PPIC: A UNIQUE DOUBLE-OPTION INVESTMENT FOR LANDOWNERS
Ever since landowners began cultivating tree farms 50-60 years
ago to make money growing trees, those with bare or cutover tracts faced two
discouraging alternatives: 1) plant trees and wait 10-15 years for first
returns, or 2) don't plant trees and wait even longer for lower returns. Now a
PPICsm offers a third alternative: it provides capital to plant trees
plus annual cash payments for use of the land. Owners sell PPICs only if they
think that they will produce higher returns than the other alternatives.
It took a while, however, for landowners to understand and
appreciate the unusual value of a PPIC's unique buy-back provision. Because it
is a free permanent call option, it allows them to invest in two different
assets at the same time and then to choose the one with better performance. It
essentially allows landowners to "borrow" cash flows under a PPIC, but pay off
the "loan" only if they choose.
To execute such a maneuver, a landowner invests PPIC annual
payments in, say, a mutual fund. Periodically, he compares results from the
mutual fund with the timber crop's increase in value, and he guesses about
future prospects. If the timber crop's value falls because of price changes or
natural calamities or rises only a small amount, he stays with the mutual fund.
Such a situation occurred in some areas in 1997. Timber prices stayed the same,
timber growth averaged 10%, but many large mutual funds produced returns over
20%.
If tree values rise sharply, however, he can capture them under
the buy-back option because its price depends not upon tree values but upon PPIC
costs. In such an event he will sell the mutual fund, use the proceeds to pay
off his "loan," and then sell the trees for his own account. We've seen a
similar situation on a cutover even though the PPIC payments were small. The
original condition of the tract was so dismal that few buyers were interested;
soon after regeneration revealed its inherent productivity, prices in offers to
buy rose sharply.
So far as we know, no other investment has a free, permanent
double-option feature. |
