Managing common-pool resources has always been a local challenge with global implications. Community-based forest (CBF) management is often cited as one of the answers to better manage forests while providing livelihood to local communities and global benefits in mitigating climate change. This study investigates the extent to which Community Forests (CF) scheme in Indonesia are managed to provide livelihood benefits for rural population while exercising sustainable forest management. First, we applied a quantitative approach to empirically compare forest cover changes within watershed protection forests with and without CF units and also against those within conservation forests. We measured forest cover changes between 2007 and 2016 in Lampung province in Indonesia where CF units were established earlier than other provinces. We used remote sensing data of annual tree cover loss and propensity score matching to reduce possible confounding effects. We found that CF concessions within watershed protection forests in Lampung province have managed to maintain forest cover loss in relatively low levels compared to those that are not managed by communities. This result shows that generating added economic benefits and improving local community’s access to forest resources do not necessarily lead to degradation of the forests. Second, we conducted a qualitative assessment through focus group discussions with farmers in two CF units with distinct biophysical characteristics to investigate the impact of different biophysical characteristics on the performance of each CF unit in achieving its goal of generating livelihood benefits with sustainable forest management. We found that the performances of each CF is fundamentally affected by its biophysical circumstances and economic benefits that community members can drive from non-timber forest products. Designation of community forestry areas should take into account biophysical characteristics of CF locations to support multiple land use scenarios that can provide ample livelihood benefits for local communities. Areas with a low percentage of tree cover, that support multiple livelihood scenarios, present the biggest opportunity to restore forests while providing livelihood benefits with the lowest risk profile for future forest degradation. This safeguard measure would improve the likelihood of community forests in achieving the dual mandates of improving livelihood of local communities while protecting and restoring remaining forests.