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Cut ’n Run, The Sequel

Goodbye, Georgia-Pacific. Or should we say ta-ta “The Timber Company”? — the pretentious name G-P gave its publicly traded timber division after spinning it off from the main group at the end of 1997. Last week, G-P made it official — “the paper company” is leaving California as fast as it can find a buyer for the 196,000 acres of North Coast timberland it owns, all but 1,000 of them here in Mendocino County. Indeed, the company hopes to have the sale all wrapped up by the end of this year.

The question, as always, is Why? The easy answer would be: because they’ve already taken all the good stuff, and that’s certainly hard to argue against. Local timber activist Linda Perkins said she and other observers had been expecting this announcement, that the timber harvest plans she’d seen coming from G-P in recent months “seemed as though this was the last rakeover.”

“They were in the same pattern that L-P was in before they left,” Perkins said. “Just something about reentering places they’d been in only four or five years ago, and really going after the best of what’s left, or setting it up for whoever comes next.”

Some might speculate that the uncertain future of the politics surrounding logging in California — Gov. Gray Davis has still not appointed permanent members to the five vacant seats on the Board of Forestry — might have influenced G-P’s decision to bail out. Others would say that gives too much credit to Davis’s willingness to rock the boat.

Certainly, The Timber Company has been busy divesting itself of timberlands recently. On April 26, the company announced the sale of 440,000 acres of lands in Maine to “an institutional investor,” and earlier that month, 390,000 Timberland Company acres in Canada’s New Brunswick province were sold to the provincial government. Even before these transactions, more than 80 percent of the company’s five million-plus acres of holdings were located in the South — in Arkansas, Mississippi, Georgia and Florida — and they seem to be holding on to those lands.

Ray said The Timber Company’s upper management had started doing a strategic plan right after the December 1997 spin-off, and one of their decisions was that the timber coming out of the California lands was a “small, specialized niche market,” and might better suit some other investor.

One part of the answer certainly lies in some 1997 changes to the federal tax laws that are being interpreted as allowing companies that own timberlands to convert themselves into real estate investment trusts, or REITs. REITs have tax advantages over the traditional corporate structure of timber companies, and timber REITs have advantages over non-timber REITs. A regular REIT must distribute 95 percent of its ordinary income to shareholders, but this tax rule does not apply to capital gains. As income from the sale of timber is generally treated as capital gains, not as ordinary income, a timber REIT will not be subject to the 95 percent distribution rule and may use as much of its income as it likes to pursue further timberland acquisitions.

One of the nation’s largest and most infamous timber companies, Plum Creek, has been turning itself into a REIT for a year. A company press release on Monday announced that a court had approved a settlement in a shareholder lawsuit on the conversion, and Plum Creek now says it intends to be a REIT by July 1. On the other hand, the Timberland Growth Corp., the first timber company to begin the REIT conversion process back in April of 1998, filed a “registration withdrawal” with the Securities & Exchange Commission in April of this year and is no longer seeking REIT status. Another timber REIT which had hoped to go public in mid-April is the (notorious to AVA readers) Strategic Timber Trust, the New Hampshire-based investment company that now owns the old Coastal Forestlands’ properties in Mendocino County, which has been trying, so far unsuccessfully, to get a stock offering based on inflated timber inventory figures through the Securities & Exchange Commission’s review process.

Tom Ray, resources manager in California for The Timber Company, agreed it was likely the G-P timberlands might be bought by a REIT: “Their lesser taxation advantage gives them a competitive advantage,” Ray said, “and makes the asset worth more to the global-type investor.” Ray had also been quoted in the Press Democrat as suggesting a pension fund might be interested in looking at G-P’s Mendocino County holdings. Indeed, Ray confirmed that CalPers, the California state employees pension fund, already owns a big chunk of Timber Company stock.

It makes sense for a pension fund to own timberland, a true, genuine “long-term” investment if managed properly, and the California state employees funds are certainly brimming over with cash right now. Heath Daniels, president of the International Association of Machinists and Aerospace Workers, Woodworkers Division, the union at G-P’s Fort Bragg mill, suggests it would be good for mill workers if a pension fund or other non-timber business buys the lands. “If one of our competitors buys the land,” he said, “we’re out of business. We’re hoping that somebody who will sell the mill logs will buy the property.”

Indeed, neither the mill nor the union workers employed therein (only 210 of them are left) nor the union employees in the tree nursery (only nine seasonal jobs right now), are included in the offering, although the non-union Timber Company employees, 35 or so office and other non-mill workers, are.

“We are planning to try to sell this operation as a turn-key process,” Ray said. “Hopefully the employees — the 35 professionals — would go right along with the operation.”

Mill workers know that if either of the two most likely timber company buyers — Pacific Lumber or Mendocino Redwood Company — buys the land, they probably won’t be interested in keeping the Fort Bragg mill running, as they’ve got their own mills to feed. Indeed, rumor had it after one recent inspection visit by Mendocino Redwood officials, that they were interested in the lands, but didn’t want the union. MRC’s Sandy Dean didn’t return phone calls by presstime on Tuesday.

If MRC were to buy G-P’s timberland it would complete an ironic full circle. G-P was forced to split off L-P in the 70s under a federal anti-trust ruling. MRC could become a reunification of the old G-P, which, in turn was the old Union Lumber Company — albeit with a lot less timber.

Richard Hargreaves, retired G-P worker and union activist, suggests that if CalPers buys the land, certain elements in the teachers union and other environmentally minded types would probably want to shut down the mill and stop all of the logging, while keeping the land.

When The Timber Company was spun off in 1997, Ray said, a three-year supply agreement with G-P was signed, giving G-P the option to purchase 80 percent of the timber from the Mendocino County acreage for its Fort Bragg mill, “provided a price was agreed upon.” That contract runs through the year 2000, Ray said, but there does still have to be an agreement on price for that final year. The rest of this year, 1999, Ray said, “will be business as usual.”

Daniels said that no matter what happens with any buy-out, mill workers are expecting to start being treated more like Louisiana-Pacific mill workers were — “Ronnie Paul, the old head guy under Harry Merlo, he’s G-P vice president now,” Daniels said. “These are all ex-L-P managers they’ve got here now. L-P used to run the mills on a seasonal basis, shut em down, start em back up again — that’s where we’re heading, to a seasonal type of work. I guess we’ll get some kind of unemployment.”

When asked what his wildest hopes were for the Fort Bragg mill, Hargreaves brought up an employee buyout, an ESOP, or employee stock option plan. An ESOP was begun back in 1985, Hargreaves said, when G-P forced mill workers to take a cut in pay. “They were threatening to close the mill, and we said, ‘We’ll buy it.’ There was money coming in from two different union trusts,” Hargreaves said, “$200 million more or less pledged at looking at buying this. I don’t know what stopped it; G-P did not want to sell the mill to their employees.”

Of course, back in 1985 there were still 1,200 G-P mill workers, not the mere couple hundred there are today, which made talk of an employee buy-out a little more realistic. “If you were going to do it now,” Hargreaves said, “you’d have to bring in the logging crews [now independent contractors]. We still have a lot of our people working those lands, they’re just not working for G-P per se.”

Another reason the Fort Bragg mill might not be up for sale, Hargreaves and others suggest, is its extensive contamination by toxics. There’s been a mill on that site since the mid- to late-1800s, and one can only speculate about what was dumped there the first few decades.

In living memory, Hargreaves said, “when they had all the old, lead-based paint, they used to take it out on the pier and burn it. There were two places where they used to dump the oil out of all the trucks, the cars, the trains — just on a routine basis. There were places where they buried batteries, and there was the old dump on the north end, the “sooty dump,” it was called. After the 1906 earthquake, when all the piping came down at the mill — asbestos-coated piping? — they took it over there and burned it. “You know Glass Beach?” Hargreaves continued, “where do you think all the glass came from? It was the dump. That stretches up into the property quite a ways; there was a lot of stuff taken out there and buried.”

Ray suggested talking to the environmental person at corporate headquarters for official comment on the toxics situation at the site, but did say he felt that G-P had been “pretty good trying to keep things clean” since they owned the mill.

Another factor coming into play in any local timberlands sale right now is the outrageous prices currently being paid for vineyard acreage in Napa and Sonoma counties. A June 17 Press Democrat article, “Vineyard prices skyrocket,” listed undeveloped vineyard land in Sonoma County as selling for $20,000 to $38,000 an acre, and in Napa County, similar property brings in $37,000 to $50,000 an acre. Established vineyards with phylloxera-resistant rootstock are bringing even higher prices — up to $100,000 an acre for established vineyards in the Napa Valley! According to one professional vineyard appraiser quoted in the story: “You have a lot more buyers than you have properties listed for sale” — especially buyers for property where an estate home can be built.

Can you successfully grow grapes on land that’s historically grown timber? Well, readers are probably familiar with Coastal Forestlands’ proposal to turn 10,000 acres of its old Longview tract along the southern part of the Mendocino coast into an industrial vineyard. Local grape farmers aren’t really taking CFL’s proposal seriously — a couple of growers familiar with the area think 500 acres at most could be successfully farmed — but we all know, money talks. Wealthy baby-boomers looking to cash in their own stock options and retire early “in the wine country” could provide plenty of eager buyers for any future combination residential/vineyard development — “estate bottled”?

Right now, Mendocino County’s timberland production zone ordinance lists “row crops,” i.e, grapevines, as a compatible use with timber production. CFL could rip up every root of every tree on every one of its 10,000 acres to plant grapes and still have the land be taxed at the extraordinarily low TPZ rate, with no “grape yield tax” to make up it for it at the end, as there is a timber yield tax. Talk about a “tax advantage.”

Normally, a county board of supervisors has to approve any request for immediate conversion out of TPZ zoning by a fourth-fifths vote, and there is a substantial tax penalty. Mendocino County’s “grape loophole” means the county won’t have to grant permission for CFL or anyone else to abandon TPZ status to plant a vineyard, because CFL doesn’t have to abandon TPZ status to plant a vineyard, at least at the county level. The California Department of Forestry does still, however, have to grant a grape conversion permit.

Today (Tuesday, June 22), the Mendocino County Board of Supervisors will consider a recommendation from its Forest Council that the county begin the process of amending this ordinance to close the grape loophole. Retired county assessor Duane Wells will suggest adding a minor use permit process to the ordinance, so that small-time owners can still plant “a few rows of grapes” on a parcel, making some extra bucks and hopefully keeping the trees growing a few years longer, while requiring a permit for somebody to entirely convert timber production to grapes on TPZ land.

We’ll see how serious our supervisors are about preserving Mendocino County’s resource base county and keeping our forests forests.

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