Gas Drilling and Mortgages

There's a good thread running over on Liz Bucar's blog, "Mortgage Troubles on Leased Properties" (below the Cochecton township zoning piece.) The thread started with a post about a property owner with a gas lease on their property who was turned down by a major lender for a home equity loan on that property. That was followed up by a post from a PA real estate broker, Jennifer Canfield, who talked with mortgage brokers about this and has been compiling a list of lenders who won't mortgage lease-encumbered property.

It is a significant issue, but not a new one. At every program on the nuts and bolts of gas leasing I've attended in the past couple of years, the difficulty of mortgaging or refinancing a property with a gas lease has been front and center. It isn't a new woodchuck crawling out of a hole. Anyone who was thinking about encumbering their property with a gas lease, and did even the most cursory due diligence, would have been aware of this downside.

In the threads over on Liz' blog, the commenters refer to 'environmental concerns' as the reason for lender reticence over mortgaging leased property. But, from my casual discussions with lenders, I think it's more complicated than that. When a property has a gas lease on it that permits use of the surface for drilling, a third party essentially has the rights to materially change the property. Environmental concerns notwithstanding, those material changes to the surface could affect the value of the property, possibly devaluing the asset that the bank has lent on. Likewise, appraisals become difficult. Any piece of real property comes with a 'bundle of rights' that comprise its value. A gas lease essentially severs one of those rights, gas extraction, from the real property, so it becomes difficult to determine the value of the property without that right to transfer with the real property. It makes valuation very complicated. And in this still-tight lending environment, most lenders don't want to deal with anything complicated or with an unquantifiable risk. So it's not surprising, for the time being at least, that they're reticent about lending on properties with gas leases.

Comments

[take a good look around]

Dave -

You should attend tonight's Town of Delaware Town Board meeting in Hortonville starting at 7:00pm.

Their Gas Drilling Resoultion is on the agenda.

The topic had been tabled at their last meeting in March and is front and center tonight.

They should have a decent attendance.

Liz writes about it on her blog.

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====>take a good look around<=====

[Bix]

Thanks, David, that's a VERY interesting and important development.

By the way, here's some news out today: a natural gas well in Louisiana just went kaboom, and hundreds of local residents were evacuated. http://www.propublica.org/feature/louisiana-well-blowout-forces-hundreds-from-homes

[Eddie]

It is amazing how the towns are so eager to get gas zoning passed before the state and EPA have even made a decision of what is going to happen. Amazing how much corruption is running these small poor townships up here.

[David Knudsen]

Eddie, I don't think you know squat about politics here. The small townships up here are anything but corrupt. Politics here is very personal. Just tonight, the township of Delaware passed a resolution calling for safe drilling. In the townships, it's not a matter of corruption, but rather a very traditional push-pull between Republican "property owner rights" and Democratic "good for the whole".

[Bix]

Well, Monticello doesn't seem to be a shining example of textbook civics, but the small towns here seem to be run on the up-and-up.

I'm generally pretty cynical on such things, but the main ingredient for corruption just ain't here: money!

[ar]

Now, now Dave, not everybody has always thought things were all Jimmy Stewart-y up here. Maybe this court case predated your arrival. It involved claims that the Town of Delaware was operated as a racketeering enterprise. Two juries found for plaintiffs, though their verdicts were gutted by the courts. ---

http://openjurist.org/244/f3d/286/joseph-de-falco--v-john-bernas

[Bonnie]

I disagree David.
I live, breath and vote in the town of Bethel but I can tell you that the towns want gas drilling more than anything. Many land owners want it, farmers want it, and more importantly town officials want it. The gas companies have approached town officials and it seems like wheather the state likes it or not, the towns are changing the zoning to allow for it and getting ready for it.

[David Knudsen]

Bonnie, the point I was countering was the assertion that the townships up here are corrupt. Corruption is not the same thing as having a pro-drilling viewpoint. Because a politician may be pro drilling, and you don't agree with them, doesn't mean they're corrupt.

And regarding the reference to the Defalco / Top of the World / Town of Delaware case, the actual events occurred more than 20 years ago, from 1988 to 1990 I believe. It took a long time for the cases to wind through the courts, and a casual look at the dates on the cite reference — 2000 and 2001 — might lead one to infer that the events occurred much more recently than two decades ago.

[Carl]

are they going to drill in the watershed?

[David Knudsen]

To the person who's posted a comment twice about an issue about purchasing a parcel at a tax auction, I'm not posting it through because it involves an unsubstantiated claim of corruption. If you have a concern about a corrupt official, you should take it to an authority or to one of the newspapers here. This isn't an investigative, expose' blog, and I just don't have the resources to defend against a libel claim.

[rube hayseed]

Republican "property owner rights" translates into this:

A landowner from Fremont who was opposed (and still is from his sign on NY Route 97) to the National Park Service coming to the Upper Delaware River. The gentleman has been bitching about being "taxed to death" and stating in the local papers that Western Sullivan will be "Little Texas" if we open our arms to gas drilling.

In fact, this same landowner pays annual taxes of a paltry *$1200 per year* on about *208 acres* of land which he can't wait to drill on - which equates into $6 bucks of taxes per acre per year due to forestry and ag exemptions for taxes.

So - here's this guy who stands to reap big bucks because he has a lot of land and at the same time blowing real hard that he pays so much taxes.

It's a load of BS.

Check it out for yourself at:

http://co.sullivan.ny.us/Departments/RealPropertyTaxServices/PropertyAssessmentData/tabid/3320/Default.aspx

[Bix]

More gas drilling news: http://www.nytimes.com/2010/04/24/science/earth/24drill.html?hpw

[D]

Dave, any comments on the decision to treat the watershed separately? Interested to know how that might affect places not directly in the watershed, but under where the aqueducts run. Thanks.

[MGG]

True that being pro-gas drilling does not mean you are corrupt, but take a look at the officials that are pro-gas drilling and see how much land they have purchased recently, in Delaware county we know of several such cases

[Bix]

There has been an enormous amount of stuff happening in gas drilling, from the watershed ruling to the test wells to the vibration testing. Personally I think that any buyer who does his homework is going to be concerned, and it may even scare off some buyers. I don't see how any houses sell in Wayne County.

[Tom P]

It appears that it will be very difficult to frack near any of the watersheds in New York with the new legislation requiring additional impact reviews for each potential drilling location. However, that still leaves huge areas in western sullivan county open.

I am looking forward to watching the movie Gasland, which studies the impact of fracking on families across the country. There is a screening in Narrowsburg on May 23 at 4:00 pm.

http://www.damascuscitizens.org/GASLAND2.html

And if you're interested in information about the doc, view this PBS interview:
http://www.pbs.org/now/shows/613/index.html

[Mike Johnson - Mortgage Broker]

Hey David, I just wanted to second the complications that you point out with this type of lending project. Environmental concerns are unlikely to play as large a role as the variability of the property's value.