When my dad was managing the family O&G I recall he sometimes sold Working Interests but would carve out and retain an Override Royalty Interest. I have some questions about this. How do I determine if this is a financially reasonable action for existing WI? I can only imagine that the WI must be fairly large to start with - but I don’t know what large is. Where do I start in considering this? TIA! TMCCH
It really starts with the net revenue interest for the WI. The size of the WI really has nothing to do with it. You should consult a CPA as the ORRI will be taxed different than the WI as one is passive income while the other is active income.
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I am definitely very familiar with the taxation difference between WI and ORRI. My question really hinges on the business case behind this process. Taking your comment further, I see that it is possible my WI is different from NRI - I forgot to consider this. Thank you. In some cases it is and in some cases it is not. Is my memory perhaps wrong? Was he perhaps assigning mineral interest (not exactly WI) and retaining an ORRI? But I thought this would be a ROYALTY INTEREST - and that ORRI are carved out of WI. I know none of you were “there” - and sorry for this vagueness. Thank you for considering my question!
Have done this same thing. If as an example the WI carries an 80% NRI and you want to sell the WI with a 75% NRI, you would carve out a 5% ORRI. Doing so may limit your potential buyers, but you never know. So you have to know what the NRI of the WI before you can make an informed decision.
I forgot to say that it is not possible in Oklahoma to have the NRI be the same as the WI. Even if a person participates with their own mineral interest, by statute the royalty interest is 1/8th & the WI’s NRI is 7/8ths.
What happen to your ORRI if the new owner of the WI ends up defaulting on their share of the operating expenses? I know a RI is right off the top. But is the ORRI dependent on the WI owner?
ORRI’s are free & clear of operating expenses. Your question would best be answered by the styling of the document.
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