Embedded Files
More on gas leases . .
http://www.ecocentricblog.org/2012/03/23/the-fracking-plot-thickens-are-gas-leases-on-thin-ice/
Ecco-Centric - March 23, 2012
The Fracking Plot Thickens: Are Gas Leases on Thin Ice?
by Kyle Rabin
The topic is increasingly in the spotlight as the land grab for gas leases - by drilling companies seeking to tap shale deposits via high-volume, hydraulic fracturing combined with horizontal drilling (fracking) - continues through New York State and the nation.
The New York Times recently shed light on yet another important aspect of gas drilling leases, that U.S. Department of Agriculture rural housing loans are being routinely granted on properties with oil and gas leases using a so-called "categorical exclusion" from the National Environmental Policy Act (NEPA), although such exclusions are only supposed to apply to properties without environmental risks.
Most people would agree that fracking comes with an assortment of environmental risks given that it's a heavy industrial activity; in this case an activity that introduces hazardous substances into people's backyards. What's less clear is the regulatory and legal landscape. If you have trouble wrapping your brain around this issue, then you're not alone. Fracking is a complex subject with an endless number of sub-themes and gas leases might just be one of the more complicated aspects of this knotty topic.
Elisabeth Radow, an attorney-at-law with a keen interest in environmental impacts on human health and the subject of hydraulic fracturing (and who wrote in depth about gas leases and mortgages in the Nov/Dec 2011 cover story for the New York State Bar Association Journal magazine), helps to explain the significance of the Times story:
The New York Times reported on Monday that environmental specialists at the US Department of Agriculture have recognized USDA mortgage loans made to property owners with oil and gas leases may violate the National Environmental Policy Act (NEPA) if an extensive review is not performed. NEPA is a federal statute enacted in 1969 which requires that all federal agencies' funding or permitting decisions be made with full consideration of the impact to the environment.
According to the Times report, USDA mortgages have been routinely granted on properties with gas leases without NEPA review by using a so-called "categorical exclusion" which is supposed to pertain to properties without environmental risks. The Times also reported that recognition in USDA of the need for a higher level of review was anticipated to result in a notice issued in April by USDA Secretary Tom Vilsack clarifying existing rules. However, on the heels of the Times article, Secretary Vilsack stated he will issue an Administrative Notice reaffirming that rural loans are "categorically excluded" under NEPA.
High volume hydraulic fracturing combined with horizontal drilling introduces heavy industrial activity and hazardous substances into property owners' backyards across America where families raise their children and farmers raise cattle and grow crops. In the words of the gas industry (as disclosed in the SEC mandated Form 10-K), this is inherently risky activity, including well blow-outs, explosions, pipe failures, fires, uncontrollable flows of natural gas, oil, brine or well fluids and other environmental hazards and risks which can result in property damage, personal injury and loss of life.
You might be wondering, what does this risk mean for the taxpayer? Radow explains:
Taxpayers subsidize the low interest-rate USDA rural development loans. In addition, these loans are routinely sold into the $6.7 trillion secondary mortgage market; 90% or more of all home mortgages are. To protect the federal government, the lending bank, the mortgage-backed securities investor and the taxpayer, it is critical that people underwriting federally backed loans grasp the multi-step (oil or) natural gas extraction process and assess the risks associated with each step so they can determine if the mortgage collateral (i.e., the land, the house and the water supply) will retain its integrity and value throughout the 30 year loan. Otherwise, USDA (and the other NEPA governed federal agencies involved in mortgage loans) risk litigation.
A close look at the USDA underwriting guidelines reveals that use of a categorical exclusion will not exempt a property from requirements of other environmental laws, regulations or Executive orders. Each property is supposed to be individually reviewed and can lose its categorical exclusion status where "extraordinary circumstances" or "cumulative impacts" are involved; both criteria have relevance here.
Radow predicts we have not heard the end of this debate since the Obama administration appears to be supportive of natural gas extraction, considers America's food supply a matter of national security and is resolute about preventing another mortgage crisis.
"To illustrate the conundrum created by these three competing priorities," Radow suggests that we need "a transparent map of all of America's farms and family homes with mortgages, superimposed on a second map of the nation's oil and gas shale plays. That visual would say it all; clearly illustrating just what's at stake."
But here's where it gets really interesting, according to Radow:
USDA underwriting guidelines prohibit a loan on a residential property which produces income or has the potential to produce income, as is the case with a residential property with a gas lease. So, while NEPA's relevance to all federal agencies involved in mortgage loans should be recognized and acted upon-to protect and preserve our food supply, property value and public health-for purposes of USDA residential mortgages, it may be moot.
Many thanks to Elisabeth Radow for her expert aid in unraveling this complex issue. As I wrote last week, in most cases, gas drilling companies shift to landowners the risk of negative environmental and health impacts associated with the fracking technique. With this new information, it would seem that an over-burdened government agency (one that is supposed to be ensuring the safety of our food supply) and taxpayers are shouldering the load.
NORTHRUP
The Worcester Gas Tax Hoax
Fracking apologists, including a lawyer representing Norse Energy and one of the New York land owners groups, have touted an apocryphal estimate of what a hypothetical shale gas well would pay in ad valorem property taxes in the Town of Worcester in Otsego, County. This mythological well is also used in the rather misleading argument against a severance tax in New York – implying that since there is an ad valorem local property tax on gas wells in New York, there does not need to be a state production (severance) tax at the wellhead. Let’s examine these arguments.
No Gas No Tax
– The ad valorem property tax is based on the amount of gas produced; if there is no production, there is no tax. The property tax valuation is similar to the “income method” on commercial property – such as a shopping center – which values the asset based on its productive value. The method used in New York is not dissimilar from that used in every other state that has a property tax on oil and gas wells – meaning every state with oil and gas production, except Pennsylvania
– Which has no property tax on gas wells. New York’s method of valuing production is not suited to horizontal shale gas wells, since the value of such wells is gone in literally a matter of months – approximately 80% of the value is gone in the first two years.
Once the initial surge of gas is gone, the value of the well on the tax rolls would drop precipitously.
If there is no gas production, there is no tax.
Dry Holes –
Tests of the Marcellus and Utica shale gas formations have not been successful near Worcester, as illustrated in the map below provided by Karen Edelstein using FracTracker.
These so-called “double play” test wells were drilled in what was touted as the “fairway” of the Utica and Marcellus, that area where the shale was thought to be most productive. None of them were successful, and one of the test wells, the Pullis 1, has already been plugged. The location for the Ross 1 well was picked by Gastem USA, which traded at $3 a share prior to drilling the test well, and 8.5 cents soon afterwards. Based on theisopachs and total organic content of the Marcellus, results on a well in Worcester should be similar to the Ross 1.
The ad valorem property tax on such a well would be zero.
http://www.scribd.com/doc/63145368/NY-Property-Tax-On-Gas-Wells
Utica / Marcellus Test Wells Near Worcester, Otsego Co. NY Looking For Gas In All The Wrong Places. At All The Wrong Prices
The problem with these test wells, and with the ad valorem prospects for the Town of Worcester, is that they were drilled in the wrong place at the wrong time. Meaning the geology in this area is not a conducive to productive gas wells – as that further south on the Pennsylvania border– or at current and projected prices for methane
http://www.scribd.com/doc/72140110/Voodoo-Frackonomics
Here’s a simple test – if the well is drilled by a company from Texas or Oklahoma when gas prices are above $5 mcf – it might have potential. If it is drilled by a company from Quebec – where fracking is banned, or Norway, where onshore shale gas exploration is illegal – it’s more likely to be a dry hole. If below $4 mcf, precious few of these horizontal dry gas shale wells make any economic sense anywhere. End of geology and economics lesson.
Ad Valorem and Severance Taxes
An ad valorem local property tax on an oil or gas well is not incompatible with a state production or severance tax at the wellhead.
In fact, they always go together
– except in New York – which has no state tax on gas – and the woebegone Pennsylvania – which has neither a state or local tax on gas.(Pennsylvania is a veritable tax haven for frackers - who have managed to buy off both the legislature and the governor. ) The lack of a severance tax is pronounced in New York – leaving the state bereft of a revenue source for regulating the industry or repairing the road damage caused by shale gas industrialization.
Since most New Yorkers are not familiar with the taxation of oil and gas wells, it is easy for fracking shills to hoodwink them into thinking that they have to make a choice – between an ad valorem property tax and a state production tax. When the answer everywhere else is both.
Absent a state tax at the wellhead, New York will simply be exploited by out of state producers.
http://www.scribd.com/doc/75615196/Worcester-Tax-Hoax-Voodoo-Frackonomics
12/30/2011 - 3:06:52 PM
Oil boom ushers gusher of legal, accounting work
By Steve Porter
Oil and gas companies and the landowners who lease to them are enjoying a boom time in the Niobrara shale play in northeastern Colorado. But others are also profiting - including attorneys and CPAs - from the stepped-up drilling activity.
Fort Collins attorney Robert Pickering, who has been working with oil companies and landowners in Wyoming and Colorado for nearly 30 years, says his business in Colorado has definitely picked up.
"It used to be almost exclusively Wyoming, but now it's about 50-50 - maybe a little more now in Colorado," he said.
While Pickering works both sides of the operator-landowner fence, he keeps the lines clearly drawn between who he represents in each state and in each situation.
"I work for the landowners down here (in Colorado) and for the companies in Wyoming," he said, noting that the Wyoming oil companies he advises are not the same companies his Colorado landowner clients are negotiating with on lease and land use agreements.
Pickering - a partner in the office of Jouard and Pickering PC - said while the practice specializes in personal injury and wrongful death cases, his experience in energy law has come in handy, especially with the acceleration of drilling and land leasing going on in the rapidly evolving Niobrara oil shale play area.
Pickering said his landowner clients are asking for advice on how to best structure their lease and other agreements with the oil companies that want to drill on their land.
"For most landowners, they're interested in the impact of the trucks coming on their property and the impact on the integrity of their wells and their water," he said. "They're also interested in the fracking companies - where those chemicals go and what's in there. And they're interested in royalties.
"There's a whole host of things they want to mitigate."
Fracking refers to the hydraulic fracturing of underground rock layers by horizontally pumping a combination of water, sand and chemicals into the layers to loosen and remove gas and oil deposits and send them to the surface.
Pickering said oil and gas companies and landowners are always looking for the same thing - getting the best deal they can.
"Hopefully, everybody can be reasonable, and they meet in the middle 99 percent of the time," he said.
Clinton Baker, a certified public accountant with Kennedy and Coe LLC, said his work with oil and gas industry clients and landowners in Colorado has grown dramatically since the Niobrara play began.
"In our oil and gas industry business, I would say we've seen at least a doubling of that," he said. "I would say the oil and gas industry is growing as fast as any other industry in our firm."
Robert Green, an independent certified public accountant in Greeley, said his work in the oil and gas business over the last 33 years has witnessed some industry ups and downs.
"I've seen probably two or three oil booms and busts, and they're in a boom at the moment," he said. "It all depends on the price of the product - oil and natural gas."
In addition to oil company clients, Green said he's also doing lots of work for small local businesses that service the big oil operators in the region, including water haulers, trucking firms and roustabout companies that provide drilling rig workers.
As a CPA, Green specializes in helping his clients navigate the complex tax regulations they must abide by.
"The oil and gas industry has its own unique tax rules," he said. "They're very complicated and there aren't many of us (in Northern Colorado) who deal with that area of taxation."
Green said his CPA energy business is definitely in a growth mode because of the Niobrara play.
"It kind of ebbs and flows, but now it's just crazy because of the horizontal (hydraulically fractured) wells," he said. "There's a big question as to how long it's going to last because there's been some dry holes drilled."
Still, Green said for the moment the oil and gas activity is in the strong part of the boom cycle.
"They've just been leasing everything in sight," he said. "They're trying to tie up all the land they can for future drilling."
And the royalties being paid to landowners?
"It's all negotiable," he said. "But I'm just amazed at the prices the leasing companies are paying."
http://www.ncbr.com/article.asp?id=61534
The Daily Star, Oneonta, NY -
November 22, 2011
Gas leases have impact on local real estate market
BY JOE MAHONEY
Staff Writer
COOPERSTOWN -- Lease or no lease?
In a region where hundreds of parcels have been leased to energy companies, more and more prospective home buyers are asking whether the real estate they are eyeing is under lease to a gas drilling company, according to several local real estate agents.
"It is impacting us to the point that we have actually lost sales because of it," said Dave LaDuke, a broker with John Mitchell Real Estate in Cooperstown.
Savvy buyers are not only asking about the status of the properties they'd like to view but also whether any other tracts of nearby land are under lease with gas companies, real estate agents said.
Unless they are possibly speculating they could profit by leasing the land themselves to a gas company, they often walk away from the property when they hear the land it sits on is under lease, real estate agents said.
"This is affecting the marketing of houses drastically, and it's affecting our sales," said Ron Johnson, an associate broker with Hubbell's Real Estate in Cooperstown. "People in general are very skeptical about buying land next to leases or houses next to leases. If they go through with the purchase, the buyers know they are going to have to live with it for a long time."
Would-be sellers whose homes are leased or next to leased lands are finding that buyers are concerned about potential pollution in wells, and concerned they may have difficulty obtaining a mortgage or homeowner's insurance.
"The banks are reluctant to take on these mortgages," Cedar Ridge Realty sales agent Kelly Branigan said. That makes it more difficult for the seller to find a buyer, she said.
Real estate agents said they are required by their code of ethics to disclose any material fact about a condition that could impact the value of a property. In anticipation that buyers will want to know up front about whether a property is leased or not, some real estate ads are beginning to include mention of if the property is under such an agreement.
Eric Lein, a sales agent with Realty USA in Oneonta, said he is surprised when he encounters buyers who have no interest in knowing whether gas drilling could be permitted in an area where they are looking for a house.
"This is something that isn't discussed enough," Lein said. "I know if I was looking for a piece of property and somebody in my area was going to have fracking on his property, I wouldn't buy in that area."
In Otsego County, a total of 1,148 parcels of land are under lease with gas companies, according to the Otsego County Conservation Association, which compiled the information from records kept by the Otsego County Clerk's office. A map showing the location of those parcels is posted on the group's web site: www.occainfo.org.
Homeowners who sign away the drilling rights to their land to natural gas companies are taking a major risk with their mortgage because mortgage agreements prohibit heavy industrial activity and hazardous materials on the property, said Elisabeth Radow, a real estate lawyer from Westchester County and an expert on gas leases.
"The notion of setting up a heavy industrial enterprise on your property is something your lender is going to want to know about," Radow said.
Also put into jeopardy by a drilling lease is the owner's homeowner's insurance policy.
"There is the potential that homeowner's insurance carriers will decline to insure homeowners who have gas leases because they don't want to be pulled into litigation and pay the litigation expenses," she noted.
And even though the state Department of Environmental Conservation is continuing to review draft rules that would allow hydrofracking to go forward, she said real estate shoppers should be especially cautious when looking in an area where there are leases.
"People have to assume that these operations are going to be going on wherever they see that a lease exists," she said.
Still another reason for caution for buyers who have no desire to lease their land to gas companies is New York's compulsory integration law, which can force neighbors into a drilling pool even when they have refused to sign a lease, Radow said.
Homeowners who have signed leases and think they can get out of them simply by waiting for the expiration date are often in for a rude awakening thanks to automatic renewal clauses that work to the advantage of the drilling companies, said Syracuse-based environmental lawyer Joseph Heath.
Heath, who has conducted lease termination workshops for homeowners seeking to get out of the agreements they signed with gas companies, said some leases allow the companies to extend the agreement simply by commencing "operations."
In one case in Pennsylvania, he said a company extended a lease simply by parking a bulldozer on a property before the agreement expired.
"It's an incredibly broad definition of what are 'operations,'" Heath said.
HydrofrackFacts-
Impact on Property Values, Mortgages, Insurance Liability
Stop Gas Drilling — Sue Your Neighbor. “Enter Gregory Alexander, A. Robert Noll Professor of Law at Cornell University. He says there’s a well-trodden legal path that could stop drilling before it begins. Called anticipatory nuisance, it’s basically the notion that you can stop your neighbor from doing something if waiting to sue until you’re harmed is ludicrous. In a western, this is where the marshal says you shot in self-defense.”
http://www.huffingtonpost.com/andrew-reinbach/stop-gas-drilling-sue-you_b_787881.html
( NOTE: This approach has not been supported by the courts in NY)
Mortgages
All residents should be concerned about this information received from a local realtor: “I had a customer inform me two days ago that the home equity loan they were obtaining in order to purchase a small investment piece near them was turned down by GMAC because their home property was under a gas lease. I dug a little further and found through mortgage brokers that that they are encountering the same reluctance on the part of some local and some bigger banks to lend on leased properties. I hope those who have signed leases have figured this into the equation. A similar example would be as in the case of Flood Zone properties for whom the Flood Insurance program was withdrawn, banks would also not lend on those. In the real estate world, things like this are a huge consideration in factoring property values. Just thought some people might not be aware of this trend by lenders.”
Here are the names of banks who will not fund leased properties, based upon environmental risk, as per information gained from a mortgage broker who is still looking further into the situation:
First Place Bank
Provident Funding
GMAC
Wells Fargo (will know for sure in a few days)
FNCB
Fidelity
FHA
First Liberty
Bank of America
Gas_Banks that won’t fund leased properties info
Gas HUD FHA rules affect property values
Gas_MortgageBrokerCorrespondence with major banks
How Marcellus Shale Gas Drilling Will Depress Your Property Values -
Steve Coffman Committee to Preserve the FingerLakes.
Mineral rights drive up prices at Broome County tax auction: “…Mineral rights on foreclosed properties that are more than 5 acres stay with Broome County…” ” (Kellie M. Place “The Land Expert”/Century 21 Chesser Realty)-
From The Pike County Courier: NORTHEAST Pa 11/20/2010. “There are a lot of properties with leases in this area,” Rudalavage notes. She adds, when it comes down to obtaining a mortgage on those properties, “more and more of [the banks] are saying, ‘no, no, no.’” …Wells Fargo would not be inclined to fund a property with a gas lease. In a memo, a top executive at the bank writes it would be “very difficult to obtain financing due to the potential hazard.” The memo continues, “Also if the Gas Leasing is new to the area there are too many unknowns.” One of the unknowns, according to the executive, is what the lease would do to “the marketability of a property.
http://gdacc.wordpress.com/resources/impact-on-property-values-mortgages-insurance/
October 19, 2011
Rush to Drill for Natural Gas Creates Conflicts With Mortgages
Rush to Drill for Natural Gas Creates Conflicts With Mortgages
By IAN URBINA
As natural gas drilling has spread across the country, energy industry representatives have sat down at kitchen tables in states like Texas, Pennsylvania and New York to offer homeowners leases that give companies the right to drill on their land.
And over the past 10 years, as natural gas has become increasingly important to the nation's energy future, Americans have signed more than a million of these leases.
But bankers and real estate executives, especially in New York, are starting to pay closer attention to the fine print and are raising provocative questions, such as: What happens if they lend money for a piece of land that ends up storing the equivalent of an Olympic-size swimming pool filled with toxic wastewater from drilling?
Fearful of just such a possibility, some banks have become reluctant to grant mortgages on properties leased for gas drilling. At least eight local or national banks do not typically issue mortgages on such properties, lenders say.
A credit union in upstate New York has started requiring gas companies to promise to pay for any damage caused by drilling that may lead to devaluation of its mortgaged properties. Another will make home loans only to people who expressly agree not to sign a gas lease as long as they hold the mortgage.
More generally, bankers are concerned because many leases allow drillers to operate in ways that violate rules in landowners' mortgages. These rulesalso require homeowners to get permission from their mortgage banker before they sign a lease - a fact that most landowners do not know.
Last year, Jack and Carol Pyhtila spent several weeks working to refinance the mortgage on their roughly 30 acres in Tompkins County, N.Y. But when they arrived to sign the mortgage, the lender, Visions Federal Credit Union, had taken a closer look at the lease on their land and revoked its offer, said Mr. Pyhtila, 72.
"They told us there was not enough information yet to know how the lease would affect the property value and they were not sure if it followed the mortgage rules," he said. Another bank agreed to refinance their loan several months later.
Lenders predict that the conflicts between leases and mortgage rules are not likely to cause foreclosures, nor have they resulted in broad litigation or legislation. But many of the leases do constitute "technical defaults" on the mortgages, lenders say, and will likely result in new rules from local banks and additional hurdles to getting a home loan or refinancing a mortgage.
Some real estate agents have started raising red flags.
"When you decide to sell your house you may find it difficult to do so because many banks, here and elsewhere, will not mortgage properties with gas leases, which, in turn, limits the number of buyers willing and able to buy your property," wrote Linda Hirvonen, an agent in Ithaca, N.Y., in a newsletter last month.
Banks establish rules for how mortgaged properties can be used, to help ensure that they will hold their value. Banks also need to guarantee that their mortgages meet certain standards so that they can sell them to institutions like Fannie Mae and Freddie Mac, which bundle and sell these mortgages to investors.
"In terms of litigation, there is a real potential for a domino effect here if lenders at each step of the way made guarantees that are invalid," said Greg May, vice president of residential mortgage lending at Tompkins Trust Company, headquartered in Ithaca.
Banks resell more than 90 percent of new residential mortgages in the United States to institutions like Fannie Mae, Freddie Mac and Ginnie Mae. It is not clear how many mortgages held by major secondary lenders or investors have oil or gas leases on them that do not comply with mortgage rules.
But if even a small percentage do, tens of billions of dollars in mortgages might be affected, raising new concerns for an industry that has suffered in recent years from home loans that proved much riskier than expected.
Some lawyers who specialize in oil and gas leases said they were not worried.
"The leases have not created any practical conflict or issue with mortgages," said Adam J. Schultz, a lawyer in Syracuse, adding that there are thousands of gas leases on mortgaged properties in New York and Pennsylvania and that state environmental regulations helped protect property values.
Most of the bankers and mortgage experts interviewed also emphasized that they were not opposed to expanded drilling. The surge in such drilling has created thousands of jobs, bolstered American energy supplies and turned some landowners into millionaires, they said.
However, the banking industry is only starting to appreciate the complexity and possible consequences, they added.
"It's truly Pandora's box," said Cosimo Manzo, a vice president of First Heritage Financial, a mortgage services company in Philadelphia, during a presentation to Pennsylvania lenders posted online in July by a state credit union association. He also compared getting leases to comply with mortgage rules to solving a Rubik's Cube.
If local banks do not require that leases comport with mortgage rules, Fannie Mae and Freddie Mac may stop buying mortgages from these banks, Mr. Manzo said. Other experts warned that the two institutions, or investors who bought mortgage-backed securities, may also force local lenders to buy back noncompliant mortgages.
Real estate experts said the chances for conflicts between leases and mortgages were growing as drilling increased in more populated areas. The issue has garnered the most attention among lawmakers and lenders in New York, partly because the state's rules for how close to homes drilling may be undertaken are more lax than in some Western states where there has been drilling for years.
Attention From Lawmakers
Lawmakers have started asking more questions about the interplay of leases and mortgages.
In September, after The New York Times asked them about the issue, two Democratic congressmen, Edward J. Markey of Massachusetts and Maurice D. Hinchey of New York, asked Fannie Mae and Freddie Mac how they intended to rectify any breaches of their standards caused by drilling leases. State legislators from New York, Ohio and Maryland have also sent letters to regulators seeking more information.
In October, Mr. May published a report after a Tompkins County legislator, Carol Chock, asked him to look into the issue. The report described various conflicts between leases and mortgages over such things as minimum distances between gas wells and homes and the construction of wastewater ponds.
Mr. May said the issue was causing "a high level of concern for prudent banks and lenders." He and other bankers have also questioned how the growing grid of buried pipelines that carry natural gas from wells to consumers will comply with mortgage rules. A separate report from the Congressional Research Service, the research arm of Congress, said signing a drilling lease without prior approval on a property with a mortgage owned or guaranteed by Fannie Mae or Freddie Mac "generally will be considered an act of default under the mortgage."
That could give either of the federally run companies the right to demand immediate payment of the full loan and even foreclose on the property if the owner cannot pay, the report said.
Representatives for Freddie Mac, Fannie Mae and the Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac, declined to comment.
Other officials at Fannie Mae, who were not authorized to speak to reporters, said it was unclear how many mortgaged properties with noncompliant leases Fannie Mae owned or had unwittingly sold to investors. Since drilling leases are frequently on farms and Farmer Mac, which purchases farm, ranch and rural homeowner mortgages, has many of the same rules as Fannie Mae and Freddie Mac, potential conflicts between mortgages and leases exist there, too.
A spokesman for Farmer Mac said he did not believe leases posed a significant financial risk.
Some bankers have emphasized that the conflicts between mortgages and leases can be resolved. But that first requires more guidance from Fannie Mae, Freddie Mac and other secondary lenders about what types of appraisals and title insurance are appropriate for mortgaged properties with leases, and whether the risks and values of these properties need to be reassessed, said Bill Crane, a senior vice president of CFCU Community Credit Union in Ithaca.
Other lenders said they needed mortgage rules relating to leased properties to be followed uniformly so that bankers who enforced these higher hurdles were not left at a competitive disadvantage.
In New York, these lenders added, regulators need to change regulations to require a larger buffer zone between homes and wells so that drilling complies with mortgage rules.
"New York needs the drilling jobs," said Ralph Kelsey, a senior vice president of Tioga State Bank in Tioga County, N.Y. "We also need a lot more answers to these questions."
Last year, Mr. Kelsey gave a presentation warning that since intensive drilling is relatively new in New York and Pennsylvania, there is a lack of historical data about how drilling affects property values, which in turn raises questions about whether appraisals will meet mortgage guidelines.
Rare Requests for Clearance
Data is scarce on how often landowners or drilling companies are getting written permission from lenders before putting leases on mortgaged properties. Most mortgage experts said the requests were rare.
Bank of America receives roughly 100 requests per month nationwide, a company spokesman said. Fewer than a dozen such requests are sent directly to Fannie Mae each year, according to Fannie Mae officials.
Wells Fargo, Bank of America, Citigroup, JPMorgan Chase, HSBC, GMAC Mortgage and the Mortgage Bankers Association declined to comment beyond saying they decided mortgages case by case and noting that the landowner or the gas company is responsible for ensuring leases do not violate mortgages.
In private e-mails, some lenders said drilling leases could create problems for getting a mortgage.
It is "very difficult to obtain financing due to the potential hazard" as well as "unknowns," an official at Wells Fargo wrote to a mortgage broker in northeastern Pennsylvania in April 2010.
Drilling officials offered a different view. They said that the income from lease bonuses and gas royalties actually enhanced property values, and that mortgage lenders welcomed gas drilling because it provided borrowers with extra income that could be used to pay off their mortgages.
New York environmental regulators recently published a report indicating that property values go up regionally with an influx of drilling jobs. But the report also said research showed the value of properties closest to drilling would likely decrease.
Chesapeake Energy, a major natural gas producer, does not seek approval from lenders before finalizing leases on mortgaged properties but asks permission later for properties where wells will be drilled and withholds royalties until consent is obtained, said Jim Gipson, a company spokesman.
However, lenders warned that mortgage rules required approvals from lenders before drilling leases were signed. They also noted that such approvals were required on all leases, not just those where wells are drilled.
Landowners said they were unaware of the rules set by their mortgages.
"It never even dawned on me to talk to the bank before I signed my lease," said Marie McRae, 67, who raises horses in Freeville, N.Y., outside Ithaca. She leased 13 acres of her farm in 2008, but came to regret her decision and has publicly criticized drilling.
Asked by The Times to review the mortgage regulations and a collection of leases, Shaun Goho, a lecturer at Harvard Law School and co-author of a guide to natural gas leasing, said he was alarmed by various potential conflicts between leases and mortgages. He added that he planned to revise the guide this fall to include a discussion of these conflicts.
Officials from Exxon Mobil, the largest natural gas producer in the United States, and America's Natural Gas Alliance, a trade association, declined to comment.
This is not the first time that questions have been raised about whether mortgages comply with standards set by major lenders.
The assembly-line way that mortgages are sold and resold makes it difficult to track liability and risk and to ensure that guidelines are being followed, said Eric Forster, a real estate and mortgage expert who is the managing principal in Forster Realty Advisors of Los Angeles, which often consults on real estate litigation.
"The subprime mortgage mess was the first symptom of this larger problem," he said. "And these leasing issues represent a second symptom."
Kitty Bennett contributed research.
The Homestead Tax Option
(Article 19 - Section 1903 of the RPTL)
http://www.orps.state.ny.us/
INTRODUCTION:
In a number of places in New York State, assessments of residential property frequently have been at a lower percentage of market (full) value than other types of property, such as commercial and industrial property. When a town or city with this situation decided to conduct a property revaluation to achieve correct and fair assessments, the residential properties, as a class, would bear a much larger share of the tax burden. This discouraged other municipalities with similar situations from conducting their own property revaluations. As a result of the concern for tax-burden shifts to homeowners, a State law was passed in 1981 establishing the Homestead Tax Option.
This local option prevents any large shift of the property tax burden to the residential class of property owners after a revaluation. In a revaluation, changes are made to individual property assessments so that they are correct and uniform -- as the law requires. These changes result in increases to some individual residential property owners whose properties were under-assessed before the revaluation. However, the homestead tax option prevents any large shift to the residential class of properties.
What is the homestead tax option?
A. It is a local option to establish two separate property tax rates: a lower tax rate for residential property owners (homestead tax), and a higher rate for all other property owners (non-homestead tax).
Is this program mandated by New York State?
A. No. It is a local-option program.
Is the homestead tax option available everywhere in the State?
A. No. It is available only to qualifying cities, towns, villages, counties, and school districts. It is not available in New York City, or in Nassau County except for villages and, for certain purposes, the cities.
How does a municipality qualify to use the homestead tax option?
A. A city, town or village that is an assessing unit first must complete a property revaluation project that meets the State Board's regulations. That entitles the assessing unit to be certified by the State Board as an "approved assessing unit". Then the local governing body of the assessing unit can adopt a local law stating its intent to use a homestead tax and a non-homestead tax.
How does the homestead tax option work?
A. The homestead tax is based on the share of property taxes paid by the residential class of property owners in the year before the new assessments from the revaluation project are used.
For example, assume that residential properties paid 40 percent of all town taxes in the Town of Smith in 1989 (the year before the revaluation project). Now, in 1990, as a result of the revaluation, the residential class represents 50 percent of the town's total taxes. As an "approved assessing unit" that has opted to use the "homestead tax option", the Town of Smith can "freeze" the residential class share of town taxes at the previous 40 percent. Thus, the town will have two tax rates: one for the residential class and another for all other property classes, such as commercial property and industrial property. The difference is that the tax rate for the residential class will be lower than the tax rate for all other property classes. For example, the town tax rate for the residential class might be something like $25 for each $1,000 of assessed valuation, while the tax rate for the nonresidential class might be $30 for each $1,000 of assessed valuation.
Once the percentage shares are determined (in our example, 40 percent for residential property and 60 percent for non-residential property), do they remain that way forever?
A. No. They can change based on the following adjustments:
Using the example for the Town of Smith, the town would have the option of adjusting the residential share at various points between 40 and 50 percent.
The municipality must make annual adjustments based on property that is added to the assessment roll and property that is removed.
The municipality must make annual adjustments for different rates of appreciation in the two classes of property based on the changes in the current market value of the classes, subject to a 5 percent cap.
What type of property qualifies as residential class propety under the homestead tax option?
A. One-, two-, and three-family residential units; farm homes; mobile homes that are owner-occupied and separately assessed, and condominiums that were built as condominiums and not converted from some other form, such as rental apartments, qualify as residential property.
Also qualifying for the residential class are vacant land parcels not larger than 10 acres that are located in zones that restrict residential use to one-, two-, or three-family residential dwellings.
I understand how the homestead tax option could work in my town, but how would it work in my school district?
A. School districts that are wholly contained within the boundaries of a city or town that has the homestead tax must use the homestead tax unless they opt out of the program by passing a resolution.
There is a special requirement for school districts located in more than one city or town that want to use homestead and non homestead school tax rates. That requirement is that one-fifth or more of the properties in the school district must be located in cities or towns that use the homestead tax option.
In addition, for school districts that are in more than one city or town, the determination of class shares will be based on current market value, with adjustments at the discretion of the school district within limitations set by law.
How many places are using the homestead tax option?
A. At the time this pamphlet was revised, 13 cities, 18 towns, 8 villages and 43 school districts, were using the homestead option. For a complete list, please visit Municipal Profiles.
In addition to adopting the homestead tax option, can "approved assessing units" also phase-in the results of the revaluation?
A. Yes. By passing a local law, approved assessing units can phase in the new revaluation assessments over a five-year period.
This option sounds simple. In reality, however, most assessment officials believe it would be extremely difficult to administer. Maybe that is why no municipality to date has decided to use the transition-assessment option.
Can a municipality that has adopted the homestead tax option revoke it later?
A. Yes, simply by adopting a local law, without referendum, to rescind it before the next levy of taxes.
Drilling Down Into the Coverage
Insurance considerations for energy industry risk managers engaged in natural gas extraction from shale formation.
http://www.riskandinsurance.com/story.jsp?storyId=533336494
By JARED ZOLA, a partner and insurance coverage deputy practice leader in Dickstein Shapiro's New York office, where he is also the co-leader of the firm's oil and gas production liabilities insurance initiative; and KENNETH BERLINE TROTTER, an insurance coverage associate in Dickstein Shapiro's Washington, D.C. office and national co-leader of the firm's property and business interruption insurance initiative
Natural gas exploration and drilling companies have significantly increased shale gas operations at least in part as a result of advancements in horizontal drilling and hydraulic fracturing methods, making it more economically feasible to extract gas from shale formations.
At the same time, natural gas is emerging as the fuel of choice over the next decade for base-load and intermediate power plants, displacing coal, nuclear and even renewable power as the nation seeks to balance cost, reliability and environmental improvement in its emerging energy policy.
Although aggressive shale gas production presents tremendous business opportunities, it also presents significant potential risks. Accordingly, energy companies should carefully consider their potential risks and maintain appropriate insurance coverage to protect their assets.
Insurance is available to cover a variety of risks, including damage and loss resulting from man made and natural disasters. Of particular interest to energy companies is insurance for property damage and loss caused by operational risks, such as well blowouts, and environmental concerns.
For example, if a blowout occurs, energy companies may sustain significant damage to their own property, losses due to business interruption and exposure to third-party liability claims.
In addition to the risks and losses associated with well blowouts, numerous environmental concerns may arise out of allegations that drilling and extraction operations cause contamination of the environment--specifically, underground sources of drinking water.
Finally, there are allegations that vibrations and subterranean pressure changes associated with hydraulic fracturing cause damage to or alteration of the underground and surface geology--even causing earthquakes.
Given these risks, and the extent of the losses and expenses that could be incurred, it is essential that energy companies carefully consider the purchase of appropriate insurance coverage.
Moreover, companies should also carefully consider agreements with other companies involved with the relevant project speaking to indemnification of losses and liabilities or the procurement of insurance. Companies should not assume that they are protected by insurance maintained by another company involved with project operations at a particular drilling site.
APPLICABLE INSURANCE COVERAGES
With the above considerations in mind, the following are some of the more important coverages available to energy companies engaged in drilling and hydraulic fracturing activities:
First-party property coverage pays for physical damage to the policyholder's property; the extra expenses incurred addressing the effects of a covered loss, such as a well blowout; and the costs incurred in establishing the extent of the loss.
Many property insurance policies are sold on an "all risk" basis, meaning that they cover losses to real property caused by any peril not expressly excluded.
Because of the breadth of coverage afforded by an "all risk" policy, once a policyholder shows that it has suffered a loss, the burden of proof shifts to the insurer to prove that the loss is not covered. By comparison, a second type of property insurance--a "named peril" policy--covers only those perils expressly listed.
Business interruption coverage reimburses the policyholder for the amount of gross earnings minus normal expenses that the policyholder would have earned but for the interruption of the policyholder's business as a result of damage to covered property. If a business purchased such coverage, the business may seek as recoverable business interruption losses the expected but not realized profit from the natural gas that would have been extracted in connection with a specific shale play but for the interruption resulting from damage to covered property.
Operator's extra expense coverage reimburses the insured for costs that energy companies incur when regaining control of a well blowout, redrilling expenses, damages paid to third parties for harm caused by seepage and pollution and costs for remedial clean-up measures. Such policies also may provide coverage for liability for damage to third-party equipment under the operator's care, custody or control.
Directors' and officers' (D&O) coverage reimburses companies and their directors and officers the costs incurred defending against and resolving claims of wrongful acts, including allegations that they failed to disclose any environmental and financial risks associated with natural gas fracturing operations. Companies should be aware that many D&O policies define "claim" much more broadly than the receipt of a lawsuit--a definition that often includes any written demand for monetary or nonmonetary relief.
General liability coverage may be implicated if, for example, a third party brings a suit alleging property damage due to vibrations and subterranean pressure changes associated with hydraulic fracturing.
In most instances energy companies will seek coverage for fracking-related claims and liabilities under the property damage liability or bodily injury liability coverages of their general liability (GL) insurance policies. Stacks of GL policies typically are purchased by corporate policyholders, the first-responding policy (in the event of a liability) being "primary," and the additional "excess" policies affording coverage ("attaching") sequentially when loss is incurred that meets or exceeds the indemnity limit of the next lowest policy in the stack.
Under the primary policy, the policyholder typically is entitled to have its defense provided by the insurer if the allegations of a relevant third-party claim present the mere possibility that the claim is covered by the insurance policy's terms. The primary GL insurer's duty to defend its policyholder is thus broader than its duty to indemnify a liability and arises when the suit against the policyholder is instituted--not when a judgment is entered or a settlement is struck.
Although standard-form GL insurance policy language obliges the insurer to defend a suit only, courts in many jurisdictions have found that non-judicial proceedings begun with letters from governmental agencies can represent suits for relevant purposes, if those letters are sufficiently coercive.
For example, if a policyholder hires an attorney to protect its interests upon receipt of an action-forcing letter from the Environmental Protection Agency, the expenses incurred may be payable under the primary GL insurance policy's duty to defend.
Other coverages an energy company may consider purchasing include environmental liability policies, professional (engineering) liability policies, hull & machinery policies and crime (fidelity) policies.
When a policyholder makes a claim for coverage, insurers may raise challenges, such as policy exclusions or defenses, to the availability of coverage.
Whether or not an exclusion or defense applies, however, will depend on the specific facts, the language in the policy and the law of the applicable jurisdiction.
For example, some insurers may assert that a "pollution exclusion" forecloses coverage of a fluids migration claim under a liability policy. However, the applicability of the exclusion may depend on the period of time during which the policy was in force, the specific language of the exclusion and the body of law that applies. Accordingly, without further inquiry and analysis, policyholders should not assume that an insurer-asserted coverage defense precludes coverage.
Pursuing an insurance claim may be a complex and challenging process. Policyholders should consider obtaining the assistance of coverage counsel who, because there are many issues that can significantly affect the existence or amount of recovery under an insurance policy, can help the policyholder comply with policy requirements and present its claim to maximize protection under the insurance policies in light of any coverage issues.
May 1, 2011
Copyright 2011© LRP Publications
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