Things that Land Agents Say – Part One
Part Two can be viewed here.
Today I thought I would write some of the things that I’ve heard land agents say to entice landowners to sign oil and gas documents. Part One will cover things that are not specific to a particular type of oil and gas contract, meaning that you could hear these phrases in lease, well-pad, pipeline, or other oil and gas negotiations.
“Don’t worry, we will just call most of your payment ‘damages’ so that you don’t have to pay taxes.” When I hear this phrase, it makes me want to scream. First, please don’t ever take tax advice from a land agent. Call an accountant—preferably a seasoned accountant who understands oil and gas contracts. Second, most damages are taxable per the I.R.S.! Third, for those non-taxable damages (a rare occurrence to begin with), they are generally limited in scope so that they can only be used one time. For those folks that live in oil and gas country it would be common to have multiple leases, pipeline rights of way and possibly even a well pad agreement. If you’ve used up your damages in some of your early transactions, you may not have any more to use! Crop and timber damages (of any kind) are generally taxable at ordinary income levels no matter what you do. Lease bonus money is also taxable at ordinary income levels because it is considered rent by the I.R.S. Sales of mineral rights can be capital gains (lower tax rate) in the right circumstances. Pipeline and well-pad damages can sometimes be considered damages to the residue of your property, which could mean not paying taxes, but can only be used one time. I have seen too many people take tax advice from land agents and they end up almost losing the farm by the time April 15 rolls around. Please call a knowledgeable accountant and oil and gas attorney to help minimize your tax burden.
“Hurry up and sign today, I can only give you this price through today.” This phrase comes in a bunch of different flavors, so you can use your imagination here. The point is the land agent is trying to entice you to hurry up and sign before you ask too many questions. I call these ‘used car salesman tactics.’ Now just like car salesmen, there are good and honest land agents—this is not intended to disparage either profession—but at the end of the day, they are in a sales job where numbers matter. I encourage landowners to remember that at the end of the day their agent has to report into his boss how many signatures he collected from landowners. No land agent wants to finish the day empty. Prices in this industry fluctuate, that’s just the way it goes. Have an attorney review your paperwork and your offer. Make your deal with the information you have in front of you at the time and don’t let yourself feel buyer’s remorse after the fact. Above all else, please don’t fall victim to land agent sales tactics. Take your time and do it right. Even if you do lose a couple dollars, you’ll still come out ahead in the end.