VARDAMAN VIRTUAL FORESTRY COMPANY

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A Pine Plantation Investment Contractâ , in its standard form, is a vehicle by which an individual can invest as little as $40,000 in timber or, in a batch of which, an institution can invest $100,000,000. Both can pay for purchases in installments. As investments, PPIC’s have several advantages over the typical tract of timberland: 1) they do not require sinking capital into land, 2) every square foot of growing space is utilized, 3) they are located on public roads and can be logged 12 months of the year, 4) they utilize loblolly pine, the most-widely-distributed species in the South, and 5) the timber they produce is bought daily in enormous quantities and therefore easy to appraise.

The predicted compound, annual return of a standard PPIC varies with the characteristics of each one. Attached as an illustration is the schedule of cash flows through a single PPIC, AL93270WG_, a 270-acre tract in Alabama planted in January 1993. Its predicted return as a standard PPIC is 11.85%. As of 1/1/99, it required a down payment of $88,420, the total costs plus interest of Pine Plantation Management Company (PPMC) at that date. All future costs (landowner payment, management, inspection, reports, and record keeping) are included in the Annual Payments. Details of 29 PPIC’s including maps, photos, and cash-flow schedules appear on http://www.se-timbersales.com/.

The Insured PPIC

The main drawback of a PPIC in early years while the trees are growing to merchantable size is a lack of liquidity. To eliminate this, we have developed a Liquidity Insurance Contract (LIC) that allows the Investor to liquidate it at specified prices after making the annual payment on 12/31 each year. Insured PPIC’s are predicted to yield a compound, annual return of 9% above inflation and have additional benefits for taxable investors. The table below shows how this works in the case of AL93270WG_. Down payment is $205,000; annual payments are $36,720. The amount that the Investor will receive by liquidating his PPIC after making the annual payment on 12/31 each year appear in the right-hand column. Since PPIC’s were designed as long-term commitments and not for in-and-out trading, the return the Investor will receive at premature liquidation will be only 3% initially and will rise as he continues to hold it.

Here are scheduled cash flows:

Two other factors must be mentioned. First, for some Investors the interest portion of the Annual Payments is deductible, and the profit from timber sales is taxable as a long-term gain. Second, the Underwriter retains an option to buy future timber sales for the predicted prices plus annual inflation as measured by the CPI-U. Therefore, the Investor will earn 9% above inflation, but will not participate in any additional rises in timber prices.

The Liquidity Insurance Contract

Since there is now no public market for PPIC’s, the Liquidity Insurance Contract (LIC) satisfies the demands of Investors who are required by regulations or other considerations to have guaranteed liquidity. Underwriters of LIC’s are often timber manufacturers that will need as future raw material the trees being grown, but that do not have the huge amounts of capital required to buy land and grow their own. The LIC is unique in that it pays timber industries to help investors grow the timber that the industries will need later.

At the time of the sale of AL93270WG_ to an Investor as an Insured PPIC, PPMC paid $120,000 of the purchase price to an Underwriter. The following table sets forth in detail the income and obligations of the Underwriter in this case:

Volume of merchantable timber on the PPICâ increases rapidly in volume after 2004 because the best trees have been released from competition by the poor-quality and undersized ones and because they have been fertilized. Its value increases at a much faster rate because trees once large enough only for pulpwood soon become large enough for sawtimber. Market value of timber remaining after the thinning = $170,370. Value at harvest 10 years later = $1,921,274, a compound annual increase of 27.4%. Values by years are as follows:

One provision of the PPIC allows the Landowner to buy back his contract by paying all PPMC costs plus interest at 10% plus the inflation rate compounded monthly. When buy-back occurs, the Investor gets an unexpected bonus, and the Underwriter’s obligation terminates early.

The LIC does not cover losses from fire, windstorm, or insects; the Investor can reduce risks of loss from these sources by buying a batch of PPIC’s. By the nature of the LIC, the Underwriter bears risks from price declines and incorrect growth predictions.

If one of these three investments interests you, please call Jim Vardaman at 800+455-4568 for more information.