WHY A LANDOWNER NEEDS A CONSULTING FORESTER

TO HELP SELL TIMBER

By W. Cary Perkins

Less than 10% of the over a billion board feet of timber sold in Kentucky each year is sold with the aid of a professional forester.  With 90% of Kentucky’s forestland in private ownership, most of that billion board feet is sold by farmers or other small landowners in direct dealings with a logger.  This includes the relatively small number of private sales that have trees marked by the state Division of Forestry.  State marked sales are handed back to the landowner after the marking is completed and the state’s assistance ends. The bottom line is that in all of these cases, the landowner is, himself, selling the timber to a buyer and handling the sale himself.

What’s wrong with that?  Well, there could be a lot.  First, most landowners don’t have a clue what their timber is worth.  Even if they did, they are usually at a loss to know how to sell it and get their price.  The range of what buyers will offer can vary dramatically.   If a landowner goes to a car dealership to buy a car, he will buy it as cheaply as the car dealer will sell it.  That’s just business.  Why would timber buyers be any different when trying to buy timber from a landowner? But a car dealer knows his product, its value, and what he can sell it for.  Unless, it has been marked by a forester and a forester is assisting them with the sale, landowners often have no idea of the volume or quality of what they have to sell, much less what it should be worth.    

Timber sales are one place where a private consulting forester earns his money.  A consulting forester has a minimum of a bachelor’s degree in forestry from an accredited college, such as the University of Kentucky, and works with private landowners in the management of their forestland.  Timber sales are part of that management.  A consulting forester not only knows timber, but he knows the market, the buyers, and how to get a landowner the most for what he has to sell.  At the same time the consultant can help a landowner protect his property. 

The most common approach used by a consultant to sell timber is a sealed bid sale where the landowner gets all of his money in advance (lump sum).  Individual trees are marked by the consultant or in some cases by the Division of Forestry.  A summary of what the landowner has to sell is advertised to potential buyers of the timber.  It’s not uncommon for this advertisement to go to buyers well over a hundred miles away and in several states.  Interested buyers are then shown the timber and asked to offer a sealed bid.  Bids are opened at a specific time and place listed in the notification of sale.  After bid opening, a contract is awarded to the highest bidder, assuming that the consultant feels the high bid is fair.  The landowner reserves the right to reject all bids. 

Why can’t a landowner do this on his own without a consultant?  He can -- but with few exceptions, he can’t do it nearly as well, and often he can’t get the right bidders there.  And once the bids are in, he lacks the knowledge to analyze the bids he does get.  Often the high bid in a sealed bid sale will be 50% to 75% higher than the low bid.  Sometimes it will be double.  And often the high bidder is not local.  What would have happened if that high bidder wasn’t there to bid?  Can the landowner induce that high bidder to offer a bid or does he even know who the high bidders are likely to be?  Again, that’s where the consulting forester earns his money and this more than pays for his commission. 

Won’t the bidders just come if it’s advertised to them?  Not necessarily. Some bidders don’t bid because they already have too much timber bought and/or can’t afford to have large sums of money tied up in timber they can’t get to immediately.  Different bidders have different markets and varying distances they are willing to travel to cut timber.  The buyers also generally look at seven things in evaluating a tract of timber:  tree species, tree grade, average size, total volume, volume per acre, logging conditions, and accessibility.  All of these have an effect on whether a buyer is interested and how much he will be willing to bid.  Among those seven things, many of the bidders have different parameters they are seeking.  Does the landowner have the knowledge to evaluate these things himself and talk intelligently about them, much less know the needs of individual bidders?

Buyers are bombarded daily with landowners asking them to come look at timber they want to sell.   Consulting foresters regularly get contacts from buyers asking them if they have timber for sale.  Some buyers will often come and bid simply because of the personal relationship they have developed with a consultant and because the consultant calls and asks them to come bid.  They know the consultant and trust that he knows what he is doing. They also know they’ll be crossing paths with the consultant again next week.   

When a landowner calls a buyer, the buyer knows he will probably never see or hear from that landowner again regardless of whether he buys the landowner’s timber. Some buyers would rather deal with a consultant for that simple reason.  He’s a known quantity. Dealing directly with landowners is often frustrating for a buyer. That’s because the average landowner has no concept of what’s involved in a timber sale, what is normal, and what is good and bad logging.  The best timber harvest is not going to be pretty. Because of this, landowners sometimes have unrealistic expectations about what is going to occur in a logging job.  Many loggers have horror stories about landowners who wanted unreasonable things or had unreasonable expectations simply because they knew little if anything about trees or logging.  From that standpoint, buyers welcome a consultant that guides and coaches a landowner through the timber sale process much like a real estate agent does in property sales.  It reduces the chances for hard feelings and awkward situations which might otherwise occur.

If a sealed bid sale is not appropriate or if it fails to generate what a consultant feels is a fair price, the consultant will usually seek to negotiate a sale on the landowner’s behalf.   In a negotiated sale, the consultant negotiates with different buyers until he is able to obtain the landowner the best available price.  This approach relies on the consultant’s knowledge of timber, markets, and prices as well as the relationships he’s built with buyers over time.  Again, it’s where the consultant earns his commission. 

As opposed to sealed bid (lump sum) sales, another common way timber is sold in Kentucky is “on the shares.”  In a share sale, a logger cuts the timber, hauls it to the mill, and gives the landowner a fixed percentage of what he receives for it.  A share sale has an advantage for the logger, particularly smaller ones, in that it doesn’t tie up large sums of money up front and it minimizes their risk if the timber has a large amount of unseen defect.  If everything works perfectly in a share sale, the landowner may make more money since lump-sum-in-advance sales require bidders to factor potential risk into their bid.  In exchange for the possibility of more money, the landowner gives up control of what’s going on.  If a logger splits a tree in cutting or a tree has unseen defect, the loss is the landowner's.  The share logger can also cut just what he wants and then stop and leave at any time leaving the landowner in the lurch.  There is no easily enforceable penalty to prevent this.   In a lump sum sale, the landowner knows up front what he is getting for his timber with all risk and guarantee of performance transferred to the logger.   Lump sum sales are cleaner for the landowner with guaranteed money and less opportunity for problems to occur. 

If in selling timber, a landowner thinks he has the tools and the knowledge to do what a consulting forester can do then, by all means, he should try.  But unless he has somewhat of a knowledge of timber and the industry, including timber markets, contracts, and what is and isn’t required by law, a consulting forester will likely make that landowner much more than his commission and also dramatically lower the landowner’s stress level as well.

LUMP SUM VERSUS SHARE TIMBER SALES

By W. Cary Perkins

There are two common methods in which standing timber is sold in Kentucky.  One is by lump sum and the other is “on the shares.”

In a lump sum sale, the landowner receives all of his money in advance before any timber is harvested.  There are two common ways this is done.  The first is that all money is paid with the signing of the contract.  The second is a down payment of 10 to 25 per cent is made when the contract is signed with the rest due at some point before harvesting begins.  The distinguishing factor in a lump sum sale is that the landowner receives full payment in advance of any cutting and transfers ownership of the trees sold to the logger.

A lump sum sale has the distinct advantage for the landowner that he knows exactly what he is going to get for his timber and has it all in advance of any harvesting.  Because the landowner already has his money, the logger is obligated to fulfill his obligations under the contract if he intends to harvest the trees.  Also, with the signing of the contract, the trees belong to the logger and the logger assumes all risk.  If a tornado blows down trees before they can be cut, or nice looking trees have unseen defect, the loss is the logger’s not the landowner’s.  

By contrast, the share sale usually involves the logger harvesting the landowner’s trees, transporting them to a mill or to a buyer, and then paying the landowner a fixed per cent of whatever the mill or buyer pays him. In a share sale the landowner is entering into a partnership with the logger. The per cent the landowner receives may vary.  A fifty-fifty split is normal in many places, but forty-sixty in favor of the logger (or even 1/3^rd – 2/3^rd for cedar) is not uncommon where logging conditions (land steepness, etc.) or other factors are unusually difficult.  Often the landowner is also charged part of the transportation bill.

In a share sale, IF everything works perfectly, a landowner may possibly make more money since lump-sum sales require bidders to factor potential risk into their bid.  In exchange for that possibility, the landowner gives up any control of what’s going on.  Read on!

Share sales have an advantage for many loggers, particularly small ones, because they don’t have to pay large sums of money up front in advance of receiving any revenue.  In a share sale, the only investment they have in a logging job is their time spent in harvesting and transporting individual trees.  If they do not have a large cash base or a high credit line, logging on the shares may be the only way some loggers can do business. 

The disadvantages for the landowner in share sales are numerous.  The logs belong to the landowner until the logger transports and sells them to a buyer. Because the landowner retains an interest in the logs until sold and is a partner with the logger in their marketing, the landowner may be held liable for any accident or injury during the logging process. The same is true if there is an accident on the way to the mill. It’s the landowner’s logs he is carrying. 

If a tree splits in falling or has unseen defect, it’s the landowner’s tree that’s being cut.  If logs are not marketed immediately after being cut and lie on a log deck for an extended period of time, they may decrease in value because of stain or other factors.  Again, the logs belong to the landowner until sold.  It may also be nearly impossible for a landowner to keep up with how much veneer is being harvested or how many truckloads of logs are being removed from his woods and to which mills or buyers his logs are being delivered.

In other instances, the logger may choose to cut only the highest value trees and then move on to another job.  Or%u2026he may choose to leave the less valuable top logs from harvested trees in the woods.  His profit is much less on these.  If he chooses not to take these top logs to the mill, the landowner is out his share of their value and they are left in the woods to rot. In a lump sum sale, the logger owns those top logs, and any loss in not removing them is his. 

Also, if the landowner has any kind of disagreement with the logger over the logging or the treatment of his property, the logger may choose to move out at any time leaving trees uncut or logs on the ground to rot.  Because the logger has paid no money up front, there is no enforceable penalty, short of a large performance bond, to prevent this. If the logger leaves without cutting all the trees the landowner wants logged, then selling the trees that are left can be very difficult or impossible, particularly if the best trees have already been removed. 

Another thing to consider is that lump sum sales are always eligible for capital gains tax treatment, whereas share sales are only eligible if specific language is included in the timber sales contract.  Since the landowner is retaining an interest in the logs when they are cut, without specific contract language, it creates a different tax situation than if the trees were sold standing. 

A variation of the share approach is that a logger will offer to buy timber on the shares but guarantee the landowner a fixed amount.   At first glance, this would appear to have some of the best of both worlds.  Since the landowner doesn’t receive any money in advance, however, the same problems listed above apply and enforcing the guarantee becomes a problem.  What if the timber does not cut as well as the logger projected and/or promised?   What mechanism will the landowner use to enforce the guarantee?  A law suit may be the only recourse if the case can be proved.

A second variation is the logger will cut and haul the logs to a log deck on the landowner’s property and bring buyers there to bid on the cut logs.  This eliminates any questions on number of logs sold and where they were taken, but most of the other things noted above still apply.  Once sold, the logger must then transport the logs to wherever the buyer wants them taken and at least part of that transportation bill is assessed to the landowner.

In summary, impartial individuals knowledgeable in the timber sale process recommend a landowner sell timber by lump sum, and not on the shares.  Lump sum is clean, enforceable, and the landowner has all his money in advance of any cutting. Selling on the shares is an invitation to a host of problems which could have easily been prevented by selling lump sum. Remember – any one can promise anything, especially when there is no mechanism to force them to deliver what they promise.  Share sales are a lot about promises.

The only reason a landowner should ever sell his timber by the share method is if, for whatever reason, it is not salable by lump sum. Such situations would include the volume to be removed being so small, so scattered, or of such low quality, that no one is willing to consider buying it by lump sum.  Those situations do exist, and a share sale may be a landowner’s only recourse.  A small share logger can get trees cut that a larger operator would not consider.  But in all other situations, a landowner is better off selling timber by the lump sum in advance method.

One more thing%u2026timber should ALWAYS be sold by a written contract that documents everything agreed upon with the logger and that covers in detail exactly what the logger is going to do in harvesting the landowner’s timber.   A lump sum sale makes it easy to write a clear and easy to administer contract.  The logger has already paid for the trees in advance and he must abide by the contract to be able to harvest them.  It is nearly impossible to write an enforceable contract for a share sale without some kind of large performance bond -- a very unlikely possibility with most share loggers.