ACQUISITION PROCESS

Submitting an Offer

Offers to purchase are usually submitted in writing, and at times accompanied by a modest down payment, or ‘earnest’ money. The purchase document can be prepared by an attorney, or more commonly is based on standard language. Agreements can be submitted “subject to legal review” at a later date. Brokerage agents are required by law to pass on to sellers any legitimate offer received.

Terms included are at the discretion of the purchaser. In addition to price, terms may include; deposit amount, closing date, financing contingencies, verification of various property characteristics (quality of title, legal access, environmental audits, timber volumes, acreage, etc) and procedures to remedy problems arising there from, or any other matter the purchaser wishes to include.

Negotiations over price and terms will then proceed, often on a verbal basis. Once terms are conceptually agreed, attorneys are usually (but not always depending on complexity of the deal) brought in to develop the final agreement language around the agreed terms. A final written agreement is then circulated for signature, and once signed binds the two parties and almost always removes the property from the open market. Commonly a more substantial deposit, often 5-10% of the price, is then due.

Post Agreement Activities

The main activities that occur between signing of the agreement and closing are:

1. Title Examination – It is the responsibility of the buyer (through their attorney) to verify the quality of the title, i.e. that the property is legally as the seller has represented it, and that there are no outstanding legal claims that would cause the quality of the title to be questioned. This is often the most significant and costly activity of the attorney, depending upon the complexities of the title and transaction history.
2. Deed Preparation – It is the responsibility of the seller (through his attorney) to prepare the new deed, to be recorded as the legal record of the transaction. Buyer’s attorney will review and approve.
3. Contingencies – Contingencies and term conditions will be addressed. Responsibility depends upon negotiated terms. Most contingencies are executed by purchaser and funded by same.

Closing

Assuming no problems arising, closing usually take place 60 days after the purchase contract is signed, although this can be as little as 30 days or in excess of 120 days.

Closing costs include the attorneys fees, recording fees and transfer taxes. Attorney fees can vary substantially depending upon size of the purchase and complexity of the agreement. In addition to the attorney’s fees, we usually recommend that buyers purchase title insurance. This is a one time, relatively modest cost, and protects the buyer should a title flaw emerge at a later date.

On larger transactions, purchasers often do a Phase I Environmental Audit. This is also a relatively modest cost, and is a physical inspection by an environmental engineer as well as a historical review of past uses, designed to minimize buyers exposure to environmental liabilities.

Cost to complete other contingencies and terms will vary with the activity.

Property transfer taxes vary State to State but are rarely onerous.

Annual liabilities and anticipated revenues such as local property taxes and lease incomes are usually prorated between buyer and seller. Property taxes are variable and depend on location, site amenities and whether the land is enrolled in a state forestry tax reduction program. Lease income fees are variable.

Immediately following the closing of the deal, the new deed is legally recorded in the public record. Deed records are usually kept by county, but in some states are kept by town. In all cases it is this recorded deed that represents and permanently protects the legality of the transaction.

Selecting an Attorney

Laws governing real estate transactions are, for the most part, under the jurisdiction of the state in which they occur. Similarly, attorneys are licensed by state for practice of law. fountains real estate maintains a list of attorneys in all states we operate that are appropriately licensed and experienced in forest land transactions.

Ownership Structures

Title to real estate in the US can legally be held through a variety of different structures, including direct ownership by individuals, wholly owned US or non-US corporations, partnerships, limited partnerships, and various trust vehicles. However, individual states may limit some of these options. The legal ramifications of the proposed ownership structure should be reviewed with the purchaser’s attorney prior to purchase. Likewise, tax ramifications of different ownership structures will depend upon not only the applicable state tax laws, but the specific situation of the purchaser, and should be reviewed with a qualified tax adviser prior to purchase.

OTHER POINTS

Planning Approval

New building approval for a single dwelling is generally automatic providing that the property has the minimum requirements of length of town maintained road frontage, usually around 200 ft, and a minimum size ranging from 1 acre in many towns to up to 46 acres in the Adirondack Park. Consequently the subdivision of properties is controlled to restrict undue and uncontrolled development.

Timber Values

Current timber valuations result from timber cruises, which collect a stratified random sample of the data on each forest, which is then multiplied to form an idea of the volumes of the various products of the whole forest. Cruises can be of varying intensity and statistical accuracy. Product values are based on comparable timber sales as well as published price lists, but are always tempered according to the specific characteristics of the property. Valuations identify current market value of the timber as it stands, with no allowance for future expectation.

Risks and Insurance

Fire insurance for timber crops is not normally recommended since hardwood forests do not burn easily, the incidence of fire is minimal and local fire control is very effective. Also the salvage values for larger trees is often the same as if they were undamaged since damage is superficial. In addition smaller trees are not valued and therefore no loss would be recognized in this size class. Finally premiums are influenced by South Eastern and West Coast experience where climatic conditions and the nature of the crops make for higher risk.

Windstorms and ice storms can occur, but are not common and are rarely widespread in their effect.

Insect and fungal damage is rarely a serious threat in what are basically natural stands containing a wide diversity of species, inherently resistant to such threats, but occasionally pests or disease can cause problems. An example is the Gypsy Moth which has caused widespread defoliation in the past during it's population peaks but which tends to cause mortality only after subsequent repeated infestations. In managed stands in particular, mortality from such outbreaks is rarely widespread, and is usually salvageable.

Comprehensive General Liability Insurance (Third Party All Risks) is recommended. Clients managed by Fountain Forestry Incorporated are automatically covered under the terms of Fountain’s policy at a modest premium (currently about $0.42/acre/year) unless they expressly request to make their own arrangements.