Government/Private Land Exchanges
A Timber Industry Perspective
by
Bob Weinberger

Why would a "for profit" company want to trade land with the government if not to make a gain on the deal? After all the process is very difficult and time consuming -often taking 3 years or more and a great deal of management attention. Furthermore, the government is required by law to make sure the fair market values in the transaction are equal, as determined by an independent third party appraiser, before any transaction can be completed. So where's the gain? Cynics and those who distrust anything connected to big business and/or the government will usually assert that the public must be getting ripped off whenever industry exchanges land with the government. I am writing this piece for those willing to examine the facts and draw their own informed opinion.

In order for an exchange to be successfully completed, all parties to the transaction must believe that they come out winners. Although this should be obvious on the face of it, many people overlook that premise as well as two corollary premises that drive all exchanges -.

1. Each party to an exchange must place a higher value on what they are getting than they place on what they are giving up.
2. If all parties valued the assets involved in the same way and for the same purposes, no exchanges would ever take place.

But how can that be? Isn't the market value of an asset the highest price a willing buyer would pay for it? Yes that is the definition of fair market value, but we are talking about exchanges not sales. The parties to an exchange can and usually do place their own values on the properties that bear little or no relationship to fair market value. What is important is that they have a higher need for what they are getting than they do for what they are giving up.

Let's look at some examples to make it clearer:

Example 1
Timber company 'B' owns 1,000 acres of land with a fair market value of $500,000 and rancher 'A' owns 200 acres of timberland with the same fair market value. Although B's land has some timber on it, its primary value is for grazing and it adjoins A's ranch. A's land is good timber growing land, but only marginal for grazing and it adjoins B's land. Each party is unwilling to sell their properties without some assurance that they can replace it with something they need more. Additionally, outright sale would force them to pay taxes on any gain over what was originally paid for the property. "A" may value B's land at $400,000 to his operation while only valuing his 200 acres at $300,000 to his operation. Conversely, B may value A's land at $600,000 to their operation while only valuing their 1000 acres at $500,000. Neither party knows how the other internally values the properties, nor is such knowledge in any way relevant to their decision. All that matters for a successful exchange is that both A and B see a gain on the deal.

Example 2
The U.S. Forest Service (USFS) and the Bureau of Land Management (BLM) determine that it is in the public interest to acquire certain parcels of private land for any or all of the following reasons-.

• Public lands surround the property and this in-holding creates administrative problems.
• The property contains cultural, historical or environmentally significant values that they believe are best protected in public ownership.
• The property is needed to round out an existing program; e.g. it is property bordering a river that receives heavy recreational use and its acquisition allows them to manage the recreational use in a comprehensive manner, or perhaps it is property that is needed to properly implement a recovery plan for a threatened or endangered species.
• Having the land in public ownership makes the management of the existing public lands more efficient or effective.
• The property is needed to provide access to public lands.

Since most of these are non-market values and the agencies are not in the business of making money, they have no direct way to put a dollar value to the government on ownership of these properties. Their only recourse to set a value is to have an independent third party certified appraiser evaluate what these properties would sell for on the open market-, i.e. fair market value. The appraiser does this by analyzing recent sales of like property in the geographic area.

In this example, most of the land the government wants to acquire is owned by a timber company. The company is unwilling to sell the property outright for the following reasons:

• The properties are primarily timberland and they are in the business of growing and harvesting trees to supply their mills.
• The Federal Agencies have ceased to be a reliable source of raw material for their mills, so any timberland that they own becomes even more critical to their operations.
• They would need to replace this land with timberland containing at least equal volume and growing capacity and from which timber could be delivered at a comparable cost.
• The money from the sale would be substantially reduced by taxes, thus reducing the dollars available to purchase replacement timberland.
• Since the Federal Government owns most of the timberland in their geographic area, there is little or no replacement timberland available to buy.

Although the agencies might conceivably be able to purchase the properties through condemnation proceedings, it would be political suicide to do so. The public already owns the majority of the land in the counties affected and this would further reduce the counties' tax base. The counties are already financially reeling from the loss of Federal timber payments. The agencies return 25% of the receipts from the land (primarily from timber sales) to the counties in lieu of taxes to cover county services affected by public land - like maintaining county roads that go through USFS land. Since agency timber management has become virtually nonexistent, these payments are a small fraction of what they were. Further, once these lands became public, there is strong likelihood that there would be little timber sold from them, thus the jobs that this timber provided would likely disappear.

If the timber company could be assured of receiving replacement land that they valued internally as relatively worth more than the traded land by a factor at least equal to the cost and effort of completing the deal; then an exchange could occur. Since by law the fair market value of the parcels must be equal ( or equalized by cash not to exceed 10% of the total transaction), the timber company will determine if the transaction is in its best interest based on their own internal criteria relative to the two properties. Examples are:

• Timber growing potential of each property.
• Current merchantable volume on each and its value to them.
• Relative fit of the growing timber on each property to their needs - by age, class, species and type.
• Harvesting costs.
• Relative long term management costs for each property as a part of their entire ownership.
• The present net value of their entire property with one property or the other.
• Any barriers to appropriate management of each property.

These are for the most part values that are unique to that company and thus bear little or no relationship to fair market value of the two properties.

The agencies decide their relative gain based on the criteria that they used to justify the need to acquire the private land. Before they agree to include any Federal land in a proposed exchange, they determine that no threatened or endangered species or their critical habitat are present, that no historically or culturally significant values are involved, and that all other public values are greater on the land to be acquired than on the land slated for disposal.

In a trade with a timber company, timber values usually make up the largest portion of the fair market value of the government land being traded. This is an advantage to the government in gaining public values through an exchange. Because of government's de-emphasis of timber management, the public would likely realize little or none of that timber value if the land is not exchanged. That timber may provide other (amenity) values by sitting there unmanaged, but the purpose of the exchange is to acquire properties with a much higher level of amenity values.

An exchange is not completed until all parties are satisfied that the transaction is beneficial to their operations,

I The Author Is Chief Forester for Boise Cascade Corporation's Northeast Oregon Region and has been involved in numerous land exchanges - both with other private parties and the Federal Government.