Replies to This Discussion

Permalink Reply by keb on March 8, 2011 at 18:57

Bacon, how much did it cost if I may ask?

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Permalink Reply by Parkdota on March 7, 2011 at 10:12

An appraiser friend wrote me the following:

 

The fair market value of anything, from what I have always been taught, is “the present worth of future benefits” to a willing purchaser at the present point in time buying under all the ordinary conditions of a fair market sale (paying cash, unaffected by undue stimulus, etc.)  Unless the IRS has some special definition of market value that twists the ordinary definition, the proper way to value minerals, timber, or the land itself, is to estimate the “present worth of future benefits.”  This would be the second method you mention and might indeed be lower than the “ultimate” value of an asset recovered some distant day in the future when market conditions, prices, costs to extract the minerals, etc. may all be different than they are today.

 

If, for instance, you were dealing with timber, a timber cruise would establish the volume and quantities that could be harvested, and derive a value for the standing timber based on the prices paid today in the open market and the costs to harvest and delivery.  The same process should apply to mineral valuation by using reliable estimates of the mineral quantities, current prices, and the residual value after extraction costs are accounted for.  Obviously, a buyer “might” buy the existing timber and NOT harvest it today, instead let it grow further and harvest at a later date when either the quality is greater or the prices are higher.  That same possibility exists with mineral extraction also.  In the future, prices could be higher and the technology could allow more extraction or extraction at a reduced cost.  Thus a buyer purchasing today would consider both options, ie. the value of the asset extracted and sold TODAY and its potential FUTURE VALUE if extracted and sold at a later point in time.  For some buyers in the market, a premium “might” be paid if there is a real prospect that the “future benefits” would be greater than what could be obtained today.  You have to study the market sufficiently in order to understand whether or not buyers are typically paying any such premiums.  If they are, then the “present worth” should reflect the premiums that are being paid by buyers who see future benefits to be obtained later in time.

 

If buyers of the minerals are basically extracting upon purchase or shortly thereafter, your problem is relatively simple. The fair market value would not have much of a “time component” to it UNLESS it requires a considerable period of time to fully extract the minerals, in which case you will have a series of cash flows, perhaps on an annual basis, which occur over the time needed to fully extract all the minerals. This then becomes a standard discounted cash flow problem readily reduced to a current market value by standard valuation techniques.

 

With solid application of appraisal theory, there is no reason why a “buy it today, start extraction now, and discount the cash flows arising over the extraction period” method of computing a value would not logically be defensible to the tax monster, absent the market showing that it would not make economic sense to extract the minerals today (high cost of extraction versus low prices, etc.)

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Permalink Reply by Parkdota on March 7, 2011 at 11:02

My estate planner just sent me this:

 

We have been using the old timey method and have had some success in audit.  Using a multiple of 2.5x to 3.5x off the last 3-5 years of production.  This is being challenged more with the CO2 stuff that is going on.  We have seen some 20x in some of the fields up for CO2.  Nonproducing are worth nothing.  

There is no correct answer.  Allot depends on the agent one gets.

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Permalink Reply by P.G. on March 7, 2011 at 12:39

So evaluating mineral rights where actual minerals have not been mined or reduced to possession is  not unlike trying to evaluate the two birds in the bush rather than the one in the hand...

I mean I've never bought a home, sitting on land and seen any consideration ever given to mineral right value by an appraiser appraising the home for the mortgage company..

In Louisiana, those rights will vanish for anyone but the actual land owner after the prescription period.. Would the tax man give someone with just ownership of the mineral rights a credit if that happened?

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Permalink Reply by Parkdota on March 7, 2011 at 14:42

Mineral Appraiser

 

Mineral Rights Valuation Mineral royalties are often valued for Estates, Litigation, and for taxation or taking purposes. Your CPA may value an income stream but the general rule is that those valuations are more than the market value for producing property and less than market value for non-producing (exploration) property. The reason is that production tends to decline with time therefore, royalty income is a declining income stream in most cases. Also, mineral appraisers with a geological background can make some judgments about the long-term potential of such royalty or mineral holdings. To properly do an oil and gas appraisal, the appraiser function is usually best separated from the estimating function. The estimating function sets up the parameters or forecast of the income stream by estimating the remaining reserves, expenses and income associated with oil and gas production. That function is best left to a member of the SPEE or a reservoir engineer or geologist experienced in estimating probable production. The appraising function takes the estimate above and translates it into a traditional appraisal using the Income, Sales, and Cost approaches (actually the Cost Approach is rarely applicable.)

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Permalink Reply by Jimmy Stiles on March 7, 2011 at 14:49

Everyone has been very helpful and forthcoming with information. Wow you really do learn something new everyday. There's a lot to consider when undertaking such a task, but I guess there is no time like the present. I'm thinking that to get a qualified Appraisal done there may not be much more than just having it done by a professional land surveyor, geologist/engineer, or petroleum geologist/engineer that has some experience doing these types of things. Hopefully as has been mentioned there won't be much to "appraise" yet when we finally can retain someone. i wouldn't think that it would be very easy to put a price on a risk. To me it's like a $5 lottery ticket. I wouldn't think that the ticket wouldn't "appraise" for much more than $5 even though it is possible that it could be worth thousands. IMHO

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Permalink Reply by Paul Jackson on March 7, 2011 at 15:33

I read your inquiry re gifting of royalty interests and your comment that an oil or gas company "may not give the most value" (or similar) to your interests.  While others will no doubt cite some of the many qualified parties to do such work, may I note that you should not necessarily be attempting to maximize the value of the gifts.  Quite to the contrary, you should minimize same in order to optimize the gifts.  Their actual value will eventually be determined by the market and the productivity associated therewith.

 

Paul Jackson

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Permalink Reply by Jimmy Stiles on March 7, 2011 at 16:17

I realized that it didn't sound that way after I wrote it, but that is what I meant. I just didn't explain in enough detail. I would think the oil companies might value the land at a little higher value b/c of their knowlwedge of the gamble. Whereas someone basing their knowledge a little more squarely on speculation might come up with a more favorable assessment of market value.

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Permalink Reply by Bacon on March 8, 2011 at 9:37

Definitely want the appraisal before production starts for tax purposes.

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Permalink Reply by cocodrie man on March 8, 2011 at 10:03

I have done this and must say the results are very mixed as of this date.  My attorney at Jones Walker in New Orleans and my north Louisiana attorney both tried to get Coutret to help us but could not.  I used a firm in Baton Rouge named Veazey & Associates.  The attorney understands what he said but I do not. 

 

It turned out to be a huge amount of work for me (which I do not need or want at this point in my life) and ended up being very costly.  I hope it was the right thing to do. I do not yet have enough experience to tell. 

 

My intentions were good and for me, this was a good idea.  Time will tell if it was done well or not. 

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Permalink Reply by benny688 on March 9, 2011 at 14:49

This kind of estate planning is really difficult without having a tax attorney do it for you.

 

We had the sad experience of our mom dying last summer.  Nine months later the attorney and CPA are still trying to evaluate this and figure out how much we owe on the estate taxes.

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Permalink Reply by P.G. on March 9, 2011 at 15:55

Wouldn't trying to evaluate "Mineral Rights" be like trying to count your chicken's before they've hatched?

All Mineral Rights are is a privilege to go looking for minerals, not actual minerals. Can Minerals even be owned in Louisiana before they have been reduced to possession? Can Mineral rights produce an income stream?

Then there's the problem of who mines them. Aren't some drillers more proficient than others? So many if's..

What about the potential Bonus money one could get if he/she were to leased their mineral rights? Should that be considered for estate taxing purposes.

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