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PENNVEST loans to Lyme Timber challenged by state senator

As conservation efforts assume a higher profile in timber markets, opposition to $50m in loans supporting a recent Pennsylvania timber purchase demonstrates the complicated politics that can accompany public sector financing.

A Pennsylvania State Senator is questioning whether $50 million in loans earmarked for water and sewer projects used to support timber acquisitions by the Lyme Timber Company were in keeping with the program’s intended purpose.

In an op-ed published Friday, Pennsylvania State Representative John Lawrence recounted how New Hampshire-based Lyme approached the Pennsylvania Department of Conservation and Natural Resources last year to seek support for the firm’s purchase of 60,000 acres of Northwest Pennsylvania timberland from Hancock Natural Resources.

As part of the agreement, which resulted in Lyme being offered two loans of about $25 million each from the Pennsylvania Infrastructure Investment Authority (PENNVEST) with an interest rate of 1 percent, Lyme agreed to place 9,362 acres of the timberland into a working forest conservation easement. The loan also required Lyme to spend $750,000 to clean up streams impacted by acid mine drainage.

“From all outside appearances, this looks like a classic backroom deal”
John Lawrence, Pennsylvania State Representative

As part of the loan application process, Lawrence said in the op-ed, Lyme responded affirmatively to questions asking whether the firm owned, operated and had built the “system” (referring to the 60,000-acre portfolio of timberland properties). The senator argued that questions remain about how Lyme’s ownership will impact the public’s access to the lands being purchased and criticized the process for awarding the loan as insufficiently competitive.

“From all outside appearances, this looks like a classic backroom deal, favoring a well-connected private business with cheap and easy public money,” he wrote. “The people of Pennsylvania deserve better.”

Lawrence told Agri Investor that the op-ed was an attempt to summarize concerns about the loan that were expressed at a late March meeting of the Pennsylvania State House Agriculture and Rural Affairs Committee.

According to the Committee’s website, six testimonies were given at the meeting. Statements supporting the loan were offered by two PENNVEST representatives and an official from the Department of Conservation and Natural Resources. (The written testimony of a third PENNVEST representative was not linked from the site.)

Two testimonies opposing the loan were offered by representatives of Caledonia Land Company, a tree growing company based in Warren County, Pennsylvania. One testimony focused on the lack of competition for the PENNVEST loans, while the other challenged Lyme’s claims in their application about the benefits of ownership consolidation and the number of jobs the project would create.

Lawrence told Agri Investor that, while the idea of conservation easements may have merit, he’s mostly concerned about the process by which such efforts are funded. “The question is: Was this $50 million loan in keeping with the mission of PENNVEST as delineated in state law?”

Q&A

On May 9, Lyme circulated a 12-page “Questions and Answers” document outlining its use of PENNVEST loans for timber investments in Northwest Pennsylvania. The document provided a summary of the transaction and related interactions between the firm and PENNVEST and argued that timber investments should be seen as part of efforts to improve water quality.

“Forests naturally filter out sediments, moderate surface water temperatures, decrease run-off and store water for later release. Forest soils allow water to pass below ground quickly, which reduces sediment transport, increases the natural absorption of pollutants and provides for groundwater recharge. The result is the sustained release of large volumes of clean water, without the need for artificial treatment or purification,” Lyme wrote.

In its document, the firm said it had paid approximately $106.4 million for 41,500 acres of conservation land from Hancock ($2,560 per acre) and $27.6 million for an additional 18,700 acres from the Forestland Group ($1,475 per acre). Lyme explained that it had opted to seek financing from PENNVEST because there was limited funding available elsewhere for the cash purchase of easements in the area and that the donation of the conservation easement for 9,500 acres of the property was offered in exchange for the low-cost financing.

Mixed messages

Lyme chief executive Jim Hourdequin told Agri Investor that, while it is reasonable to question whether future PENNVEST funding should be used for land conservation, any suggestion that the loans already extended to his firm were secured in a less than transparent way is inaccurate.

Hourdequin stressed that the funding for the PENNVEST loans comes from a federal clean-water revolving loan that each state ‘on-lends’ to projects benefiting water supply. Though the PENNVEST loan was the first time that Lyme has used credit issued directly by a unit of government, he said that the firm regularly receives financing at concessionary rates from non-profit conservation organizations, such as land trusts, in exchange for land-conservation benefits.

“The key element that, unfortunately, was lost in the hearing was the equivalency between the benefit that we are getting form the financing, and the benefits that we are delivering in terms of conservation outcomes,” Hourdequin said.

In its May document, Lyme calculated the present value of the PENNVEST financing at between $5 million and $8.75 million and said that it believes the firm is delivering at least that much value back to Pennsylvania.

“What kind of message does that send to private capital that wants to put significant investments in rural communities such as Pennsylvania?”
Jim Hourdequin, Lyme Timber Company

Hourdequin said that Lyme consulted with PENNVEST throughout the application process, which took the form of about 100 screens asking for information that in some cases did not directly apply to timber projects. Consultations with PENNVEST included how to address these items, according to Hourdequin, who added that no reasonable person reading the firm’s application would think that Lyme was proposing the installation of a sewer system or a wastewater treatment plant.

“There were places in the application where we understood that the intent was for us to answer the questions that included the word ‘system’ with a yes,” said Hourdequin.  “People are now trying to look at that application and find ways in which they can take parts of the application out of context to suggest we were applying for something that we were not applying for.”

He also pointed out that the application itself does not necessarily fully reflect the underlying authority and mandate of PENNVEST, which he said probably looked to use the application as a tool to filter out projects. Further complicating public reception of the loans, according to him, was the fact that Lyme’s application to PENNVEST was quickly followed by another application seeking financing for a similar purpose.

“People said: ‘Wait a second, is this going to open the floodgates for the use of this financing for this purpose, potentially at the expense of other projects that PENNVEST has to support?’ That’s a perfectly reasonable public policy question to ask,” he said.

The second application was withdrawn in the face of opposition. Hourdequin said he hopes that critics of the loan to Lyme appreciate that their concerns have created a window for further discussion about whether PENNVEST funds should be used to support timber projects in the future.

“The one thing that private capital and investors in any state find very difficult is when commitments are made and people think they can unwind those commitments,” he said. “What kind of message does that send to private capital that wants to put significant investments in rural communities such as Pennsylvania?”