The First Right of Refusal

About 35 years ago, my brother and I were looking for a ranch. We had little money, but lots of time and energy.

We heard about a property we might be able to buy at an affordable price. It was listed for sale with a real estate broker with whom I was acquainted. He explained the situation like this.

Two brothers, Frankie and Al, had owned a ranch for many years. They had purchased it primarily as a hunting club. One of the brothers ran the business affairs and the other had made a hobby of making physical improvements like dams and roads. Over time they purchased additional property and the ranch grew to over 1,000 acres. In addition, it was adjacent to two land-locked sections of BLM ground – giving them almost 2,000 acres on which to hunt. The had it almost to themselves.

They had also built a very nice home on the property and they invited family members to hunt. Some of their guests actually paid a fee which allowed them unaccompanied access to the ranch.

Over the years, the brothers agreed that in their old age, they would sell the ranch if they needed money for retirement. Little did they know that Albert would drop dead from a heart attack at about the age of 50. Al was married and his portion of the ranch went to his wife. Having no other means to support herself, Albert’s wife asked Frank to purchase her interest in the property, or (at least) allow her to sell her half.

Although Frank did not agree to purchase her half, he did agree to letting her subdivide and sell subject to Frank having a first right of refusal to purchase.

Their agreement included a division of half the ranch into five 120 acre parcels. The parcels were put on the market for about $100,000 each with seller financing. As offers came in, Frank had the right to either match the offer or let Albert’s wife sell to the buyer.

The price was acceptable, but nobody wanted to be the guinea pig for Frank. It became clear to us that the agent and Albert’s wife were frustrated by their inability to obtain a viable offer.

My agreement with the seller’s agent was that we would split a 10% commission, but I couldn’t see making an offer just to watch Frank take the opportunity away from us. The $100,000 price was a little too rich for Rob and I to handle on our own, so we found a partner who would become  co-owner if the deal came together.

Then I got an idea that made a lot of sense. If the seller wanted to get the property sold, she might need to pay a higher commission. If she were willing to pay 20% and the selling agent was willing to accept 5%, we could pay me 15% even if Frank purchased the property. That would fund a pay out of 5% to me and each of my partners. Once I proposed this idea, my partners were a go. If Frank acted on the first right, we would each be compensated for our efforts.

The seller’s agent and the seller were fine with idea. At this point we made our $100,000 offer and waited to hear from Frank. He acted upon the first right.

There were  four remaining parcels available and we still didn’t know exactly what to expect from Frank, so we made an offer that would repeat itself on each of the remaining parcels with a commission being paid to me (and indirectly my partners) each time Frank acted.

Frank not only exercised his first right, but he became so annoyed that he outright purchased the remainder of the ranch. I received a commission of 15% on all five parcels. My partners and I were disappointed that we couldn’t own the property, but we were compensated for our disappointment.

Some significant information can be gleaned from this story. First of all, it is clear that a first right of refusal has a negative impact on one’s ability to sell property. And, it is clear that the first right decreases the value of the property – in this case about ten percent. In my opinion the actual decrease in value was even higher than that.

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Unfounded Fears, New ATV

For about a week Rob and I had been discussing the ranch. Out of reach during the week’s storms, we could only wait for a break in the weather and a couple days of drying before heading out to determine damage.

In the meantime, we decided it was time to purchase a new ranch vehicle. Having lost one of our ATV’s to engine failure and needing a two seater, it was decision time.

After years of debate, we concluded it was time to purchase a Yamaha Rhino. We looked at other side by sides, but the Rhino won the contest and after riding around for a day I’m convinced we made a good choice.

The Rhino had plenty of power, good breaks and compression for slowing on hills.

We barely had the Rhino out of the trailer when a group of jakes stopped by.

The break in the weather was welcome by all.

A creek crossing along the way, could have created a real issue, but wisely we loaded the Rhino back into the truck trailer before crossing. The water was deep and would have turned our vehicle from an ATV to an AWV and sunk.

That was the biggest obstacle. We checked ponds and roads for a couple hours and were amazed that more damage had not occured.

The ponds we checked were full and looking good.

Our biggest fear was that the roaring water had wiped out one or more of our culverts or caused a big slide making the road impassible.

We were relieved to find the road in good shape.

Deer were out in good numbers.

About a dozen deer fed on the ridge.

We also found the skull of one more good buck that met up with a lion.

Rob found this skull in the canyon.

All in all it was a good day at the ranch. Hopefully we’re over the worst weather and we’ll have nothing but spring showers from here on out.

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Locked Out – The Battle for LaCosta Ridge

Accessing property via a road that has no deeded rights is common. In the hills around Livermore, very few of the landowners have right-of-ways that have been validated by an official grant of easement.

On the other hand, very few of these access roads are disputed. The land seldom changes hands, so the owners are known to other landowners along the route. Good neighbor policy is to leave reasonable people alone and not create a Hatfield’s and McCoy situation.

In our case, most of the property along our access road is owned by the City and County of San Francisco. This is a situation with both good and bad implications.

We do however, have a portion of our road that passes through a privately owned piece and this has become a problem. Recently the owners of this small parcel have decided that we do not have the right to pass and locked the gate. Doing what we could to make it clear that we believe the route is our legal access, we enforced our rights by cutting the chain (we used our giant master key, the bolt cutter) and placed our own lock on the gate.  The property owner promptly removed our lock, and thus the battle of LaCosta Ridge. (Juan LaCosta was one of the early landowners in the area.)

When seeking to have the owners sign a grant deed that could be recorded to validate our rights, we were told they could not do that as they were planning to sell their piece and the purchasers were not interested in buying if a right-of-way existed. Thus we sued to establish our right.

For the early years of my life, I dreaded law suits and therefore avoided legal action at almost all cost. Now, after having courtroom experience, I’ve concluded that when you believe you’re right, court is a good place and having concluded that we’re right, it looks like that’s where we’re headed.

This battle of LaCosta Ridge has motivated me to learn about the history of the road and it’s very interesting. The earliest inhabitants were Ohlone Indians. They gave way to Spanish Missionaries in the late eighteenth century. The area down stream of our ranch became known as Rancho El Valle de San Jose and a Spanish Mexican land grant turned most of the bottom land over to the Bernal family – soon to become also known as the Sunols (by marriage). Thus leading to the name for the railroad town at the head of Niles Canyon – Sunol.

When California became a state, there was some debate about the validity of their Land Grant ownership, so a land commission was formed to validate the Spanish Mexican land grants and validate they did. Shortly thereafter the upstream area, now best described by the Public Property Survey System, was surveyed with the intent by the U.S. Government of selling. The Township in which our ranch is located is Tier 4 South, Range 2 East, Mount Diablo Base and Meridian. And, the parcels within this township were created by surveys that took place about the time of the Civil War.

Not long after the Civil War, the properties of this township were sold and the land transfers took place by U.S. Land Patents. In most cases the Homestead Act.

During this time, the homesteaders utilized the land by grazing cattle, sheep and horses.

Learning about the history of our ranch has been enjoyable, but it also makes us realize that there were many before us. The first recorded documents related to road access to the area occurred in 1882 when a group of about twenty people petitioned the County of Alameda to make the access road a County Road, which they did. But the County Road was abandoned in 1922.

One thing we’ve learned while preparing for this law suit is that right-of-way law is very complex. Fortunately for us, it looks like the story of our rights is simple.

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Conservation Culture Wars

There’s a war going on. It’s a conservation culture war.  Traditionalists believe hunters and fishermen have been major supporters of wildlife and there is plenty of evidence to support that claim. Those who oppose consumptive uses would like to find a way to supplant that financial underpinning for wildlife habitat.

This is nothing new, but there are other wars going on within the conservation community as well. Within the Federal and State Wildlife agencies there are those who believe in “hands on”government  and those who believe in only government oversight of activities that can better be developed by private enterprize.

This battle is typically between those whose comfort lies with relying on the dominance of a big government run by bureaucrats vs those who work in the private sector and believe in the creativity and efficiency that financial rewards can produce.

One example is the ongoing battle between private sector interests (conservation and mitigation banks) versus Habitat Conservation Plans (HCP), which is a big government venture. These entities are so counter to each other that the USFWS has two competing departments within its organization and the two don’t seem to be able to coexist.

In another arena, it appears that the California Department of Fish and Game is about to extinguish the private sector from managing endowment accounts that private continuous funding for Conservation Banks. Eliminating the private sector and NGO from this industry is misguided. There would certainly be growing pains while private enterprize faces the steep learning curve required to set up these programs, there would also be a big payoff.

The use of private parties and NGOs to hold endowment funding for long-term conservation programs which assure the perpetual existance of many species, would minimize the cost to taxpayers and build a conservation network much larger than we can afford government to become.

Currently, big government seems to be winning the war and private enterprize seems to be waning (in both the large and small arenas), but you never know as politics are volatile . Personally I enjoy freedom derrived from being entrepreneurial and independent. Maybe I’m an endangered species.

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What’s a Duck Club Worth?

The value of a duck club is as subjective as any real estate evaluation on earth.

You never own the ducks.

An appraiser would look at duck club sales and compare the price, annual operating costs, taxes and acreage to come up with a value.

A few days ago I got a call from a duck hunter who was evaluating a duck club offering in the delta. He’d checked out my blog and decided that it would be worth his time to give me a call.

He gave me the salient facts. 1,000 acre club, ten partners, $2,500 per acres price for land under a wetlands reserve easement. 100 acre closed area, 7 days per week shooting, $40 per acre per year reclamation fees and a club house that he didn’t intend to use.

He then asked if I thought it would be a good purchase.

This is where things get dicey. Was he a hard-care duck hunter who appreciated quality time in the marsh? Or, was he a trophy duck-club owner who mainly wanted to impress acquaintances with his duck club address?

I assumed he was the former, not the later and told him that the price sounded OK if he could afford it. He said he could and sounded as if he was ready to move on it.

For sake of discussion, my clarity and your benefit, let me review the purchase. It may be helpful down the road to take a closer look at his purchase.

The price was straight forward – $250,000 for 1/10th share of 1,000 acres.

The fixed annual fees are pretty easy to estimate. Reclamation – $4000. Taxes – $2,500. If he’s borrowing the money, he should figure an annual interest cost of about $5,000 – $7,500 per $100,000 borrowed depending upon his borrowing rate. Most duck club buyers either pay cash for this type of property, or the seller provides financing.

Let’s assume he pays cash. That means he’s out at least $6,500 per year. But that’s not the end of the story. Duck clubs have other costs associated with operations. Insurance for one and that can vary depending upon the owners and the type of ownership entity.

A duck club should have an operating entity that creates an annual budget, pays bills and takes care of business. Somebody will be in charge and that person will probably want to be paid. Usually these fees are not large, but in this case I would estimate that the individual managing this club will want at least $200 per month. The insurance will probably be $1,000 per year. That adds up to another $340 per partner. Add in electricity and we can call it $400 per partner.

Duck clubs need to be maintained. That means they must be mowed, plowed and or sprayed. To plow the club one time around may cost $10 per acre – just a guess. Therefore I would estimate that the annual cost of maintaining the ponds would be about double that or $2,000 per share – including irrigation management, water control maintenance etc.

That puts the annual cost at about $9,000 for each owner. You can add to that a few other costs personal in nature.

The good news is the only time a buyer evaluates the cost of a duck club is when he’s making the decision to purchase. Once you own a club, you will just blindly pay until you either die, go broke, quit hunting or decide to purchase a new club.

It’s easy to divide up the cost of ownership. The tricky part of a duck club purchase is dividing up the hunting. That depends upon the individual member’s allowance of time, flexibility and desire.

A scenario that includes hunting every day tends to create a problem that’s hard to resolve -  competition between owners.

Having a system to give each owner a fair chance to enjoy the benefits of ownership is as critical to the success of a duck club as the availability of water.

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Ranch Ponds in March

 

Traveled to the ranch last weekend to take a break and look over the ponds we worked on last fall. http://hunterlandowner.wordpress.com/2009/10/06/pond-repair-at-the-ranch/

The pond repairs will produce water for cattle and wildlife. Stock ponds are also breeding habitat for endangered amphibians, the California red-legged frog and California tiger salamander. The winter rains were well spaced and appropriately timed for good results. We were quite lucky to have optimal conditions, conditions that allowed the bare ground to sprout the seeds we sowed. Here are a few photos showing that the ponds did well. 

This pond was deeply incised in the spillway area. We built up the dam and finished off the spillway with many loads of rock and other material.

The dam wall showed almost no erosion. Jute matting, straw and native seeds were spread over the bare dirt after we finished rebuilding the dam.

The gradual spillway was loaded with rock, bricks, boards and pipes driven into the ground for support.

Spring flowers were popping. Along with shooting stars, johnny jump ups and buttercups were showing.

California newts were the most visible amphibians.

It was a great spring day until about 4:00 PM when clouds appeared to the West and I decided to make my way home before the roads could get slippery.

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Creating a Partnership that Lasts

Friends Fred, Steve, Gary and Ralph with limits

 

I recently received the following email. The question was so appropriate that I decided to make a post on the topic. 

Good morning Rich, 

          I bought a 100 acre property here in Ontario, Canada in January with three partners. We have known each other for over 25 years and have hunted together forever. We are starting to build our new camp this spring. I have been doing research on the net to find a document we can use and all agree on and sign for our camp. I am looking for something that may cover a member’s sudden death, buy outs, passing shares on to spouses or children, divorce and anything else that may pop up. I joined a few hunting forums to try and get some advise and possibly a copy of an other camps document, but all I seem to get is the old “be careful” speeches and not much more. A lot of people seem to have partnership agreements, but no one seems to want to share them with me. We have contacted a lawyer to draft an official document, but he told us if we could get a document already completed and just modify it to our situation it would be a lot cheaper. Rich, would you have a copy of a partnership agreement that you could share with me?  

Dear Ontario: It would not be appropriate, or much true help, for me to give you a partnership agreement from California. Penny wise and pound foolish would be an applicable phrase. 

I am not the best source to provide you with such a document. I am a real estate broker in California and I do have some experience with partnerships. I also have a copy of a partnership agreement around that I could provide. A lawyer is an expert in the law and also trained at producing clear agreements without ambiguity. Many of the clauses you need for your agreement have stood the test of time and an attorney understands how they apply. I do not do legal work. 

Undoubtedly the laws of Ontario Canada are different from the laws of California, both from a real estate and a partnership prospective. I could be accepting some liability by going so far as to provide a document – and it makes no sense to me to create liability as a blog writer. However, I do have a layman’s experience and I am willing to pass along some guidance – guidance that a lawyer may not provide. 

You must think of the partnership relationship you and your partners want to create. I believe that the best partnerships are created amongst groups that have commonality of goals and also similar starting points. As partnerships age, often the group splits as each individual moves in their own direction.  

Having a common starting point also creates a degree of equality among partners, making it difficult for one person to dominate. And, it creates the basis for common goals. 

Sometimes partnerships create limitations on the ability of partners to sell their interest. For example, partnerships sometimes allow partners to sell out only for their initial cost, plus some accrued interest. This type of partnership creates a situation where partners have little or no profit. Accordingly, there is no motivation to ever sell and little investment incentive. These agreements typically have a first right of refusal agreement built-in so the group or remaining partners have the first opportunity to purchase when an individual partner decides to sell. 

First right agreements tend to devalue each partnership interest. Typically the logic is that control over the membership is necessary to protect that group from exposure to undesirable individuals who could ruin the quite enjoyment of each of the group members. This is understandable. 

However, I am not a fan of this type of agreement. I prefer an agreement that follows typical real estate investment strategies where each individual has a right to sell their interest in the partnership at fair market value. I believe this model produces a better investment incentive for people who have limited funds. Partners are able to withdraw their funds and reinvest when necessary. 

If money is no consideration for any of the partners, or a degree of benevolence is present for some of the partners, the “no profit” concept can work, but this is not typically a healthy partnership situation from my prospective. 

An alternative method of protecting both the real estate business interests of the group and also the quite enjoyment of the hunt club is to create two entities. One group holds title to the property and the other leases the property from the real estate group. The two groups may be exactly the same people or they can be different. 

If a hunting partner wants to sell his real estate interest, he can do so and the protection of the recreational aspect will be provided by the operating agreement between the lessees. And, the lease provides some annual income to create a degree of investment incentive for the investor-owners. 

In other words, create two partnerships. This also adds flexibility to the group. If an individual owner moves away for a while, the group may be able to find somebody to be a lease partner until the real estate owner returns. When he returns he can assume his place in the hunting lodge again. 

If one of the owners gets into a financial bind, he may be able to sell his interest to a non-hunting owner and continue to hunt even though he can no longer afford to be an owner. The purchaser may decide it’s a worthwhile investment based upon the lease income. 

When a property has multiple uses, it’s possible to have hunting and non-hunter partners for other reasons as well. Diversity is often a  good thing. 

The makeup of the partnerships in which I’ve been involved has changed over time, but eventually we  seemed to find the “right” guys and subsequently have remained together for quite a while, despite the fact that each of us has our own unique style. 

It’s quite a bit like marriage. Oh my…..

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How the Endangered Species Act Affects Wildlife Conservation through Highest and Best Use

The concept of highest and best use is most used by developers and appraisers. A developer will tell you that when a property is economically ready to be improved to a more productive use, it’s time for him to step in. An appraiser will tell you that a property’s highest value is based upon the most productive use allowed.

In wildlife conservation, highest and best use can lead to conversion of habitat to rural uses that eliminate or water down habitat quality. Farming, ranching and timber production can be compatible with wildlife habitat or even beneficial in some cases, but as urbanization occurs these wildlife-compatible rural uses are converted.

Further from town, low intensity ranching and public and private forest lands provide habitat where hunting added to the value of the land. Traditionally, hunting has been a huge contributor to maintaining wildlife habitat through game producing habitat manipulation that benefited other species including those that have become endangered or threatened.

Waterfowl hunting adds significant value to farmland.

 However, hunting, ranching and rural living cannot protect land from development as the rule of highest and best use concept applies, meaning that a higher use creates more value and a pressure on the landowner to convert for capital gain.

Now it’s the 21^st Century and in comes the Endangered Species Act (ESA) and new mitigation principles. Through the laws associated with the ESA, Federal Agencies (ACE & USFWS) and some state agencies (CDFG) have set up standards for habitat mitigation where permits are required before major capital projects can proceed. This mitigation commonly related to road construction and water projects.

The California Red-legged frog is a listed species.

When “listed” species (those which have high status in the endangered pecking order) are affected, developments must provide mitigation to offset the negative impact the project will have to the subject species.

Mitigation typically occurs on rural lands where the same listed species dwell. These rural lands can be protected in perpetuity and managed specifically for the listed species. When an agreement is signed deeding certain rights from the landowner to the agencies and it is then recorded against the property. In return for protecting the species so the developer can receive a permit to commence the project, the landowner receives cash.

The point of the discussion is that this process has created a new highest and best use for undeveloped land and an entirely new set of values for rural land in California. Not only that, but this highest and best use principle has created a new type of wildlife conservation – highest and best use conservation.

 Rural landowners can now leave their land in open space, while managing their land for endangered species, and also protecting their property values. (Hunting is often a compatible use as well, but not always.) In many cases, the value of California wildlife habitat as a land use is now competitive with all rural and many suburban uses. In other words the ESA is protecting property values far beyond those properties that are currently participating as mitigation sites.

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Life Estates – They Serve a Purpose

To many of us, the Life Estate appears to be something that we’ll never see. I remember first learning about life estates when I took my first real estate course in 1977. It seemed like a neat trick.

A life estate can be granted to an individual by the owner of a property. First there must be a legal description describing the parcel. Secondly, the grantor of the life estate must have clear title and all the owners must sign on. The person granted a life estate has the right to use the described property during their lifetime.

The owner of a life estate can also transfer the use to another individual during their lifetime, but as soon as they die, the title reverts to the underlying property owner. I’ve been involved in several properties where life estates have existed both as a benefactor and as an underlying property owner.

One problem with life estates is that it can be a hassle removing the recorded documentation from the public record. Once a life estate is created, it is recorded to create public notice that the individual is receiving the right to use of the property until they die. When that person dies, a death certificate must be obtained and recorded to demonstrate that the estate is over.

My experience has been that there are often better ways to accomplish the intent of a life estate than to actually create one. A contractual arrangement can create the same arrangement without creating a recorded document. If you’re on the receiving end, it is probably better to receive the real thing, but if you’re deeding somebody those rights, you might want to consider some other option.

I am currently in the process of searching for death certificates for two individuals who retained a life estate allowing them to hunt deer on our property until their death. In their case, all the recipients did to document the Estate was to state that they were retaining a Life Estate and access rights when they created the grant deed.

It is simply written on the deed and it worked. They have been deceased for years, but the life estate was never removed from title. I recently received a call from a grandson who thinks he can produce the two death certificates I need in order to clear title.

It has taken several months to track down this relative who has good enough legal standing to obtain the death certificates and provide them to me. After I receive the death certificate I’ll give it to the title company and they will then remove the Life Estate from our title report.

In about 1986, a group of us had an opportunity to sell our duck club, but we didn’t have any motivation to sell.  When the buyer told us he’d grant us Life Estates for the purpose of duck and pheasant hunting, we changed our minds.

The ensuing contractual arrangement has allowed us to continue hunting that property for more than 20 years – a very good deal. With luck, some of us may be hunting there for another 20 years.

In our recent partition suit, an agreement between us and one of the other owners helped seal the deal. We agreed to allow him to use a cabin and hunt on the surrounding 320 acres until his death or five years, whichever comes sooner. He’s not in great health, but the arrangement made selling his interest more palatable for him and was acceptable to us. Although this arrangement is not a true Life Estate, it has some of the same characteristics.

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The Checkerspot Butterfly

This is a photo of a chalcedon checkerspot butterfy. The photo was taken by Rob Fletcher on May 28, 2008 in the hills south of Livermore.

May is the time when the butterflies are out at the ranch.  A different (from the one in the photo) species of checkerspot, the bay checkerspot, is closely associated with serpentine soils. Some soils on our ranch have charactaristics similar to serpentine soils. These soils are found on rocky outcroppings. Some host plants for the endangered butterfly are found on our property.

These soil types have a low ratio of calcium to magnesium, low nitrogen levels and high levels of toxic minerals. Although there are numerous plants associated with serpentine soil types, the total plant biomass is typically low.

For various reasons, serpentine soils (which were never abundant) are becoming increasingly scarce, hence the listing of many associated flora and fauna, including the bay checkerspot.

Another photo taken by Rob Fletcher on June 28, 2008. These checkerspots are on coyotemint, a nectar plant for the butterfly. According to my resource these butterflies live in the adult stage for about one week.

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