43
Valley landowners urged to put lease deals into escrow
By Karl Henkel
Last of a five-part series
YOUNGSTOWN
Oil and gas leases can be quite convoluted.
The negotiating process may seem tedious, but signing on the dotted line doesn’t mean the process is complete.
The leases themselves don’t stand alone; there’s much more for which a landowner must be aware.
To ensure timely and accurate bonus payments, the attorneys have advised many, including those involved in Associated Landowners of the Mahoning Valley, a nonprofit landowner advocacy group, that lease agreements be placed into escrow at a bank.
Sight drafts allow drilling companies to accumulate land without having to immediately dole out bonus payments for all of those properties.
This is necessary to ensure that landowners have full rights to their mineral titles, which can date back hundreds of years and may have switched hands on multiple occasions.
If placed in escrow, the landowner then can retrieve the lease if the drilling company fails to pay. If the lease is returned to the drilling company prior to payment, a landowner can seek little if no retribution.
That lease agreement has other impacts, too, including on some mortgages, including some backed by Fannie Mae or Freddie Mac, which can include a stipulation that requires landowners to formally report a mineral-rights lease or purchase.
Patti Mika, Real Living real-estate agent, said landowners should stay aware of mortgage restrictions, though she added that’s something that is normally checked by real-estate agents.
In the case of land that’s already been paid for, values could increase or decrease artificially, depending on the levels of natural-gas and oil production and property alterations, including possible wells.
They could decrease, especially if a well comes up “dry” or does not produce long-term, said Dan Heck, owner of Heritage Title Agency Inc. in Columbiana and Carroll counties, who previously worked in the oil and gas industry for seven years.
But a natural-gas or oil-rich property could increase land values.
“Since most of the properties won’t have operations on them but they will be getting a revenue stream, having a property covered by a lease could enhance the overall value,” said Sean Moran, co-chairman of the Energy section and Oil & Gas Practice at the law firm of Buchanan Ingersoll & Rooney PC in Pennsylvania.
There’s also the issue of taxation.
With the potential for tens of thousands of dollars in per-acre bonus payments, it creates a lotterylike effect for landowners.
But the taxation is not similar.
“A lot of people believe that a bonus payment can be subject to capital-gains taxes,” said Christopher Baronzzi, an attorney at the Youngstown law firm Harrington, Hoppe & Mitchell. “That’s not true. A bonus payment is taxed at ordinary income.”
Those who opted to sell mineral rights, however, fall under different tax rules.
“If you have sold your mineral rights, then you have sold an interest in property and it can be subject to capital-gains tax,” Baronzzi said.