Who Owns Minnesota’s Forests?

The question of who owns Minnesota’s forests requires a diversity of answers. And that’s good, says Kathryn Fernholz, executive director of the nonprofit Dovetail Partners, a natural resources think tank.

“I think what’s unique about Minnesota is that we have a fairly even split of public and private ownership,” Fernholz says. Within the broad category of public land, Minnesota has national forests and parks, state forest land, including state forests, parks, and scientific research areas, and county forest land, where local residents can have direct input by just visiting the county courthouse. “That diversification is important because, with the different entities, we don’t see rapid shifts in forest policy. There are no overnight changes, which is good.”

There’s diversification on the private side as well, including individual citizen owners and corporations, plus nine different tribal entities. “So really, what would you tweak? I think it’s darn close to optimal,” Fernholz says.

Minnesota’s woods are special to the people who live in this state. They’re a source of income, of recreation, of living space, and great beauty to the millions of people who live in them and visit them. They’re also shelter for the multitude of native plants and animals required for a healthy environment. While aspen makes up about 30% of the forest, 52 native tree species populate Minnesota’s woods. Some especially notable trees found here are the nation’s largest jack pine (in Lake Bronson State Park) and its biggest tamarack (in Crow Wing County).

For a forest to remain healthy, productive and beautiful, it needs to be managed, and that comes down to ownership. The USDA’s Forest Service classified more than 17 million acres of the state as forest land in its second full annual inventory of Minnesota’s forests in 2011. Of these acres, the public owns around 56%, or about 9 million acres, through government entities. The state of Minnesota owns 37.5% of those 9 million acres, while counties and municipalities own another 32%. The federal government owns the remaining 30%.

The other 44% of the state’s forest land, about 7.6 million acres, is privately held, owned by families, individuals, tribes, trusts, estates, the wood products industry, and as investment holdings. Local families, tribes, and farmers own about 90% of this private forest land.

Forest products-related companies, none of which are headquartered in Minnesota, own only about 7% of the state’s forest land, and three quarters of those acres are in Itasca, Koochiching, Lake, and St. Louis counties. Molpus Woodlands Group (286,000 acres), Potlatch Corporation (205,000 acres) and Blandin Paper (UPM-Kymmene, with 187,000 acres) are Minnesota’s three largest private land owners and/or managers.

So, with a diversity of trees and a diversity of owners, all’s well in our woods, right?

It depends on who you ask.

Why is who controls Minnesota’s forests important?

“Some of the benefits of sustainably managed forests are easily quantified,” including jobs and economic impact, says Donald Deckard, a Department of Natural Resources forest economist. “Other benefits are more difficult to quantify.”

Timber harvesting is the primary management tool used to maintain forest health and productivity on public land, Deckard says. These practices enhance wildlife habitat, reduce wildfire hazards, and support biodiversity.

What figures are available for harvests on private forest land, however, show a dramatic decline in management activity since 2005, Deckard says, while public forest management activity has stayed relatively constant. Minnesotans should be concerned, he says, because lack of management on private land can have serious impacts down the road, including a decline in productivity and an increasing risk of catastrophic forest fires.

“Economics is clearly an important driver” for good, sustainable forest management, agrees Michael Kilgore, a professor in the University of Minnesota’s Department of Forest Resources and the author of numerous papers on forest issues. “There are a lot of other benefits, too: habitat, clean water, clean air, diversity of wildlife, the amenity benefits. People who vacation in northern Minnesota see these. If you want to see wildlife, the forests are the setting.” These benefits are harder to quantify in economic terms, but they’re measurable.

 “When you’re talking about public investment in forestry, it’s a question of what’s the net benefit to society. Not to a particular segment of society, but society as a whole,” Kilgore says. At the end of the day, is society better off? What changes would need to be made to result in the aesthetic and economic outputs society wants and needs?

Knowing who owns Minnesota’s forests goes a long way toward understanding the challenges of managing forests to meet the needs and wants of Minnesotans.

Take, for example, the recent dustup over public access to forest land managed by one of the biggest private holders in the state, Molpus Woodlands Group. In 2001, the Minnesota state legislature created the Sustainable Forestry Incentive Program. SFIP replaced the tree growth tax rate, the only preferential forest property tax law available at the time. Landowners with 20 or more acres of forest land enrolled in SFIP get money back from the state after they pay their property taxes if they agree to keep the land undeveloped and follow the state’s timber management guidelines on the property for eight years. Landowners with more than 1,920 acres (three square miles) in the program are also required to provide public access to the forest land for recreation.

In the beginning, the average annual SFIP payment rate was $3.19 an acre. Landowners’ payments were determined by multiplying the number of acres enrolled by three per-acre rates and using the highest result. In 2009, when the average payment was $8.74 an acre, changes to Minnesota tax law and increases in the assessed value of forest land caused one of the formulas to change slightly. That change nearly doubled 2010’s average rate to $15.67 an acre.

In the program’s first year, 320 landowners enrolled 531,508 acres. That had grown to 2,048 landowners and 917,586 acres by 2010. But in 2009, Gov. Tim Pawlenty capped the total payment at $100,000 per landowner, effective in 2010, through the unallotment process. In 2011, the legislature affirmed the cap and set the payment at a flat $7 an acre. Landowners were allowed to leave the program without penalty, and the total number of acres in the program dropped to 777,805 acres.

One especially unhappy entity was Molpus, whose payments plummeted from $2 million to the cap amount of $100,000. After Molpus sued for breach of contract and lost, it threatened to close 128,000 of its acres (mainly in northern St. Louis County) to recreational users.

“This is a direct result of the loss of tax incentives,” Craig Halla, the Minnesota property manager for Molpus, told the Duluth News Tribune in a September 27, 2012, article. At the time, timber prices and harvests had been declining steadily for several years. Harvest levels in 2009 were down by nearly 1 million cords compared to 2005 levels. “It’s very difficult to manage this land based just on the timber sales revenues now with prices so low and [the company] still paying taxes. If we want to keep the land in production and open to public access, there has to be another source of revenue.”

State Rep. David Dill, DFL-Crane Lake, and State Sen. Tom Bakk, DFL-Tower, negotiated with the company and averted the blockade. Then they worked throughout the 2013 legislative session to resolve the issue. The $100,000 cap was removed in the 2013 omnibus tax bill, and Molpus promised to re-enroll in the program, keeping its forest land open to the public.

“This was a premier issue for the north and also statewide, because so many people depend on access to it across the state and even outside the state,” Dill told the International Falls Journal in an article from May 23, 2013.

Removing the cap will cost the state an estimated $3.9 million for two years. “Not everyone is happy about this because the money comes from the general fund,” says Dill, who adds that Legacy Amendment funds cannot be used to supplement current state expenditures. Any time general fund monies are used, Dill says, someone is unhappy because they had their own ideas of how to spend the money. “We put in place a mechanism to pay Molpus and for them to re-enroll the land. This solves [the issue] until the next biennium or until somebody else wants to use the money in a different way.”

(The State Legislative Auditor released a report on the Sustainable Forestry Incentive Program in November 2013. To read the report, click here.)

Profits and parcelization

How did we get to a point where some woods that had been open to all were nearly fenced off?

To answer that question, we need to follow the evolution of the state’s largest—and smallest—private holders of forested land.

The largest, Molpus, is a timberland investment management organization (TIMO). (For more on what a TIMO is, click here and here.) Headquartered in Mississippi, Molpus bought 286,000 acres of Minnesota forest in 2012 from Forest Capital Partners, another TIMO. Forest Capital Partners had bought those acres from Boise Cascade in 2005. The state’s second largest private holder, Potlatch Corporation, reorganized itself in 2005 as a real estate investment trust (REIT). (What is a REIT? Click here and here.) It created a taxable subsidiary, Potlatch TRS, which harvests timber and manufactures wood products.

One of the state’s large forest products companies that did not convert to a TIMO or REIT is the Blandin Paper Company. Established in 1902 in Grand Rapids, it’s owned today by UPM-Kymmene of Finland, the world’s biggest manufacturer of magazine papers. In 2010, UPM sold a conservation easement of 187,876 acres to the state for $44 million. UPM retained ownership, however, of the Blandin paper mill in Grand Rapids and the land, which it continues to use as a working forest. The easement that was sold to the state allows the public to access the property for recreational purposes, such as hunting, fishing, hiking and snowmobiling, in perpetuity and preserves the natural and scenic resources.

The DNR’s Deckard notes that the change in ownership structure was the result of federal tax laws that limit the income tax liability of REITs and TIMOs. According to Deckard, “The basic difference between corporate tax and REIT/TIMO tax is that corporate dividends are double-taxed, with income taxes paid by the corporation and the investor, while REIT/TIMO dividends are single-taxed, with income taxes paid by the investor only.”

“Twenty-five or 30 years ago,” explains Fernholz, “the large-scale operations were integrated forest product companies, like Boise Cascade and Potlatch. They had jobs and mills and were directly connected to the forest land they owned. Their business interests followed all the way from the land to the products they sold.”

 In the 1990s, rocketing real estate values made Wall Street investors take another look at corporate-owned forest land. Many corporations determined that their property was undervalued. They decided to reorganize as TIMOs and REITs, Fernholz says.

Rep. Dill says ruefully that his constituents in far northern Minnesota understood early on the ramifications of capping the SFIP funds, but metro people didn’t “get it” until their hunting and snowmobiling activities were threatened.

Eye-catching as the Molpus controversy was, REITs and TIMOs are a relatively small part of the ownership spectrum of Minnesota’s 17 million acres of forest land. About a third of Minnesota’s forests, or more than 5 million acres, is owned by more than 170,000 family owners, according to a 2011 report to the state legislature on parcelization.[i]

So even though they get the attention, it’s not just big corporate land holders who can post signs and lock gates.

A private owner’s forest property rights are similar to those of other property owners. Land use is limited by a variety of statutes, zoning ordinances, and forestry best-management practices. Wetlands and forests adjacent to wetlands are regulated by the Environmental Protection Agency through the U.S. Army Corps of Engineers. “Private forest owners can fence their woods and gate their roads unless the land is enrolled in a property tax break program that requires the land be open for public use,” says the DNR’s Deckard. Requirements vary depending on the tax program. “Hence, permits are required for just about everything.”

The Sustainable Forest Incentive Program and conservation easements are just two of many tax and land management options landowners have when considering how to use their forest land. (In 2008, the Legislature created the Minnesota Forests for the Future program to coordinate the state’s efforts to conserve forest land.) SFIP and other programs offer fixed, short-term options, while easements are individually negotiated but are permanently tied to the land.

Just like the big corporate land holders, individual citizen owners must weigh many variables when deciding what to do with their property. For a growing number, the decision results in chopping up their forest land into smaller pieces, what forestry experts call parcelization.

“There’s been a slow but gradual change in the size of family forest land, and that’s likely an inevitable outcome,” says the U’s Kilgore. “Property gets subdivided, for example, if someone has three children and wants to leave them all some of the land. We see it not just here in Minnesota but across the country and, really, across the world.”

The average size of parcels has changed substantially, Kilgore says. Twenty years ago, the average parcel size was about 70 acres. Today it’s between 55 and 65 acres.

What’s the impact of these trends?

In that 2011 report on parcelization in Minnesota, Kilgore and the other authors noted that 15% of the owners of family forest land had changed over the previous five years, affecting 12% of the total acreage. They also noted that, in addition to the myriad environmental concerns raised by losing forest land in general—decreased native and increased non-native flora and fauna, reduced water and air quality, increased wildfire damage and reduced biodiversity—other states have found a correlation between smaller parcels and reduced public access.

“We did a study of Itasca County, and we found the rate of subdivision was pretty constant,” says Kilgore. “What we also saw was when forest land was subdivided, usually within a short time a building popped up on it.” As the land is subdivided, “all of a sudden, you put in a road or there’s a housing development,” Kilgore says, creating potential issues with wildlife and clean water, among other things.

“You can go up north and see stretches where every 40 acres or so there’s a cabin or two, or a hunting shack,” says Kilgore. “They might all be backed up against public land, but it’s a common phenomenon to see the frontage property, which is privately owned, subdivided so people can put up shacks.” That can make things difficult for a public land manager or a logger. Crossing a half-mile of private land to get where they need to go may require contacting four different owners. It can be problematic even when land is still forested. “At some point, it’s hard to cross-country ski or use snowmobile trails when the land is parcelized,” Kilgore says.

Since 1999, the state has secured conservation easements on about 350,000 acres of working forest land using federal, state, and Nature Conservancy dollars, says Deckard, opening the property up to public access.

From Deckard’s perspective, the decision to parcelize is an economic one. According to Deckard, many owners of forest land feel forced to sell their land because their property is taxed at the “higher and better use” rate. In other words, it’s taxed as developed land rather than undeveloped. For example, a parcel of forest land with a taxable value of $1,000 per acre as forest land may be appraised for tax purposes at a value of $6,000 per acre using the higher and better use rate (development, lake frontage, or rural recreation designations).

“Although I am certain the counties will not agree,” says Deckard, “the primary parcelization policy opportunity is to tax private land at current use instead of the higher and better use rate.” 

Another option for a few forest land owners is converting the land to farm land to take advantage of higher farm land and commodity prices.

According to Deckard, most of Minnesota’s forest land is not suitable for farming. “However,” he adds, “some marginal farmland has been planted in trees under the federally funded Conservation Reserve Program.” The program pays farmers an annual rate per acre to exclude acres from agricultural production. The enrollment term is 15 years for planted trees with penalties for early withdrawal. But when corn and soybean prices go up, says Deckard, “there is financial pressure on land owners to put marginal acres back in production.”

He points to Verso Sartell Paper Company, the owner of the paper mill that burned down in Sartell in 2012. The company recently sold most of its hybrid poplar plantations on more than 15,400 acres in five Central Minnesota counties. That land is classified as tillable and will likely be converted back to agriculture.

“There is increasing pressure on farmers to remove trees and increase commodities,” says Fernholz. “There hasn’t been this much competition, or conflict, between growing trees and producing commodities, like corn and soybeans, since the 1920s.”

According to Fernholz, the two biggest challenges facing Minnesota’s forests are rising farmland values and getting the best information possible to make forest policy decisions. “The state needs to invest in understanding and using the best technology possible to plan and prepare for changes. Foresters still head out to collect data with papers and pencils.” The state needs to invest not only in better data collection technology, but to then monitor those investments, all with the goal of making better decisions, Fernholz says.

Deckard agrees that more information about small, private forest land would help the state’s forests. He notes that while basic forest inventory data is collected by the DNR with the U.S. Forest Service’s Forest Inventory Analysis (FIA) unit, there are gaps in available data. According to Deckard, the state needs in particular to monitor and enforce existing forest management plans that were already approved by the DNR to qualify the landowner for property tax breaks. In addition, the DNR should directly collect small landowner timber sales volume and value data at the county level and improve the quality of land use data available, Deckard says.

A move in the right direction would include acquiring high-resolution satellite imagery and LIDAR data (light detection and ranging, sophisticated measuring technology using lasers) in coordination with existing Forest Service field inventories, Deckard says. “The DNR has a resource assessment unit that is well suited for this. The problem is a lack of fiscal resources.”

Managing forests for the future

When it comes to maintaining the state’s forests, there’s a lot at stake. In 2011, the forest products industry was the state’s fifth largest manufacturing sector by employment (60,900 jobs) with an annual economic impact of $16.2 billion, according to the DNR. In 2012, the state owned 24% of Minnesota’s commercially productive forest land and contributed 29% of the total timber harvested (855,000 of 2,920,000 cords). The DNR estimates that each cord of wood harvested from state land generates $34 in state general fund revenue and $14 in local property taxes through primary forest products manufacturing. In addition, the U.S. Forest Service also manages and sells timber from the state’s two national forests, says Brenda Halter, Forest Supervisor at Superior National Forest.

“We need to have productive forests,” says Rep. Dill. “We need to have employment opportunities from logger to trucker. [The 2013 legislative session] was the first year in 11 years that we actually put money into the DNR forest division to get something done. They can mark some trees and sell some wood. The DNR used to write good, sound forest management plans for small owners that really provided for good forest stewardship. I think we’re at a turn in the road. Good forests mean a lot for clean air, clean water. They mean a lot to a lot of different people.”

“Forest management is the single most important tool to manipulating timber production,” but it won’t happen without strong economic incentives, Kilgore says. The wood products industry and timber prices have been depressed for at least five years. There will be ups and downs in the market going forward, but for the most part, the amount of timber harvested in the state is about 60% of what it once was.

Minnesota’s forests are generally well managed, Kilgore says. “I’m optimistic that we’ll see a return, probably not to the same level, though, and it might not be for the traditional products. Forests are changing, incentives are changing and technology plays an important role in what the future economics of the forests might be.”

Along with Kilgore, Fernholz is enthusiastic about the new products that are emerging from the timber and wood products industry.

The “Wood First” campaign in the United Kingdom, Canada, Australia, and Sweden promotes building with lumber instead of steel and concrete. Architects in Sweden have proposed a 34-story skyscraper of wood. The country has a seven-story all-wooden building already.

“There’s incredible innovation happening,” says Fernholz. Researchers over the last 20 years have been examining what happens to wood when it is broken down into nano particles. The result is a very strong material, says Fernholz, and scientists are just starting to understand how it works and what wood might mean for the future. “It’s an abundant, affordable raw material.”

 “For the next five to 25 years, in many ways, we’re in great shape,” says Fernholz. “But this is an opportunity to be proactive and to get more serious about forest health. Are we going to strategically influence what our forests are going to look like?”

— Julie Jensen is a freelance writer in St. Paul.