A tropical teak forest situated on the sunny shores of Panama can provide investors 15 to 20 percent returns on profits from timber and carbon credit sales through companies that offer a selection of investment options.
Most timber investment companies in Panama focus on teak trees, which are a hardwood cash crop of sorts, producing high yields in a short amount of time. However, some companies expand beyond teak. Futuro Forestal, for example, a German-Panamanian forest service company, plants up to six different species of native timber and reserves 25 percent of the land for natural regeneration.
With Futuro Forestal, investors buy 2.47 acre parcels for $24,990 and receive direct title land ownership in Panama; Panamanian tax-free profits from the sale of the timber; and an annual internal rate of return (a calculation that takes into account the time value of money) of up to 11 percent on a 25-year term from timber sales, seed sales and carbon credit sales. Futuro Forestal offers management based on principles from the Yale University School of Forestry and Environmental Studies and is working on habitat restoration for local flora and fauna and endangered species.
Other timber investment companies are also working to protect the environment and boost the local economy. In addition to employing local workers, removing atmospheric carbon dioxide and restoring farmland suffering from the effects of long-term slash and burn farming, Panama Teak Forestry has implemented other measures to increase the sustainability of their timberland.
“We have introduced modern technology and systems for restoring depleted soil through revitalizing the microorganisms on the soil and creating a balanced managed ecosystem within our reforested areas,” Jeff Duda, president of Panama Teak Forestry, said. “We also devote about 10 percent of our land holding to natural biodiversity.”
Teak is the cream of the crop in the timber business, Duda said. Timber, in general, has beaten the S&P 500 since 1987, according to the National Council of Real Estate Investment Fiduciaries (NCREIF). (For more information on general timber investing, see Timber: A Renewable Resource.)
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“Overall, this industry can be beneficial to the earth and at the same time produce an income,” Duda said. “Teak is one of the highest yielding forests of the timber industry….[It] can yield about $4,000 per hectare per year over time, which gives a 15 to 20 percent [return on investment] in a safe steady industry. [It’s] a green investment that gives steady, safe returns.”
Investors with Panama Teak Forestry begin with a minimum investment of $50,000 in the company’s shares, available to accredited investors. Dividends begin to pay out at seven years and every year thereafter, according to Panama Teak Forestry’s website. Shares can be sold at any time, which allows investors to have a flexible exit strategy.
Panama is one of few places in the world where high quality teak trees grow. Burma (Myanmar) has long been a large supplier of teak to international markets, but the political unrest, coupled with the fact that the Burmese military regime owns every teak plantation in the country, means the supply from Burma may be unstable.
There are some potential drawbacks to investing in Panamanian timber. While there is potential for excellent rates of return, it is impossible to predict the market for teak, or any hardwood, for 25 years.
Teak trees, like any hardwood, have some inherent risks. Fire, particularly when teak trees are between their first and fourth year of growth, can be devastating. After the fourth year, their bark hardens and they are more resistant to fire, according to Panama at Your Service. Grazing animals, on the other hand, can be somewhat damaging. However, these risks may be mitigated by investing in shares of a timber company (which reduces the risk of a fire on an individual’s stand to nearly zero, according to Duda), or owning shares in a multi-age stand. A multi-age stand also reduces the time to harvest and increases the early cash flow.
Still, weather is not a risk factor, because there are no hurricanes in Panama. Futher, teak is somewhat resistant to insects and diseases, according to Panama at Your Service.
Futuro Forestal offers some protections against fire dangers, including fire insurance on the trees for the first five years. Additionally, Futuro Forestal pledges to replant any tree that dies because of disturbed growth.
Panama timber investors have more options than just buying shares of a timber investment company. The Panamanian government recently reapproved a reforestation visa program. With the visa programs, investors receive fully titled land in Panama, are offered a complete break on Panamanian taxes from the sale of their timber and have the option of applying for a residency visa. The rate of return from these reforestation visa programs is lower than the return from a pure timber investment in Panama, Duda said. For more information about this program, see PanamaReals.com.
Investors should be cautious and conduct thorough due diligence prior to investing with Panamanian timber companies, particularly those offering the reforestation visa program. Some fraudulent companies have used the reforestation visa program in an illegal manner, according to The Panama News. Investors should consult an attorney experienced in Panamanian reforestation law. If they are interested in setting up a Panamanian corporation, they should also consult an attorney familiar with that process. The attorneys, of course, should be independent from the reforestation companies.