Seeing the Forest and the Trees

A Vertically Integrated Approach to Rural Economic Development

NEW MARKETS TAX CREDIT CONNECTION

Prepared by:

Charlie Spies and Susan Strommer, CEI Capital Management LLC

Spring 2011

A Vertically Integrated Approach to Rural Economic Development

America's struggling rural economies need both enhancement of traditional industries and diversification into new income streams. Many rural communities have surrounding forestland that provides significant economic drivers, or chains of value, for those communities. CEI Capital Management LLC (CCML), with a national New Markets footprint and significant expertise in the forest products industry, has been able to go "deep into the woods" with NMTCs to enhance traditional forest value chains and add diversification opportunities.

CEI and CCML: Coastal Enterprises, Inc. (CEI) is a New Markets allocatee based in Maine. CEI Capital Management LLC (CCML) is a wholly-owned subsidiary of CEI tasked with managing the $683 million of investment capacity currently awarded under the federal New Markets Tax Credit (NMTC) program. Following CEI's mission, CCML has a rural focus and each New Markets project must satisfy "triple E" underwriting criteria: Economic Progress, Social Equity, and Environmental Sustainability.

Common conceptions of the forest value chain typically start with a healthy forest and then focus on commodities derived from harvesting trees, and processing them into lumber, paper, and other commodities. Furthermore, value from this same forest typically goes well beyond traditional products. Forests also support a myriad of businesses based on recreation including eco-tourism and services such as guiding and lodging. From a purely environmental perspective, a healthy forest is a key link in the value chain because it is an excellent resource for indigenous animal habitat, clean water and better air quality. All these value chains are interconnected and represent economic development opportunities that stem from sustainably managed forests CCML considers the integration of these chains as they progress from a common foundation in a healthy forest to basic commodities such as a two-by-four stud, a thriving recreational industry, clean water production or mitigation of negative environmental impacts. On a project-by-project basis, CCML seeks to both see and impact the forest, the trees and the human communities to promote sustainable economic growth and diversity. This article profiles three projects that exemplify CCML's attention to the different links in these chains. Big Forests and People Rome Creek Timber LLC: Supporting a Family-Owned Forest Products Company Key benefits of the project: Assures the sustainable management of over 103,000 acres of Timberland Preserves jobs in over 80 communities throughout the country Supports a well-regarded corporate citizen that pays workers above average wages and provides generous benefits

Headquartered in Dillard, Oregon, Rome Creek Timber is a subsidiary of one of the largest remaining family-owned wood products company of its size in the United States, RLC Industries Co (RLC). RLC is vertically integrated with forest holdings, harvesting operations, and wood products facilities ranging from standard lumber to highly sophisticated engineered beams and plywood. RLC's wages and benefits are generous and the company has a reputation as a good corporate citizen. Starting in 2008 and continuing through 2011, RLC Industries is faced with one of the most difficult wood products and housing markets in history. In addition, it has to manage a debt structure crafted prior to the 2008 housing "bust" and downturn in the U.S. economy. CCML partnered with two other allocatees to use a total of $100 million in NMTC allocation to refinance a portion of RLCs' debt as a critical first step in its overall refinancing that will see the company through the market downturn. This refinancing will allow for the continued consolidated timberland ownership that is critical to the long-term, sustainable management practices used by RLC. Maintaining control of the supply from its timberlands will protect RLC as a whole from the financial impact due to supply-side pricing fluctuations. By supporting the successful refinancing, CCML will allow RLC to continue to offer excellent jobs to its existing employees, and hire additional employees as the housing and wood products market recover. By looking at large forest tracts that support diverse commercial products produced in multiple communities, CCML helped RLC to impact the chain in it is entirety from seedling to the sawmill and all of the people affected at each level. Community Forests and People Grand Lake Stream Woodlands: Preserving a Working Community Forest in Maine Key benefits of the project: Encourages environmentally sensitive harvesting practices on 22,000 acres of over harvested timberland Preserves 100 local jobs in logging and tourism and offers new opportunities for ecotourism Provides 65 acres and $500,000 for low income housing and 55 acres for light-industrial use In late 2008, CCML's working partner, Sustainable Forest Futures (SFF), a subsidiary of the Northern Forest Center, discovered that a 22,000 acre parcel of productive forestland in northern Maine might be sold for private real estate development. This sale would threaten local jobs in the logging and ecotourism industry. CCML and SFF worked with the Town of Grand Lake Stream to use $19.8 million in New Markets financing to preserve the land's traditional uses and the residents' economic future. The town was so enthusiastic about the project that residents voted to increase their financial contribution by four times the budgeted amount. In an area with a rich history of ecotourism, the purchase of the parcel by Lyme Timber Company preserves sustainable forestry in the Downeast Lakes Region of Maine. Also, it secures a way of life for the local residents who serve as registered Maine Guides, loggers, truckers, lodge staff and other positions. The project includes the purchase of conservation easements to permanently protect the land from private residential development and creates the option to acquire the fee interest in the property by

the Downeast Lakes Land Trust to create a community-owned forest. It also secures over 100 acres adjacent to the town for affordable housing and light industrial manufacturing along with $500,000 in seed money for the housing project. The Grand Lake Steam project serves as an example of a moderatelysized forest tract that supports a community with both logging and recreational uses a project the town supported with its wallet. Forest Products and People PBS Lumber Manufacturing: Revitalizing a Louisiana Lumber Mill Key Benefits of the Project: Preserves 49 jobs and creates 60 new jobs with the addition of a second shift Provides $140,000 in funding to local technical college Brings in $794,500 in state and local tax revenue during operations annually PBS produces dimension lumber (two-by-fours, etc.) from plantation-grown Southern Yellow Pine. When the housing bust took hold and demand for dimension lumber fell to historic lows in early 2008, PBS was forced to cut production and had to eliminate their second shift. In the small town of Winnfield, Louisiana (population 5,000), the cuts were devastating. PBS wanted to bring back the second shift, but despite being an efficient and well-run operation, the price paid per board foot in the dimension lumber markets had fallen below the company's unit production costs. As demonstrated by other plant closings, this not only precluded a second shift, it threatened the company as a whole. Management knew they wouldn't be able to survive in the long term without becoming more efficient. $11 million in New Markets financing through CCML allowed PBS to expand its kiln drying facilities, eliminating a production bottleneck and allowing higher throughput from the sawing operation. This reduced the cost of production to compare favorably with current market pricing saving 49 existing jobs and creating 60 new ones. By helping a processor become more efficient in a commodity business where every penny per board foot of production is important, CCML used NMTCs to create change at the very top of the forest value chain. PBS now employs a significant portion of the population of Winnfield. As part of the transaction, PBS agreed to share its financial success to fund scholarships that will help the local technical school train the next generation of workers. By looking at rural natural assets holistically and considering the integration of value chains, New Markets can be used to support traditional industries and to make way for greater growth and diversification. It's a matter of seeing the forest for the trees and the people among them.