§ 8.5 - Timberland Purchase and Sale Transactions

• Jurisdiction: Washington

§8.5 TIMBERLAND PURCHASE AND SALE TRANSACTIONS

Timberland purchase and sale transactions are unique. Such transactions, although similar in part, are different from residential, commercial, or industrial real property transactions. Further, each transaction is different and unique issues may arise in any particular timberland transaction. That said, this section focuses on two important undertakings in any timberland transaction: (1) due diligence and (2) negotiation and preparation of the timberland purchase and sale agreement.

(1) Due diligence pertaining to timberland property

Timberland sellers typically resist allowing the due diligence process to begin until the property is under contract. The explanation is obvious. Negotiating the timberland purchase and sale agreement prior to due diligence affords the seller an information advantage. Timberland purchasers, by contrast, typically desire to conduct due diligence prior to signing a purchase and sale agreement.

Practice Tip: If sellers wish to reduce the due diligence process, there are steps they can take. First, sellers can prepare a thorough prospectus for the property and/or "data room" that enables a purchaser to expedite its due diligence. Second, given their information advantage, sellers can provide meaningful representations and warranties as to the condition of the property.

Whether before, during, or after the timberland purchase and sale agreement is signed, prior to closing on the purchase of timberlands purchasers should conduct appropriate due diligence. The section identifies sensible due diligence steps pertaining to timberland property.

(a) Title and encumbrances

Informed sellers will provide purchasers with a title report and copies of all exception documents. Presumably, prior to marketing the timberland, the seller will have reviewed and removed inappropriate title encumbrances. The due diligence process, however, should allow the purchaser to identify and evaluate title to the timberland and all applicable encumbrances pertaining to the timberland and, if any, their potential impact. Examples include:

Easements. Easements (e.g., roads, utilities, pipelines, transmission lines, gas storage rights, conservation easements) on the timberland can be especially problematic to the extent that the easement holder's rights are dominant over the timberland owner's rights.

Railroad beds. Encompasses both operating rail lines and historic railroad beds. On occasion, such railroad beds are converted to public access trails that then manage the encumbrance much differently and inevitably create conflict with adjacent timber operations.

Permits, contracts, and agreements. E.g., agreements with third parties to use or manage the timberland in a specified manner.

Governmental agreements. E.g., wildlife management agreements, explosives storage agreements, research agreements, biosolids or sewage disposal agreements, etc.

Historic sites or resources. Although the "footprint" for such sites may seem small —perhaps only an acre or two—some "stakeholders" may have a considerably larger footprint interpretation. In addition, it is not uncommon for stakeholders to argue for restrictive "buffers" of various size around such sites as well as for access to such sites that will impact management operations, monetization opportunities, etc.

Mortgages, liens, LIDs, etc. Although rare, timberlands, on occasion, are subject to local improvement districts, and such LIDs can create significant financial obligations pertaining to the property.

Public structures. E.g., bridges, roads, trails, water systems, emergency management equipment.

(b) Access

Timberland with inadequate, impaired, or no access is worth substantially less than timberland with access. Accordingly, it is necessary to determine that each and all parts of the timberland have adequate legal access—preferably from a public road.

In the event that the timberland has access via an easement, right-of-way, permit, or other agreement, it is important to review and confirm the terms and conditions pertaining to such access agreement. In addition, it is necessary to determine that the access agreement is valid and assignable. Keep in mind that many easements pertaining to public lands (e.g., U.S. Forest Service lands) either are not assignable or may trigger additional environmental review and subsequent conditioning.

(c) Property condition

The due diligence process should allow the purchaser to determine the condition—current and historic—of the timberland. Purchasers oftentimes will wish to have the right to conduct an environmental assessment of the timberland (typically a phase one environmental site assessment). In evaluating the timberland, parties should pay special attention to the presence of conditions that could result in costs or liability, such as dump sites, historic landfills, underground storage tanks, bark and/or sawdust disposal sites, cemeteries, unstable slopes, noxious weeds, groundwater contamination (e.g., from abandoned autos, dumpsites, and truck shops), and mine shafts and/or tailings.

(d) Property boundaries

The due diligence process should allow the purchaser to determine whether the timberland is impacted by boundary issues including adverse possession, boundary disputes, prescriptive easements, historic roads and/or trails, or fences.

In addition, the purchaser should identify and determine whether any of the adjacent properties present increased risks pertaining to the timberland. Examples include adjacent properties that are used for residences, organic farms, bee keeping, shooting ranges, wildlife parks, conservation areas, watersheds, federal or state parks, monuments, scenic areas, wilderness areas, scenic roads, etc. Similarly, purchasers should be alert to adjacent properties that may present heightened fire risk to the timberland.

(e) Property classification

The due diligence process should allow the purchaser to confirm the applicable zoning and tax classification pertaining to the timberland. This is especially critical in cases where the timberland is being marketed as including higher and better use (HBU) value or when the sale or change in use of the timberland following the sale could result in the removal of any current tax designation or classification, or the imposition of compensating taxes or penalties. See §8.8(9) and (10), below.

(f) Timber operations review

The due diligence process should allow the purchaser to identify and evaluate the timber operations, including (1) harvest—status of current year harvest plan; (2) roads—status of current year road construction, maintenance, and road abandonment plans; (3) reforestation—status of reforestation obligations including site preparation and pending reforestation (e.g., seedling supply agreements); (4) FPAs—status of pending and planned forest practices applications, notices to comply, and stop work orders pertaining to the timberland; (5) appeals—status of FPAs, if any, that have been appealed; and (6) standing timber inventory—volume and species mix of standing timber located on the timberlands; (7) silviculture—status of recent and pending silvicultural applications and prescriptions; and (8) watershed analysis—status of any approved watershed analysis and associated prescriptions and/or obligations.

(g) Nontimber use of the timberland

The due diligence process should allow the purchaser to identify all current and historic nontimber uses of the timberland. Certain current and/or historic nontimber uses could create unanticipated costs, liabilities, conflicts, or other problems. Examples of nontimber uses include (1) communication facilities—e.g., broadcast towers, cell towers, microwave stations; (2) dumps, landfills, disposal sites; (3) mines and wells; (4) recreational use permits or programs; (5) shooting ranges; and (6) agriculture or farming.

(h) Wildlife

The due diligence process should allow the purchaser to determine whether the timberland is impacted by endangered, threatened, or sensitive wildlife (or plant) species and whether the timberland is impacted by any designated or proposed critical habitat. In addition, purchasers will need to verify whether the timberland is subject to any governmental agreement(s) pertaining to wildlife protection (e.g., Habitat Management Agreement; Incidental Take Permit). Similarly, prudent purchasers will wish to verify whether the timberland is subject to any voluntary agreement(s) pertaining to wildlife research, monitoring, enhancement, or protection.

(i) Infrastructure

The due diligence process should allow the purchaser to identify and evaluate the condition of the infrastructure pertaining to the timberland, including the following:

Roads. Identify and determine whether the roads have been properly constructed and maintained as well as potential water pollution issues and/or habitat degradation issues.

Water crossings. Identify and determine whether...