Thursday, March 22, 2007

Timberland for Retirement

Things have been a little slow on the transaction front lately but a couple of articles caught my attention with respect to investing retirement funds in timberland. The first is another example of Europeans moving more aggressively with pension fund investments (which is not really news) and the second relates to an individual buying timberland in his/her self-directed IRA. The latter one was certainly news to me and I found the methodology very interesting.

In the case of the Europeans, a Dutch company, Stichting Pensioenfonds ABP, (reportedly the third largest pension fund in the world), had a contest among employees to select some innovative investments to supplement the standard stocks and fixed income investments. APB is committing $5 billion to this particular investment. They had several ideas (art, wine, etc.) but the winner at this point is timber and ABP plans to make an investment by the end of the year. The article makes reference to the NCREIF Timberland Property Index which shows the value of timber assets increasing at an annual rate of 15 percent over the last 20 years compared to a 12 percent annual return for the Standard & Poor's 500 Index. Those kind of numbers certainly do draw investment interest.

The article also states "California Public Employees' Retirement System, the largest public U.S. pension fund, said in January it planned to start a new asset class that would include some timber investments". That's an interesting development when just two years (three years?) ago the concern was that timberland prices would fall because CALPERS was selling its timberland investments and getting out of that market! If interested, you can read the whole article here.

Here is a final quote from the article above which I will use as a springboard into the self-directed IRA discussion.

"While a fund the size of ABP can explore esoteric investments, most company pension funds wouldn't be able to, said John Hastings, a consultant at Hymans Robertson in Glasgow.
'If you are going to do something like this you have got to understand it and smaller pension funds wouldn't have the resources to do that,' Hastings said."

So if you think timberland is an "esoteric" investment, if you don't know what a TIMO is and if you have never heard of consulting foresters, read no further. But if you would like to consider timberland as a part of your (or a client's) IRA, read on.

The key to a timberland investment in an IRA is to create a Limited Liability Corporation and then to transfer the assets of the IRA into the LLC. The IRA actually owns the LLC which can then purchase and own timberland or other "alternative" investments (or "esoteric" if you prefer). For a more lengthy and much clearer explanation, see "The IRA Owned LLC, A Great Tool for Investing".

I have a self-directed IRA, mainly invested in stock, which I can assure you has not produced anywhere near the return of my Tree Farm so this does sound very interesting. The one issue that merits a little more thought is the taxation issue. A timberland investment outside the IRA would not be taxed until it was sold (at retirement let's say) and then it would be taxed at the capital gains rate. I believe the same investment for timberland in an IRA would be taxed at the normal rate as it was withdrawn from the IRA. Somebody check me on this.

Finally, it looks like there may be an opportunity for a consultant forester or two to link up with the lady that wrote the article to provide a package for IRA investors interested in adding timberland to their IRA portfolio. That would take the "esoteric" out of it!

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