It sounds almost too good to be true. A private company, Hawaiian Legacy Hardwoods, LLC, has plans to restore native koa forests to thousands of acres of Big Island land, grazed and logged to a nub over the last century and a half. To achieve this it has devised a business plan that claims to benefit not only investors and the environment, but dozens of Hawai`i non-profit organizations – everything from the Boy Scouts to the Kidney Foundation to The Nature Conservancy of Hawai`i.
True or not, the operation is moving forward with plantings of hundreds of thousands of koa seedlings on the vast grassy plains of Kuka`iau Ranch, on the northern slope of Mauna Kea near Pa`auilo town. The plantings, which so far occupy about 400 acres, are on lands leased by Hawaiian Legacy Hardwoods (HLH) from ranch owner David S. DeLuz Sr. In the tiny village of Umikoa, nestled in the middle of the ranch, HLH has erected three greenhouses. Here, HLH workers take seeds harvested from what HLH’s sales manager Richard D. Lindberg says are the hardiest, straightest koa remaining on the ranch and bury them in soil cylinders the size of espresso cups. When ready to be planted, in four to five weeks, each seedling goes into the ground accompanied by a computer chip embedded in a tongue-depressor-like plastic stick. Coded into it is the origin of the seed and its purchaser, who, the company says, will be able to track remotely the tree’s progress over the years.
One cannot help but be impressed by the sight of a hundred thousand bright green seedlings, each an inch or two high, each ready to be enlisted in the fight to bring back the forest.
’Reasonable Expectations’
That’s not the only, or even the most, impressive part about HLH’s operations. The company’s projections of growth rates and yields of marketable koa from investors’ trees are far greater than anything that foresters from the University of Hawai`i and the U.S. Forest Service have recorded. In mature stands of planted koa, just a few miles from Kuka`iau Ranch, the trees’ basal area – the actual square footage occupied by trees, and a proxy for tree productivity – has been measured by foresters as somewhere between 60 and 175 square feet per acre. HLH claims that for its koa, “250 square feet per acre seems a reasonable expectation.” In a booklet distributed to potential investors, HLH states that their estimates of growth are arrived at “using the growth rates typical of other plantation grown tropical hardwoods,” such as Acacia mangium, which has been described by some promoters as “an investor’s miracle tree” in terms of fast growth.
(In a telephone interview last month, HLH chief executive officer Jeff Dunster backed away from the 250-square-foot claim. Last year, he said, “we actually modified all of our yields to 175,” reflecting the upper limit in the range set by university and Forest Service experts. Despite the lower number, he said, projections for investor profits did not diminish. “Because the price of koa has gone up so drastically,” Dunster said, lowering the basal area estimates “didn’t change the profits.” The reduction was made, Dunster continued, “not because we agree with the number – we still think it’s woefully low. But it doesn’t matter, since the price has gone up.”)
Basal area projections are not the only area of disagreement between the experts and HLH. Estimates of the volume of lumber taken from HLH stands at the end of the 25-year investment cycle were “more than an order of magnitude more than what we observe on a neighboring ranch,” said J.B. Friday, a University of Hawai`i extension service forester and one of the authors of several studies on koa growth trends. HLH projects that more than 77,000 board feet per acre will be taken over a 25-year rotation, Friday noted at a January meeting of the state Forest Stewardship Advisory Committee where HLH’s plan was discussed. When Friday prepared a paper on koa plantings on former ranch land, he continued, “we used a figure of 9,500 board feet per acre, and still Peter Simmons [a Big Island forester] thought we were way over. The most recent figure I published was 7,000 board feet per acre… And they [HLH] project 77,900 board feet per acre.”
Lindberg, the sales director, explained the discrepancy by noting that HLH was using seed from trees specially selected for their vitality and likelihood of producing “investment-grade” wood. Seed sources for the plots Friday and his colleagues had examined were unknown, he said.
That’s not quite right, Friday said. At the best of the three koa plantation sites (all within a few miles of the HLH plantings) studied by him and colleagues Paul Scowcroft, Janis Haraguchi, Travis Idol, and Nicklos Dudley, the planted trees were from seeds taken under “superior parent trees.” Those trees, planted at an area called Keanakolu, did have “much better form” than trees at the two other sites, but yields were still nowhere near those anticipated by HLH.
Whatever the yields, HLH tells investors to expect no return until the eighth year following planting of their blocks. In a prospectus-like booklet given to investors, HLH says that it assigns “no value to the trees that are culled or thinned in years 1-7.”
“We do however value the wood derived from the year 8 thinning harvest,” it continues. At year 8, of the 100 seedlings planted, between 37 and 43 will be harvested, each with 35 board feet of “marketable wood.” Later harvests will be made at years 13, 17, and 21, with the final harvest – of between 9 and 11 trees – at year 25. By that time, each tree is anticipated to have around 540 board feet of marketable wood. With a projected value ranging from $30.43 to 47.47 per board foot, each tree would then be worth more than $16,000, and possibly as much as $26,000. Between 43 percent and 64 percent of the investor’s total projected profits would come from this last harvest.
From the initial $7,807 block of trees, then, investors can expect to see net returns (after HLH takes out costs for milling, harvesting, processing, and maintenance) of between $282,946 and $316,485, the booklet states. Averaged over the 25-year investment period, that comes to an annual return on investment of between 14 and 16 percent.
The high risks associated with the investments are disclosed only in the order form that potential purchasers of 100-tree blocks must complete. There, HLH states that it will replace any tree “that is not growing as anticipated or of good form” only within the first year of planting. Also, buyers must “acknowledge that HLH does not guarantee the growth of your trees, the value of your trees, the yield of your trees or the value or saleability of the logs/lumber that may be harvesting [sic] from your trees.”
Accredited Investors
HLH also includes in the order form a clause normally found only in sales of high-risk stocks, requiring purchasers to attest that they are “accredited investors,” as defined by the Securities and Exchange Commission. Accredited investors are generally institutions (pension funds and the like) and wealthy individuals.
According to Dunster, the restriction was included just to make sure that investors knew what they were getting into. “It was a personal decision on my part,” he told Environment Hawai`i. “We want to deal with people who have the ability to hire their own analysts. We want to make sure we’re not dealing with situations where, even with good intentions, someone buys an investment that’s not right for them.”
When questioned as to whether investor funds were segregated from the company’s general revenues, Dunster said that they were – in a trust controlled by the company. “It’s our way of making sure we only draw down funds to fulfill our obligations to the tree owners,” he said. “The largest expense, when someone buys a block, occurs in the first year. But we keep a reserve. Over the next three and a half years, after the trees are planted, they need to be fertilized.”
Dunster knows a thing or two about risk, having once held a registration with the National Association of Securities Dealers, or NASD, now known as FINRA, for the Financial Industry Regulatory Authority. According to FINRA’s online “brokercheck” records, Dunster was expelled from NASD in 1990 for non-payment of a fine imposed on him as a minority stakeholder in a brokerage firm, Pan Oceanic Investments, that the NASD had sanctioned for several unethical trading practices. When asked about this, Dunster provided the decision of the NASD Board on an appeal of the original sanctions against him and Pan Oceanic. In that decision, the NASD Board severed him from the fines against Pan Oceanic and instead imposed on him a 10-day suspension and a $75,000 fine intended to “effectively deprive him of the $58,778, or 25 percent of the excessive mark-ups … plus assess an additional $16,222 as a deterrent against future misconduct.” After Dunster did not pay the fine, the NASD expelled him.
Dunster also provided a copy of a letter dated May 10, 1994, from the New York law firm that represented him before the NASD Board. Referring to the NASD Board’s decision in the appeal, written February 29, 1990, the letter states, “The net effect of the decision for any and all purposes is that you are not now suspended and have never been expelled ‘from membership in … an association registered as a national securities association” with the SEC. However, as far as NASD/FINRA is concerned, Dunster was well and truly expelled from its ranks as of July 17, 1990. In an interview last month, Dunster disparaged NASD: “It’s an organization that makes its living going in and imposing finds. It’s just simply a game…. It’s all about collecting fees, and I wasn’t going to pay it [the fine].”
In the 1990s and well into the last decade, Dunster and his partner, Darrell Fox, worked closely with a number of penhy-stock companies, advising them on mergers, drumming up publicity for their activities, and consulting on raising capital. Now, Dunster says he is interested in more than making money. “Why are we doing this?” he said in the interview. “I’ve seen what money does to people – it makes you a target. I want to put my money now in a place where I can feel I’ve done something with it. Securities is basically betting on horse races. I want to do something with a tangible impact. Putting up a forest is for us the ultimate statement.”
Second-Growth Koa
One of the most significant variables in the company’s projections is the market price of koa. Three possible scenarios are set forth in the HLH booklet for investors calculate different rates of increase in market prices for koa: 6 percent a year, 7 percent, and 9 percent. These rates are conservative, HLH says, given that “the rate of increase in tropical hardwood prices since records started being kept in 1972 has averaged 13 percent per year.”
“For koa, demand and limited supply has resulted in a price increase of more than 1000 percent in just the last 10 years,” it goes on to say.
Friday points out a flaw in the projections, however. Today, he said, “everybody’s harvesting old-growth stuff. It’s beautiful wood.” But whether young, so-called “second generation” koa can demand the same high prices is an open question, he added.
In 2009, Friday was part of a demonstration project at Kuka`iau Ranch that looked at a one-acre stand of koa planted in 1976 by the Forest Service – a stand, by the way, that Lindberg and others with HLH now cite as an example of the high productivity that can be expected from their plantings.
The object of the project was to examine the quality of plantation koa. “We took down one large, ‘crop’ tree and four smaller ‘cull’ trees, milled them up and scaled them,” Friday said. “We looked at the lumber, said here’s what you can get out of a 32-year old tree. The loggers said that if I had a pallet of this wood, I couldn’t sell it in today’s market. I could mix in a few boards of it with a lot of better wood, but this stuff isn’t marketable in today’s market.”
The crop tree, with a 20-inch diameter at breast height (dbh), yielded 200 board feet of lumber, while the two cull trees that were milled (12 inches dbh and 15.5 inches dbh) yielded 42 board feet each. Of the approximately 1,000 trees planted in the one-acre stand, there were just 12 potential crop trees.
Nothing would please Friday more than to see a market develop in second-growth koa, “but in my view, it’s not there today.”
“What we got isn’t the same stuff as you get from a huge tree in a pasture that falls down. Slice it off, get a beautiful rind of wood. But that’s not sustainable – you’re just hunting wild meat.” (Photos of the August 17, 2009 demonstration are available online at: http://www.ctahr.hawaii.edu/forestry/Workshops/kukaiau17Aug09.html.)
Dunster was asked how confident he was that the second-growth wood produced by HLH trees will be as marketable as old-growth koa and fetch prices just as high. Very confident, he replied. As the supply of old-growth koa diminishes, people will have bidding wars over what remains, he said. “It’s a supply-demand thing,” he said. “I do know there are folks that can make use of 25-year koa.”
Legacy Trees
The investor trees are not the whole story of HLH’s operations, however. The company had no representative at the January meeting of the Forest Stewardship Advisory Committee, but in a recent tour of the operation, sales director Lindberg said that HLH is planting as many legacy trees as it is investor trees. The business plan called for having legacy trees represent up to 20 percent of plantings, he said, but as it turns out, they are around 50 percent.
So what is a legacy tree?
According to one of the company’s websites, www.legacytrees.org, these are trees that are not intended to be harvested, but which will, instead, be a part of a long-term reforestation plan. Individuals wishing to plant a legacy tree – in memory, perhaps, of a loved one, or as penance for extravagant carbon consumption, or to participate in a reforestation effort – pay HLH $60 to plant a tree. Of that, $20 goes to a charity of the buyer’s choice, $1 goes to The Nature Conservancy of Hawai`i (which also receives $50,000 a year from HLH), and the remaining $39 goes to the company.
To date, all the legacy trees have been koa, but, says Lindberg, that won’t always be the case. Mamane, `ohi`a, or other native species “appropriate for the area” could also be planted as legacy trees, he said. Dunster told Environment Hawai`i that HLH has contracted with nurseries to furnish iliahi (sandalwood), mamane, naio, `ohi`a, and even some understory plants such as akala and ko`oko`olau.
The proposal submitted to the Forest Stewardship Advisory Committee states that such trees “will stand as a permanent memorial on the land. They will be planted in fenced units along ridges, gulches, and hollows that are not otherwise suitable for commercial plantings.”
Lindberg was asked how the plantings can be deemed permanent while HTH has less than 30 years remaining on its lease with Kuka`iau Ranch. Lindberg noted that the company’s website never claims that the plantings will be perpetual and that, in any event, HLH is in negotiations with DeLuz to exercise its option to purchase the land. According to records at the state Bureau of Conveyances, in 2010, HLH was granted an option to extend the lease by 32 years (for a total of 60 years from its commencement, in 2009), but there is no recorded mention of an option to purchase.
Dunster acknowledged that there was no assurance the company would be able to purchase the land from Kuka`iau Ranch. “What I can tell you is, we have documents signed by them stating that that was their intention, and I think they’re changing their minds. If we can work a deal with them, we absolutely want to purchase all of this.” Dunster made clear he was referring to all 3,688 acres that are included in the restoration proposal HLH submitted to the Forest Stewardship Advisory Committee, not simply the 1,000 acres the company leases.
At the end of the third year of the 28-year lease term, would Dunster continue to sell blocks of trees with an expected 25-year life?
Dunster responded by explaining that the 28-year clock only began ticking when a given field within the lease area is planted. “In the lease, it states, ‘The term of the lease shall vary as to individual Planted Areas.’ In other words, the 28 year lease begins as we take on each new parcel of land for that year’s planting. In essence we end up with many little leases with staggered expiration dates,” he wrote in an email to Environment Hawai`i. (The lease itself was not recorded at the state Bureau of Conveyances, but rather only a memorandum of lease, taking notice of its existence.)
Should HLH lose the land, what will happen to the investor and legacy trees? Dunster was asked. “When we set it up,” he said, “we designed it so that if something happened to HLH, the obligations we’ve committed to will be honored by the landowner. We built it right into the lease – that the landowner agrees they’ll honor all our obligations.”
Carbon Credits
Lindberg said the company makes no money on its legacy trees and not much on its investment trees, either. The real profit center, he said is in selling credits for carbon sequestration.
“We have had an analysis done for carbon” by Kent & Associates, Dunster added. “We haven’t published it, haven’t released it, but … they agree with our old numbers” (the 250-plus square feet per acre basal area of koa, not the 175-square-foot number in the company’s current projections). Kent & Associates “did their own studies,” Dunster continued. “They came up on their own with the same numbers that we had, within one or two percent. It was rewarding and vindicating.”
Kent & Associates “certify carbon, which is all about growth rates,” he said. “We’re in the final stages… We will actually be the first certified licensed tropical hardwood carbon credit on U.S. soil in the world.”
According to Kent & Associates website, it “performs carbon project eligibility and feasibility assessments. If a carbon project makes sense, we will help the client prepare a project and list the carbon credits with an appropriate registry.”
Investors are told that the carbon-credit value of the trees they own is theirs to sell. “If you plant 100 koa trees,” HLH claims, “the anticipated yield over their 25-year growth and harvest cycle is in excess of 17,000 board feet. Koa weighs approximately 3.15 pounds per board foot. That makes the yield about 53,550 pounds. If half of this is carbon, you have trapped about 26,775 pounds of carbon. To do this, your trees removed 49.1 tons of carbon dioxide from the atmosphere.” Even after the trees are felled, investors need not worry about the carbon once more becoming a greenhouse gas: “When the wood grown is precious tropical hardwoods, the lumber and products made from this wood will be around for generations. It will be a very long time indeed before that carbon finds its way back into the atmosphere.” The carbon-credit value of legacy trees and of other trees owned by HLH belongs to the company.
Patricia Tummons
Volume 22, Number 9 — March 2012
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