Basic Landowner Rights Unit: Owning Property Lesson: Basic Landowner Rights.
What a landowner needs to know about the sale of mineral rights
description
Transcript of What a landowner needs to know about the sale of mineral rights
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WHATALANDOWNERNEEDSTOKNOWABOUTSALESOFMINERALRIGHTS?
Sandusky,MISanilacCounty
13014
CurtisTalleyJr.FarmManagementEducatorMSUExtension,Hart,MI
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DefinitionofMineralProperty Mineralpropertyisrealproperty canbeseveredfromsurface
Mineralnouniversaldefinition Generallyincludes:Fossilfuels oil,naturalgas,andcoal;Metalsandmetalbearingoressuchasgold,copper,andiron;Nonmetallicmineralsandmineablerockproductssuchaslimestone,gypsum,buildingstonesandsalt;Mayalsoincludesandandgravel,peat,marl,etc.
Canalsoincludepotassium,gasessuchashelium"mineral"canvaryfromstatetostateandevenchangeovertime
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CharacteristicsofMineralSale Saleisgenerallyforever Ownersgoalsveryimportant
Cashnowvs.potentialfuturecashfromleasebonusorroyalty
Financialneedmaybeafactor Youngvs.Older;goalsmaydiffer Oldermaywanttolivebetternow
Cansellalloraportion Example50%dividedinterest(tenantincommon)ofthehydrocarbons
Donebymineraldeed
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CharacteristicsofMineralSaleContinued
Ifnoroyalties,difficulttoestablishvalue Whatarenonproducingmineralsworth? Consultoilandgasappraiser
Sellerlosescontrolandleveragewitheventualmineraldeveloper
Ifcashflowsexistseveralvaluationmethods OneRuleofthumb:Salesprice=4yearsofroyalties
Example:Ifroyaltiesthepast4yearsaveraged$5,000peryear;salevalue=$20,000
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CharacteristicsofMineralSaleContinued
AnalysisofpreviouscashflowstoprojectfuturecashflowsandNetPresentValue Allocatesverylittleornovaluetononproducingminerals
Doesnotconsiderfutureimprovementsinnewtechnologyimpactoncashflows
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CharacteristicsofMineralSaleContinued
Currentcashflowscansellbymineralauction Ifthereiscompetitioncansignificantlyincreaseincome
Surfaceownerlosescontrolofreducingimpactstosurface
Newmineralownernoincentivetoprotectsurface
Getreferencesonpotentialbuyer Understandsalescontract!qualifiedlegaladvice
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MagnitudeoftheRoyalty
Situation:40acres,oneoilwell@25barrels/dayfor200days@$90/barrel
25x200x$90=$450,000/year 1/8royalty=$56,250/yr=$1,406/acre/yr 1/6royalty=$75,150/yr=$1,878/acre/yr 3/16royalty=$84,375/yr=$2,109/acre/yr .20royalty=$90,000/yr=$2,250/acre/yr
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CharacteristicsofMineralSaleContinued
KnowwhatPartneringTogethermeansinthesalescontract
Example:Sell50%undividedinterestfor$250/acregrantsbuyer50%offuturemineralincometo100%ofpropertyseeMagnitudeofRoyalty
Buyermayflipthelandjustascanbedonewiththesaleofanoilandgaslease
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MineralRetentionConsiderations Oilandgascompaniesprefersameownerofsurfaceandminerals Lesspeopletoplease(1vs.2) Surfaceownermorecloutwithcompanywhenmineralownerandsurfaceownerthesame
Leasebonuscanbeimmediatecash Bonuses$15/acreupto$3,500/acreinMI2010
Leasehaslongtermroyaltypotential Shortprimarytermmaymeanopportunitytoleaseagain=bonusagain
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MineralRetentionConsiderationsContinued
Technologyconstantlychanging Hydraulicfracturingandhorizontaldrillingexamples
Newtechnologyincreasesproductionfromoldwells
Potentialtonegotiatefavorablelease
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SalesofMineralRightsReducingRisk?
Willseveringmineralsaffectfuturesaleofsurface? Mineralproductionpresentbutnoroyaltytosurfaceownermayreducepotentialbuyers
Intactmineralswithroyaltyincomeattractivetocertainbuyers salenowcouldincreaserisklater
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SellMineralRightsandReclaimin20Years?
UnderMichigan'sDormantMineralsAct,severedoilorgasrightsreverttothesurfaceowneraftertwentyyears,unless:
Theseveredinterestissold,leased,mortgaged,ortransferredbyrecordedinstrument.Adrillingpermitisissued.
Oilorgasisactuallyproducedorwithdrawnfromtheseveredholdings.Theinterestisutilizedforundergroundgasstorageoperations
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SellMineralRightsandGetThemBackin20Years?
BuyermustfilerecordclaimofinterestwiththecountyRegisterofDeeds(affidavittoretain)duringthe20years.
Clockstartstickingdaydeedfiled TheDormantMineralsActappliesonlytooilorgasrights,andnotothermineralrights.
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IWishYouTaxProblems!
DONOTLETINCOMETAXDICTATEADECISION Sale:2013MFJiftaxableincome$72,500Cap.gainrate15%;earnedincomerate25%+SEtax
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IWishYouTaxProblems!
Oil&Gasleasebonusnotearnedincome:tax@ordinaryrate;noSEtax
Oil&gasroyaltiesnotearnedincome;tax@ordinaryrate;noSEtax
CropdamagesordinaryincomesubjecttoSEtax
SurfacedamagesordinaryincomenotsubjecttoSEtax
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Resources MSUExtensionhastheOilandGaswebpageathttp://msue.anr.msu.edu/program/info/oil_and_gas
Oilandgasleasingvideoonwebpage Leaseaddendumonwebpage [email protected]
http://news.msue.msu.edu MSUExtensionnewsarticles
YourcountyMSUextensionoffice
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THANKYOU
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