Conservation Finance: Framework & Basic Concepts

1. Conservation Finance:Framework & Basic Concepts Brad Gentry and Deborah Spalding Yale/Working Lands Investment Partners Conservation Finance Camp

2. What Will We Cover In This Session? 1. An organizing framework For thinking about the “costs of money” Across the different sources/“pots” now being used 2. Some key financial concepts Particularly for working with private investors 3. Layering different sources of funding Into individual projects by availability/cost Start you thinking about the group projects… Conservation Finance Camp

3. Conservation without money is just conversation… John Forgach Conservation Finance Camp

4. Necessity is the mother of invention… Plato Conservation Finance Camp

5. No Money is Free… Life Conservation Finance Camp

6. An Organizing Framework Sources/Pots Characteristics • Thanks to: • Katherine Birnie, MCHT/EIP • Chris Larson, Patrick Holmes, Yale School of Forestry & Environmental Studies • David Batchelder, Kittery Land Trust The “Cost of Money” matrix • Summary (3 pp) + details on seven main sources/pots (13pp) on class website Conservation Finance Camp

7. “Cost of Money” Tradeoffs Across Pots Increasing volumes, costs, complexity, risk, return, etc… Go for the cheapest/simplest money first! Conservation Finance Camp

8. Conservation Finance Pots of Money Conservation Finance Camp

9. “Cost of Money” Characteristics How much can your organization handle? Conservation Finance Camp

10. “Cost of Money” Characteristics Conservation Finance Camp

11. “Cost of Money” Characteristics Conservation Finance Camp

12. “Cost of Money” Characteristics Conservation Finance Camp

13. “Cost of Money” Characteristics Conservation Finance Camp

14. How Layer Sources Together for Your Capacity/ Project? Conservation Finance Camp

15. Layering Example: Guilford, CT • 780 acres open space protection 2007-2009 • Broomstick Ledges (141 acres) acquired by Guilford Land Conservation Trust • $2.15 million • $500,000 from Town of Guilford • $600,000 from State • 1998 Open Space and Watershed Acquisition Program • Balance from private donors Conservation Finance Camp

16. Layering Example: Guilford, CT • East River Preserve (640 acres) acquired by Town • Deal brokered by Guilford Land Conservation Trust • Multi-conservation organizational effort to preserve tidal headwaters of the East River in Guilford • Adjacent to 240 acre Audubon Salt Marsh Sanctuary • $3,000,000 NOAA grant • Coastal and Estuarine Land Conservation Program • $5,000 FWS grant to write property management plan • 2009 town referendum for $15.4 million • $27 per $100,000 in property value • Passed by a 5:1 margin (2645 / 486) Conservation Finance Camp

17. The Role of Private Investors • Why do we need private investors? • Many sources of public capital have dried up • Easy transfer of protected lands to state/federal agencies is no longer assured • Most economically productive lands remain unprotected • To effectively utilize private capital it is important to understand their values and objectives Conservation Finance Camp

18. Investor Interest in Working Lands • Stable, “real asset” in turbulent markets • Mix of income and capital appreciation • Inflation hedge • Diversification and low correlation to other assets • Desire to demonstrate sound land stewardship ethic • Longer term drivers: • Scarcity value of arable land and water • Farmland loss / population growth • Use of technology to increase productivity • Growth in markets for ecosystem services Conservation Finance Camp

19. How Private Investors See the World • Not necessarily avoiding risk but balancing risk and return • Seen in both financial and conservation terms Conservation Finance Camp

20. Delineating Risks and Returns • Returns • Market rates vs. mission rates of returns • Timing of cash flows • Liquidity and holding period • Optimal capital structure (debt/equity/public sources) • Ecological “uplift” • Risks • Financial performance and capital losses • Time value of money • Lock up • Leverage • Achievement of conservation goals Conservation Finance Camp

21. Investment Performance Metrics • Internal Rate of Return (IRR) (%) • Annualized effective compound rate of return • Used to compare different investments • Total Return (%) • Cash yield/income plus asset appreciation • Investment multiple (x) • What you get back vs. what you put in • Opportunity Costs • Forgone returns that might otherwise be realized Conservation Finance Camp

22. IRR vs. Investment Multiple • Some investors prefer one or the other but best to evaluate both in combination Conservation Finance Camp

23. Discounting / Time Value of Money • $1 today is worth more than $1 in five years • “Present Value” (PV) = current value of future payments discounted to reflect the time value of money and risk • Ways to determine discount rate: • “risk-free rate” PLUS some risk premium to pay investor for the risk that cash flows do not occur as expected • Investment “cost of capital” (mix of debt/equity/other) Conservation Finance Camp

24. Things to Watch Out for With Private Investors • Strongly value “information advantage”—everything is proprietary • Greater due diligence since one’s own capital is at risk • Return on investment may trump landscape priorities • Look at a variety of deal flow to find the best transactions Conservation Finance Camp

25. Sample Project Pathway Conservation Finance Camp

26. Sample Project Pathway: Example Conservation Finance Camp

27. Sample Project Returns: IRRs Conservation Finance Camp

28. Key Questions to Ask • Who controls the deal and its terms? • Who determines the conservation trade-offs? • What happens if the deal fails? • Who bears the risk? How do each parties’ risk profiles differ? • What is driving the price of land, the appraisal or the expected IRR? Conservation Finance Camp

29. Questions? Conservation Finance Camp