Current Issues In Timberlands Acquisitions & · PDF fileCurrent Issues In Timberlands Acquisitions & Dispositions. ... Super Lawyer in 2006 in Real Estate Law. ... Supply/demand

Victor Haley & Greg Tolbert2008 Forest Landowners Association

Current Issues In Timberlands Acquisitions

& Dispositions

Victor Haley & Greg Tolbert Forest Landowners Association2008 National Conference

Victor P. HaleyPartner and Member of Timber and Forest Products Group,Sutherland Asbill & Brennan LLP

Education J.D., University of Virginia School of Law, 1984 Notes Editor, Virginia Law Review B.A., with honors, Harvard College, 1980 Victor has extensive experience in the full range of timberland transactions, including representation of buyers and sellers, timberland financings, joint ventures and timber supply agreements. He recently represented a consortium of buyers in the acquisition of approximately five million acres of timberland from International Paper, which was the largest private land transaction ever. Victor also regularly represents buyers and sellers of timberlands outside of the United States, most recently in Brazil, Belize and Costa Rica. Victor was named a Best Lawyer in 2006 and 2007 and an Atlanta Magazine Georgia Super Lawyer in 2006 in Real Estate Law. Victor speaks frequently at legal education forums on such topics as timberland acquisitions and joint ventures and title issues unique to timberlands.

Bio at www.sablaw.com


Greg TolbertSenior Legal Counsel, Weyerhaeuser CompanyChief Solutions Officer, Sirius Business, LLC

Since 1994, Greg has provided legal support for Weyerhaeuser Company's Timberlands Business and is the youngest Weyerhaeuser employee ever to be awarded the company's President's Award for extraordinary contribution, twice.Greg grew up in rural Montana with a keen understanding of natural resources and natural resource-based communities and, today, is a leading authority regarding timber and timberlands, mineral resources, and natural resources law issues. Greg is an honors graduate of Lewis & Clark College (B.S., Business 1986), the College of William & Mary (J.D., Order of the Coif, 1989), and Northwestern School of Law of Lewis & Clark College (LL.M. Environmental & Natural Resources Law, magna cum laude, 1994). Greg has extensive timberlands experience pertaining to all aspects of the business and supports Weyerhaeuser Company business leaders in managing a substantial timberlands portfolio.Bio at www.avvo.com/attorneys/98063-wa-gregory-tolbert- 19754.html.


Agenda

1. Industry Transformation

2. What Forest Landowners Need to Know in Today’s Changed Marketplace

3. Timberland Purchase & Sale Agreements

A. Context

B. Common Issues

C. Practical Solutions & Tips

4. Emerging Issues

Industry Transformation


Timberlands Ownership

200

293

50

16

0

50

100

150

200

250

300

USFS Private Industry Investor


Private Sector Timberlands Ownership

T-REITs

MLPs PrivateEquity

TIMOs

C-Corp

Ownership


Simple ViewTimberlandsOwnership

Traditional Financial

NIPF

Publicly Traded

Private

TIMOs

Timberland REITs

MLPs

Private Equity

Conservation NGOs


TIMOs

Timber Investment Management OrganizationsExamples –

The Campbell Group (1981)Forest Capitol Partners, LLCForest Investment Associates (1986)GMOGlobal Forest PartnersHancock Timber Resource Group (1985)Lyme Timber CompanyMolpus Woodlands Group, LLC (1996)RMK Timberland Group (1981)Resource Management Service, LLC (RMS)The Forestland GroupTimberStarTimbervest, LLC (1995)Wagner Forest Management


T-REITs

Timberland Real Estate Investment TrustsExamples –

Plum Creek Timber Company (1999)Rayonier Inc. (2004)Potlatch Corporation (2006)Longview Fibre Company* (2006)

*Acquired by Brookfield Asset Management (2007)

Wells Timberland REIT, Inc. (2007)


MLPs

Master Limited PartnershipsExamples –

Pope ResourcesPlum Creek*(before it converted to a REIT in 1999)


Private Equity

Private EquityExamples –

Ted TurnerRed Emerson - Sierra Pacific IndustriesJD IrvingSingleton FamilyKing Ranch HeirsPingree HeirsReed Family - Green Diamond Resource CompanyFord FamilyHuber FamilyTim BlixsethCassidy HeirsEddy Family – Port Blakely Tree FarmsRoseburg Forest ProductsRosboroHampton AffiliatesSDS Lumber CompanyStimson Lumber CompanyMerrill & Ring


C-Corps

C-corporationsExamples –

Weyerhaeuser Company


Arbitrage

InvestorsExamples –

Madison DearbornBrookfield Asset ManagementCarl IcahnFranklin Mutual


Options to Unlock Timberlands Value

ChangeOwnershipStructure

ChangeOwnershipStructure

HostileTakeover

HostileTakeover

CorporateMetamorphosis

CorporateMetamorphosis

TrackingStock

TrackingStock

ChangeUS Tax Code

ChangeUS Tax Code

DoNothing

DoNothing

Sell Timberlandsto

Highest Bidder

Sell Timberlandsto

Highest Bidder

TimberlandsTimberlands


Rapid Transformation

197640 C-Corps60 million acres

20066 C-corps11 million acres4 REITS13 million acres18 TIMOs18 million acres


What Drove the Transformation?

BusinessInvestment moneyTax efficiency


Tax Efficiency

2006 Plum Creek WY

Structure T-REIT C-Corp

Revenue (millions) 1,627 21,896

Income before Taxes 328 826

Corporate Income Tax 13 471

Net Income (with Adjustments)

317 453

Effective Tax Rate 4% 57%


A Brief History

1970sCongress enacts ERISACAA & CWA increase US industry costs & decrease competitiveness

1980sInstitutional investors begin to invest in alternative asset classesFirst investment in timberlands (1984)TIMOs emergeSir James Goldsmith buys Crown Zellerbach (1985)Tax code change (1986)CalPers makes initial allocation to timberlands (1986)

1990s – EarlyPacific NW - NSO listed (1990)Pacific NW mills are closingCompanies are continuing to re-position to southeastern US & off-shoreLog prices downWall of wood – south, west, & off shore


Brief History, cont.

1990s - LaterIndustry consolidationMore investors are buying US timberlandLarge scale conservation easements (TIMOs)Wall street chatter to ‘unlock the value’US paper production peaks & starts shrinking (1999)

21st CenturyTech bubble inflates & popsStock market returns tank but funds need a place to place moneyWall street – ‘unlock the value’Corp scandals/Sox/balance sheetsHBU buyersArbs move inSoftwood Lumber Agreement (2006)US housing market collapseFirst U.S.-listed Global Timber ETF (2007)


What Happened?

Ownership changeIn the past 10 years, the forest industry sold over 31 million acres of timberlands80% of the property went to financial investors

Pushed up timberland valuesSupply/demandDisadvantaged non-tax efficient purchasersCreated pressure to ‘unlock the value’

Industry restructured


Industry RestructuringT-REIT conversions

1999: Plum Creek 2004: Rayonier2006: Potlatch & Longview Fibre

Consolidation1999: IP acquires Union Camp1999: Rayonier acquires Smurfit’s timberlands2000: IP acquires Champion International2000: Plum Creek acquires Georgia Pacific’s timberlands 2002: WY acquires MacMillan Bloedel & Willamette Industries

Exit timberlands ownership1999: Kimberly Clark Corporation1999: Smurfit Stone Container2000: Georgia Pacific2002: Louisiana Pacific Corporation2002: Boise Cascade2006: International Paper2007: MeadWestvaco2007: Temple-Inland2007: Menasha Forest Products Company

BankruptciesCrown Pacific Partners LPPacific Lumber Company (Palco)Pope & Talbot


Timberlands Timberlands Now Owned By

Company Owned REIT TIMO Other

Boise Cascade

Bowater

Champion

Crown Zellerbach

Diamond International

Georgia Pacific

International Paper

Longview Fibre

Louisiana Pacific

Mead Westvaco

Menasha Forest Products

Plum Creek Timber Company 1999

Potlatch Corporation 2006

Rayonier Corporation 2004

Temple-Inland

Union Camp

Weyerhaeuser Company Yes

Willamette Industries


Top 20 Timberlands Owners1 Plum Creek Timber Company REIT 8,200,000

2 Weyerhaeuser Company C-Corp 6,400,000

3 Resource Management Service TIMO 2,600,000

4 Hancock Timber Resource Group TIMO 2,400,000

5 The Campbell Group TIMO 2,358,000

6 Rayonier, Inc. REIT 2,200,000

7 The Forestland Group TIMO 2,104,765

8 Forest Capital Partners, LLC TIMO 2,100,000

9 Grantham, Mayo, Van Otterloo Private 2,100,000

10 Wagner Forest management Ltd. TIMO 2,000,000

11 Forest Investment Associates TIMO 1,900,000

12 Sierra Pacific Industries Private 1,721,771

13 Potlatch Corp. REIT 1,700,000

14 Global Forest Partners TIMO 1,400,000

15 Regions Morgan Keegan Timberland Group TIMO 1,400,000

16 TimberStar Commercial 1,245,000

17 J.D. Irving Private 1,218,000

18 Green Diamond Resource Company Private 900,015

19 Timbervest LLC TIMO 850,000

20 Seven Islands Management TIMO 845,000

What Forest Landowners Need to Know In Today’s Changed Marketplace

Changed marketplaceOutlook for Timberlands


Impact on Forest Landowners

Timberlands Business is still a great businessParticipants have changed

TIMOsREITsHBU investorsGovernment & NGOs

Marketplace valuesOther than commercial forestland


Outlook for Timberlands

Declining returnsMarketplace has digested a lot of transactionsDemand for forest products has been flat since 1982Some financial investors are exitingTIMO cash flows can be unstableTIMO funds are approaching maturityEnough buyers?Off Shore

Timberland Purchase & Sale Agreements

ContextGoals


Context

Own orOperate

Closing

Post-Closing

Decisionto Sell

DueDiligence

Purchase& Sale

Agreement

DueDiligence


Goals

SellersBest priceLow hassleManageable riskDeal certainty

BuyersBest priceLow hassleManageable riskDeal certainty


Purchase & Sale Agreements

This is no place to try to ‘save some trees’Purchase & Sale Agreements may be long

Depends on -Deal complexityUnusual factual situationsTime until closing

In addition -Specialized provisionsStatutory provisionsExhibits


Common Issues


Purchase Price

Earnest money depositsSoft-firm-hardFree option

Purchase price adjustmentsTitle defectsAcreage; SurveyHarvest reconciliationTimber cruise; AppraisalEnvironmentalCasualty loss


Title

TitleDeed formEncumbrances

Title InsurancePolicyEndorsements

AccessPublic roadEasements


Property Condition

TimberRecent/current harvestOutstanding timber rights

Infrastructure/ImprovementsRoadsWater crossings

OtherT&E species; Critical habitatLandslides; unstable slopesDump sites; Historic landfillsAdverse possession


Seller Reservations

Mineral reservationsEasementsHigh value footprintsResearch test areasPolitical/environmental


Closing Costs & ProrationsTraditional Closing Costs

Escrow feesRecording costsTransfer taxes

Traditional ProrationsReal property taxesLand related agreements (hunting leases)Security deposits

Change in Tax ClassificationTitle Insurance


Contingencies

Buyer due diligenceBuyer financingAssignment & assumption of key land-related agreementsGovernmental agreementsHBU zoning


Common Issues, cont.

Representations & warrantiesScope & exceptionsCorporate reps & warranties

IndemnitySurvivalProcessBasketsCaps


Risk of LossScopeObligation to closePrice adjustment mechanism


Tools of the Trade

MapsMaps, photos, etc.SurveysRoad plansGIS and similar unique data

Forestry DataInventorySilvicultural treatmentsWildlife surveys


Tools of the Trade, cont.

Seeds & seedlingsSite specific

Third party claimsPrescriptive easementsBoundary disputesPotential adverse possessionWater systemsCemeteriesCultural or historic properties


Practical Solutions & Tips for Buyers & Sellers


Plan Ahead

Engage competent advisors & counsel

TitleAttorneys


Title

Title conditionRecognize that title companies can add valueObtain & review title reportsScrub unnecessary/expired encumbrances

Title InsuranceAllow sufficient timeSpecify policy type; endorsementsConsider seller’s policies


Due Diligence

EnvironmentalConsider whether property will cause reasonable buyers to engage in lengthy review

Consider using virtual data rooms


Advance Planning To Enhance Value

TitleRemove unnecessary encumbrances

Old mortgages, liens, etc,

Improve title – e.g., partial ownership

PropertyAcquire severed mineral rightsNegotiate surface use issues with third parties


Advance Planning To Enhance Value, cont.

AccessObtain necessary, supplemental, or value-added access

OtherResolve boundary disputes before marketingUnderstand buyer point of view regarding environmental review


Closing

As soon as practicalEscrow closingsRepresentatives on siteDraft & review closing statements in advance of closingAvoid Friday or end of quarter closingsMake sure the court house will be open


Partial Sale Tips

Reciprocal easementsAccessTail holds

Road use agreementsGood neighbor clauses


H-S-R Transactions

Don’t close prior to premerger notificationEvaluate exemptionsSplit HSR filing feeCollaborate in FTC/DOJ filing


Use Exhibits

Deed formAgreed encumbrancesEasement formFIRPTA certificateStructured transaction forms

Emerging Issues


Post-Industry Transformation

Fiber Supply AgreementsMany forest products manufacturers no longer own timberlandHedge against spot market & global resource wars

Seedling sales (purchase rights)


Development Rights

Transferable Development RightsConservation EasementsWater Utilities – Watershed Agreements


Political/Environmental

Timberland Conservation

Land use restrictionsNIMBY crowdWetlands mitigation banks

Climate ChangeCarbon credits & sequestrationCarbon storage

EnvironmentalT&E speciesGreen building requirements


Green EnergyWind farmsGeothermalCellulosic ethanol

Major betDerived from non-foodstock sources

Switch grassHybrid poplarsForest thinnings

Energy Independence & Security Act of 2007

Renewable fuels standardFederal lands prohibitionSome private lands prohibited


High Maintenance Neighbors

Organic FarmsHBU LandownersDrug Cartels


Other

Specialty/minor forest productsRight-of-waysRecreational Access

Thank You

Documents

Current Issues In Timberlands Acquisitions & · PDF fileCurrent Issues In Timberlands Acquisitions & Dispositions. ... Super Lawyer in 2006 in Real Estate Law. ... Supply/demand