage scarce conservation money to protect the area's redwood and Douglas fir forests. Each redwood that Kelly cuts, many of them the younger, smaller trees, will fetch an average of $105 at the lumber mill. Kelly can then use that money to restore streams where endangered salmon spawn, repair forest roads - and pay down the millions of dollars in loans that he used to buy the forests.
Scott Kelly, no relation to Chris, says, "We're gonna let it grow as much as we can and log a little bit - just enough to pay the bills." Earlier that day, the three of us waded through a tangle of logging slash to watch a sawyer administer the coup de grace to another towering redwood. The tree hit the ground with a mighty whumpf, and the moment felt a little like a scene from an old Budweiser commercial.
Scott paused for effect, and then said: "That one's for you, Chris."
After nearly two decades of putting together real estate deals for conservation organizations, Chris Kelly has developed an eye for the often-paradoxical opportunities of timber country.
Much of the forestland on the North Coast is consolidated in the hands of timber companies that have been more than happy to clear-cut it - a situation that, in the standard green version of the story, is plainly bad. But Kelly was intrigued by the fact that just a handful of owners held so much of the land on the North Coast. Unlike other parts of California, where a conservation group might spend decades assembling a decent-sized parcel from fragmented chunks of land, timber country provided ready-made, tens-of-thousands-of-acre targets of opportunity as timber companies started divesting their properties.
"From a landscape conservation standpoint, that's fantastic: You can go out and buy 23,000 acres - a third of the Garcia watershed - in one deal," Kelly says. "You can recover coho salmon in the Garcia with that one deal."
From a financing perspective, however, it is a nightmare. There is no way that public agencies, such as the state park system, or environmental nonprofits could afford to buy and maintain that much land outright. "So whaddya do?" Kelly mused. "Well, these are forests, after all: They grow, and" - being redwood forests - "they grow vigorously."
Kelly decided to act like a timber company, getting loans to buy forests, and then paying back the loans by logging the trees - or at least some of them. The strategy wasn't entirely Kelly's brainchild. But until they bought a forest, he says, "it was an abstract concept." "Nobody was doing it in a way that people pointed to and said, 'That's what we mean.' "
The Conservation Fund's foray into the timber business is a gigantic exercise in considered pragmatism. "It's not like we're taking pristine, old-growth forests and using them to pay off loans," says Chris Kelly. "These are beat-up properties" - many of which have already been logged two or three times.
The Conservation Fund has cordoned off a third of the Garcia River Forest as an ecological preserve. On the rest, it's using a meticulous logging technique called selection forestry - in part because the timber company that previously owned the property "high-graded" it, taking out the biggest, best timber. Now, says Kelly, "You gotta kind of make your living by poking around and finding trees (big enough to sell to a mill)."
As they go, loggers are also cutting younger trees to thin the forest and open up space for the remaining trees to grow bigger. Then, Kelly says, you have to "really hold your breath for a decade" until the trees reach merchantable size.
It is a labor-intensive process. "We take about 30 to 35 percent of the (trees), so you gotta cover three times the acres to get the same amount of logs. And that's inherently more expensive. It's cheaper," Kelly says, a little ruefully, "to clearcut."
Scott Kelly and an assistant marked each tree that will be cut on this 300-acre harvest, carefully considering which ones are ready for the mill, which should be cut to allow others to grow bigger and which should be left to provide habitat for spotted owls and other wildlife. "You don't go out and mark trees just for yucks," Scott says. "And by the end of it, you've seen every tree. You have a lot of time invested in this." Each time a logger cuts a tree, he pencils his initials onto the butt end of the log so Scott can do quality control.
Much of the money from the logs cut here will be used to upgrade the forest's dirt roads, critical to improving water quality in the streams below. "All these roads were just cowboy-engineered in with bulldozers," Chris says. "And every year, these roads want to melt into the Garcia River and plug up the spawning gravels (for salmon)."
A contractor is upgrading the roads to make them, as Scott puts it, "hydrologically invisible," so that when it rains, they won't shed sediment into streams. The work is not cheap: The per-mile cost of upgrading roads here starts at $17,000.
The Conservation Fund owns the Garcia Forest debt-free, so the money raised by logging the trees here goes mainly toward upkeep of roads and restoring salmon streams. But the organization will employ the same cut-the-trees-to-save-the-forest strategy to pay off the loans it used to buy another 16,300 acres of forest, just to the north in the Big River and Salmon Creek drainages, last year.
In an experimental effort to leverage The Conservation Fund's money, Kelly turned to California's State Water Resources Control Board to borrow half of the $48 million purchase price for that land. "The importance of their loan is that it's very low interest," he says. Because the loan was combined with another $24 million from grants and other "traditional" funding sources that don't have to be paid back, "you've reduced the (repayment) pressure by half, right off the top. And then the loan is 2.3 percent, fixed rate, which is probably a third or less of a commercial loan - so the burden you put on the property is much, much lower than under a commercial loan rate."
This year, another group pushed the concept even further. Instead of applying for a state loan to buy forestland, the nonprofit Redwood Forest Foundation Inc. (RFFI) went straight to the bank. In June, RFFI (pronounced "reffy") bought 50,000 acres in northern Mendocino County with $65 million that it borrowed from Bank of America.
"We used 100 percent private financing to do it," says Art Harwood, RFFI's chairman. That loan, like the one The Conservation Fund secured from the state water board, has a 20-year term. RFFI will repay the loan primarily with timber revenues, although it will have to pay higher interest rates than The Conservation Fund: While neither Bank of America nor RFFI will say what the interest rate is, people familiar with the transaction peg it at between 5 and 7 percent.
Putting together such deals can require a new degree of sophistication. Harwood, a mill owner and veteran of the '90s-era North Coast timber wars who now chairs a board composed of many of his erstwhile environmental adversaries, says, "People don't loan you $65 million if you just climbed out of a tree to go to the meeting."
For his part, Chris Kelly acknowledges that if, for instance, log prices go down, he may have to log at higher levels than he'd like to keep up with his loan payments. "We have to figure out how, in fact, we do this sustainably. Is it even doable?" he says. "And we don't know yet - we're still trying to figure it out."
But once you start doing a Zen mind job on the timber business the way Kelly has, the menu of creative financing for this sort of deal is broader than it first appears. The Conservation Fund now hopes to sell carbon credits to PG&E, California's biggest energy supplier, for its nascent carbon-offset program. Carbon credits, Kelly says, "could be a really nice hedge or complement to our timber incomes. If we can get paid for the trees we cut, and get paid for the trees we don't cut (through carbon offsets), then we're in really good shape."
In fact, such diverse streams of income were what helped sell the Bank of America on the loan it made to RFFI. "It became apparent that there were enough different ways to generate cash to pay us back," says Mike Balok, a senior vice president with the bank. Those included not just timber harvesting and the sale of carbon credits, but also the sale of conservation easements and smaller parcels of the property to the state park system. "Instead of looking at one thing, which is cutting down trees and selling logs," Balok says, "there's a lot of different ways that they can use the property to generate cash."
The options for securing money could themselves soon get bigger. Tom Tuchmann, who oversaw President Clinton's Northwest Forest Plan and now runs a consulting firm called US Forest Capital (he also helped negotiate the RFFI deal), is working to develop federal legislation that would allow nonprofit groups to sell tax-exempt revenue bonds to fund forest purchases.
In Mendocino County, "you're now approaching over 90,000 acres (of working forest) that's owned by nonprofits," says Chris Kelly. "It's a little bit of a revolution up here, and it's evolving peoples' idea of what it means to do conservation."
But in San Francisco, Bank of America's Mike Balok says that even industrial timber companies themselves will increasingly turn toward the kinds of non-traditional revenue sources that Chris Kelly and RFFI are considering, such as the sale of conservation easements and carbon credits, to pay back their own loans. "The reality is that's what everybody's going to be doing over the next 20 years anyway - they just might not know it yet."
Matt Jenkins is a contributing editor of High Country News.