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EVALUATION: INTERNAL RATE OF RETURN - IRR

Brochure 3 in IRR Series

December 22, 2003

Land Use Committee
Hugo Neighborhood Association & Historical Society
Member of the CACNA Coalition

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Woodlot Resource To Non-Resource Lands

Goal 11 provides the rules and procedures for amending the various components of the Josephine County Comprehensive Plan (JCCP).1 The JCCP contains the general goals and policies, maps, inventories, functional plans and implementing ordinances that are required to guide the future development of Josephine County. Article 46 of the Josephine County Rural Land Development Code (RLDC) is the zoning ordinance that implements the rules and procedures.2

The Josephine County, Oregon internal rate of return (IRR) system is part of the JCCP (Goal 11: Policy 3. Non-Resource Land Criteria) and Article 46 where authorized lots or parcels (but not portions thereof) which have been zoned Woodlot Resource may be designated as non-resource.3 & 4

Evaluation By State Of Oregon (DLCD & ODF)

DLCD5 The DLCD believes that the IRRs for unrated soils need to be recalculated using updated data. Activity costs should be reduced to better reflect common management practices and current costs. Stumpage values need to be updated to reflect current prices. Updating information regarding common management practices, costs and stumpage values substantially changes the IRR. For an example soil, Tallowbox (188e, Tallowbox, 20 to 30 % slopes), the IRR increases from 3.89 to 7.21. A 7.21% internal rate of return is considered quite good in terms of the Josephine County model (i.e., 4.0 and above is good forest land) and therefore, indicates that the subject soil is well suited for forest operations.

New data should not change the 3.5 and 4.0 CIRR baselines established by the county. These figures reflect a real rate of return which is a comparison with other investments that could be made by a landowner.

ODF6 The future rate of return produced by a timber investment depends on a number of variables that change in response to market forces; including costs, price, rotation age, and the rate of increase in real stumpage prices. All of these variables must be projected into the future; some like price for 85 years, and there is no way to assure that the estimates are accurate. One set of numbers is not necessarily right or wrong; The bottom line is that the IRR System is not a good tool for planning purposes because it is subject to interpretations and market fluctuations.

The IRR system is biased toward producing low rates of return because the estimated variables used in the analysis are either conservative or outdated.

More Information

ODF’s Evaluation Continued The costs are relatively high but within reason, the prices are old and extremely low, the rotation age is longer than the economic optimum, and the real timber price increase is conservative. All these factors decrease the rate of return for each soil making forestry look like a poorer quality investment.

Past returns on investments in timber have been very good, but because there is no guarantee for the future most economic analyses tend to be ultra conservative and under estimate the growth potential of the investment. A stand level economic analysis, like this, is commonly used to compare investments or purchasing decisions in different stands of timber. As long as you understand the limitations and inherent short comings of the system it can be a useful tool. However, because of the subjective nature of an economic analysis it is not a good planning tool. We do not recommend using economic evaluations in planning.

More Information. Would you like to learn more about citizen involvement in land use planning? Contact a member of the Land Use Committee of the Hugo Neighborhood.

Disclaimer. This brochure is as much about providing information and provoking questions as it is about opinions concerning the adequacy of findings of fact and land use decisions. It does not provide recommendations to citizens and it is not legal advice. It does not take the place of a lawyer. If citizens use information contained in this paper, its their personal responsibility to make sure that the facts and general information contained in it are applicable to their situation. (Link)

1. Josephine County. October 2000. The Comprehensive Plan For Josephine County. Grants Pass, OR.

2. Josephine County. Revised October 2001. Josephine County Rural Land Development Code. Grants Pass, OR.

3. Lawrence F. Brown. 1985. Using The Internal Rate Of Return To Rate Forest Soils For Applications In Land Use Planning. Grants Pass, OR.; Michael Snider. 1999. Locational Factors Affecting Woodlot Resource Lands. Josephine County Planning Office. Grants Pass, OR.

4. Hugo Neighborhood Association & Historical Society. 2003. Woodlot Resource To Non-Resource Lands. Grants Pass, OR.

5. James W. Johnson. 1995. Letter from Johnson, Farm/Forest Coordinator, Oregon Department of Land Conservation and Development (DLCD), to Michael Snider, Josephine County Planning Office, dated July 12, 1995.

6. Kevin R. Birch. 1995. Letter from Birch, Planning Coordinator, Oregon Department of Forestry (ODF), to James Johnson, DLCD, dated June 30, 1995.

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