A group of friends has decided to purchase a deer hunting property to provide long-term assurance of a place for their friends and families to hunt in years to come.  What do they need to think about first?

There are a number of things to consider but in this article, we will cover three major points with the knowledge and understanding that there are many more factors to consider.  The points to be discussed are:

  1. Budget
  2. Entity type:  example – LLC, corporation, etc.…
  3. Exit plan

Budget:  Does it make sense to purchase a property the group, or individuals in the group, cannot afford?  Our recommendation is for the individuals in the group to hash the budget issues out before any other steps are taken.

Questions:

Will everyone put up cash?

Will some put up cash, and others borrow money?

Will the group try to secure a loan?

In just about every group setting there will be differences in financial abilities, and if one or more of the persons in the group do not have the financial capabilities, the desire or the interest to meet the individual obligation involved, it is highly likely there will be a day of reckoning.

Work the money issues out on the very front end.

Entity Type:  When considering a group purchase of land, the decision as to the entity type to utilize is critical.  In extremely rare situations with a very small group, it might be acceptable to buy land as tenants in common, i.e., in the individual names.  However, our recommendation is that any group purchase be made by an entity as opposed to in the individual names.  It is suggested that the group employ an attorney and CPA to provide advice and direction in that regard.

As a matter of information, most of the group purchases we see today are in the name of a limited liability company (“LLC”), with a few being in the name of a corporation.  The primary consideration is generally to provide a level of protection from personal liability; however, ease of doing business is a secondary motivation.  For example, if ten people go together to buy land in the individual names, generally everyone has to agree on a given action, such as granting a lien (Deed of Trust) in connection with a loan.  In view of the fact that it is often impossible to get ten people to fully agree on anything, the individual ownership approach seldom works.  With an LLC, the Operating Agreement generally provides that a stated percentage (normally something over 50%, but less than 100%) of the members or membership units can vote to enable the entity to borrow money, grant a lien and conduct other business.

Get a knowledgeable attorney and CPA involved on the front end to provide direction with the entity type and other issues.

Exit Plan:  Realizing that it looks odd for an “exit plan” to be the third point referenced, the exit plan is one of the most important factors in the long term success of a group which buys land for hunting or other recreational purposes.  It is a fact, someone, or maybe several people, will want out before the others are ready to sell the property.  When that situation occurs, the parties who wish for things to continue generally do not want to pay the person who wants out fair market value for his/her interest.  Without a fair and equitable exit plan, the issues get complicated and, quite often, hard feelings develop.  Before you jump in and pay a lot of money, make it a point to have a written agreement among all investors spelling out a procedure and the payment amount or formula for determining the buyout amount.

Reduced levels of interest in hunting, changes in financial situation, and other factors will result in one’s continued participation in the group operation becoming less desirable going forward.  If you know on the front end that there is an agreed upon written policy for selling an ownership interest, it will generally cause the process of withdrawal, with fair consideration for your ownership interest, much less painful when the decision is made to sell.

It would benefit everyone involved to make sure there is a written exit plan in place on the very front end.