The initial price of a Far North Afforestation freehold title forestry investment block is comprised of:-

Land - Freehold Title
The cost of the bare land and the construction of permanent roads and access tracks.

Forest Establishment
This includes clearing the block of competing vegetation, purchase of the seedlings, planting and releasing.

Stamp Duty
Under the Stamp and Cheque Duties Amendment Act (No. 2) 1998, purchasers are required to pay conveyance duty on the land component of the purchase price.

Legal Fees
Most purchasers will require the services of a lawyer to take care of the legal considerations associated with the purchase of a forestry block.

Typical legal considerations include:

1. Title search and advice on the sale and purchase agreement.
2. Title transfer
3. Overseas Investment Commission approval for overseas investors.

Annual Costs

Rates
Rates payable on the forestry block are assessed by the Far North District Council.

Fire Insurance
Fire is a manageable and insurable risk in forestry projects. Historically in New Zealand fire has destroyed less than 0.1% of the stocked area of plantation forests per annum, with losses declining in recent years due to better monitoring and detection techniques, better public education, and improved management practices. Fire insurance is comprised of three components, loss of forest, re-establishment costs, and fire fighting costs. The scheme is flexible in that the forest owner can select the level of cover for each of the three components to satisfy his or her requirements. Fire insurance is currently available through NZI or Lloyds (which also offers cover from wind damage)

Silviculture
The silviculture operations adopted for the purposes of cash flow analysis are those followed for the most commonly practiced clear wood regime. A clear wood regime involves pruning and thinning the forest at selected ages to maximize the volume of high value, knot free timber upon harvest of the forest. Forest owners have complete flexibility to choose whatever silvicultural regime they desire. There is however a high correlation between the amount invested in silviculture and the value of the wood upon harvest.

Forest Management
Forest management is an important aspect of forest ownership and is especially important if the purchaser knows little or nothing about the operational aspects of forestry. Typical duties of a forest manager include:

1. Protection of the forest from weeds and feral animals.
2. Monitoring of forest health.
3. Advice and information dissemination to owners
4. Liaison with forest consultants and contractors.
5. Negotiation and arrangement of silvicultural operations, log sale, and harvest activity.
6. Twice yearly reports.

Forestry Returns
The returns at the selected harvest age of the forest are stumpage income from selling the trees and capital realization from the sale of bare land. The harvest age assumed for cash flow Analysis is 28 years. A 28 year harvest age is for illustrative purposes only. Forest owners have complete control to select the harvest age which suits their financial objectives.

Land Sale
It is standard practice when modelling forestry investment opportunities to assume only one rotation of the forest and include sale of the underlying land as an inflow at the end of the rotation. In the interest of conservatism, the value of the land at the end of the rotation is assumed to be equal to the value at the beginning of the rotation.

Stumpage
Stumpage income is the product of the volume of the wood upon harvest for each log grade and the prevailing stumpage price for each log grade. Stumpage income represents the figure actually received by the forest owner upon harvest of the stand, before tax, but net of harvest costs such as logging, loading, cartage, roading and administration.

Internal Rate of Return
The projected financial performance of a forestry investment project will generally be expressed as the internal rate of return (IRR). Provided all costs and returns are expressed in current dollar terms, and costs and returns move similarly with inflation, then the rate of return is a real rate - i.e. the rate which can be achieved over and above inflation. IRRs can be expressed as pre-tax or post-tax. For simplicity, because different individuals have different tax liabilities, pre-tax IRRs are most commonly referred to as a benchmark for comparison purposes.

Income Tax
Forest owners must pay tax on the stumpage income received upon harvest of the forest. The sale of the bare forest land is not taxable. Current legislation confers upon the forest owner with tax assessable income in New Zealand the right to treat expenditure on forest operations and interest on debt raised for acquisition as deductible from income from any source. The taxation benefit has the effect of reducing the initial outlay for participation and reducing the amount of subsequent commitments. For overseas investors with no income in New Zealand they have the right to deduct the development expenditure from the forest income at the time the forest is sold. It is assumed in all cash flow analysis that the forest owner pays a marginal tax rate of 33%. The forest owner has certain freedom to manipulate the pattern and the timing of the cash flows relating to taxation.

The following expenses/costs are deductible for tax purposes if incurred by the owner of the forest:

• land preparation costs for planting
• cost of trees
• cost of forming temporary roads
• pruning
• thinning
• Certification of pruning
• rates
• forest management
• insurance on forest
• interest on borrowings related to forest acquisition/development
• valuations
• forest consultancy

Taxation and ownership structures

• Personal Ownership - will enable tax deductions to be offset against other sources of income however this is a growth asset which would be subject to creditor attack.
• Trust - deductions and forestry losses held in the name of trust. Losses/deductions can be offset against other trustee income. The trust structure is ideal for holding growth assets and can provide creditor protection.
• Loss Attributing Qualifying Company (LAQC) - this is a limited liability company with some of the attributes of a partnership. The main advantages of a LAQC is that losses can be allocated from the company to the shareholder in proportion to their shareholding. Once most of the forestry development expenditure is complete, the shares of the company can be transferred to a family trust.

• all shareholders must be NZ residents
• no more than 5 shareholders
• each shareholder is either
  1. natural person
  2. Trust
  3. another qualifying company
• shareholders are liable for any unpaid company income tax.

GST
The purchase price for each forestry block and subsequent items of forest operating expenditure are rated for GST. Forest owners can voluntarily register for GST and claim back all GST on forestry expenditure/costs. In cash flow analysis, all figures are exclusive of GST. It is assumed that the purchaser is GST registered.

Disclaimer
Whilst every effort has been made to ensure the accuracy of the information as outlined every investors circumstances are different. For this reason, with all forestry and other investments we strongly recommend that you seek independent legal, taxation and forestry advice.

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"Initial Purchase Price"

"Annual Costs"