When many real estate investors hear the terms oil and gas mineral and royalty interests, they might cringe and possibly even run the other way. The unusual thing is the asset profile is very similar to that of a commercial real estate portfolio, yet delivered in a way that tends to be uncorrelated with traditional real estate yields and valuations. This is why an often misunderstood product set can be a perfect diversification tool to a traditional real estate portfolio.
Mineral Interests and corresponding royalties are considered subsurface real estate and are eligible as replacement real property for 1031 exchanges. The mineral royalty owner (MRO) owns a tract or fraction thereof from the surface of the earth downward. A portion of commodities extracted from the land by an operating lessor (OpCo) is paid to the owner in the form of a royalty. This is similar to a landlord/tenant relationship in a busy shopping center where the landlord negotiates for a portion of the gross sales earned by the tenant.
MROs receive royalties in units of actual commodities, such as barrels of oil as an example, which are then marketed for them by the OpCo as opposed to a portion of revenue from the OpCo. The royalty units are considered property of the MRO once the commodity reaches the earth’s surface at the wellhead. This mitigates the MRO’s counterparty credit risk exposure to the OpCo and generally makes the mineral royalty investment bankruptcy remote to the OpCo. Click to read more at www.rednews.com.