Frequently Asked Questions About Oil and Gas Royalties
If royalties are so valuable, why would an individual or an oil company sell them?
The exact same reason an individual or corporation sells the real property or real estate. No difference why royalties are sold and liquidated. To raise cash! The most valuable properties are sold on a regular daily basis and include royalty properties. Often times an oil company will liquidate part of its inventory of oil and gas royalties. This is to finance a particular drilling project or for corporate overhead expenses.
An individual oftentimes is confronted with cash needs which may include, an estate liquidation, tax issues, lawsuits, community property issues, or raising cash to buy another property. Valuable oil and gas royalties are sold every day, for common issues requiring cash needs.
How are oil and gas royalties like-kind property to brick and mortar real estate for tax deffered exchanges?
Mineral rights are otherwise known as a “mineral estate”. These are the legal rights that a person has to exploit, mine, or produce any materials underneath the surface. These materials may be any organic or inorganic substance. It includes ores of metal, coal, oil, natural gas. Moreover are gemstones, stone, salt, or any other substance besides sand, gravel, or water.
The owner of the mineral rights can sell, lease, gift, or bequeath these minerals. This is applicable to any individual or entity they choose. For example, a person may own 20 acres of land, and beneath the surface of that land lies minerals. This can be sold or leased or gifted for an amount of money. That person may own the surface of the land. While someone else may own what is beneath the surface; in other words, the mineral rights.
What is the benefit of selecting an il and gas royalty property over traditional brick and mortar for my tax deffered exchange.
Oil and Gas Royalties should not be viewed as one property being better than the other, and for that reason should be considered as a “blend” with traditional brick and mortar when identifying replacement properties. You will find that every type of asset has its particular benefits and so too, does oil and gas royalties.
Royalties should be viewed as a means of diversifying your asset replacement selection for your tax deferred exchange. If “cash flow” with no expenses and double digit returns is your objective, then royalties is the right choice. Since the IRS will allow the identification of “3” replacement properties for a tax deferred exchange, a reasonable approach would be to identify royalties as one of your choices as a replacement property.
What are some of the “risk” factors associated with a Ranger and Minerals Royalty Property.
Since the cash flow generated by the royalty property is directly related to the commodity pricing of oil and gas, you should expect a “fluctuation” in the monthly revenue stream from one month to the next. The “spot price” of oil and gas is a direct result of this cash flow and will go up as the commodity pricing goes up, but also will go down as the pricing goes down.
The annualized yield to a royalty property is not fixed rather fluctuates with the market pricing of oil and gas. However, that being said, Ranger Land and Minerals mitigates the risk of a potential declining performing property by placing you on a royalty property with continuous growth.
This means that the property has room for many more oil and gas wells to be added to the property at no expense to you. So, there will always be an addition of production with additional cash flow to the property for many years to come.
Are there any “tax benefits” allowed by the IRS on oil and gas royalty income even though I did participage on the drilling side of the program?
Yes! Although owners of an oil and gas royalty property did not participate on the risk side of the drilling, the IRS will allow a 15% depletion allowance on the cash flow received. Oil and gas royalty properties are considered a “depleting asset11 and it is for this reason that the IRS will allow 15% depletion allowance on the cash flow, resulting in taxes being paid on 85% of the income received, and is taxed as ordinary income. A year-end tax Form-1099 is issued for the income received.
By comparison, the depletion allowance given on oil and gas royalty properties is similar to the depreciation schedule allowed by the IRS on real estate and brick and mortar assets.
If a royalty property is utilized as a “replacement property11 for a IRC-1031 tax deferred exchange, then significant tax savings can be realized on the deferral of capital gains tax. This would be an indirect tax benefit connected to the purchase of an oil and gas royalty property.
If there are no expenses connected to owning oil and gas royalties, how are the existing wells maintained and new ones drilled. Who provides the capital to drill the wells?
The capital expense connected to the maintenance and drilling of new wells comes from the publicly traded and wall-street based operator. The relationship between the landowner and the drilling operator is the drilling operator or wall-street based operator incurs 100% of the drilling expense and liability. The landowner is “rich in land11 with oil and gas minerals and enters a contract agreement otherwise known as a lease agreement allowing the drilling operator access to drill on the land.
So, the land owner gets a free ride, so to speak, and a certain percentage of the revenue stream goes to the landowner free and clear of expenses for allowing use of the land. A typical lease agreement would allow the landowner somewhere between 20% to 25% royalty interest (R.I), the remainder would go to the drilling operator for putting up the capital and assuming the liability. This is the side of the equation that Ranger Land and Minerals places buyers of oil and gas royalty properties so that no expenses are ever required.
If I buy a royalty property from Ranger Land and Minerals and this is on the side of the "landowner", does that mean that I will own the surface rights or the real estate similar to buying acreage of land.
No, the oil and gas royalty properties offered by Ranger Land and Minerals represents the sub- surface minerals beneath the acreage where the drilling takes place. Often times, royalty properties will have “i1′ separate owners, a land owner owning the surface rights and another owner owning the sub surface mineral rights.
In most instances, royalty properties will involve only the sub-surface minerals. However, it should be noted that the value of minerals is similar to owing acres of land due to the mineral deed connected to this transaction, and is considered an asset with growth potential and future liquidity similar to owning land.
Is there a secondary market for selling my royalties and can I sell or liquidate at any time? Or, better yet, is there an "exit strategy" for liquidation.
Yes! Similar to owning real estate you may liquidate at any time. However, keep in mind that the longer a royalty property is held, the more value it will gain with time. This is due to the selection process Ranger Land and Minerals goes thru in acquiring royalty properties.
Only those royalty properties with publicly traded drilling operators demonstrating “growth potential , are selected as part of the criteria in acquiringroyalty properties. In other words if a property has a fixed number of wells producing today, there must be an aggressive drilling schedule by the drilling operator for the addition of new wells being added over the course of many years. This mitigates any risk of a property rapidly declining and maintaining its asset value.
I understand that oil and gas is a depleting asset, How long should I expect my royalty property to last and can I expect to make a profit upon liquidation.
Yes! Very similar to real estate, the “3” factors ensuring value and longevity is location! Location! And location! Ranger Land & Minerals will only acquire royalty properties connected and drilled by the wall-street based and publicly traded drilling operators. Not only are they highly capitalized worth billions of dollars and highly experienced, but this group of operators also have access to energy formations in the United States considered world class, where the productive life of the wells would be more than 50 years.
One example would be, the world-class formation in Texas known as located the in Permian West Basin Texas, many of the wells in this area continue to produce after “90” years of production. So yes, the royalty properties offered by Ranger Land & Minerals will not only maintain its original asset value, you should expect your asset to appreciate in value similar to a real estate property held for many years.
How is a Royalty Property purchased from Ranger Land and Minerals different from a "Royalty Trust" or a Tenants in Common otherwise known as a TIC.
The royalty properties offered by RTahnegemr aLjaonrdd&iffeMreineeraalsnwdilsligpnroifvicidaencyeouis “”oswtrnuecrtushreipof tohfetohfefeprrionpgerty and a mineral deed as part of the transaction. A royalty fund, is just that a fund where you will receive dividends connected to a multitude of mineral properties, however, there are administrative costs connected with this type of structure and you will not receive ownership position.
The structure of a TIC is often times compared to a fund, since you may appear to have an ownership position of your investment but an exit strategy is almost non-existent. The TIC structure requires you to receive approval of the other participants for liquidation and exiting out of the TIC is very difficult. A Ranger Land and Minerals royalty property provides you independent ownership of your investment with the ability to liquidate at any point in the future without any other participant.
This sounds too good to be true! Why isn’t everyone buying oil and gas royalties?
Historically, oil and gas royalties have been around for over “100 years”. Only major institutions worth billions of dollars were able to take advantage of the performance, safety and liquidity of royalties, not to mention the appreciation of asset value that royalties provide.
The big purchasers of oil and gas royalties have been University Endowment Funds and several Universities here in the United States have billions of dollars of royalties in their portfolio. Also, Hedge Funds, Pension Plans, Equity Funds and Wall Street based Corporations have all been buyers of royalties.
The only thing that is relatively “new” to the retail market, is the opportunity to get involved in the purchase of oil and gas royalties without having to invest substantial amounts of money like the corporate world. The oil and gas property offerings provided by Ranger Land and Minerals allows an average investor the same opportunity and value at a reasonable investment amount and very similar to buying real estate.
It is a common belief for the first-time buyer of oil and gas royalties, that the performance appears to be “too good to be true”. However, once you participate in the due diligence process of analyzing one of the many royalty properties offered by Ranger Land and Minerals, you will become an active investor.
What assurance do I have that the Drilling Operator will not steal or misrepresent the production of the wells to receive more of the revenue and not the landowner.
The production of oil and gas, as well as the revenue stream it generates is highly regulated by the State Governments where the drilling takes place, or Federal Agencies if drilling takes place on Federal Land. Every well in the United States is assigned an API number or American Petroleum Institute number similar to a VIN # on an automobile, every well in the United States is assigned an API number for regulation and accountability.
The reason for this high intensity of regulation is that the State Governments or the Federal Government receives its portion of taxes in the form of Ad Valorem Tax or Severance Tax, meaning property tax and school tax. So, it is highly unlikely that a drilling operator will jeopardize its relationship with the State Governments or Federal Government who grants the drilling permit to the operator to drill on a particular property. So, the safeguard that you have is that your royalty checks or revenue stream has the oversight of the local or federal governments.
Frequently Asked Questions About Real Estate and Royalties as Real Property
How does Ranger Land and Minerals achieve “clear title” to properties or offers for sale as a replacement property for IRC-1031 tax deffered exchange.
The purchc;ise of oil and gas royalties from Ranger Land and Minerals involves purchasing sub-surface mineralsJ where fractional interest is the standard measurement used in an acreage position similar to buying land on the surface. Often, royalty properties may involve the production of hundreds if not thousands of producing wells on a particular property. Achieving clear title to a particular property will include a “two-fold11 process beginning with the initial title search required before drilling takes place.
The legal team representing the drilling operator will complete this task to ensure the rightful landowner receives their entitled royalties and revenue connected to the production of oil and gas. The drilling operator will not commence drilling until clear title is achieved showing all mineral rights owners. Additionally, new wells added to the property, do not require a new title search, instead a “division order” is generated by the operator and legal team showing that clear title has been maintained and no liens, incumbrances, law suits or anything to deter the revenue stream going to the rightful mineral owner.
Ranger Land and Minerals with their experienced land staff confirm clear title with careful evaluation of both initial title search and subsequent division orders for each and every producing well on the property.
How does a royalty property from Ranfer Land and Minerals compare to the cap rates of a traditional real estate triple net lease for an IRC-1031 tax deffered exchange?
Mineral rights (otherwise known as a “mineral estate” are the legal rights that a person has to exploit, mine, or produce any materials underneath the surface of the earth. These materials may be any organic or inorganic substance such as ores of metal, coal, oil, natural gas, gemstones, stone, salt, or any other substance besides sand, gravel, or water.
The owner of the mineral rights can sell, lease, gift, or bequeath these minerals to any individual or entity they choose. For example, a person may own 20 acres of land, and beneath the surface of that land lies minerals that can be sold or leased or gifted for an amount of money. That person may own the surface of the land, while someone else may own what is beneath the surface; in other words, the mineral rights.
Do I have to utilize all of my cash proceeds from my relinquished property to identify and transfer all of the money to a royalty property represented by Ranger Land and Minerals.
No, in fact it is strongly suggested to utilize a blend between traditional “brick and mortar1 and oil and gas royalties to achieve a balance between both properties. Each type of property provides a benefit the other does not and receiving the best of both worlds is the best approach.
One benefit readily available on a brick and mortar real property is the ability to “leverage11, not provided by an oil and gas royalty property. So, brick and mortar will provide “leverage11 and oil and gas royalties will provide pure “cash flow11 with no expenses.
Thus far, only positive features have been pointed out regarding an oil and gas royalty property with Ranger Land and Minerals. What are some of the downsides if any?
The majority of real estate investors have achieved major wealth over the years with the use of “leverage” recognized and accepted by banks across the nation. This is one of the major limitations to an oil and gas royalty property. Although this type of transaction provides a mineral deed, similar to the deeded transaction of traditional real estate, the fact that royalties are connected to oil and gas, commodities that banks perceive as volatile, places this type of asset in a different category not often used for leverage.
Also, for that same reason, the volatility of the commodity pricing will affect the cash flow of the royalty property. The cash flow will go up if the price of oil andgas goes up and likewise will go down if the price of oil and gas goes down. Another possible limitation when compared to traditional real estate would be the secondary market for sale and liquidation of royalties.
The secondary market for oil and gas royalties exists, and is quite large, but not nearly as vast as the real estate market, and the liquidation of a royalty property may take longer than real estate.
I already have a Qualified Intermediary (Q.I.) in place to complete my IRC-1031 tax deferred exchange, how do I get Ranger Land and Minerals involved to identify a royalty property.
Ranger Land and Minerals is not a Qualified Intermediary (Q.1.) and should be viewed as a product or property sponsor of oil and gas royalties identified as replacement properties when selling a relinquished property qualifying for a tax deferred exchange. Ranger Land and Minerals and their qualified staff are prepared at a moments notice to help a client “identify” a particular royalty property with any Qualified Intermediary anywhere in the United States.
Documents including legal property description of a particular royalty property required by a Q.I. are prepared to go to any Q.I. within minutes for easy “identification” and purchase as a replacement property.
The financial advisors I work with including my Qualified Intermediary advise me that I must select a Like-Kind Replacement property in order to comply with tax code IRC-1031.
Oil and gas royalties, minerals and overriding royalties are defined by the tax code IRC-1031 as real property and like-kind property when selling an appreciated real property qualifying for a tax deferred exchange. The staff at Ranger Land and Minerals is prepared to assist your financial advisors and Qualified Intermediary with legal documents stemming from IRS Rulings and court cases which have upheld this topic and will support this type of transaction.
It should be further noted that the final document which makes this transaction compatible is the mineral deed or assignment of conveyance document which Ranger Land and Minerals will ultimately issue.
