The Opportunity Cost of Developmental Deed Restrictions for Minnesota Private Forest Owners

Abstract

The cost of an eight-year developmental deed restriction for nonindustrial private forest (NIPF)

owners in Minnesota was estimated by examining the property tax records from 1,200

landowners (1,341 parcels) who enrolled in one of two property tax incentive programs that

promote sustainable forest management in 2009. The requirements of these two programs, the

Minnesota Sustainable Forest Incentive Act (SFIA) and Minnesota 2c Managed Forest Lands

(2c), are identical in nearly every respect except for the minimum enrollment period. The SFIA

program requires forest landowners to place a covenant on their property deeds, restricting them

from developing their land for a minimum of eight years. The 2c program had no such minimum

enrollment period. However, landowners are prohibited from developing their properties while

enrolled in the 2c program. The coexistence of these two preferential forest property tax

programs provided a unique opportunity to analyze the enrollment choices landowners made and

the associated property tax consequences.

Each enrolled parcel was classified according to its actual tax savings associated with the

landowner’s preferred property tax program (the SFIA or 2c program). Then each parcel’s

potential tax savings (or loss) were calculated by assuming it had been enrolled in the SFIA

program. Comparing the potential tax savings (or loss) to actual tax savings (or loss) enabled

each forest landowner to be classified according to the enrollment decision it should have made

if the objective was to minimize its annual property tax liability. While studies have repeatedly

shown NIPF ownership motivations include a mix of objectives that are not purely financial

(Baughman 1988, Kilgore et al. 2007, Butler 2008). However, this study analyzes a sample of

forest landowners’ decisions from a purely financial perspective to quantify the opportunity cost

of an eight-year covenant recorded on their property deeds. By linking enrollment choices to the

parcel-specific annual property tax savings associated with each program, we estimated the value

NIPF owners place on the temporary loss of developmental rights.

This study found that a majority of the landowners in our study were willing to forego substantial

annual property tax savings ($422 on average) in order to avoid the deed restriction required by

the SFIA program. A logistic regression model was developed to identify significant

determinants of choosing the SFIA program over the 2c program and estimate the probability of

enrollment in the SFIA program over the 2c program. Developmental pressure, as measured by

two proximate variables and the level of annual financial savings offered by each program, were

highly significant variables in predicting a landowner’s enrollment decision.