Mineral rights owners are often confused between selling or leasing their property. Leasing seems very attractive as many assume that it is a constant way of generating income. In reality, however, leasing is not as easy and beneficial as you might think.
Below are 6 common potential risks associated with mining rights leasing:
1. Unstable royalty payments
A license fee is compensation that the mining rights holder receives by granting the mining company the right to extract oil and gas from their property. Although there are several methods of calculating this payment, the simplest method would be to prepay the lease deposit plus a royalty on the production value.
It is clear that the license fee depends on the value of the production. If you are renting the rights for the first time, production in the first few months will be significant. As the well progresses, the production potential of the well decreases and affects your royalty payments. If you don’t have a well that produces well, the lease usually leaves you with a shaky income. There is also the possibility that the leasing company may not want to drill at all during the term of the lease, leaving you with no income and immobilizing your property.
2. Risk of asset depletion
It is very difficult to predict the productive life of a well. Sometimes a newly drilled well that is producing a significant amount can suddenly stop and run out of production. Once it is depleted, your mining rights are useless. You do not receive license fees and you cannot sell rights to other companies.
3. Negative effects on the value of the property
One of the biggest drawbacks to leasing is not knowing the right terms and clauses that should be included in a rental agreement. This can potentially significantly reduce your income on a property. Signing a rental agreement but leaving it in negative or operator-friendly leasing language can have an impact on the overall value of the property. Also, in many cases, it is best not to lease in order to get the most value for your rights. In any case, it is best to do your research before signing a rental agreement. Once you’ve cut off the mining rights, the landowner can often be a big problem. Many surface ownership clauses should be taken very seriously and left to those who know them best.
4. Complicated legal process
As soon as two parties agree on the leasing of the mining rights, both parties must sign a contract, which is usually drawn up and drawn up by the leasing company. All legal processes and leasing documentation are complex and can lead to disputes and disagreements during dismantling and production. If you do not agree to any of the operations after the start of drilling, you are bound by the agreed rental contract, which in most cases cannot prevent the operator from drilling.
5. High tax burden
While most income from the sale of mining rights is taxed at 15% (capital gains), income from royalties and bonus payments from a lease payment is calculated at normal income rates, which can be very high. . (Inquire with your tax advisor). In general, because of the much lower tax rate possible on income and sales, it is very beneficial to sell the mining rights rather than leasing them.
6. Accounting problems
Receiving royalty may sound exciting, but bookkeeping and records are challenging tasks. One has to monitor the drilling process, the payment process, and the outstanding payments. In addition, and most importantly, to verify the accuracy of the bookkeeping, professional audits are required.
The only way to avoid all of the above problems is to sell the mineral rights. When you sell your mining rights, you receive a one-time cash payment that you can use for other investments, such as B. Real estate or bills or overdue payments.
Let’s say you inherited 2/7 of the mining rights but leased them and have a potential monthly income of $ 300-500. However, you recently received an attractive offer from an oil and fuel company, the question is, do you want to sell mineral rights or not?
First, let’s define mining rights. It refers to the claim or curiosity about the minerals under the landlord’s house. The minerals here can refer to gold, silver, precious stones, coal, natural gasoline, or oil. However, the exact definition of the term varies from state to state.
Now it can be a general rule of thumb to negotiate the assumed value of a property or item. (The reverse also applies – wait until you can make the best offer if you want to buy a property or a commodity.) If you calculate the full lease of your mining rights in, for example, 40 decades, even if interest accrues and the full supply already takes place now bigger than that in terms of sales, which is a no-brainer. Any company worth your money would recommend selling the mining rights.
But let’s say you can’t really see your personal component for good sentimental reasons because you’ve been with loved ones for generations. If you currently have a lease, it is likely that ownership of the mining rights has already been established.