ages equal to the replacement cost of the property, facilities, and access acquired by the Federal Government. In addition, to such replacement costs, damages should also be granted for the diminished value of the remaining property which can be attributed directly to the taking. We are pleased to share our views with your committee in its deliberations regarding S. 1681 and S. 1201. Rather than deal with each bill in detail, we have outlined some general principles that we believe will be of assistance to you.

The forest products industry

The forest products industry is composed of approximately 32,000 sawmills and planing mills, more than 5,000 pulp and paper facilities, over 500 plywood mills and many other manufacturing facilities. In recent years the lumber and wood products industry has provided nearly $24.8 billion annually to the gross national product. There are more than 3 million employees who directly and indirectly derive their income from the forest products industry.

The forest products industry consumes each year more than 9.5 billion cubic feet of timber. This timber is cut from 487 million acres of commercial forest land; 99 million acres is in Federal ownership and 360 million acres is in private ownership. The remainder is in State, county, and municipal ownership. In one of the principal forested regions of the United States, the Pacific Northwest, 65 percent of all commercial forest land, or 71 million acres, is owned or managed by the Federal Government. In the 12 Southern States, 8 percent, or 14 million acres, is in Federal ownership.

If timber consumption is to remain at better than 9 billion cubic feet per year and expand to meet new demands, vast acreage of timberland must remain productive to furnish an adequate supply for the future. Recognizing the need to insure a continuous supply of timber, the forest products industry and the Federal Government have adopted intensive forest management practices. One of these is sustained yield, the harvesting of a volume of timber from a given stand equal only to the annual growth. An assured supply of timber resources will thus be available for future generations. Even with the continuous improvement in forestry practices it requires from 20 to 120 years to grow a crop of merchantable timber.

The forest products industry has three potential sources of raw material: (1) Trees harvested from its own land; (2) timber purchased from federally owned or managed forest lands; or (3) timber purchased on the open market.

With the continuing increase in land acquisition by the Federal Government for use other than growing trees, there is a substantial reduction in the availabiltiy of the raw material base necessary to supply the forest products industry. When the source of timber needed to supply a mill is acquired by the GovernIment and not replaced by the mill from other sources, curtailment in mill production becomes necessary. Employees, communities and manufacturers suffer severe economic loss. If for this reason alone, the Federal Government must consider seriously the effect of Federal land acquisition on the forest products industry and those dependent on it for their livelihood.

If the forest products industry is to prosper, its raw material supply must be assured. Under the present rules and regulations governing land acquisition by the Federal Government, little consideration is given to the economic effect of a taking or the necessity of replacing the resources taken. To date, Federal appraisal practices have frequently resulted in inequitable compensation to the forest products industry.

Legal standards of governing property acquisition by Government

The Constitution of the United States requires that when private property, which includes any property rights, is taken by the Federal Government for a public purpose, the Government must pay just compensation to the property owner. In Olsen v. United States, 292 U.S. 246, “just compensation" was defined to include all elements of value that inhere in the property but not exceeding market value fairly determined. The court further stated that the highest and most profitable use for which the property is acceptable and needed, or likely to be needed in the reasonably near future, is to be considered, not necessarily as a measure of value, but to the full extent that the prospects of demand for such use affects the market value while the property is privately held. In dealing with this problem, the courts have established that the fair market value of the property taken is "that price which a willing buyer will pay to a willing seller." The philosophy behind this rule is that the owner of the property shall be fully

compensated for the value of the property taken. When this is accomplished the constitutional guarantee is satisfied under present interpretations.

The courts and Federal acquiring agencies, in attempting to develop the fair market value for property taken, have, in some instances, determined that the actual replacement value would be the only adequate compensation. In addition, the courts have consistently held that compensation must be awarded also for any severance damages which occur as a direct result of a taking. On the other hand, the courts have stated that consequential damages-those classified as indirect damages, such as the increased cost of doing businessare not compensable. It has also been held that even when there is no market value, damages must nevertheless be determined.

Compensation problems affecting the forest products industry

Compensation problems affecting the forest products industry fall into three distinct categories: (1) the determination of the value of the timber and facilities taken; (2) the determination of the value of means of access taken; and (3) the determination of the value of unique facilities taken.

Determination of value of timber and facilities

The principal problem in determining the value of timber supply taken occurs when replacement timberlands are not readily available. Generally a timber owner must accept a forced sale to Government where there is no other contiguous timberlands of equal quality available at the fair market value which he is paid. For the forest products industry, the most equitable method of securing adequate compensation would be for the acquiring governmental agency to exchange similar Federal land within an economic hauling distance of the facility. A second acceptable alternative method would be for Government to allow compensation based upon the replacement value rather than to attempt, as is now the case, to artificially determine at what price a willing seller would dispose of his property to a willing buyer.

Proposed solutions

Because of the necessity in the forest products industry for a long term timber resource base, the most desirable compensation for timberlands taken would be to require the acquiring Federal agency, wherever feasible, to work with other Federal agencies to assist in the location of suitable Federal timberlands for exchange, within the economic hauling distance of the facility. As is the case throughout the country, and particularly in the West, private property is often bounded on all sides by Federal commercial timberlands. Actual cash expenditures by the Federal Government in acquiring private timberland could be held to a minimum by establishment of a requirement that the acquiring agency determine the feasibility of an exchange based on availability of suitable land. The timber owner-operator would be able to maintain his established level of production and employees of the manufacturing facility would not suffer the loss of jobs or a reduction in hours worked.

Another remedy which would equitably compensate the forest landowner whose land is taken by Government, would be to consider the company's ability to replace land acquired with other suitable private owned commercial timberland. If such timberland were available, contiguous to or within an economic hauling distance of the manufacturing facility, then a measure of the fair market value of the property taken could be established by giving consideration to the replacement cost the property owner would be obliged to pay if he were to reestablish his raw material base by purchasing other forest land.

If these procedures were impossible, due to the absence of available public or private timberland, other methods of compensation could be adopted which would compensate the timber owner more adequately than present methods. One of these would be a modification of the appraisal procedure. Such modified regulations should require that an appraisal give due consideration to value based upon the highest and best use of the land within the reasonable contemplation of the landowner. This use might be established from the nature of the actions of other property owners proximate to the land acquired and by an examination of the plans developed by the property owner whose lands are taken.

After the land has been valued, a separate appraisal should then be made of the timber resources situated on the property. Overmature and mature timber would be valued at the current market value as is presently done. Consideration should then be given to the evaluation of immature timber based upon its future market value when mature (at current market prices), discounted on the basis

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of its present age. At present the taking of immature timber is generally not a compensable damage. The value of property with growing immature timber is usually based solely on the value of the land. The U.S. Army has, however, on at least one occasion, found it reasonable to compensate the timberowners for the loss of immature timber based on future discounted value. Attached as exhibit A is a copy of the compensation schedule used by the Army during its Operation Sagebrush in 1955-56.

Determination of the value of means of access taken

A second major problem confronting the forest products industry is determining the measure of damages when Government acquires the means of access to private timberland. Access must be replaced if the remaining timber is to be harvested. The problem is how to determine the fair market value of an access. The most equitable method would be to pay damages equal to the replacement cost of the access, plus or minus the increase or the reduction in the value of the remaining standing timber. Under the present system the Federal agencies pay the original cost of construction of the access less depreciation-usually giving no consideration to alternate means of access or the diminished value of the remainder.

Because of the broad areas of land required to supply the necessary raw materials to a manufacturing facility, extensive systems of access are necessary. It is normal in many forested regions for a forest products facility of competitive economic size to have tens or even hundreds of miles in a private road system. The cost of a transportation system varies considerably with the terrain involved. For instance, in the Northwest, road costs average $30,000 per mile and run several times that much in rough country. It is easy to see at these prices how a timber grower can invest hundreds of thousands of dollars in the construction of access road systems.

The complexity of this problem as it affects the timberowner is increased considerably when it is recognized that timberowners often must negotiate rightof-way either in the form of licenses or easements over private or publicly owned lands. Disputes arising out of such agreements between private landowners are subject to the processes of law. The rights of the grantor and the grantee may be clearly established and enforcible in court either by action for specific performance or payment of damages. The situation is considerably different where a private landowners must negotiate a right-of-way with a Federal agency. The difficulties arise because the Federal land management agencies have varying degrees of authority to convey interests in Federal property.

Another phase of the access problem arises in cases where a Federal land agency constructs a dam across a stream which has been used as a means of removing timber from private timberlands. The Government seems to believe that loss of such access by a private timberowner is not compensable.

Under existing statutory authority, and regulations of Federal land agencies, compensation for the taking of access is based upon the fair market value of the property taken. In the absence of established property rights, such as a license coupled with an interest, the Federal Government will not pay compensation for a taking.

At present, fair market value is based upon the original cost of construction minus depreciation with no consideration given to the effect on the value of the taking of the remaining standing timber.

The value of standing timber is determined by the Forest Service, the Bureau of Land Management, and private industry in much the same manner. It is determined by taking the estimated value of the end product to be manufactured, less costs of manufacturing, access, logging, and hauling. The remainder is the value of the standing timber. Attached as exhibit B is a schedule of estimated costs indicating the method of determining the value of stumpage. It is easy to see that an increase in cost in any of these factors, especially access, results in a corresponding decrease in the value of the standing timber.

Loss of access decreases the value of the remaining timber and such decreases in value should be compensable under existing law. This damage is the direct result of the taking of the access.

When property rights in access are taken for a public purpose, consideration should be given to the cost of the replacement of the access and compensation should be granted for the diminished value of the timber as a consequence of the taking since timber value is directly related to the cost of its removal.

This decrease in value of the remainder is usually not considered a compensable damage by Government which tends to treat this factor as an "increased cost of doing business." However, in the forest products industry, it can be shown by means of the table attached as exhibit B, that an increased cost in access results directly in the devaluation of the timber supply.

To encourage and protect the investment made by private timberowners in access improvements on Government land, existing rules and regulations should be amended so as to permit the payment of compensation for the value of such improvements when the Government terminates use of such access. The adoption of the following language by all Federal agencies involved in acquisition situations would correct present defects.

"If the owner of property acquired by the U.S. Government has the right or privilege of access thereto by lease, contract, license, easement, servitude, permit or law, whether exclusive, nonexclusive or revocable, by road, railroad, canal, waterway, stream or right-of-way over land, water, or air, then the loss of impairment of such right or privilege may be considered in determining the compensation to be paid for the property acquired and the diminution or enhancement in value of any remaining property."

Determination of value of unique facilities

The third major problem of the forest products industry in acquisition cases is in determining damages resulting from a taking of unique facilities such as seed orchards and nurseries. The fair market value of such properties, as determined under existing rules, is not equitable. The damages should be determined based on that value to the property owner which is the actual cost of replacing the unique facility.

Reforestation of timberlands following timber harvest and afforestation of marginal agricultural lands, is a principal activity of the forest products industry. The Forest Service estimates that forest tree planting in fiscal year 1963 was accomplished on 1,326,688 acres of land, 79 percent of which was on privately owned lands.

Following timber harvest, an area is restocked by (1) natural reseeding; (2) hand planting of nursery grown seedlings; or (3) other artificial reseeding. Many timber growers maintain tree nurseries for raising 1- to 3-year-old seedlings for transplanting in the forest. Nursery soil, while developed for its best characteristics, must of necessity approximate the growing conditions in the forest. For this reason a nursery often must be located near a company's timber stand.

Nursery sites are limited to suitable soil type; drainage; composition; and fertility; exposure; rainfall; and accessibility. Ideal nursery sites are often found in well drained bottom lands. Since a nursery's principal investment is in the soil itself, replacement is difficult and costly.

The forest industries have also established very unique seed orchards devoted to the production of seed from parent trees selected for outstanding qualities of height, straightness, size, and rate of growth. Through grafting and controlled pollination, forest geneticists obtain superior quality seed on a basis that makes it practical to base an operation on superior trees.

Selection of a seed orchard is even more exacting than the selection of forest nursery sites. The selected trees must not only meet the characteristics mentioned above, but also must occur in a natural density (number of trees per acre) to justify development, i.e., clearing of other trees nearby to prevent unwanted cross-pollination.

Due to the unique qualities of these facilities and the fact that the properties are not readily marketable, fair market value is not an equitable measure of damages. The fair measure of damages would be the value of the facilities to the company. These may be best measured in terms of the replacement cost of the facility.

Cost of litigation

Under existing law a property owner, dissatisfied with an offer of damages from a Federal taking, may technically contest the legal sufficiency of the award in a Federal court. The condemnation process, however, is often lengthy and very expensive. These facts work as a deterrent to judicial review, the cost of the legal fees, economic studies, and private appraisal, necessary to support the legal battle, often run into many thousands of dollars.

Consequently, a private property owner is reluctant to take the Federal Government to court where he feels he is being inadequately compensated because

the cost of an extensive court battle may exceed or offset the potential compensation awarded to litigation. The tendency is for a property owner to accept less than fair market value to avoid litigation expenses. This effectively eliminates the right of judicial review of the proposed award of damages. The Federal agencies are fully aware of this reluctance to sue.

The reluctance to take condemnation cases to court where compensation is inadequate could be relieved and adequate compensation assured by requiring the Federal Government to pay all of the costs of litigation where the jury, or the judge in a nonjury case, finds that the property owner had reason to believe that the last offer made by the Federal agency was wholly inadequate and in violation of the requirements of the fifth amendment of the Constitution. As an example, a 20-percent differential between the find of damages and the last offer of the Federal agency would be sufficient to warrant the payment of the costs of litigation including legal fees, economic studies, appraisal fees, etc., by the Federal Government.

Tax treatment of damages

When private timberland is purchased or condemned by the Federal Government the timber grower may need a substantial period of time to replace the property at a price comparable to that paid by the Government. In many cases the property is either simply not replaceable or not replaceable at prices similar to those paid by the Federal Government in the acquisition. In recognition of this and unique aspects of timber-growing land, we favor a change in the Internal Revenue Code along the lines of section 201 of S. 1201. In areas where timberlands cannot be replaced, but where the timber operation can be made more productive through additional investments, the Internal Revenue Code change would allow such investments within the time allowed, in lieu of land replacement. This increased utilization could provide jobs for those employees who might otherwise be cut off.

Summary and conclusions

The established criteria which are utilized by Federal agencies to determine the damage to a timber owner for the loss of property acquired by the Federal Government are wholly inequitable. This results primarily from the fact that the statutes, rules, and regulations governing Federal acquisition were not developed to adequately determine the unique value of forest industry property.. If this industry is to prosper today and in the future substantial modifications of appraisal practices and procedures must be implemented.

As previously described the forest products industry contributes greatly to the Nation's economy by means of its $24.8 billion of manufacturing productivity as well as providing employment for more than 3 million Americans. The operation of this industry extends into every State of the Union. Thousands of communities throughout the country are primarily dependent upon this industry for their continued existence and economic well-being.

We hope that your committee will take into consideration our comments and please call upon us if we can assist you in any way.

Sincerely,

FREDERICK P. KOPP,

Chairman, Special Subcommittee on Compensation for Real Property Acquisition.