When Should Properties with Gas Leases Start Paying Higher Real Property Taxes?

Incentives, bonuses, and royalties paid to landowners who sign gas leases are taxable as ordinary income. But when do properties with gas leases become subject to taxation as gas producing properties - when the gas lease is signed or when the well is drilled or when the well starts to produce. It seems to me that the answer is when the lease is signed and is payable by the landowner unless another party owns the mineral rights.

The New York Real Property Tax Law (RPTL) provides a uniform, State-wide method of valuing gas producing properties for real property tax purposes. It mandates the assessment of gas properties in production separately from all other interests in the property (e.g., land, buildings).

Gas producing properties are assessed as economic units. Economic units include all the real property subject to taxation and assessed in accordance with the RPTL. Before this law, methods of assessing gas producing properties were determined by local assessors and varied throughout the State. In addition, assessors were not required to assess land separately from oil and gas rights, even when owned by someone other than the landowner. The reason for assessing mineral rights separately from the land itself recognizes the fact that the ownership sometimes differs.

To compute the assessment of a gas economic unit, the assessor must multiply the amount of production by the appropriate unit of production value. The production used in the calculation is from the production year preceding the applicable taxable status date as reported by the producer. The result of this calculation must be multiplied by the most recent State equalization rate or special equalization rate. When the rate exceeds one hundred, the special equalization rate of one hundred must be used which has been established by the State Board for this purpose.

The Real Property Tax Law provides for the assessment of gas economic units to be based on measured annual production during the life of the well.

In a case where annual production may be nonexistent due to circumstances that prevent production, each gas economic unit is subject to a minimum assessment for two one-year periods. These assessments are based on a minimum annual production equivalent to 2,400 MCF and are only applied once during the life of a gas well. Upon completion of the second year minimum assessment, a gas economic unit must be assessed on actual measured annual production of gas.

No minimum assessment may be applied to any gas economic unit existing on or before January 1, 1986. In this case, gas economic units may be assessed only on actual measured annual production.

Economic units including gas rights are not eligible for any exemption from taxation, and/or annual charge except if they are owned by a school district, The Board of Cooperative Educational Services (BOCES), or if owned by an organization whose property is exempt.

Overall Steps of the Assessment Process for Unit of Production Values

Step 1: Local assessor requests production data and ORPS (Office of Real Property Services) requests economic profile reports from producer.

Step 2: Producers complete and file production data with assessor and economic profile reports with ORPS.

Step 3: ORPS processes and analyzes economic profiles and calculates discount rates to derive unit of production values.

Step 4: State Board establishes tentative unit of production values and notifies assessors, producers and county directors.

Step 5: A hearing is held to receive comments on tentative values.

Step 6: A review of hearing comments may revise tentative values, as necessary.

Step 7: Department of Environmental Conservation processes and distributes well permits and production information to county directors for future release to assessors.

Step 8: State Board certifies final unit of production values and distributes values to assessors, producers and county directors.

Step 9: Assessor derives the assessed value for each economic unit by multiplying the unit of production value times the production and then times equalization rate.

Step 10: Assessed values of all oil and gas economic units are set on the tentative assessment roll.\

Step 11: After grievance day and after Board of Assessment Review decisions are made, the values are set as part of the final assessment roll.

In summary, the methodology for the valuation of producing gas and oil properties can be stated: First, attain the production decline rate of a field from past operation and the current production for the year of the appraisal to calculate the total production over the economic life of the well or property; Second, use the price per thousand cubic feet (MCF) of gas and the expense for production of the gas to project the income stream for the economic life of the well; Third, apply the rate of return (or discount rate) to the income stream to yield the value of the reserve.

At this point, it should be noted: The unit of production value, when multiplied by the annual production for the "economic unit", yields the value of the "economic unit". This value is the value of the reserve, not the value of the annual production.