"Differentiation is the core fundamental process behind ecological and economic development," said Ecotrust Chairman Spencer Beebe, who contends the region should stick to producing high-quality wood and wood products. "Why are we degrading our competitive advantage in order to compete where we will lose?"
In the Pacific Northwest, von Hagen said, a mature forest of 60-80 years has double the stocking rate of one that has just finished its teenage growth spurt. The value of the wood in these larger trees at harvest can also be up to 50 percent higher than the teenage version.
Rather than clear-cut, EFM maintains a continuous forest cover while harvesting regularly, with the aim of keeping the trees for 60 to 80 years or, in some cases, leaving the forest to live forever. To ensure that the diameter of the trees can continue to grow, it engages in several light thinnings. The idea is to maintain a natural mix of species and ages and to produce a range of log sizes. Since 2004, the funds have sold eight million board feet of wood.
EFM reduces capital expenditures by relying more, though not exclusively, on natural regeneration. While von Hagen says it will ultimately be cheaper per volume of wood to extract fewer large trees instead of multiple smaller ones, Ecotrust's harvesting costs are currently higher due to the precautions it takes to protect the forest when it fells a tree.
How else does Ecotrust boost income while waiting for the forest's balance sheet to grow? It begins by purchasing young forests or those that need rehabilitation—woodlands that are less desirable to traditional timberland operators, who generally seek quicker returns on merchantable timber. In addition, it looks for land in areas that the government designates as low-income communities or in areas that, say, are in the last remaining part of an ecological watershed. These characteristics can bring advantageous financing.
For example, all four of Ecotrust's properties in its first fund were financed using federal New Markets tax credits designed to spur investment in distressed communities. (About half the forestland in Oregon and Washington qualifies, von Hagen says.) Although the mechanics are complex, the bottom line is that the tax credits allow purchasers to reduce their basis in property acquisitions by 20 percent to 25 percent. The credits were the largest revenue producer in the first fund's financial results. Through 2012, they accounted for 4.4 percent of the fund's 10.6 percent internal rate of return.
The funds gets paid for protecting wildlife habitat and recreational land by selling development rights in the form of conservation easements to land trusts and government agencies. These range from 20 percent to 50 percent of the land's appraised value. Fund I has raised $356,000 for such conservation activities—about 1.2 percent of the $30 million under management.
Ecotrust's strategy involves analyzing each cluster of trees in its portfolio and how it can best extract value Are the trees near a river, where they have greater value maintaining salmon habitat and selling conservation easements? Or is it close to a logging road, where it may be optimized for timber production? If it's on a steep slope, where it's hard to extract the timber, or if it's far from a logging road, where the cost of timber extraction is high, the best option for those trees may be producing high-quality carbon. In March, Ecotrust closed a $500,000 carbon-credit sale to Chevrolet from its woods, an amount equivalent to 1.7 percent of funds under management.
"If you only have a timber hat on, you are going to cut that [timber] whether it produces a high or low value for you because it's the only tool you have," von Hagen said.
Fund I is an evergreen fund, meaning there is no term limit and investors can enter and exit when they want. As a structure that "matches the life of the forest," von Hagen said, the fund’s greater flexibility means there is less worry about the timing of a property purchase and whether its value can be realized by the end of a term. Also, there is an opportunity to engage in beneficial environmental techniques such thinning, tree improvement or even inoculating trees with truffles—things that may not bear fruit in the short term.