How to Evaluate Panamanian Reforestation Residency Visa Programs (A “Teak Visa”)
Contributed by: Don Winner —
Teak investments in Panama fall into two general categories:
a. permanent residency visa programs; and
b. standard, profit-oriented timber investment opportunities.
Reforestation visa programs can make money if selected carefully, but their primary purpose is to obtain a residency visa for the investor, not to provide the maximum return on investment. For the highest returns, a traditional timber investment in Panama is a better option than a reforestation visa program (Keep in mind that simply making an investment in Panamanian timber does not qualify you for a reforestation visa.) Only reforestation residency visa programs can meet the needs of individuals seeking Panamanian residency through an investment in tropical timber.
Determining which Visa option is best for you:
With the reforestation investment visa program, a person who invests $80,000 in a reforestation project may be eligible to obtain a permanent residency visa in Panama. By making this type of investment, you are essentially buying a Panamanian residency visa and getting a teak investment along with it. If your primary goal is to obtain a Panamanian residency visa, research all of the residency visa alternatives to determine whether a reforestation visa program is the most appropriate option for you. If it is, the next step is to decide which company’s reforestation program best meets your needs.
Panamanian law grants reforestation visas based on ownership of a minimum of 5 hectares (about 12.4 acres) of timber land titled in the investor’s name or in the name of a corporation in which the investor has at least a 51% share. Sales contracts for reforestation projects contain two parts: a land purchase contract and a tree and management contract. Once the contract is executed, the visa investor is considered the owner of an independent reforestation project, with a contract in place to manage the timber property through final harvest. Each 5-hectare project in the residency visa applicant’s name must be independently certified by ANAM (Autoridad Nacional del Ambiente, the national environmental authority of Panama) and other government authorities.
Companies that market reforestation visa packages normally do all the obligatory studies and obtain all the certifications needed for the visa applicant to qualify for the residency visa. The essential information is then provided to the applicant’s lawyer. As you compare programs, be sure that there are no additional charges for these services in connection with the visa application process. ?
Selecting a Reforestation Visa Company:
The major differences between reforestation visa companies are the number of hectares of timber that you actually receive and the ongoing cost of managing your reforestation project. Most of the established companies provide good management service, and the trees grow at about the same rate, resulting in roughly the same yield per hectare per year. In the end, all teak properties managed by reputable companies will have about the same value per hectare for the investor. Although yield projections for teak plantations vary, the reality is that plantation teak has been around for over 1000 years and teak is a popular commercial hardwood. Both growth rates and sale prices for logs and lumber are well established.
Be wary of overly optimistic projections as you compare the programs offered by Panama’s reforestation visa companies. Although 20 year and shorter harvest rotations are sometimes advertised and of course sound attractive to prospective investors, the true minimum rotation time frame to produce good quality teak is 25 years. The companies that advertise 20 year rotations do not, in fact, have any 20-year-old trees and have yet to discover that 20 years is not enough time to bring a teak plantation to maturity. For example, rotations in India and Indonesia, which have long histories with plantation teak, run from 25 to 60 years; the longer rotations produce higher volumes per hectare and a better quality wood. Optimum return on investment (ROI) is obtained from a 25 to 30 year rotation.
Pros and Cons of Corporate Ownership of Your Teak Investment: As mentioned previously, Panamanian law specifies a minimum size of 5 hectares for timber plots that are used to qualify the investor for a reforestation visa. Some companies that market reforestation visa packages have found ways to increase their own profits by offering investors smaller-sized properties. These smaller plots are titled to the investor’s Panamanian corporation rather than directly to the investor.
Be wary of this option, since it reduces your ROI and can increase the risk and cost of your teak investment without adding any value. Although corporate ownership can shorten the approval time needed to get your residency visa by a few months, there is a significant down side to owning your teak property through a corporation.
First, you may receive fewer than 5 hectares of timber land for your investment. Second, there are costs associated with owning a Panamanian corporation, including set-up and maintenance fees. These run from $500 to $1200, depending on the reforestation visa company that you select and how the corporation is structured. There is also a net asset tax of 2% of the value of the holdings. This means that you will owe the Panamanian government at least $1,600 per year in taxes even if the government never reappraises the value of your holdings. Keep in mind also that there are costs associated with filing the paperwork to pay your corporate taxes. ?
If you are a U.S. citizen and you own your timber property through a Panamanian corporation, that corporation is deemed a controlled foreign corporation (CFC) in the U.S. There are new and rather rigorous reporting requirements for owning a CFC, which are available online from the IRS and other sources. An accountant in the U.S. will typically charge from $2,000 to $7,000 per year to fill out the forms required by the government, and the penalties for improper reporting can be significant.
Because of reporting requirements, your ownership of the Panamanian corporation that holds the title to your timber property becomes a matter of public record. In addition, you get very little asset protection through this corporate ownership structure.
Over the lifetime of your teak investment, owning your timber land through a Panamanian corporation can add at least $40,000 in net asset taxes to the cost of your investment package.
You can also expect these expenses over the life of the investment held in a Panama Corporation:
approximately $12,500 in corporation maintenance costs even if you are a citizen of a country with no CFC reporting requirements,
an additional $62,500 for reporting costs to comply with U.S. CFC laws if you are a U.S. citizen.
Having your plot titled in the name of a Panamanian corporation that you control can make the visa application process a bit shorter. However, up to $115,000 is a lot to pay to shorten what can be a six-year process by a few months.
Evaluating Visa Company Management Charges:
As you evaluate the packages offered by Panama’s reforestation visa companies, you will find that management charges vary greatly. Most companies include management costs for the first few years of the contract in your initial $80,000 investment. From year 6 or from year 10 on, however, you will probably be charged an annual maintenance fee that ranges from a few hundred dollars per hectare to as much as $800 per acre. Since there are about 2.5 acres in a hectare, note whether the management fee in the company’s contract is expressed in hectares or acres to be sure that you are comparing apples to apples.
Some companies collect a percentage of the harvest as their management fee. This is ultimately in your best interest as an investor, because:
Your management company has a financial stake in producing the maximum amount of quality wood from your land;
Your out-of-pocket expenses are lower.
As with all financial offerings, read the fine print in visa company management contracts carefully. ?
Example 1: 51% Corporate Ownership and an $800/Acre Management Fee: For example, assume that, to qualify for a reforestation visa, you buy a 51% share in a Panamanian corporation that holds the title to 5 hectares of teak property. You also agree to pay an $800 per acre management fee after year 10. In this scenario, you own about 2.5 hectares (a little over 6 acres) of teak property.
This could turn out to be a very expensive proposition. In addition to your initial $80,000 investment, you will have to pay about $115,000 in corporate fees and taxes in Panama and $60,000 in management fees. Your total investment in 2.5 hectares of teak will yield about $260,000 in logs by year 25 of the rotation. Your total cost can be as much as $255,000 leaving a net profit of only $5000 after 25 years.
Example 2: Personal Ownership and a Percentage of the Harvest as the Management Fee: Alternatively, assume that you select a reforestation visa company that sells you 5 hectares of teak land titled in your name and charges you 20% of the harvest as its management fee. You will own 5 hectares of land and will be entitled to the profits from 80% of the harvest (the yield from 4 hectares) through the 25-year rotation. This arrangement will yield about $520,000 in returns from your initial $80,000 investment, for a net profit of approximately $440,000. That return is over 8,800% better than the return in the first example.
When evaluating reforestation visa packages, your focus should be on the cost of this investment over time, the number of hectares of teak you will receive, and exactly what you are buying. For example, some companies sell you the trees, but not the land. This means that you will receive the proceeds from one full teak rotation but your ownership stake ends with the final harvest. You cannot benefit from the appreciating value of the timber land itself or from any future production.
Sample Yield Per Hectare Projection:
Below are typical yield per hectare figures for a teak property, using realistic numbers that have not been adjusted upward for inflation. Projections are best done in this way. Once inflation is added to the numbers, almost any return may be projected simply by inflating the future value of the harvest, making the projection meaningless.
Over time, of course, teak prices will rise. Timber prices, in general, have exceeded the inflation rate over the past 30 years. To determine what your internal rate of return (IRR) would be with inflation factored in, just add whatever average inflation number you feel is appropriate to the yield numbers shown below. For example, if the projected IRR is 8% and you add 7% for inflation, the inflation-adjusted return rate will be 15%. ?
Costs have not been factored into this projection because—as discussed above—your expenses can vary significantly, depending on the terms of your contract with the reforestation visa company.
Yield at Key Stages of the Teak Rotation:
This info from the Director of Panama Teak Forestry. A major tropical timber investment company focused on teak investment.