Mineral Rights

[Rick Neighbors]

I know this has been discussed before.....as has most every aspect of the appraisal profession.....but I got an interesting comment from an Underwriter a while back.

Here in the North Texas area where I live and appraise, we have had a bunch of gas well business spring up in the past couple of years. Lots of folks getting a crash course in signing bad leases, losing money, making money, going to court, pipeline easements, property damage, and a lot of new Jed Clampetts!

I recently did a couple of RELO's for a company, and the Underwriter called and told me that in all the appraisals that they had done on the 2 properties, I was the only Appraiser that even mentioned the Barnett Shale and the possible ramifications involved with it and ownership or lack of ownership of the minerals on a property.

To say I was surprised is an understatement. How could any appraiser not at least make a comment.....even if they didn't have the necessary data to maybe make any adjustments?

I am signed up for some classes next month being sponsered by the Association of Texas Appraisers, and it appears that one of the speakers may be addressing this issue. I certainly hope so.



Rick

 

[Terrel L. Shields]

How could any appraiser not at least make a comment.....even if they didn't have the necessary data to maybe make any adjustments?

This is a problem all over. Minerals are part of the fee simple or severed from same. Most simply do not even mention them. Development (likewise) can have a major impact upon surrounding residential properties. It also affects subdivisons because some have to reserve areas for future wells if mineral rights are severed and pipelines can impact location of roads, etc.

some classes next month being sponsered by the Association of Texas Appraisers,

My class has been approved and taught in OK and AR. If any provider in Texas wants to sponsor it, let me know and I will work with them to submit the instructor application and coursework. It's called Mineral Rights as part of Fee Simple.

 

[Rick Neighbors]

Mineral stuff

Terrell,

Why don't you contact George Harrison at Columbia Institute. I have taken a lot of classes from them, and they are well taught and reasonable!

In a recent class I took we kinda discussed the mineral rights, and Fee Simple. We basically came up with the idea of placing the verbiage "Fee in Surface" in that area, then explaining what we meant by that. I have a rather extensive couple of paragraphs that I put in my local reports that explain Fee Simple ownership, as well as why most Appraisers are not yet qualified to value the minerals.

Just an idea. Thanks for the response.

Rick

PS - Do you have a text book that can be purchased for reference?

 

[Rick Neighbors]

Fee simple

Another thought.

I see Real Estate Agents placing Fee Simple on contracts, when actually the buyer didn't get any minerals.

Why haven't there been lawsuits?

Rick

 

[Richard Carlsen]

Fee Simple designation does not mean the complete bundle of rights to a property.

It means that the property ownership is inheritable in the estate. It is not entailed.

There are many things that are lost in that complete bundle of rights in ownership. One of the basic ones is lost to zoning regulation for instance. You cannot build or do out of the property anything you want. Therefore, a portion of the bundle of rights is gone. But the title to the property normally transfers here in the US in fee simple.

We deal with oil and gas up here in Northern Michigan due to the Antrim gas and the Niagara oil fields. The value of the gas leases for instance is normally valued based on the market value of the rents paid. A typical valuation in years past was about 60 times the monthly rent. Today, I understand that it is lower in certain production areas, somewhere in the 36 times the monthly rent, as the field is receding and production levels are down. To get this valuation, one must get a quote from a gas lease buyer based on the average income for the owners typical 1/8th production share over the past 3 years. That quote is then based on the site location within the field and the prospects of continuing production. It could be in the center with a 40 year up side on on the edge where the field is known to be receding. Now you are getting into accounting, geology, etc., well beyond the expertise of the appraiser. Since houses exchange up here with very little concern for the oil and gas mineral rights, we do not consider them as part of the normal valuation given in an appraisal. If there is a value, that is a separate issue for the buyers and sellers to work out. About 95% of the land up here is under mineral lease agreements.

The following is put in every appraisal I do and has been in the report for some 15 years:

* No consideration is given in the report for the contributory value of any of the following: personal property, mineral rights or standing timber, if any.

I have done appraisals where the mineral rights were included in the opinion of value........but not for $350.

 

[Rick Neighbors]

Fee Simple

Well, let me preface my remarks by saying I am not an attorney.

But in all my text books Fee Simple is the highest or most complete form of ownership. And while I realize that there are gray areas, my point was to make the user of the report aware of the fact that it is not owned fee simple.

Fee Simple Absolute, Fee Simple Qualified, Fee Simple Defeasible, etc. More terms that I'm not aware of I'm sure.

So without getting into a long legal discussion, I was merely trying to make sure that folks using my reports were aware that there might be a difference in the ownership of the property.

Rick

 

[Richard Carlsen]

The FNMA 1005 and 2055 report forms only ask if the ownership right appraised is Fee Simple, Leasehold or any other. It does not require the appraiser to get into a legal dissertation about ownership of air space, zoning laws, deed or plat restrictions, etc. Just the type of ownership that is being appraised.

The Fee in fee simple simply refers to the ownership being complete and not conditional. The simple refers to this ownership interest as opposed to other interests such as leasehold or fee tail. Therefore, a property may be held in fee simple by one party (the owner) while at the same time, another party has a leasehold interest in the same property (the tenant). Another aspect of ownership is that the fee simple ownership exists in perpetuity while the leasehold interest has a fixed term.

When we say the property rights being appraised are fee simple, we are not saying that they are the complete bundle of rights in ownership of the land. We are only saying that the ownership position is not conditional and no ending (i.e. ownership continues on in the estate).

 

[Rick Neighbors]

Agree to disagree

Well, I see what you are saying Richard, but after beating this up in an appraisasal class, with about 40 Appraisers, the general consensus was if you say you are appraising a property Fee Simple, and there are not any owned mineral rights for instance, you are asking for trouble as it could be construed as misleading.

That's why the general consensus was to use the "Other" block and explain.

Seems like we are always trying to CYA! :new_smile-l:




Rick

 

[Terrel L. Shields]

Why haven't there been lawsuits?

There have. Since the Fayetteville Shale play hit Arkansas, the courts are full of suits over who actually owns what and title companies CYA with caveats about not warranteeing mineral titles. Further, the mess was clouded by a bad law which allowed assessors to assess taxes on dormant minerals, ending in landowners going to "quiet title" and get minerals back only to find that the Attorney General declared an opinion that such deeds were not valid. It is a mess and our legde is trying to fix the problem and it isn't fixable. Dormant mineral laws attempt to put the genie back in the bottle but challenges to those laws have overturned one and others are suspect. Louisiana has Napoleanic court system and they are the one state where mineral rights can be held for 20 years but never really leave the "fee" estate.

Fee Simple designation does not mean the complete bundle of rights to a property.

Yes it does. As MAI and past ASFMRA president and instructor, John Widdoss noted, "I haven't appraised fee simple in a long time." Fee simple means absolute ownership unencumbered (12th Ed of Appraisal of Real Estate)

from http://www.orps.state.ny.us/assessor/valuation/valstdsm.htm

In most cases, the real property is valued assuming fee simple estate, unencumbered, with all property rights included. On specific property, however, lesser ownership must be valued with a manual override or modification of mass appraisal indications of value (e.g., severed oil and gas rights, mineral rights, easements or conservation easements, contracts, covenants, declarations or ordinances).

Fee Simple is the absolute ownership of a parcel. And if the mineral rights are severed, they maintain a right of egress and engress over the surface...ie.- an oil company can enter your property and drill a well without violating your ownership of the surface. In fact, in many states, they don't have to compensate the surface owner for anything but physical damages to the property.

If the mineral rights are leased, then again, the estate is less than fee simple even if the surface and mineral owner are one and the same. The mineral estate would be a leased fee estate.

from my slide presentation

Traditionally it is accepted that “Fee Simple” includes the right from the center of the earth to the heavens above

BTW, similar fee issues revolve around timber, water, and air rights.

 

[Rick Neighbors]

Mineral Taxes

Terrell,

I hope to take your class someday. I have a bunch of questions. One that has surfaced recently is the local taxing authority adding to our tax burden based on some pie in the sky system of valuing mineral rights.

We have 2 gas wells on one property, and one of them got damaged when another gas company frac'd a well across the fence from our gas wells. No production in 3 months, but the taxing authority doesn't seem to consider that sort of situation.

We have a bunch of folks that would like to contest their taxes if there were an Appraiser and an Attorney that could help them.

Rick