Lending against land and standing timber

Four kinds of institution write the paper on Southern timberland, and they behave differently enough that it is worth knowing which one you are sitting across from.

Farm Credit associations

Borrower-owned cooperatives inside the Farm Credit System, chartered to lend to agriculture and rural America. Timberland is ordinary business for them rather than an exception, they write genuinely long-term real estate paper, and they return patronage to their member-borrowers. They are the default first call for a land purchase in most Southern counties.

Community and regional banks

The bank in the county seat may know the tract, the family and the buyer at the mill better than any institution alive. What it may not have is a long-term fixed-rate product for land, because it is funding itself with deposits that can leave.

Government-guaranteed lending

FSA farm loans, direct or guaranteed, and SBA 7(a) on the business rather than the timber. These are not a separate lender so much as a separate wrapper: a guarantee that lets a bank say yes to a file it would otherwise decline.

The secondary market

Farmer Mac never meets the borrower. It buys and guarantees loans the lender originates, which is what allows a bank with short deposits to put a long fixed rate on the table.

Life insurance companies and specialist funds also lend on timberland, but at sizes that begin well above a family tract. If you are financing a few hundred acres, the first two rows of that table are the market.

A timberland appraisal is two valuations bound into one report: the bare land, and what is growing on it. Whoever writes it will typically be walking or flying the tract, not working from the county's assessment.

The timber cruise

A statistical sample of the stand - plots measured on a grid, trees tallied by species and diameter, heights taken - grossed up to a volume per acre by product class: pulpwood, chip-n-saw, sawtimber, poles. The cruise is the single most consequential document in the file, because everything downstream is arithmetic on its numbers.

Product mix, not total volume

The same tonnage is worth a multiple more as sawtimber than as pulpwood. An appraisal that reports volume without breaking it into products has not told the lender anything he can lend against.

Age, stocking and site index

How old the stand is, how fully it occupies the ground, and how fast that ground grows trees. Site index is what tells a lender whether the next rotation will be a good one.

Access

Deeded legal access, road condition, whether a loaded truck can get out after a wet week, stream crossings, and the haul distance to each mill that would take the wood. A landlocked tract with a handshake for access is a different asset from a tract with a recorded easement.

Management history

Thinnings, burns, herbicide, fertiliser, replant records. A managed stand appraises differently from a neglected one of the same age, and the file shows which it is.

The higher and better use question

Whether the market is paying more for the tract as recreation, homesites or development than as growing stock. Near a metro edge that question, not the cruise, can drive the number.

Whatever the lender, the file is broadly the same, and every item in it that arrives with the first conversation is a week off the closing.

• The deed, the legal description, and a title commitment - including who holds the mineral and timber rights, which are not always the person selling the surface.
• A survey or a defensible acreage figure. Deeded acres and GIS acres disagree more often than anyone expects.
• A current timber cruise from a consulting forester, with volumes broken out by product.
• A written management plan: what will be thinned, when, and what the tract is expected to produce over the loan's term.
• Personal or business financial statements, tax returns, and a balance sheet - a timber loan is still underwritten on the borrower, not only on the wood.
• Proof of legal access, recorded rather than assumed.
• For a purchase, the contract; for a refinance, the payoff and the existing lien picture.
• Any existing timber deed, lease, easement, conservation easement or cost-share contract encumbering the tract. These bind the next owner and change what the collateral is.

The last item is the one that most often surprises a seller. A tract enrolled in a multi-year conservation contract, or carrying a timber deed somebody else can still exercise, is not the tract the cruise describes.

Timberland paper is structured around the fact that the collateral produces cash in lumps, years apart, rather than every autumn.

Term and amortisation

Land loans run long - measured in decades rather than years - because the asset does. Farm Credit associations and lenders selling into the secondary market are the ones most able to hold a long fixed rate.

Fixed against adjustable

A long fixed rate transfers rate risk to the lender, and the lender charges for carrying it or lays it off in the capital markets. An adjustable rate leaves that risk with you across a rotation you cannot shorten.

Payment shape

Annual and semi-annual payment schedules exist precisely because timber income does not arrive monthly. Some files are structured with interest-only during an establishment period on a young stand.

The timber cutting clause

Read this one twice. The security agreement will usually require the lender's written consent before merchantable timber is cut, and may direct the proceeds of a harvest to the loan. That clause is normal, and it also decides whether the thinning you had planned for year eight is your decision alone.

Release provisions

What it takes to get a parcel released from the mortgage if you sell off a corner. Negotiated at origination; nearly impossible to add later.

Prepayment

Long fixed-rate paper often carries a prepayment provision, because the lender funded it with a matching long liability. If you expect to clear the loan with one big harvest, this is the clause that prices that plan.

Files fall over for a small number of repeated reasons, and most of them are fixable before the application rather than after the decline.

• No recorded legal access. A neighbour's permission is not access, and it does not transfer.
• A title that does not deliver what the borrower thinks it does: severed minerals, an outstanding timber deed, an unreleased old mortgage, heirs who never signed.
• Recently harvested ground presented at pre-harvest value. Cutting the stand ahead of the appraisal removes the collateral the loan was going to be secured by.
• No cruise, or a cruise done by someone with an interest in the sale.
• Repayment that depends entirely on one future harvest, with no other source of debt service if that market is soft in the year the payment is due.
• Boundaries that do not agree with the deed, or acreage that shrinks under a survey.
• A borrower whose overall balance sheet cannot carry the payment through a bad year, however good the tract is.

A decline from one lender is not a verdict on the tract. Timberland is a specialty, and an institution that writes it every week will read a file that a generalist could not price.