Since there is so much information available from so many sources, this writer figures it’s about time to review what we have learned so far. This is a small overview and is not meant to be all inclusive. The reader can fill in the gaps if they desire.
One of the first things we should have learned is that Common Sense was the first casualty. Some could call it greed on the part of the landowners who were only looking for a check, “Free Money” so they thought. When you get a few landowners together for almost any purpose, invariably, the discussion turns to gas leases, gas wells, and the like. Invariably, the subject of price per acre for a gas lease comes up, then the boys (and girls) start comparing notes.
Unfortunately, too many folks were too concerned with how much they got as “up front” lease money. They don’t look at the fact that although they have received the entire amount of money, the actual price to lease per acre is determined by taking the amount paid, dividing it by the number of acres and then divide it by the number of years they signed the property up. It really doesn’t look quite so good when you divide $750 per acre by 5 or 7 or 10 years does it? Many property owners signed up for a whole lot less.
Of course the most important financial part of the lease is what percentage the royalty would be AND just as important what determined the footprint (both as to outline and size) of a production unit.
The former part of the question is partially answered by the Commonwealth of Pennsylvania who states that 1/8 (12.5%) is minimum. Yes, there are some who signed for less than that. In other places, the royalty is up to as much as 25%. The second part of the question has never been answered by any landman either completely, honestly or correctly, other than to say they don’t know. Well someone knows, but they aren’t telling a prospect when they have them sign a lease.
Oh yes, many landowners have agreed with the clause that there is a one time option for the gas company to have a second term for the same amount of money as the first term. Here’s something to think about: If a dollar is worth less today then it was worth say 10 years ago, how much less will it be worth 5 to 10 years from today!
Other terms of the lease are absolutely confusing to the average reader. The more savvy landowners consulted their attorneys who suggested various changes and addendums. Although this was somewhat of a help, our local boys and girls in the law community are over their heads in this matter. There are very few attorneys who are really competent to address the contents of a lease within a couple of hundred miles of our fair county.
Anyway, for whatever reason, you signed the lease for whatever terms you negotiated. Now you have a check. What to do, what to do.
If you read the local papers, you have probably noticed they currently have a number of ads to (a) lease your land - best prices paid and (b) are you faced with the decision of what to do with all that cash you have just received from the generous gas lease you just signed.
Now, after talking with your neighbors and reading the paper, you feel both used and confused. Used, in that since you have signed, the price per acre has gone up significantly (its a long way from $25 per acre to the current $2,500). Confused in that you are torn between buying a new vehicle and puting the money in the bank. Maybe the first thing is to see a financial advisor, banker or accountant. Remember, the first thing is that your Uncle Sam needs his cut. Unfortunately, there are more than a few who have ignored that litle fact. They are in for a rude awakening next April 15th.
This is more than long enough for Part 1. Part 2 will be along shortly.
One last thought here. Several acquaintances of, as well as this writer, have spoken with different people in the Oil and Gas Management department as well as the Water Quality people at DEP. One thing is absolutely apparent. Your friendly landman running around here offering you the “last opportunity to lease your land at the absolute most any company will pay” is NOT well regarded by folks who know at DEP. One person characterized them as being somewhere below used car salesmen.
How nice. This lays the groundwork to completely mistrust the gas companies who are now going to in some cases drill on land you have leased to them.
Pleasant dreams?
The busiest bit of real estate in Susquehanna County is the office of the Recorder of Deeds (http://www.susqco.org/subsites/gov/pages/regrec/regrechome.htm). There are lines for the computer workstations and for desk space.
One man there commented that last week someone came in with a two inch thick pile of leases that had been sold to a company in Australia. We are now truly part of the global economy with someone half a world away deciding what to do with our land.
Dividing “$750 per acre” by any number of years doesn’t help since you really don’t know the number. If gas is found in reasonable quantities the number could be 40 or forever. As long as your land is part of a production unit and you receive a couple of dollars a year, your land remains leased.
About the clause to pay to extend the lease: Most of the current leases are “paid up”. There is no more money for the leasing, ever. There may be a fee paid if the gas company drills on your land, and there may be some royalties, but not lease renewal or shut-in payments.
In the local papers there is a third ad: “If you signed for $50 or $100 per acre call us!”
Not only Uncle Sam. Governor Rendell wants his cut. The sad thing is that you are taxed on a payment that decreases the value of your home which is protected from capital gains tax.
For example: You bought your home (and 50 acres of land) for $200,000 ten years ago and lived in it since. If you sold it today for $450,000 (price depending on location, etc.), you would pay no tax on the $250,000 capital gain. If you accept a $2,500 per acre lease, you will receive $125,000 today and pay Uncle Sam and The Governor. Probably $25,000 to the IRS, or if you had any other income this year the AMT might hit you harder. Plus, almost $4000 to the state.
According to a recent post here (Gas Muse 5-6-2008) your retail property value would decrease by the then current up-front lease price. You might hope to get $450,000 - $125,000 = $325,000 for your house. Now your exempt capital gain is only $125,000. Your net is $325,000 plus the $125,000 up front lease price minus the almost $30,000 in taxes or $420,000. The extra $30,000 would buy you a nice car.
IRS: “Individuals may be able to exclude up to $250,000 of capital gain, and married taxpayers filing joint returns may be able to exclude up to $500,000 of gain each time you sell your main home, but generally no more frequently than once every two years.”
http://www.irs.gov/newsroom/article/0,,id=106951,00.html
The lease prices are likely to rise. This recent article from the Dallas Morning News says that a recent offer of $30,000 per acre in the Barlett Shale was refused.
If you have a small (for Susquehanna County) piece of land, it might be more valuable to the gas company to provide a right of way for a gas pipeline. As the real estate folk say, location, loction, etc.
Take your time, understand the lease.
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Actually, it’s worse than that regarding the $750 divided by the number of years. If they put an injection well on your property, there are no royalties associated with that. As the man said above, take your time, understand the lease. If you don’t understand, retain an attorney (almost certainly NOT a local) who really understands these leases.
More discussion later in Part 2.
A question for the poster/owner of the blog…
Are you a land owner? If yes, have you been approached to lease your land?
Yes.
Yes.
Two questions for a3k:
Are you a landowner in Susquehanna or a surrounding county?
Are you a landman?
Our District Attorney on gas leases”
http://susquehannacounty-da.org/PDF/pdf2008/9may08.pdf
I had the opportunity to speak with a cabot landman at an informal
meeting a neighbor had at his place saturday.It was the same fellow
that was around last summer offering 75 per, now at 2500.00.
I inquired about a nonsurface lease and it was still 2500.00.The
question is why sign a surface lease?In hopes of having a well on
your property? I heard of someone signing on with 1 acre someone else
with a quarter acre.do the gas people want every piece of land no
matter the size.Over near east rush a company called Great Lakes
Geo physical is conducting some kind of sounding work.Folks in that area received certified letters for well site nearby.Is it gas fever or what?
Public television to air natural gas Q&A/Penn State’s, WPSU-TV is airing “Pennsylvania’s Gas Rush” at 7 p.m. Thursday, May 22nd. The live program will also be aired simultaneously on the Pennsylvania Cable Network, and online at http://www.wpsu.org/gasrush. Local PBS station WVIA will rebroadcast the taped program at 8 p.m.
http://www.thetimes-tribune.com/site/news.cfm?newsid=19699819&BRD=2185&PAG=461&dept_id=415898&rfi=6
Yes I am a landowner.
a3k: Again, in Susquehanna or surrounding counties?
And again, are you a landman?
Wyoming county and no, I’m not a landman.
Excellent. In the past, we have had landmen on this site. It is my opinion that they have absolutely no interest whatsoever in the future impact to this area, only what they can make in commission. Further, as we shall see, they have no concern about our real estate laws in this state.
A reader of this blog has filed a complaint with the real estate commission as well as the legal department of the Pennsylvania Association of Realtors regarding these landmen. As has been shown on this site previously, they are acting illegally because they are independent contractors not employees or officers of these gas leasing companies.