Note: Because of Securities and Exchange Commission (SEC) regulations that prevent private equity firms from discussing their work in ways that might be interpreted as a solicitation of investment, Carl Palmer was not able to speak with us about all aspects of Beartooth's business. He was able to speak about other areas of Beartooth's business, including their conservation mission and how they restore the ecological and agricultural value of their ranch properties.
GIIN: What motivated you to create a market-based business model to address land conservation?
CP: There is a natural alignment between creating financial value and ecological value. Conservation organizations and landowners have known that for a long time, since your typical ranch buyer is looking for a place with beautiful wide-open views and abundant populations of trout, elk and other wildlife. Although conservation groups accomplish a tremendous amount of important work with the limited resources available to them, it is widely recognized that philanthropic and government funding simply isn't adequate to get enough conservation work done. Additional sources of capital are required to make change on a significant scale. Beartooth Capital was formed to be part of the solution to that need.
GIIN: Describe how Beartooth integrates conservation into its work.
CP: Our conservation mission is integrated at the core of our business model. Rather than being an impediment to our work, we believe that conservation is an important competitive advantage for us in the market place. Having a strong conservation focus increases our access to enhanced deal flow from conservation partners, funding for restoration and land protection, data on the ranch market gathered by conservation partners, and our conservation partners' significant expertise and experience in restoration and protection that is so important to our model. In short, we acquire ecologically important ranchland that has significant flaws and where we believe we can create value. Flaws range from legal or physical access barriers to severe environmental degradation. We take property that's not as valuable as it could be and make it more productive from an agricultural perspective - in terms of growing more grass and supporting more cattle - and from a wildlife perspective - in terms of restoring fish, big game, and bird populations - as well as from the perspective of future landowners who will use, steward, and enjoy the property. The ecological and agricultural improvements we make correlate directly to higher recreational value for hunting, fishing and general wildlife enjoyment. This all means higher real estate values at the end of the day.
GIIN: What kinds of improvements do you make to your properties?
CP: We create value in all sorts of ways, from mundane things like cleaning up a ranch that has accumulated generations of junk to addressing legal issues like a property lacking deeded access or requiring rezoning to allow for limited development. There are literally dozens of ways we create value on our properties, but we have the most fun, and often create the most value, through ecological restoration. Physically restoring a degraded river or creek is some of the most gratifying work we do. On the River Why Ranch in Montana, a previous owner had moved the meandering North Fork of the Musselshell River into a straight ditch he dug on the side of the river bottom. He also removed all the willows and cottonwood trees, so he could grow more hay where the river had been. When we bought the ranch, we restored the original meandering river channel, replanted willows, and turned that straight ditch into a series of wetlands. That effort created a mile of additional river channel and turned a mediocre fishery into a fantastic one. We also do a lot of other restoration, sometimes using livestock grazing to restore grasslands.
All this restoration work can have tremendous benefits for wildlife, as we saw at Big Springs Creek Ranch in Idaho. There we worked with The Nature Conservancy, Idaho Fish and Game, and other partners to remove an irrigation diversion that removed much of the water from the property's large spring creek. Once that irrigation diversion was gone and other tributaries were re-connected, wild Chinook Salmon returned from the Pacific to the ranch and spawned in areas where few, if any, had ever been seen before.
GIIN: Does Beartooth actually own livestock, or do you work with the ranchers on the land?
CP: We do occasionally own livestock, but that's a rarity. We most often work with local ranchers. We have a tremendous amount of respect for ranchers and their deep expertise. In many cases, they are doing things the way their parents and grandparents did, which may not be sustainable. We bring in local grazing experts who develop livestock grazing management plans for our properties, and then we work with local ranchers who implement those plans. We always look to the former owners and to other local ranchers to teach us about each property where we work, because they have such a deep and sustained connection to the land. Their long-term experience and knowledge is extremely valuable for developing new methods and implementing more sustainable approaches over time.
It is critically important that we all work to keep ranchers on the land and to bring the next generation of ranchers along. There's a real need for ranchers out there. They are the ones who steward the American West's wide-open spaces and take care of the places that are so critical for wildlife.
GIIN: How do you find the properties that you purchase?
CP: When we started doing this work, we thought conservation organizations would bring us great land opportunities. That didn't happen right away. We had to demonstrate our commitment to conservation. Now that we've been doing this for seven years, and we have protected every acre of our properties that a conservation partner has deemed a top priority, we see a tremendous amount of deal flow from conservation organizations because we've demonstrated our commitment to protecting these important places. We're seeing more opportunities from our conservation partners and higher priority properties all the time. That is really gratifying because it is emblematic of both the relationships we've been fortunate to build with our conservation partners and the important role we can play for them.
We also see deal flow from the leading ranch real estate brokers in our markets. Often times, they bring us opportunities that aren't yet on the market because they know what we're looking for and they know that we have capital available - not a small thing in today's market.
GIIN: What is your process for evaluating and preserving the environmental value of a property?
CP: When we think a property might be an interesting prospect for us, we sit down with our local conservation partners to determine whether the property is a high conservation priority, to assess the opportunities for restoration, and to define our goals in terms of what needs to be restored and protected. Not every acre of every property needs to be managed or preserved by a conservation organization or a government agency. When there is a high-priority portion of a property that would be at risk if we sold it without protections, we work with our partners to craft a conservation easement that will permanently protect it, or to negotiate the sale of this important property to a conservation group or agency.
GIIN: What is a conservation easement?
CP: Conservation easements are very effective tools that conservation organizations use to permanently protect property without having to own the property itself. Easements have enabled the protection of far more land than would otherwise be possible if conservation organizations were forced to acquire every property that they wished to protect.
A conservation easement essentially enables conservation groups to own certain rights associated with a property, without having to own the land. We tend to see property rights as ownership of a single thing. In fact property ownership is really a bundle of rights. For example, land ownership includes water rights, mineral rights, the right to cut timber, the right to build homes, and so forth. Ownership of a single piece of property includes dozens of different kinds of rights. A conservation easement is a very effective way of transferring some of those rights to a conservation organization. Legally, conservation easements can only be held by qualified entities, including land trusts, groups like The Nature Conservancy, and certain government agencies. As a landowner, Beartooth can transfer some development rights - for example, how a property can be subdivided, mined, or grazed - to the permanent ownership of an organization that holds these rights in trust and ensures that the conservation values are protected forever.
The organization that holds a conservation easement monitors the property each year to make sure that the terms of the easement haven't been violated. They make sure that grazing or timber harvesting are happening appropriately, or that the property hasn't been subdivided, or that development hasn't happened in places where it's not allowed. We put conservation easements on most of our properties because we often deal with important landscapes where there's a long-term need for protection. Conservation groups we work with, including The Nature Conservancy and Colorado Open Lands, then hold those conservation easements in perpetuity and make sure that those conservation values are upheld.
GIIN: When all your work is done with a property, who are your potential buyers?
CP: The perfect buyer for our ranches varies depending upon the particular property. Often, our properties have some robust agricultural assets, so we have sold portions of properties to agricultural producers - local farmers and ranchers or wealthy individuals who want a working ranch. The majority of our buyers though are recreationally oriented. These tend to be wealthy individuals who are primarily motivated by hunting, fishing, horseback riding, hiking and the general enjoyment of the land. They may or may not be interested in conservation themselves. Instead they want to own a ranch that is ready for them to enjoy, like our properties after they have been restored.
In some cases, the public ends up buying parts of our properties. In the case of Little Wood Headwaters Ranch just outside of Sun Valley, the local land trust bought a small portion of a ranch because it was the last private property on a road that terminates at an important forest service trailhead. The land trust wanted to acquire the last hundred acres along the road in order to ensure that the public will always have access to the forest service lands beyond. In Colorado, we sold 200 acres of Tarryall Creek Ranch in South Park (yes, that South Park!) to the County for use as a managed public access shooting range where law enforcement practices firing arms, the 4-H chapter teaches people how to use rifles for hunting, and hunters safely test their equipment at the start of the season. From our perspective, it's wonderful when we can help our partners achieve their goals, whether that's keeping ranchers on the land, preserving open space, restoring or protecting biodiversity, ensuring public access to public lands, or meeting important community needs.
GIIN: Has the collapse of the real estate market affected your work?
CP: I believe it has affected everyone. We are fortunate that we sat out much of the peak in the ranch real estate market, but we'll probably still end up with a few longer property holds than we would have if the market kept roaring ahead. The flip side is that the downturn has had some real benefits for us and for our conservation partners. The ranch real estate market generally seems to have held up quite well. That said, more sellers are putting properties on the market out of necessity. In those cases, properties where prices had previously been driven so high that they became unattainable for us or our conservation partners are actually now back on the table as possible opportunities for conservation. The economic situation has actually been positive that way - this is an unprecedented time of opportunity for us and for conservation in general, one that we will be unlikely to see again anytime soon.
GIIN: Could this model for conservation work in other places, either in the US or in other countries?
CP: I think the potential is very real. In some places you may have handicaps because you might not have the legislation in place that allows for things like conservation easements. But in places that have property rights and a modicum of conservation infrastructure, I think that this approach holds tremendous potential. Beartooth may well expand into other areas over time and have properties to sell in other parts of the United States and beyond.