May. 03, 2018

What would you think if you learned that a New Hampshire-based private timber company was approved for a $50 million loan from the state of Pennsylvania to purchase timberland in northwest Pennsylvania? At a 1 percent interest rate, with generous repayment terms? What if you learned that the deal was not publicly advertised or competitively bid? Or that this $50 million loan, for the purchase of private timberland by a private company, comes from a taxpayer-subsidized state program that is, by law, required to fund improvements to water and sewer plants? Would you have questions? Would you be outraged?

Let’s take a step back. PENNVEST, which is an abbreviation for the Pennsylvania Infrastructure Investment Authority, is a state agency charged by law “To give low interest loans and some grants to owners and operators of sewer, water, and stormwater systems for infrastructure improvements.” PENNVEST loans are repaid by water and sewer ratepayers, and default rates on PENNVEST loans are near zero.

Over the past forty years, nearly 3,000 municipal water and sewer projects across Pennsylvania have been funded through this program. Despite this progress, anyone involved in municipal government or water treatment knows that hundreds – maybe thousands – of water infrastructure projects across the Commonwealth still need to be addressed in the very near future. To meet these needs, it is a certain there will be no shortage of demands on the PENNVEST loan program in the coming years.

So why would PENNVEST, whose legal mission is water and sewer infrastructure improvements, lend $50 million to a private timber company to buy real estate? Good question. To get some answers, the House Agriculture and Rural Affairs Committee recently held an informational meeting to get some answers. After nearly four hours of testimony, there were more questions than answers.

The Committee learned that late last year, Lyme Timber Company, a private corporation based in New Hampshire, approached the Pennsylvania Department of Conservation and Natural Resources (DCNR) looking for financing to buy 60,000 acres of timberland in northwest Pennsylvania. The ground, owned by Boston-based Hancock Timber Resources, had been for sale for more than two years at a price that some thought was on the high side.

Lyme Timber approached the state government looking for money to facilitate the land purchase for their private investors. DCNR and PENNVEST facilitated what some would call a sweetheart deal - a $50 million state loan at a mere 1 percent interest rate.

Any applicant for any state loan or grant program must submit an application, and the standard PENNVEST application is clearly meant for applicants making improvements to water, sewer and stormwater treatment “systems.” Even a cursory reading of Lyme Timber’s application for a PENNVEST loan raises serious questions, as their answers to certain key questions simply make no sense. For example, when asked “Does the Applicant own the System?”, Lyme said “Yes.” Does the Applicant operate the System? Construct the System? “Yes” and “Yes.” Seems hard to believe that Lyme Timber “constructed” 60,000 acres of timberland, or that anyone could construe 60,000 acres of timberland as a “system.”

There is fierce competition for any state grant or loan – often the number of applications far exceeds the amount of funding available. Lyme Timber did not need to worry about this – they were the only applicant. In fact, they were the only ones who even knew the opportunity was available.

For its part, Lyme Timber agreed to place 9,362 of the 60,000 acres into a “working forest conservation easement” held by DCNR, to allow some public access to the property, and to mitigate an existing acid mine drainage issue at an estimated cost of $750,000. While the environmental clean-up is commendable, the cost is minimal compared to the savings Lyme will enjoy with a government-funded loan. And the actual terms of the proposed conservation easement, along with crucial details surrounding public access requirements, have not been finalized. The state has approved a large sum of money up front with the details left for another day.

Anyone purchasing land in Pennsylvania’s northern tier knows that mineral rights can greatly affect the sale price of real estate. Incredibly, DCNR could not provide any information to the House Agriculture Committee about the status of the mineral rights on the property – who owns them, what plans Lyme Timber might have for any rights acquired, how development of mineral rights could impact the proposed conservation easement, or how repayment of the $50 million loan could be impacted.

In addition, Lyme Timber Company and Hancock Timber, the seller of this property, have a history of doing business. Just this past September, Hancock purchased 78,986 acres of timberland in northwestern Wisconsin from Lyme Timber Company. Now, with the benefit of a $50 million low-interest state-backed loan, Lyme purchases 60,000 acres in Pennsylvania from Hancock at a price that many industry observers believe was inflated. The optics are far from flattering.

What justification exists to redirect state-subsidized loans, intended for water and sewer treatment plant improvements, to a private equity firm for timberland acquisition? Why was the deal offered to one well-connected, out-of-state private equity firm instead of publicly advertised for any interested party? Why was Lyme’s loan application allowed to proceed, even when it is obvious that their answers don’t match up with the questions on the application? Why didn’t DCNR inquire about the status of mineral rights on the property? What other private firms stand to gain from future deals of this nature? Why was the deal consummated without clearly defining how the public will be able to access the property?

These concerns require immediate answers from the Wolf administration. From all outside appearances, this looks like a classic backroom deal, favoring a well-connected private business with cheap and easy public money. The people of Pennsylvania deserve better.

By John Lawrence