Question
April 29, 2004
By Hand Delivery
Nancy M. Ovuka,Esq.
Premerger Notification Office
Federal Trade Commission
6`" Street and Pennsylvania Avenue
Washington, D.C. 20580
Re: Reportability of acquisition of timberland assets by REIT
DearNancy:
This confirms our telephone conversation today in which youadvised that the facts described below do not give rise to a tiling obligationunder the Hart- Scott-Rodino Act:
Company A is conducting business as a real estate investment trust("REIT") as defined by the applicable provisions of the InternalRevenue Code ("IRC"). In a proposed asset acquisition, Company A, orone of its qualified REIT subsidiaries (either a partnership or LLC) to bedetermined (collectively referred to hereinafter as "Company A")intends to acquire certain timberlands from Company B, a non-REIT. The onlymaterial assets of Company A are and will be timberlands and associated timbercutting and related agreements.1Company A will generate income from the acquired timberlands pursuant tosection 631 (b) of the IRC. That section provides for a passive method oftimber disposition under which a timber owner can enter into cutting contractswith unrelated timber purchasers. Under these "pay-as-cut"agreements, the timber purchaser enters the timber property, cuts the timberand pays the timber owner based upon the volume of timber removed by thepurchaser from the property. Company A will not lease for its own use any ofthe timberland assets to be acquired from Company B.
We assume that the parties to the proposed transaction satisfy thesize of the parties test and that the transaction exceeds the size of thetransaction test. We also assume that the transaction does not qualify forexemption under section 802.2(c) because of prior cutting and removal of timberduring the ownership by Company B.
In this case, as a REIT timber owner, Company A will enter intotimber cutting contracts under which the timber purchaser cuts the timber andpays the owner for the timber removed. The Internal Revenue Service ("IRS") has recognized thepassive nature of this revenue under IRC section 631 (b) and regards theunderlying transaction as a "lease" of timber property, producing aform of passive royalty income.
Section 802.5 provides that acquisitions of investment rentalproperty assets shall be exempt from the requirements of the Hart-Scott-RodinoAct. Accordingly, as a REIT operating in conformity with section 631 (b) of theInternal Revenue Code, Company A's acquisition of the timberland assets ofCompany B will be exempt from the premerger filing requirements of the Hart-Scott-Rodino Act. This conclusion is consistent with the Premerger Office'slongstanding interpretation that acquisitions of income producing real estateby a REIT are exempt from premerger filing requirements so long as the REITacts in conformity with the requirements of the IRS.
As I mentioned during our telephone call, this is a particularlyimportant matter for Company A in light of the fact that it may make additionalacquisitions of timberlands in the future based on the same factualcircumstances and will necessarily rely on the Premerger Office's advice thatsuch acquisitions are exempt from the filing requirements of theHart-Scott-Rodino Act. Please let me know at your earliest convenience if Ihave not summarized correctly the position of the Premerger office.
Footnote:
1. Portions of the timberlands are currentlyleased by Company B to hunting clubs. Company A intends to continue thisleasing activity. Under these leases, Company A will receive rental income fromthe clubs.