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.

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…..

Partition – Ending Co-tenancy

The situation

Ten parcels of ranch property owned by one partnership with about 25 members, one LLC with three members, a family trust with 20 heirs and four individuals including one who was deceased and still on title.

 

That was the status of our ranch in year 2003. We owned an undivided interest equivalent to 949 of the 2,540 acres and we owned different portions of each parcel. It was a mess.

 

Our first attorney couldn’t even get out of the box before he admitted we needed somebody else. Our second attorney got us half way there and decided to retire. Our third attorney took over and completed the job.

 

Now it’s over. All that’s left is to sign a few deeds. The judge signed a stipulated judgment (what all the parties agreed to through mediation) and  that agreement is on its way to the Alameda County Recorder’s office.

 

Why choose the partition route?

Partition is the last thing one must do to resolve untenable property ownership. All other options should be explored first. For ten years we attempted to work out an arrangement to have co-petitioners in a partition suit so we wouldn’t have to take everybody on by ourselves, but that attempt failed and in the end we were forced to go alone.

 

What’s the legal basis?

In general, every co-owner of property who owns property in co-tenancy and doesn’t have some type of partnership agreement has the right to sue for partition. If the property can be subdivided and distributed to co-owners (in kind distribution) the law says that’s the best resolution. If the property cannot be divided up into appropriate parcels, the law says you sell and divide up the money proportionate to each ownership interest.

 

We evaluated our situation. Although some said it could be done, we decided that there was no way to subdivide the ranch. The parcels ranged in size from 20 acres to 640 acres. Zoning laws did not allow parcels to be split. Ownership interests couldn’t be fit into the existing parcels without major ownership changes.

 

We held firm that the ranch would have to be sold.

 

Why didn’t we leave things the way they were?

One family group owned 5% of the ranch. They had at least five people hunting and each could kill two bucks. They showed no interest in conservation of the deer herd. If all the owners killed deer at a proportionate rate we would be taking more than 100 bucks per season. The ranch didn’t have 100 deer on it, let alone 100 bucks. Similar issues existed with at least one other owner.

 

The ranch was (and still is) suffering from disrepair. Since nobody claimed the ranch as their own, nobody took responsibility for doing the little maintenance things that are necessary to keep things working properly. Ponds dams needed work, fences were patched with temporary fixes, gates were held together with bailing wire etc. The few buildings on the property were ready to fall down.

 

Once we initiated the action, all the partners had to respond to the law suit or default on the action. If they defaulted, they would have no say in the outcome and would be forced to accept the judge’s decision.

 

Just getting the case ready for and in front of a judge took about two years. Once we got a court hearing, we then went through a year of delays as attorneys for the defendants sought extensions for any or no reason during the first few court dates.

 

Finally, mediation was scheduled for the spring of 2007. Getting meetings arranged took a few months, but the mediator was efficient and knowledgeable. He made it clear to each owner that if a mediation solution could not be reached that the ranch would be put up for sale. At least one of our co-owners was so angry with us that we thought the mediation might not be successful.

 

However, ultimately everybody realized that there was a solution to fit all. We bought out two owners of a total of 400 acres. Another co-owner bought about 250 acres. We agreed to take four parcels that approximated our ownership share and others did the same. We gave some property to another co-owner.

 

One year after completion of the mediation, the suit is over. After about four or five years of effort, the ranch will have four ownership entities. Everybody is better off. The guy who owned 94 acres and hunted on 2,540 may not have as good a hunting scenario, but he now owns 160 acres by himself and he got it without paying anything for the additional acreage.

 

Along the way we had to resolve ownership by one co-owner who was deceased and we gave another individual a five-year right to use one of the cabins on the property. Another individual received five years grazing rights on a section of ground.

 

Instead of 949 acres co-owned and unmanageable, we now have 1,300 acres we can manage as we see fit. I haven’t calculated the legal fees, but we paid attorneys two to three thousand dollars a month for several years. Whatever it cost, it was worth it.

 

Create a functional partnership agreement

The best way to prevent this problem is to enter into a partnership or co-tenant agreement whenever you become co-tenants with anybody. The partnership agreement must describe the process for selling whenever an individual wants to opt out of ownership. Keep in mind that not all partnership agreements are fair and equitable. I’ve seen some agreements that left the co-owners with fewer rights than they would have without an agreement.

 

Please keep in mind that I’m not an attorney and the purpose of this information is to give you the benefit of our experience. However, before you take action on your own, hire an attorney to tell you to resolve your issues. A good attorney may appear to be expensive, but in the long run good legal advise can be invaluable.

 

Partition – How We Ended Co-ownership with a Deceased Person (part 2)

When initiating our partition action, we knew that one of the owners had died unexpectedly, but we didn’t know the rest of the story – that he died intestate (without a will), that he was married and that his estate had not been probated even though he’d be deceased for over ten years.

 

We could not probate his estate because probate must be carried out by somebody who has legal standing and knowledge about the individual. In an attempt to resolve the issue, we researched to find out who his heirs were. That’s when we discovered that he had been married. We also knew his father.

 

Because his wife was of foreign decent, she did not communicate well and also was suspicious of our attempts. She also commented that she did not wish to give the property up because her deceased husband’s ashes were on the property.

 

We were very discouraged by these road blocks. She refused to respond to our notices, letters and direct communications. Because of her failure to respond we were forced to advertise for possible heirs and also post the ten parcels. She defaulted on responding to the suit so the judge’s final decision did not include her input.

 

Our attorney concluded that the only way to resolve the issue was to approach the judge with a plan to determine that our deceased co-owner had died without any known heirs and that the court should take over his estate’s share in ownership of the property.

 

We accomplished the necessary noticing and advertising and the stipulated judgment for partition states that we will receive title to the property and initiate what is called an “interpleader” action and deposit the purchase price with the Court to be held for the heirs or devisees of our deceased co-owner.

 

It is our responsibility to initiate this interpleader action and deposit the necessary funds. After we take the steps necessary to notify the heirs of the deceased partner we will be released from any further participation. In the mean time we have clear title and can wrap up the suit.

 

This mess demonstrates just one of the major issues that can arise from co-ownership without a written partnership agreement. If the heirs of a coowner don’t take the proper legal steps to probate upon death of a co-owner, it will end up being your problem too. This type of legal action is very expensive and very time consuming.

Landowner view of Condemnation

During 2003, thinking it was a good time to buy a property to suit my own investment needs, I scoured the multiple listing service for an attractive buying opportunity.  On one occasion, I found a property that seemed to be listed below market value.

The property listed was advertised to be a 32-acre site with county road frontage. The price appeared to be too good to be true.

 

Knowing that good opportunities don’t last, I jumped into my car and drove to the site. No “for sale” sign, no indication of what was for sale. I made a mental note of what appeared to be the subject property and contacted the listing broker.

 

He quickly explained why the price seemed low. It was not an independent parcel. The owner was looking for a buyer who would step in to obtain a variance and subdivide his property so that the 32-acre listed parcel could be purchased.

 

Knowing that this was something I might be able to accomplish, I made an offer to purchase the property and set the offer up so that I could buy it without using a lot of my own cash – always an important issue when you’re a real estate broker. Cash flow is usually the biggest problem when you’re self-employed.

 

The property was listed for $325,000. I asked the broker to represent me as my agent and offered $260,000 with a $500 deposit to be increased to $5,000 after a variance for the lot split was approved. The owner would carry 50% of the purchase price at close of escrow and the note, with annual interest only payments at 6% interest, would be due three years after close of escrow.

 

The seller accepted the offer. It turns out there was more history on this property than I knew when I made the offer, but I was satisfied with my opportunity and proceeded to make application for a variance that would allow the property to be split.

 

The unique circumstances surrounding the parcel led to an approval of the lot split. But, it was a lengthy process that took over a year to complete. The issues surrounding the process were quite interesting and make a good story, but this is about what happened next – after the approval.

 

The property I acquired was adjacent to lands owned by a local open-space park district on two sides. During the subdivision process, it entered my mind that the park district was a logical buyer for this parcel and I was surprised that they had not tried to purchase it. After the split was approved, I was even more surprised when the park district approached me with an inquiry. (As it turns out they had attempted to purchase it.)

 

Since I intended to sell the property to make money anyway, I was more than willing to sit down with them to discuss their intentions with hope of selling the property quickly (and for a profit).

 

After a cordial meeting between me, my attorney and park district representatives, I delivered a comparable sale to the park people, via my attorney. The comparable sale was a 20-acre parcel that had sold for $695,000 more than a year before my purchase. I didn’t say exactly what I wanted, but my intent was that $695,000 would be about right.

 

I was shocked when their official response was that they would pay $300,000 and that they would commence condemnation proceedings if I didn’t sell “voluntarily”. They showed me their appraisal in an attempt to back up their offer and were using my purchase price ($260,000) as a key element of it.

 

Needless to say this put a crimp in my long-term goal (selling the property for a profit). My original purchase price of $260,000 was just the beginning of what I had into the property.

 

Between the original offer and when the park district made their offer (about a year and a half), several things had happened. First I had taken on a silent partner who agreed to pay $175,000 for a 50% interest in the property ($350,000 for the whole property) while explaining to him that the property would be worth at least $550,000 once the approval was obtained. The reason I had sold for that price was because I’d covered my original investment (reducing my risk) while retaining the ability to make more money when we made the final sale of the property a couple years down the road and I didn’t have enough cash to continue this lengthy process comfortably.

 

Therefore my partner would take a loss if I accepted the park offer. Not only that, but my investment had grown during the approval process and I’d also drilled and paid for a test well to the tune of about $10,000 before taking on the partner.

 

But, most importantly, the property was worth the $695,000 price supported by my comparable sale.

 

It wasn’t long before I began looking for an attorney who specialized in condemnation cases. I was not surprised to find out that the condemnation attorney would want to be paid 20 to 35% of the amount of the gain I would receive by going to court.

 

For example, I had been offered $300,000 and I hoped that I would win a suit at a value of about $700,000 (I had the advantage of being in the real estate business and being quite certain about what the property was worth). Therefore the attorney would be paid approximately a quarter of the difference or $100,000. (I wonder if the park attorneys were able to make this calculation?)

 

During our fee negotiations, my attorney could see that this was a good opportunity and took a percentage at the lower end of the scale. At 20%, he ended up making the difference between $730,000 and $300,000 or about $86,000. I also paid my appraiser $15,000. As the initiator of this process, the park (tax payers) paid most of the other fees, such as court costs. I don’t know what their (tax payer) total expenses came to, but I’m sure it wasn’t cheap.

 

In May of 2005, the park took possession of the property. I hired my condemnation attorney in July of 2005 and the case was heard in June of 2006. After the jury had spoken, the park paid interest on the unpaid balance of the purchase price at 3% per annum from the date they took possession until I was paid in full.

 

I was upset enough about what I considered to be bullying by the public agency, that I refused their final appraisal price of $625,000 and all their ensuing offers including one for $700,000 a couple days before the trial started.

 

The fact that they had raised their appraisal price from $300,000 to $625,000 (using the same sales data) was an indication to me that they had not been dealing in good faith. And, because my attorney fees would be the same whether or not I went to court, the resulting jury award produced the largest sales net of any selling opportunity afforded me.

 

Although the week of sitting in front of a jury was frustrating, the satisfaction I received by having my day in court outweighed the pain of trial. Having received a public decision by a jury of peers, the information about my case is public information.

 

If I had accepted a settlement, my guess is that the park attorneys would have required me to sign an agreement not to speak about the case, which in my opinion included bullying and hardball by the park after I had made a fair and good faith offer to settle – which would have saved the public a lot of time and money.

 

Not all condemnation cases are so distasteful. In fact I’ve witnessed public agencies that behaved fairly and above board while exercising the power of eminent domain. It’s just a mater of who you’re dealing with, how much money they have and sometimes property history.

How Much Is Enough?

 kids-love-to-fish-2002-cropped.jpg

(Caption: The size of the pond and the catch vary with “the beholder.”)

The small sycamore tree stood atop a 20 foot high mound where it had been spared by quarry equipment. It remained an island in an otherwise barren gravel pit. From our vantage point, my brother, Rob, and I could see a valley quail sitting atop the branches of the scraggly sycamore – probably a lookout. 

 kobus-and-rich-wildibeast-cropped.jpg 

(Caption: Above is a photo of myself an PH Kobus Grobler with a wildebeast that I shot from a ground blind at a water hole. In South Africa, game ranches manage habitat for maximum sustained harvest of game by keeping the game animals in and the poachers out. Such control over the game is critical to their financial success. In North America, hunting game in high-fence enclosures is generally frowned upon. But, there are many other factors, besides fences, that can improve your hunting such as managing hunting pressure and making your land more attractive to wildlife.)

 We had learned that the best ammo for long range shooting with our slingshots was cat’s eye marbles. They didn’t travel fast, but they carried a lot of “retained energy” as modern ballistic experts would say. The other advantage was that they made good lobbing – and you could follow the track of the projectile and adjust your aim with each shot. Rob didn’t need to adjust on that day. His aim was true and at a range that I recalled to be about 150 yards, he dropped that quail from the tree. 

I was somewhat surprised and disappointed when I visited the sight a couple years ago. A house has been built where we stood, but the gravel pit remains nearly unchanged and the scraggly sycamore is still in place. The shot of a lifetime was really only about 30 yards. Things sure change over time.  The hunting ground of our youth seemed endless, but in fact it encompassed only 100 acres or so. Conclusion: When your equipment is propelled by rubber bands, you don’t need as much hunting country. 

Our first local deer hunting spot was a 5,000 acre ranch that held a good blacktail buck population. We were quite fortunate to be able to hunt the ranch and could still hunt during the morning and then spot bucks under the shade of oaks and buckeye trees during the afternoon.    Of the 5,000 acres, we probably hunted on more than half of it during the three or four days we’d hunt each summer.

There was plenty of territory for us and the deer. Action was fast, but results were predictably low. Over the approximately five years we hunted there Rob killed three deer with bow and arrow. I didn’t kill any, but I did have my chances. 

Today that ranch is leased out to a small group of hunters who pay for the right to hunt. My guess is that there are five of them and they hunt primarily with rifles, taking a buck apiece each season. I’m sure their success rate is 100% or very close to that. Which brings me to the question – How many archers could that ranch support? We know it can support five rifle hunters with 100% success. If the archery success rate were close to the 30% that Rob and I experienced (relatively high), the ranch could support three times as many bow hunters with fewer deer taken.

cripped-ram-side-view.jpg

(Caption: In sharp contrast to the game ranch hunting in South Africa is stone sheep hunting in British Columbia. Stone sheep live and thrive on remote high-mountain slopes where they require huge expanses of habitat to survive. The difficulty of finding and shooting a stone sheep ram make them a rare and expensive trophy. However, the hunting experience is very similar to hunting other less expensive big game such as mule deer, which also require large habitats and remote territory.)

One can make a very good case that archery equipment expands habitat. Rick Copeland, manager of Wilderness Unlimited, a California hunting operation, understands that archery equipment extends habitat. That’s why two of their deer hunting ranches are open only to archery equipment. Members can hunt the ranches during the A- Zone archery season and again during the A- Zone rifle season. By hunting only with bow and arrow, they are expanding opportunity and maximizing the use of the non-migratory deer population. 

Weapon choice is not the only vaiable that effects the amount of hunting that a property can support. Of course the quality of the habitat is a huge factor. When we purchased an interest in our first 140 acre duck club we were amazed at how much hunting pressure it could handle. The habitat on the parcel was dense with berry bushes and thick patches of stinging nettles. Tall stands of Johnson grass and many other weeds added to the ability of game to utilize the property – especially pheasants. 

The heavy growth and several large sand hills effectively parceled the property so that hunters could hunt ducks or geese with little interference from the others. After title to the property changed hands when we sold, the new landowners removed all the dense habitat and disked up the open space between corn fields. The property character changed and the amount of hunting pressure it could support dropped accordingly.  Although we still have reasonable hunting, it’s not like it was. 

The same principle applies on upland ranches. Ranchers that graze heavily leave little escape cover for deer, turkeys or pigs, but ranchers who leave habitat in place have more game that supports more hunting pressure.  

Of course other factors, like topography are a major consideration. So is water, climate and soil structure. Some property is just plan more productive. On hill ground in California, creeks, springs and waterholes play a major role in wildlife density and game management and weather patterns can vary greatly within only a mile or two.  Exposure to the sun plays a huge role in habitat quality. 

Location plays a role in many ways. Who are the neighbors? Do they hunt?  If  the neighbors do hunt, how hard?  Do they stay within their boundaries? Is poaching a constant problem? Are there roads through your property to cause disturbance and increased trespassing.  

The aggressiveness of the partners is a major consideration. If you’re in a partnership, how much will each partner be allowed to hunt? It should be spelled out. Will there be hunt days and rest days? How many guests will each partner be allow to bring? You have the ability to craft out an agreement that improves the quality and equality of hunting opportunity for the partners.  

In the end, the partner that hunts is the one who will enjoy the property the most. There are always those who seem to reap the most rewards, but that’s life.  

The days of picking up your shotgun and heading to the hills to hunt without paying a fee are long gone. The next question is, are you going to put yourself in control of your destiny or roll the dice to see if you can find a place to hunt?  In fact, not only your destiny as a hunter, but also the destiny of all hunters is tied to the answer to this question.