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Douglas Donnell is Vice President, National Manager, of the division of Bank of America Private Bank that offers timber management and advisory service.  He has a Master’s degree in forestry and served with Georgia-Pacific Corporation and Wachovia Bank before joining BofA five years ago.  His question on our Discussion Forum started the valuable discussion that led to Warren Flick’s article.  Since his clients constitute an important market for timberland, we interviewed him to learn their requirements.

JMV: What does BofA’s Private Bank do, and do all banks have one?

DD: The Private Bank is a major division of BofA and serves all the needs of very affluent investors, i.e., persons with an investment portfolio of $1,000,000 or more.  These needs include loans, various types of accounts, trusts, and advice on all sorts of investments.  I think that most banks have such a division or at least one experienced officer who specializes in this work.

JMV: How much capital is managed by U.S. banks in this way?

DD:  I can’t even guess, but I am sure that it is large and growing rapidly.  Dr. Flick is certainly right in pointing out the effect of years of good times.

JMV: Describe what you do when a client is considering a typical investment in timberland.

DD: Usually our client has been thinking and reading about timberland for quite a while, has found a tract that seems attractive, and asks what we think of it.  From the start of our relationship, we have known what his investment goals are and thus can express an opinion about whether the tract fits this plan.  Knowing what the goals are is especially important in managing trust accounts for which the decisions are made solely by the bank.

If he is still interested, the next step is to find a qualified appraiser to determine the values of the various components.  Timberland presents an unusual valuation problem because there are both biological and financial aspects.  We must be sure about both the volume of timber and the value of it.  With these facts in hand, we can usually quantify the cash flows through the investment so that our client can make an informed decision.

JMV: Where do you find the values that you seek?

DD: That’s what so tough about our job.  Pension funds investing tens of millions of dollars can usually learn the facts about a dozen or so comparable transactions.  Price reports issued by Timber Mart South are quite helpful in evaluating the present and future values of the timber component, and studies by several academics provide some level of comfort on the same values for bare land.

But we are working with transactions of perhaps $100,000 to $2,000,000, and there might be hundreds of comparable trades.  Then average timber values over a wide area aren’t much help.  Furthermore, amenity values (beauty, suitability for weekend retreats, guesses about future growth of urban areas, etc.) are always involved.  Then the secrecy surrounding many of these transactions almost eliminates our ability to advise on their suitability as investments.

JMV: In such cases what do your clients do?

DD: These investors are accustomed to instantaneous valuations and the historical performance indexes of more traditional asset classes, so the lack of data on the major components of timberland raises their discomfort level so high that they invest their funds elsewhere.  We think that they thereby miss opportunities that would bring them much profit and pleasure, but we can’t do anything about this as long as we are flying blind.  The timber buyer who chewed you out for announcing the bids obviously profits from an inefficient market, but this attitude makes many sophisticated investors uncomfortable with the asset class.