Reeves County implemented a new tax this year on mineral rights. It was described to me as a tax on the income potential of the property. I don’t know if it is specific to mineral rights (it should not be in my mind), but it is not an insignificant amount. They have some formula for figuring out what the projected income of a piece of property will be and then tax it. However, it appears to be based primarily on previous revenue generated by the property - so in my mind it is a county income tax.
This year the projected tax will actually be nearly as much as the royalties received off the property (that is after filing a protest and getting about a 24% reduction or told we will receive that amount of a reduction as we have yet to see the tax bill).
For those familiar with this new tax, is my interpretation of it accurate?
Did the operator also suffer a proportional, confiscatory increase? What was the assessed value in the first year your received your royalties? Compare the property role value histories of your interest and the operator’s interest: Reeves Central Appraisal District Property Search
Actual ad valorem taxes have not changed much on this property in the many years it has been in the family - since 1942. As to this new tax, this is the first year of it and I have not basis for comparison, nor do I know if the producer (apache) has been impacted by it. I am assuming not, as this is income tax is targeted the mineral rights owners.
What mechanism/approach would allow your fractional interest to be legally taxed by Reeves county at a higher rate than Apache’s larger fractional interest.
There are two leases on the family property near Toyah - 71-31/32. One is Ashe and the other Birch. Totals six or seven wells. Whereas the tax notification from the Reeves Appraisal district specifies the acreage, the statements from Reeves for this tax specifies each individual well.
This is the ad valorem tax on the producing minerals which is assessed on a per RRC lease basis (could be one or more wells in the RRC lease number). Reeves County sent out Notice of Appraised Value in the spring. The appraised value for the well is set by Thomas Y Pickett & Co based on the estimated economic length of life of the well, oil and gas prices, etc. Other counties use other appraisal companies, but the process is the same. Generally, to reduce the appraised value, the oil company protests the economic life of the well be reduced because it will be unprofitable to operate the well(s) before the end of the physical life of the well. The appraisal value is supposed to be the discounted value of the estimated stream of revenues over time that the mineral owner will receive. This is the market value of your minerals if you decided to sell your minerals. You will receive separate tax statements from the county and the school district. The combined tax rate for the county, school district, hospital district etc may total around 5% of the market value of your mineral interest in the well. It is the same process of taxing other real estate such as a house - the tax rate applied to the market value of the house. The minerals are not taxed until they are producing. Surface is always taxed and statements are sent separately. It is not an income tax .
Well during my protest of the valuation they utilized statements from me to help set the basis, so in essence they were using our income as the basis of the tax. In my simpleton eyes that seems like an income tax. In our case the value they were using was significantly higher because of the early production gas wells starting out high. The 2019 numbers ($$$$$) was much lower, which from what I can tell is the norm for gas production. I know legally, Texas would not allow an income tax by any county/local taxing entity, but for us the result appears to be an income tax.
On the Reeves CAD I found three entries for Birch unit and three for Ash unit
Apache’s interest is ~75% in each.
For the Ash Unit #401AH the initial view shows the “appraised value” as $13,351,818 but when one opens the item the “assessed” and “taxable” values are listed as $6,675,909. Apache’s ownership is 75.3%. Its **Estimated Taxes With Exemptions is $126,477.43 and its Estimated Taxes Without Exemptions is $139,829.25. Lease Name: ASH UNIT , Lease No.: 287029 , Well No.: 401AHWell Type: Gas began producing in December 2018.
Not sure of post production deductions - will have to review our lease documents.
From the recalculated report from CAGI. I am guessing the RI factor is for percentage of ownership.
Birch wells values (Ri=0.23010)
101BH - 121,448;
102ah - 97,336;
103BH - 174,162;
Ash wells values (Ri=0.01561512)
101ah - 183,530;
102bh-171,507;
401ah - 160,907.
The initial notice of taxes from Reeves totaled to about $22,000 for the six wells. I went back and reviewed actual disbursements for this year from apache and they were higher than I thought. However, the last 4 months or so were only about a 1/4 of the first part of the year.
As you can tell, I am pretty much out of my element here. I really wish Reeves would get us our tax statement for this new tax for 2020.
Reeves County will not receive the appraised value until 2020 because it will be based on the average oil prices and average gas prices for January through December 2019. You should receive the notice of appraised value sometime between mid April and June 1.
It may seem like an income tax, but it is the only way. Conventional real estate may be valued three ways (1) recent comparable sales, (2) replacement value, and (3) income approach for income producing properties.
For O&G minerals, the first two approaches are impractical for county assessors, so they rely upon the only feasible valuation approach, the income approach of modeling future net operating revenue.
I dealt with the Capital Appraisal Group rep by the name of Trent. After being provided what we actually received this year as compared to the data they had which was based on early production values, did modify our assessment some. They provided assessments of each well with projected production going out to 2028 in grid form and 2040 in chart form.
I was prompted to reconsider our position when my mother received an offer in the mail this weekend that translated to about $5k per acre. My cousin, who has 50 percent of the property (mom has 25 percent) is of the opinion that is way too low, but he too is pretty wary of where this new tax is going.
Also, does anyone have any experience with the Texas Resource Group - I believe out of the Dallas area?
Did the valuation company explain why your tax (or valuation) may be reduced 24%? 24%, that’s huge. You mention the well depletion curve, which is a well known phenomenon.
The appraiser indicated after reviewing actuals vs estimated, he may not have been aggressive enough in projecting the reduced production rates. Since this stuff is all public domain, here are my numbers (well for my mom’s percentage) for the appraisals (well number initial valuation revised valuation; well number initial valuation revised valuation):
Original total valuation:1193649 Revised total valuation: 908890
The way I figure it, that is about 23 percent decrease. I suck at this stuff. I am a systems person. None of this stuff, including the statements from Apache come in a format I can easily digitize into a spreadsheet. That would be nice.
I have to admit I didn’t read everyones’ response to the question, but the Texas Comptroller’s Office Property Tax Division defines how minerals are to be appraised and, to my knowledge, there’s been no changes in the procedure since I worked for them back in the late 1990’s.
As to the process, I know little. It was the tax itself. We had not seen this one before. I would have thought it would be part of the taxing done through the producer (we see reference to taxes paid to various entities on our statements) and not the mineral owner. It looks like double dipping to me. If they are going after revenue potential, then in my mind every property owner in the county should be assessed on their property’s potential to earn revenue, not just mineral owners.
In some states, the ad valorem / property taxes are levied on the operator which then parcels the tax out among the owners. In Texas, the ad valorem tax on a well is allocated among the owners (operator, other working interests, royalty owners, overriding royalty interests) based on their decimal interests and who all pay directly. It has been this way for many decades. Be glad that you now have operating wells on your minerals and are having to pay the tax. Many others are waiting for their first wells.
