2A — August 14 - 27, 2015 — M id A tlantic
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The Real Estate Side of Oil and Gas Royalties Alfred C. Teran, Patriot Energy W henever we hear the word “real estate” what comes to mind is the traditional categories of property we see and live in on a daily basis. There is Farmland, Ranchland, raw land, brick and mortar, commercial properties, multi-family structures and our homestead, all of which affect our daily lives in a positiveman- ner. These types of real property provide a variety of financial gain by generating cash flow or a revenue stream to the owner of these assets. Outside of our homestead, most real estate properties have an investment appeal that attracts all of us to one or more categories of real property assets. There is an additional benefit to own- ing one or more categories of property assets, and that is the appreciation of value most real estate provides, meaning that the initial purchase price of the property will grow in value once it is sold in future years. There is another category of real estate and real property not very well known by many of us and not readily available to ev- eryone. However, this category of real estate provides the same benefits as the traditional real estate we all understand. The greatest appeal to the purchase of real estate and real property is the fact that there is the pride of ownership that attracts all of us when we own an asset as part of our investment portfolio. The category of asset and real property I will introduce you to in this article will offer you the same benefit of “ownership” and a property class with the ability of appreciating in value with capital gains, all the while providing an income streamyou are looking for. You will also find it interesting to know that there is a secondary market for selling and liquidation of royalties that follows the same pattern as selling traditional real estate property. The real estate class I am speaking of is located sub- surface to the traditional real estate raw land or farmland or ranch land we know and understand. In particular, this property asset is classified as Oil and Gas Royalties, and is the real property that provides the revenue streamor income to the owner of the land and paid
J.D. Parker Manhattan
Brian Hosey New Jersey (201) 582-1000 Bryn Merrey Washington, D.C. (202) 536-3700
(212) 430-5100 Brenton Baskin Philadelphia (215) 531-7000
The views expressed by contributing columnists are not necessarily representative of the Mid Atlantic Real Estate Journal
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to the landowner free of any ex- penses. The landowner not only owns the surface of the earth but often times owns the valu- able sub-surface minerals. This landowner is rewarded by the drilling operator a percentage of the oil and gas production in the form of cash revenue better known as “royalties”, without any expenses or cash calls con- nected to the drilling operation. The drilling operator must incur all of the expense and liability and will continue the development of drilling opera- tion on the property for years to come. This relationship between landowner and drilling operator exists because the landowner is “rich” in land and oil and gas minerals, and the drilling operator is “rich” in experience, technology and capital. On a broader scale, this re- lationship between landowner and drilling operator has taken place for decades and for over a century, billions of dollars of valuable “real property” known as royalties has been developed and continues to be developed on a daily basis. If you are familiar with the big major oil operators located on Wall Street such as Exxon-Mobile, Texaco-Shell, Chevron, Chesa- peake, Anadarko and the many thousands of operators, every time they drill on a landowners property, valuable royalties are created. The landowner and the royalties he receives represents the win, win side of the equa- tion since he assumes not one ounce of risk, only the publicly traded oil operator assumes all risk and capitalization for the drilling. It is important to understand this particular relationship between the landowner and the drilling operator so as not to confuse this, with a drilling investment many of us have been involved with. There is a big difference to a drilling program in which an “inde- pendent drilling operator” uses your money to look for the oil.
A drilling program is different, in that it is a highly speculative venture and often time’s leads to less than expected results. This article is to direct you to the opportunity where the oil and gas has already been discovered, developed and gen- erating “cash flow”. This type of venture is associated with the publicly traded wall-street operators who are highly capi- talized to develop a property for many generations, and do not use your money for the drilling operation. This valuable asset, although not visible to the naked eye, has been the focus of major institutions, foundations, hedge funds, pension plans, uni- versity endowment funds as well as equity funds for over a century. It is this asset class that provides pure cash with no maintenance and no liability all the while appreciating in value and with no cash calls. If you are an individual inves- tor wanting to know what the proper application would be to owning a royalty property in your portfolio, understand that if traditional real estate is your interest, then royalties will fit this traditional role. A royalty property will provide you the monthly revenue stream with double digit returns you look for in rental property, such as multi-family housing, of- fice buildings, and triple net lease properties. Royalties can be replacement properties for Like-Kind Exchanges and IRC- 1031 transactions, suitable for Qualified Plans like IRA’s, Roth IRA’s Profit Sharing Plans, inside of a Family Trust, Fund a College Program for children, and finally by donating a roy- alty property to a Charitable Fund you will continue your legacy for generations to come. Become an active buyer of valu- able royalty assets and find how simple it is to own. Alfred Teran is president of divestitures at Patriot Energy. n
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