What is the risk of devaluing land that does not have mineral rights? Are...

Asked July 8, 2013, 6:52 AM EDT

What is the risk of devaluing land that does not have mineral rights? Are there any studies on this topic? Do banks have issues with financing properties that do not have mineral rights?

Cheboygan County Michigan

3 Responses

I am not sure I understand your question. If you are asking can land be developed for oil and gas without the surface owner’s permission, the answer is yes. The mineral estate is dominant in every state that I am aware of.

Whether or not that development affects property value depends on many things; size of parcel, location and a prospective buyers goals to name a few. A 40 acre parcel with one oil and gas well may not devalue the property at all, while a 5 acre property with an oil and gas well could be devalued.

The impact on land value can be determined by a property appraisal. It may have to be a special appraisal to compare a parcel that has oil and gas development and no mineral rights with comparable parcels without any oil and gas development to determine any value differences. The negative impact of the oil and gas development becomes evident when the subject property is compared to the comparable properties. I am not aware of any studies on this subject because it is very property specific.

Banks have historically not had a problem financing a property that does not have mineral rights. There are millions of acres and home-sites nationwide that have a split estate, meaning someone owns the surface and someone else owns the mineral rights. Split estates are very common. A bank may have a problem with financing if the appraisal shows oil and gas activity has devalued the property in comparison to comparable properties. This problem could be resolved by the borrower increasing the down payment on the loan to reduce the bank’s risk.

If you would like to discuss these questions further feel free to call me at 231-873-6841

Thanks Curtis. Going back to the question on banks financing properties that do not have mineral rights. I wonder if this is starting to change with the advent of fracking? I found a couple of papers that offer compelling evidence, but with all things internet, I try to be objective. I just wonder what your read on these might be:

"Save Colorado From Fracking", and "The Facts Behind the Frack, Science News"

There is nothing in life that is totally risk free. Are there risks? Absolutely, and unfortunately, even with the best intentions accidents happen. The plane crash a couple of days ago is a good example.

Since we live in MI, I rely on MI statistics. The Michigan DEQ states that over 12,000 oil and gas wells have been hydraulically fractured since the 1960s and there has not been a water contamination problem. It is true that the vast majority of these are vertical wells, but they are also very shallow wells (1500 feet deep), which means they are fracking much closer to the water table than the deep horizontal wells (4000 -8,000 feet deep). I have heard repeatedly that MI has some of the most stringent regulations for horizontal drilling and hydraulic fracturing in the nation.

In this day and age, a person needs to get multiple viewpoints. For example, there is a well in Pavillion Wyoming that has been studied by the EPA and the U.S. Geological Survey (USGS). These are both federal government entities. They studied the same well and came up with totally opposing conclusions. The USGS stated that the EPA did not even use their own criteria when sampling the water and they believe the EPA contaminated their own samples. Not knowing the background and only looking at selected statistics, if you are for fracking you can use the USGS study. If you are against fracking you can use the EPA study. Both would seem to have credibility, it just depends on what your agenda is.

I checked with a representative of Chemical Bank and they have no problems writing loans on properties that do not own the mineral rights.