What are mineral rights?
Investors are looking for other options to protect their capital due to recent events, economic uncertainty, and market volatility. Real estate has been hit with unprecedented challenges due to the decline in rental incomes as a result of economic reactions to the Coronavirus pandemic. You may think of traditional or commercial office buildings when you think about real estate investing. These are great investments but there’s another asset class that investors need to be more aware of.
Mineral rights can be purchased, sold, or leased just like other real property. Mineral rights are often separable from the surface estate making them more liquid than traditional real estate. Subsurface minerals in the United States are typically privately owned. Companies that are able to extract natural resources from the ground can lease the right to develop these minerals. We buy mineral rights in Pheasant Energy in cases that have oil and gas leases that are producing oil and gas and are paying royalties.
Surface rights are landowners’ rights to the upper boundaries of land, water, and other substances. These rights do not include mineral rights. The ownership of surface rights does NOT necessarily mean that you have mineral rights or air right ownership, as we mentioned earlier.
Subsurface rights are also known as “mineral rights” and allow you to profit from any organic or inorganic substance below the surface. Florida Statute 704.05 states that a mineral rights owner can legally enter a property without consenting to the surface rights owner to extract minerals from its subsurface.
The right to use the vertical space above a property’s surface is called air right. The property owner who owns the air rights has the right to use, control, and occupy the air above their property. This right is not unlimited and can be subject to zoning restrictions as well as reasonable use by neighbors and other people for different purposes, such as aircraft.
A niche asset class that can generate long-term income
Mineral rights are leased by energy companies, which creates royalty for mineral rights owners. They receive their pro-rata share from the hydrocarbons extracted from their land. Mineral rights owners will usually receive 12.5% to 25% of the revenues from wells that are drilled on their land. Investors who want to diversify their real estate portfolio have a unique opportunity. They can move capital into an asset class that is more liquid and generates recurring income based on production. Additionally, tax code 1031 allows them to defer capital gains tax by reinvesting proceeds from the sale of mineral rights. This provides steady, predictable revenue. A royalty owner is not responsible for unexpected costs, repairs, or vacant properties. The cost of drilling wells or developing the land is not the responsibility of a royalty owner. This responsibility has been transferred to an operator.
Success is dependent on the success of your mineral selection process
You can get immediate returns by buying mineral rights in areas that have proven cash flow and are rich in-ground resources. Investors want to have a diverse portfolio that includes cash-producing properties and undeveloped properties. To ensure that you acquire the best assets with cash flow and potential growth, look for companies where engineers, landmen, and geologists review every deal. Companies that use sophisticated technical analysis and rely on industry experience, among other information, are better equipped to identify and quickly acquire undervalued assets. This same method identifies underdeveloped land that can be quickly developed, providing additional cash flow and increasing your exposure to the upside.
What is the importance of this?
One of the most basic forms is the private ownership of land, also called “fee simple property”. This includes the ownership of the property’s surface, subsurface and air rights. A landowner does not have to sell the property with all rights intact. This includes Florida ranch land. A landowner can separate the ownership of the property to sell, lease or transfer the air, surface, and subsurface rights of the property to other people. This can result in partial ownership or a split estate. Potential buyers may be faced with major difficulties if the rights to property are sold, leased, or transferred separately.
Split estates recognize the mineral rights ownership as the dominant estate. Mineral rights owners are entitled to carry out activities that are “reasonably required” to extract minerals from the subsurface. This is even if the owner of surface rights objects to them. Some agreements may stipulate that mineral rights owners may extract minerals from the subsurface or lease mineral rights at any moment, regardless of any effect on the property’s surface.
Knowing your rights as a buyer for ranch land in Florida depends on the intended use is key to making an informed land investment decision. A land professional is recommended in order to determine if a property’s rights have been lost. Our agents and brokers at Pheasantenergy have a wealth of knowledge and experience in leasing and sales of land. This will ensure that you are protected and preserved as a landowner.