This entry is brought to you by Slater Anderson who advises landowners and their advisors on land planning, appraisal, conservation, management, and disposition services through the Real Estate Consulting Group at LandVest. 

LandVest has traditionally assisted landowners and their advisors in making informed decisions about their real estate assets.  For four decades we have specialized in providing advisory services related to land valuation, development options,  disposition plans, and timber management and sales, as well as the use of conservation easements as a means to protect land, generate tax benefits, or provide cash from the sale of development rights. 

Today, landowners, investors, conservation organizations, and government entities are grappling with the opportunities and risks associated with the emerging real estate value dynamics related to ecosystem services (aka natural capital, environmental commodities or eco-assets).  Ecosystem services are the multiple benefits people derive from the natural environment. 

Examples include fresh water, nutrient removal, clean air, carbon storage, reduced greenhouse gas emissions, recreation, erosion control, pollination, biodiversity, and protection from natural hazards, to name a few.  These services have often been ignored or undervalued by traditional real estate valuation techniques which typically focus on the income potential of real estate from traditional sources such as residential, commercial, and industrial development, as well as farming, forestry, and other extractive uses.  The emergence of the US and world economies from the global economic downturn will have a significant impact on the demand for natural resources and the services they provide which will in turn likely drive up the value of environmental commodities of all kinds.

As the markets for these non-traditional environmental commodities and services gain broader acceptance, the valuation implications are significant.  In a recent Boston Globe article entitled “The $100 Million Pond” Pavan Sukhdev, study leader of the UN-sponsored report on The Economics of Ecosystems and Biodiversity, was quoted as saying, “The value that nature delivers to us is economically invisible.  Effectively, we pretend that it’s zero.”  Traditional appraisal practice typically relies on “as of right” uses under existing zoning or reasonable amendments to zoning to determine the “highest and best use” and ultimately the market value of a given property.  In many cases, natural features are considered a limitation on utility and value.  The emergence of natural capital markets is beginning to change the scope of some appraisal assignments such that alternative non-traditional uses and values must be addressed and analyzed. 

Governmental Intervention

In some ways, the greatest catalyst to the evolution of these markets is government policies and incentives.  These policies or incentives include development mitigation requirements, alternative energy portfolio standards, tax credits or charitable deductions for conservation or preservation easements.   The anticipation of government regulations can also create a market where one may not have existed otherwise.  The contentious climate change debate and evolving regulation of greenhouse gases is a significant recent example of this dynamic where a “pre-compliance” or “voluntary” carbon credit market has emerged in anticipation of (or speculation about) federal “cap-and-trade” legislation that has yet to be enacted.  The rapid flow of financial and intellectual capital into carbon and other emerging ecosystem markets in recent years is significant. 

Appraisal Implications

From the appraiser’s perspective, as these markets gain regulatory certainty and greater capitalization, the typical “highest and best use” analysis that the appraiser undertakes as part of the appraisal process will necessarily have to consider the market value of the environmental commodities associated with the real estate assets.  Of course, like any potential use of real property, there are established appraisal criteria for determining the highest and best use that include legal permissibility, physical possibility, financial feasibility, and maximum productivity (i.e. most profit).  As environmental markets mature, certain non-traditional uses of land may move from “speculative” to “reasonably probable” in some cases. 

Inevitably, additional (new) real property value will be realized through these rapidly emerging markets as they evolve and correct earlier failures.  Fundamentally, these markets are driven by the need for additional services of a growing global population and by international, federal, state, and local incentives and mandates.  

The LandVest Role

As with many rapidly emerging markets there is risk.  This risk along with rapidly changing markets and regulations requires cautious and well-advised decisions by landowners.  LandVest can assist its clients in realizing the additional economic value from these emerging markets while also mitigating risk.  Through sound planning and proper sequencing or partitioning of land management initiatives, it may be feasible for a landowner to access the value of ecosystem services along with other traditional real estate values and land uses, resulting in the maximization of real estate asset value, income generation, and/or tax benefits.  However, the “stacking” of environmental values is a controversial aspect to these emerging markets and must be carefully evaluated.  The value implications of these growing markets are significant for owners of mid-to-large real estate holdings.  To assist these landowners, LandVest can:

• Evaluate the potential applicability of these emerging markets for client properties
• Advise clients about potential value opportunities  as well as risks associated with participation in a particular program
• Undertake field studies to establish baseline inventories
• Value alternative land management and/or use  models
• Continue to provide the highest quality land planning, appraisal, project management, consulting forestry, and brokerage services

 Future parts of this series with address items touched on in this blog in greater depth with contributions from our experts in the Real Estate Consulting Group and Timberland Division.

For more information, please view contact information for Slater Anderson or contact Slater at sanderson@landvest.com.

 LandVest advises clients and their advisors in land planning, appraisal, management, and marketing of their homes, farms, and timberland. Our practice has grown over our forty years well beyond our New England roots to a national and international practice. This unique perspective allows us to intelligently partner with clients who may own multiple properties, from Florida and Coastal New England to farms and timberland from Maine to California.