Security Interests in Marketable Timber

[John Jessie]

I am looking at land that has a fairly decent stand of marketable timber on it. The land has decent a location (i.e., it's not in the middle of "no-where"), but it is on the side of a hill, knob. However, it does have a nice pond on it that may provide for an attractive site for some development once the land is cleared off.

My question is in regard to the bank note needed to buy the land and the bank's interest in the timber. Let's say, for instance, I get the land (50 acres) for $100k ($2k/acre). A portion of the timber, after it's harvested and sold, brings $60,000. In KY, we typically do a 50/50 split with landowner and logger. Therefore, I would realize $30,000 in the transaction. Would a bank require a security interest in the marketable timber, requiring me to give them the $30,000, due to the harvest of the timber and possible diminish in value of the land? 

I have talked with @Jay Hinrichs about this briefly, but I would like to see if anyone has any perspectives from the angle of a bank/lender. 

Thanks in advance. 

[Jay Hinrichs]

Well  I can't speak for Kentucky but I can speak for Oregon and Washington were I logged for 10 years and did many many deals with my bank and private sellers.

If the bank is aware of the timber and timber value they will include it in the loan docs IE your not allow to harvest timber without their permition and then you negotiate a dollar amount.

Sellers that do Seller carry back will usually have a provision in the mortgage or trust deed that says no timber harvest unless loan is paid in full in advance.

OR in our area you can have a Deed of Trust or Mortgage depending on what the lender wants AND you can have a separate Timber Deed on the same parcel.. the Timber deed can also have a time limit on it.. IE.. Its good for X amount of time and if you don't harvest and payoff the timber deed the timber reverts to the land owner...

So its just a negotiation really. I suspect since logging happened in Kentucky before ORegon was a state I bet they already have security interests in timber well established..

If your a title and escrow state IE title companies close deals.. they will know.. If your an attorney closing state a good closing attorney will know.

Along with any decent Log buyer for a Milll they will know.

IN the good ole days I would get advances from the Mill to buy timber and they would secure it with Timber Deed Never encumbered the Dirt.. then I could get a loan from my bank on the dirt as well.

NOw when it was really good the Timber advance by the mill would pay the whole mary ann for land and Timber.. I would log pay off Timber deed Usually make 100 to 200k on the logging then end up with the dirt free and clear.... Again the good ole days.. !!!  it can still be done but you need to really be sharp .... and of course its harder now that the Japanese export log went from 1200 MBF to 700MBF.. not as much gross revenue per acre as the good ole days.