waters of the US (WOTUS)

Repeal of WOTUS Rule Moves Forward

June 28, 2017 (Chicago, Ill.) – The Realtors Land Institute (RLI) stands behind the U.S. EPA’s decision yesterday to move forward repealing the controversial Clean Water rule, also known as Waters of the U.S. (WOTUS), which was put in place in 2015. The move would take the legislation back to what it was prior to 2015 while the agencies involved reevaluate the definition of what constitutes as ‘Waters of the U.S’.

All of this follows President Donald Trump’s executive order on February 28, 2017, which called upon the EPA to review the rule. EPA Administrator Scott Pruitt stated that the intent of the review is to “[Take] significant action to return power to the states and provide regulatory certainty to our nation’s farmers and businesses.”

The Realtors Land Institute has long advocated that withdrawing WOTUS would have a beneficial impact on the real estate sector, especially land real estate. The organization hopes to see the review of the rule eliminate the need for costly and time-consuming permits on waters that were previously unregulated by the federal government.

“RLI looks forward to working with the Administration, EPA Administrator Scott Pruitt and the Assistant Secretary of the Army for Civil Works, as they move forward to develop common-sense solutions to protecting our nation’s water resources while balancing the interests of land real estate and communities nationwide,” said Brandon Rogillio, ALC, 2017 Realtors Land Institute National President.

Learn more about this issue and other legislative issues important to land real estate owners and agents on the Realtors Land Institute’s Advocacy page.

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About the REALTORS® Land Institute
The Realtors Land Institute, “The Voice of Land,” continually strives to maintain its status as the acknowledged leader for all matters pertaining to the land real estate profession. RLI endeavors to remain the essential membership organization for the extraordinary real estate professionals who broker, lease, sell, develop, and manage our most precious resource: the land. The Realtors Land Institute, provides the expertise, camaraderie, and valuable resources that are the foundation for all land real estate professionals to become the best in the business. For more information, visit rliland.com or call 800.441.5263.

Forget the Capital Gains Tax, Full Speed Ahead!

One of my favorite old westerns is “El Dorado”. Yes, it stars John Wayne and Robert Mitchum. Yes it has James Caan and Arthur Honeycutt. And, more importantly, it has Charlotte Holt and the cutest Cary Michelle and, of course, the golden tunes of George Alexander singing the theme song…

In the movie, the bad guy, Ed Asner tries to steal a ranch owned by the McDonald family. In the end, Wayne, Mitchum, Caan and Honeycutt come to the rescue and the ranch is saved. Maybe the best part is when Ed Asner gets shot about a gazillion times at the end. Considering how he treated Mary Tyler Moore about 80 years later, he got what he deserved. The moral of the story is, when the McDonalds thought that they would lose their ranch, the gang came to the rescue and that is what we are going to discuss.

Like the McDonalds, landowners are under attack and now it’s from Congress. Congress is actually considering making changes or even revoking 1031 exchanges. What are these people thinking? Real estate associations, qualified intermediaries, and all kinds of people and groups associated with real estate have been lobbying; however, their efforts may be falling on deaf ears. Maybe Congress should be spending more of its time on spending reform and leave 1031 exchanges alone.

So the million dollar question (before taxes!) is what can a landowner do if 1031 exchanges are no longer part of the tax code to defer taxes. Well, there is good news! If there wasn’t, would I be writing this blog?

There is a great opportunity today for RLI members to assist their clients to defer taxes when the sale of a great property creates a large tax liability. That can be any type of property including a primary residence. Not only is there a way to defer taxes with a 20-year track record of success, but it may also be more flexible than a 1031.

I am fortunate to be one of the few advisors nationwide with access to a proprietary trust that was created by some of the smartest tax attorneys in the country to defer taxes when the sale of a highly appreciated asset creates a large tax liability. The IRS conducted a two-year examination of the proprietary trust and that examination was concluded in Washington DC. Other regulatory agencies have also conducted examinations and had not had any concerns.

Our proprietary trust has a 20-year track record with over 2,000 trusts being successfully created with our largest transaction being over $100 million with a tax deferral of $50 million. The proprietary trust has also successfully passed all 13 IRS audits with no changes recommended by the IRS. Our proprietary trust is on solid legal and tax ground but it is always important for your clients to do their due diligence as well. Because of the flexibility of our trust, almost any situation where there is a tax liability can be an opportunity for RLI members to sell more real estate by deferring taxes. Here are a few of the opportunities where our strategies may be useful.

Imagine for a moment if you could defer your sellers’ capital gains tax, state tax, depreciation recapture, and the Obamacare tax on their hard earned sales proceeds and you can defer them indefinitely. Imagine being able to defer those taxes without 45 or 180 day periods, no loan to value ratios, and your seller can buy any type of property at any time in the future. If it takes a year to find another property, that’s fine.

Imagine that you have a farmer or rancher client that has worked his property for decades and would like to sell and retire. You can sell that property and defer those taxes on his hard earned sales proceeds and give the seller a larger retirement income than if he had to pay taxes first.

Imagine all the times in the past that either your seller’s 1031 exchange couldn’t be completed or 1031 exchanges aren’t appropriate. Being able to defer those taxes today, and without an exchange, provides a great opportunity for your sellers. If you can’t identify a property in 45 days, no problem. If it takes six months, we can still defer taxes. You identify a property and if a problem of some kind occurs and the exchange falls apart, we can still defer taxes.

Has this scenario ever happened: You are selling a great property for your seller but he refuses to accept any offer until he finds a replacement property, and six to eight months later he is still looking for one. What if instead, you sell the property now, defer taxes now, get paid now, and, if it takes a year to find that replacement property, everyone is happy.

Say you found a great buyer for your seller. There is a slight problem. The seller is going to have a large tax liability and would like to defer taxes using a 1031. Unfortunately, the buyer has to pay for the property over four years. A 1031 exchange to defer the capital gains tax probably won’t work but our strategies will.

Say you have three owners of a great property that want you to sell the property for them. One owner wants to take the proceeds and run. The other two owners want to defer taxes. A 1031 probably won’t work but our strategies will.

You have a great client who is thinking about selling his high end residential property. He is going to have to pay millions in taxes. You can defer his capital gains tax, state tax, and the Obamacare tax on the sales proceeds. In gratitude, maybe he will buy a ranch or farm from you.

As a long-time partner of the RLI, I have worked with brokers all over the country. We have deferred millions in taxes and we are now also working with large institutional buyers of rural properties. Our Section 453 tax deferral strategies have been utilized successfully over 2,000 times with our largest transaction being over $100 million with a tax deferral of $50 million.

The bottom line is… relax. If Congress is smart, they will leave 1031 exchanges alone and our strategies can be a great Plan B. If Congress ends 1031 exchanges, we may have a better option to defer taxes, and in more situations. If there is a potential tax liability, let’s chat and see if there is an opportunity to defer that tax liability. Your sellers will love you.

Every time I watch a John Wayne movie except maybe The Quiet Man, Wayne comes to the rescue and I always wish that was me. Now is my time to come to the rescue and help your property owners sell a great property and keep more of their hard earned sales proceeds in their pockets while sending less to Washington and their local state capital.

Happy Selling!

About the Author: David is a Partner at Creative Real Estate Strategies, a 2015 Silver Partner of the Institute, and has been in the industry since the late 70s. His years of experience help him to assist land brokers in helping their clients defer capital gains tax, state tax and depreciation recapture taxes on their client’s sales proceeds when either their clients are unable to complete their 1031 or the client would like to sell and retire but still defer taxes. By understanding these tax deferral strategies, brokers have been able to sell more real estate. David can be reached at 713-702-6401 or at David@cresknowsrealestate.com

Public Relations: The Land Real Estate Professional’s Ultimate Weapon

Public Relations has become the most fundamental tool for shaping public opinion, investment markets, company reputations and business outcomes. As a land professional, your career is tied to a commodity with many stakeholders and many opinions on how land is to be managed and regulated. Far from being a “nice to have,” PR defines success—and failure—in today’s world.

Land professionals and Accredited Land Consultants (ALCs) have a right-down-to-the-soil impact on the physical and economic well-being of America. In a high-risk world, land—particularly commodity-producing acreage—offers roots of stability and a solid base for expansion. Land professionals, including brokers, agents, appraisers and auctioneers, together comprise the infrastructure upon which land is profitably conserved, exchanged and utilized.

Public Relations Gets You Known

But who really knows these things about land professionals?

By survey, one of the biggest hurdles a land professional faces is trying to explain what they do, what their knowledge and skills are, and how to care for the land and livestock on that land—free range, antibiotics vs. organic, and so forth. Ninety-eight percent of the general public has no knowledge of agriculture. This is a strong indication that effective public relations is not in play. The objective of PR is to make your business well-known and highly regarded so that you don’t have to repeatedly explain yourself.

If what you do, your purpose and the benefits you provide as a land professional are not clear to your public, some other perception will take its place—one that usually favors a competing interest.

Public Relations is About Reaching Minds: It Manages Emotions and Directs Attention

Public opinion regarding land management, its resources and the concept of stakeholder (the general public) over shareholder (the owners) is being shaped today by social media. And that social media, uncontrolled, has the liability of amplifying emotions over logic, presenting inaccurate data as fact, and omitting balanced points of view. It is a runaway horse, and only the art and science of public relations can manage.

Strong new community realities, such as sustainability; natural resources stake holding; environmental impact management; the control of interrelated natural systems such as navigable waters (Waters of the U.S. or WOTUS) and wildlife habitats—along with many other concerns—have created tension with private ownership. All of these factors influence legislation and can negatively affect land prices. Look carefully at any new legislation that affects land profits or limits sales—or any successful repeal of legislation—and you will usually find a publicity campaign that preceded it.

PR is often confused with activities that are more properly parts of branding, promotion and marketing, or it is thought to be only a plan to put out press releases now and then. While it has high synergy with these activities—even making them more effective—PR has its own precise scope.

It takes only a quick look at the news today to see that we live in highly opinionated times. People with strongly held beliefs and agendas often seek out only the news and information that support their viewpoints, and will disregard conflicting reports. Imagine, for example, trying to sell a fervent Republican on a Democratic candidate—the facts would be flying back and forth, but neither side would be listening to the other. Impasse! PR would need to step in, find the real issues people care about, and either makes a bipartisan solution well known, push a workable compromise, or show one side (or the other) to be the best solution.

PR—not money—is how the world turns today. It’s PR first that determines how the money will be spent.

As simple as it should be, the buying and selling of land will face increasingly complex challenges in the immediate future as more organized groups and government agencies seek to exert influence on how land is managed, transferred and used. Each will be passionate about their position.

Public Relations Creates Agreement

PR is the art and science of creating agreement and cooperation. It achieves this by framing the real issues involved in such a way that both sides might better work together.

Take, for example, the Clean Water Rule. Its stated purpose is to ensure that waters protected under the Clean Water Act are more precisely defined, more predictably determined, and easier for businesses and industry to understand. A visit to the EPA website shows the scope of the rule. But the comments on the regulations.gov website range from fear that individual farms will be decimated to fears that a government conspiracy aims to take over control of farming.

PR exposes the real issues in a strategic fashion in order to gain agreement, and in so doing, a solution often appears that everyone can get behind. Sometimes it’s simply a matter of reframing an issue to eliminate unproductive bias or false data. We want a clean flow of water. We also want viable farms and sustainable lands. Workable resolutions bring about mutual understanding and progress.

Public Relations is Proactive

A recent seminar by Hertz Farm Management, Inc., revealed that most farmers are over sixty-five years of age, and that forty-two percent of them plan to retire within the next five years. Many of them have yet to identify a successor. The number of farmers under the age of thirty-five is dwindling. These factors could change the characteristic of the farm market within this decade—more farms for sale by auction. A land professional who proactively prepares to take on a leadership position will be able to take advantage of shifts in the marketplace—but to do so, requires a PR strategy. Many prospective buyers are investors. They may run their own numbers and valuations, but they look for brokers with strong local savvy—someone who can connect the dots for them and has easily referenced credibility. Keeping yourself in the news, leading thought with insightful articles, and making public your good works are invaluable.

PR releases are written specifically to change perceptions, create strong affinities, forward strategies and form profitable perceptions. They are not fluff pieces full of bragging. Some common errors that show up too often, wasting valuable time and money, include:

  • Written by a committee. You’ve heard that a camel is actually a horse designed by a committee. Don’t let anything you publish sound like it came from a group. No one will read it, and no media will pick it up. Writing has to connect on a one-to-one basis. PR releases with strong points of view and a persuasive story/argument directed at the right public are pure gold.
  • Deliver a relevant message. It is the whole point, really. However, incredibly, it is often missing or overshadowed by less important details. Every PR campaign has, as its purpose, to deliver a specific message and make it stick in the minds of the public. A message is really what the reader comes away thinking, once he or she has read the release.
  • Keep it lean. Factually, you have about 1/125th of a second to grab attention, and from there, every word has to count. Short and sweet communications get read. They stand out from the ocean of verbosity online.
  • It’s not about you. Bad releases often come off as too self-serving and are rarely newsworthy. How great you are is not news, how you can serve your public is.
  • Not written for humans. Releases and web content cranked out to attract the eyes of keyword searchers with sentences built for search engine optimization don’t engage anyone, and make the reader think the writer doesn’t know what he or she is talking about.

Public Relations is Causative—It Gets Results

As a land professional, public relations technology really is your ultimate weapon. You are dealing with the most basic commodity on earth—Earth—and you are living in a time of unprecedented attention on how we manage our natural resources. Your efficient use of PR can help you get out ahead of non-optimum legislation before it happens; influence those who might otherwise oppose you; secure your business leadership; and create a stable future. These benefit everyone.

This article originally appeared in the 2016 Winter Terra Firma Magazine, the official publication of the REALTORS® Land Institute.

Karla Jo Helms, Public RelationsAbout the author: Karla Jo Helms, is the CEO and visionary behind JoTo PR. She has patterned her agency on a combination of her hard-won Public Relations experience, uncompromising high standards and exacting nationwide market research. Karla hosted two breakout sessions and a round table discussion at the 2016 National Land Conference.

real estate auction

Real Estate Auctions Just Don’t Work In My Area

Real estate auctions just don’t work in my area! Oh, how many times I have heard that over the years. I always find that statement amazing as our company has completed over 1,200 auctions in just the last five years and, as near as I can figure, in my 35-year career I have been involved in somewhere around 2,500 land auctions. Auctions have been around for more than 2,000 years. Records handed down from the ancient Greeks document auctions occurring as far back as 500 B.C. At that time, women were auctioned off as wives. Now, those of us that have been doing this a while know of landowners who might be willing to auction their wives or husbands for a well drained 160 acres of land even today.  All joking aside, if you’re trying to enhance your image as a full service real estate professional, real estate auctions should definitely be a part of your business.

What is a Real Estate Auction?

A real estate auction is an intense and accelerated real estate marketing process that involves the public sale of property through competitive bidding. The word ‘auction’ derives from the Latin word “auctus,” which means increasing. Well run, successful real estate auctions can create momentum for future business for you; increasing your income and enhancing your image as the person that can get things sold.

Is every property a good auction prospect? No and not every seller is a good auction prospect. As a real estate professional, it is your job to understand what makes a good auction property and if your seller will be a good auction prospect. I’ll talk more in detail about qualifying the seller and the property a little later in the article but, for now, let’s look at some types of real estate auctions that I have successfully used in my business and their advantages and disadvantages.

Absolute Real Estate Auctions

In an absolute auction there is no minimum bid. The property is sold to the highest bidder, regardless of price. The advantage of an absolute auction is that it attracts more buyers because they know the property is going to sell. The disadvantage is that it provides no safety net for the seller, which makes it difficult to recommend to seller client’s in some situations.

Minimum-Bid Real Estate Auctions

Sometimes called a minimum published bid auction. In this type of auction the lowest acceptable price is pre-determined by the seller and the auction firm. The minimum price is then stated on all the marketing materials. When the bidding reaches the minimum amount, the property will sell.  This is a good type of auction to use when you have a property that might have been on the market for some time and is market weary. The advantages of this auction is that it lets buyers know what the minimum price the seller is willing to take for the property, and it still creates a safety net for the seller; unlike an absolute auction. The disadvantage is that sometimes the inexperienced agent and a demanding seller may set the minimum bid too high and buyers will not be willing to bid.

Reserve Real Estate Auctions

In a reserve auction, the seller reserves the right to accept or reject the highest bid. The owner, with the advice of his agent, determines the price at which he would be willing to sell the property. This pre-determined price is not published or disclosed to the public. Sellers are not obligated to accept any other price than the pre-determined reserve price or above. The advantage to this type of auction is that it provides a safety net for the seller while still giving the real estate professional the knowledge at what price the seller is willing to let the property be sold. The disadvantage is that many prospective buyers do not want to take the time or go to the expense of investigating the property when there is no guarantee that they will receive the property even if their bid is the high bid. Over the years I have had many buyers tell me that “We don’t come to auctions to bid, we come to buy, and so, until I know that the reserve has been met, I am not going to bid.” This can be a problem with this type of auction, so, it is very important that the seller and agent establish a very realistic reserve price.

Sealed Bid Real Estate Auctions

All bids are confidential. Usually, they are submitted to the agent and then opened at a predetermined time and place. This type of auction can also be used in conjunction with the three listed above. The advantage is that if you have a buyer with a very strong personality or presence in an area and other buyers don’t want to publicly compete with him they can do so. The disadvantage is that by doing everything confidentially, some buyers may question whether there really were other competing bids. You also lose the excitement created at a public out-cry auction that often times will cause competing bidders to pay more than they thought they would for a property.

Multi-par Real Estate Auctions

This type of auction works well for large parcels that need to be offered in smaller parcels to attract the most buyers. It allows the bidder to bid on one parcel or any combination of parcels. The advantage is that it allows bidders who want only one parcel and bidders who may want several or the whole thing to compete. The disadvantage is that the buyer who wants to buy the whole parcel does not need to compete until the end. It also requires a very knowledgeable staff to keep track of bids and help potential buyers submit bids that keep them in the winning position.

There are other types of auctions that can be used, but these are the ones that work best for me. As technology has advanced, online auctions and online bidding is becoming more common. However, since I often hold auctions in areas that I don’t have even good cell phone service let alone internet connections, this type of bidding has been a problem for me. These auctions are being used very successfully in the selling of livestock and personal property, and I do see them becoming more common in the land business in the future.

What Makes a Seller a Good Candidate?

Now, let’s talk about what makes a seller a good candidate for a real estate auction. Here is what I consider the top five questions you need to ask as the real estate professional:

  1. Is there adequate equity in the property?
  2. Is the property being sold to settle an estate or divorce?
  3. Has the property ever been listed?
  4. Does the seller have realistic expectations?
  5. Is the seller familiar with the auction process?

A “yes” answer to these questions would be positive towards an auction. A “no” answer would lead to the need for additional questions to be asked before deciding on encouraging the use of an auction.

What makes a good property to auction?

As a general rule, a property that is in good condition and in a desirable location will sell successfully at an auction. Am I saying that only good, well located properties should be auctioned? Of course not! The auction method can successfully be used in the marketing of just about any type of property. It is very important though that you analyze the seller, the property and the market to see if there would be positive demand for the property.

An auction should be a well prepared and carefully planned event. It definitely is not a one man show.

If you do not plan to become an auctioneer yourself, it is very important that you choose an auction company wisely. There is a saying, “There are three types of lies used in the marketing material of a lot of companies, lies, damn lies, and statistics.” Don’t just rely on the statistics presented to you in their marketing material. It is important that you attend a few of their real estate auctions, and don’t be afraid to ask for references from past clients. The entire auction team needs to be competent and professional in both their dress and their actions. Many times you will have people attend your auctions who are considering an auction on their property in the future. A well conducted auction is a great selling tool, but if the auction is disorganized and poorly ran it will be a reflection on you and you won’t get their future business.

Auctions can be a win-win situation for all. The sellers get their property sold at an acceptable price. The buyers purchase the property at fair market value, knowing the price was determined by open, competitive bidding and you as the agent have a happy client and a successful transaction.

I can’t possibly tell you all the things you need to know about auctions in this article. If you would like to know more about auctions and the auction method of selling real estate I would encourage you to take the Real Estate Auctions course offered by the REALTORS® Land Institute. This course will give you a very good background in auctions and how to use them to market real property.

I can tell you from experience that auctions do work and that the auction tool is one you, as a real estate professional, need to have in your tool box.

This article originally appeared in the 2017 Winter Terra Firma Magazine, the official publication of the REALTORS® Land Institute.

Sam Kain, ALC, Real Estate Auctions LANDU InstructorAbout the author: Sam Kain, ALC, is the Assistant Vice President – Real Estate / National Sales Manager for Farmers National Company in Des Moines, IA. Kain served as the 2005 National President of RLI and continues to be active in the organization as a LANDU Instructor for the Real Estate Auctions course.

The Value And Uses Of Pore Space As A Property Right

The Emergence of Pore Space as a Property Right

Pore space, although rarely thought about, should be viewed as just another private property right. Pore space is generally thought of as a subsurface property right. Although it can be defined in a number of different ways, pore space, by its simplest definition, is the empty space between grains of rock, fractures, and voids.

Until very recently, pore space was hardly considered a property right at all. However, the surge of interest in carbon capture and sequestration (CCS), as well as the need to store salt water produced by the oil and gas industry—as a waste product arising from oil and gas production and from hydraulic fracturing—has made pore space ownership an increasingly popular, yet extremely underdeveloped area of the law.

pore spaceLike most property rights, pore space ownership has evolved out of common law property rights, which are traceable to the old common law maxim known as the “ad coelum doctrine.” The ad coelum doctrine states “cujus est solum, ejus est usque ad coelum et ad inferos,” meaning “to whomever the soil belongs, he owns also to the sky and to the depths.”  Taken literally, the owner of the surface holds title to the entire tract from the heavens to the depths of the earth.  This form of ownership, although no longer as broad as it was originally, is the simplest and broadest property interest allowed by law, which is known as a fee simple interest.  Determining ownership of pore space is very straightforward when a fee simple interest is involved because the fee owner holds title to both the surface estate and the mineral estate.  However, once the fee simple interest is severed into differing estates and burdened with a variety of other property interests, determining pore space ownership can become a confusing and complicated issue.

There are two common ownership structures once the mineral estate has been severed from the surface estate: (1) the non-ownership theory, known as the “English Rule”; and (2) the ownership in place theory, known as the “American Rule.”

Application of the English Rule vests pore space ownership with the mineral estate—which is clearly the current minority rule within the United States.

The American Rule, on the other hand, “involves the severance of a mineral right from the interest in the whole geological formation.”  When applying the American Rule, the mineral estate owns the minerals beneath the land, but the geological formation, is owned by the surface estate.  The American Rule is currently the majority rule in the United States.

In addition, although the American Rule vests pore space ownership with surface estate, the mineral estate still has the right to explore and remove minerals from the land, which allows a mineral estate the right of reasonable use of pore space for mineral exploration. As a result, in states applying the American Rule, it cannot simply be said that pore space belongs solely to the surface estate. It must also be determined if the reservoir has been depleted of minerals because until depletion occurs, the mineral estate still has a right to use the pore space.

We researched pore space law in Arkansas, Colorado, Kansas, Kentucky, Montana, New Mexico, North Dakota, Oklahoma, Pennsylvania, Texas, Wyoming, Michigan, Louisiana, New York, and West Virginia to determine if there is a trend towards vesting ownership of pore space with the surface or mineral estate. Six of the states were undecided, four states have a clear statute vesting ownership with the surface estate, four other states have case law supporting surface estate ownership, and one state had a case arguing pore space could be owned by the mineral estate.

As such, landowners should be mindful of the following legal and practical considerations associated with their pore space rights. Landowners, and those representing them, must be cognizant of how title to pore space can be modified through various contracts, easements, litigation, releases, and other agreements landowners routinely enter into.

Legal and Practical Considerations of Pore Space Rights

Valuation of Pore Space

As surface owners become more educated about pore space ownership and as technology advances, it is highly likely that operators will need to acquire rights to the pore space in order to engage in directional drilling or inject wastewater in areas outside of the drilling units. Yet, placing a monetary value on pore space can be just as complicated as determining ownership. For instance, valuation of pore space will likely be difficult to determine as it will depend on the particular use and what the user is willing to pay as opposed to the actual value of occupation.

CO2 Sequestration

As previously mentioned, pore space can be used for carbon capture and sequestration (CCS). CCS can potentially remove eighty to ninety-five percent of the CO2 emitted from power plants.  Studies have also indicated that global sequestration capacity in depleted oil and gas fields is substantial, with the capacity to store 125 years of current worldwide CO2 emissions from fossil fuel fired power plants.  Although CO2 is routinely injected into subsurface pore space in an effort to aid in the recovery of oil and gas, and though large-scale sequestration sites have been identified within the United States, there are currently no large-scale, commercial sequestration projects underway in the United States.  Still, pore space owners should be mindful of the opportunity and their right to use depleted oil and gas reservoirs for CO2 sequestration.

Underground Natural Gas Storage

In addition to CO2 sequestration, pore space also has the potential to be used for underground natural gas storage. Natural gas, unlike oil, is more easily stored by re-injection into underground rock pore spaces, which are typically geological formations or common sources of supply whose pore spaces formerly held producible hydrocarbons that are now substantially depleted.  In some states, surface owners retain the right to depleted geological formations and; therefore, should request compensation for storage of natural gas in depleted geological formations, and for injection of wastewater produced from out of section wells.

Subsurface Trespass

In additional to potential uses for pore space, pore space owners should be aware of the high potential of a subsurface trespass.

Traditional Oil and Gas Subsurface Trespass

The most obvious example of an actionable trespass in this context is a directional well that bottoms out under neighboring property.  This situation gives rise to an actionable trespass due to the well-established principle of property law that prevents the use of the surface to support mineral extraction activities on other lands.  However, operators can avoid a trespass situation by seeking an appropriate release from the pore space owner.

Hydraulic Fracturing

A subsurface trespass can also occur during hydraulic fracturing. However, courts tend to rule that an injury must occur in connection with the subsurface trespass as hydraulic fracturing prevents underground waste of hydrocarbons by allowing its recovery from tight reservoirs that would not otherwise be productive and thus, meets an important social need.  Although this reasoning wisely protects the well-established and necessary practice of hydraulic fracturing, it also gives an inference that courts may be reluctant to find a subsurface trespass of pore space as a result of hydraulic fracturing.

Secondary and Enhanced Recovery Operations

Secondary or enhanced recovery operations are used to maintain or increase production of a well once the reservoir’s natural production decreases.  Although states often recognize secondary or enhanced recovery as a valid public interest, trespass issues can arise in instances when an operator injects a substance, such as salt water, carbon dioxide, chemicals, or natural gas, into the subsurface of its own property in order to increase production and the injected substance invades the subsurface of the neighboring property.

Generally, when secondary recovery is involved, it appears that most courts are unwilling to find the migration of wastewater onto neighboring properties to be a trespass. This is likely because secondary recovery is in the best interest of the public and industry. With that said, there appears to be no clear case law challenging this logic specifically in the realm of pore space.

Wastewater Injection Wells

Wastewater injection wells can be associated with subsurface trespasses. In this situation, a subsurface trespass occurs when fluids from a wastewater injection well migrate beyond the legal surface boundaries of operator’s rights. It is likely that the operation of many wastewater injection wells result in the subsurface trespass of pore space to some extent, as common sense says that when a commercial wastewater disposal operator only owns one acre yet injects hundreds of thousands of barrels of wastewater into a wellbore on that one acre, the wastewater is migrating to an area outside of that one acre. However, that being said, it would be difficult to prove. Nevertheless, pore space owners should always be mindful of wastewater injection wells near their property and the potential for that wastewater to migrate onto their property. As the law on pore space develops, surface owners may seek compensation from these commercial wastewater disposal operators or may even try to prohibit the injection.

Conclusion

Evaluating pore space as an underground property right should be considered in every land deal. The development of pore space as a valuable property right is an increasing area of consideration for REALTORS®, title examiners, landmen, policymakers, attorneys, and judges. As such, it will be increasingly important to consider the implications every deal may have on this emerging area of the law.

For a more in-depth analysis of pore space, you can download a copy of the 2015 thesis and other writings on the topic by visiting www.LandownerFirm.com.

This article originally appeared in the 2017 Winter Terra Firma Magazine, the official publication of the REALTORS® Land Institute.

About the author: Trae Gray is a Mediator, Entrepreneur, Lawyer, Speaker, and Expert Witness with specialized expertise in ethics and natural resources. With a nationwide practice he is listed by Super Lawyers and The Top Trial Lawyers in America as a Lifetime Member of the Multi-Million Dollar Advocates Forum – something that is achieved by less than 1% of U.S. lawyers. More can be found online at TraeGray.com.

 

About the author: Ryan Ellis, a partner with LandownerFirm, is a legal research and writing specialist with specialized expertise in Class Action, Environmental, Energy, and Natural Resource legal matters. She graduated with honors from the University of Tulsa College of Law where she completed the Sustainable Energy and Resources Law Program, which offers one of the most advanced energy, environmental, and natural resource legal educations in the nation. More can be found online at LandownerFirm.com.

Top Four Considerations When Finding a Real Estate Mentor

I listened to Zig Ziglar say once “The fastest way to get what you want is to help other people get what they want.” I didn’t understand this until I had a real estate mentor for a couple years and realized what Zig said was true. Whether you are the mentor or mentee there are great benefits to the relationship that can be established.

When I was looking for a real estate mentor, four things came to mind when I started my search that I felt were important.

The first thing that was important to me was finding an individual who was successful. The success that I was after was not just in the finical category but rather a list that I constructed when planning who I wanted to surround myself with. Successful to me was an individual who worked with integrity, spent time away from work with friends and family, was healthy, financially very well off, and had a process and system to their business. I have learned you can make more money than you can count. However, if you do not have a passion or dreams to go after with that money, more is actually less.

The second thing I looked for was someone who was not going to be a “card holder,” which also meant that this individual I was after probably was not going to be a direct competitor. When someone is a direct competitor, or sees you as a threat to their business or their current way of life, they most likely will not show all the cards and truly want to help you along your road to success. My mentor choice was a couple hours away and almost never worked in my area which also made it easy when it came to referral opportunities on both sides.

The third thing I looked for was time. How much time am I willing to give to my real estate mentor and how much time is he or she going to give to me. I have a very tight structure to mentor meetings. I want this person’s knowledge and friendship, and know I need to appreciate their attention like it is gold when they offer it to me. First, I list out all my sales numbers, transaction types, goals, and executions. Second, I listen to what they have to say or ask about whatever I have documented. I usually try to keep the time with them to one hour or less and write down three to four action items that I am going to do between the meeting and the next time we meet.

The fourth thing I found important was knowledge outside of my typical “sell more farms intentions.” Once I find the money, what can I do with it so I don’t have to go find it again? How do I make it find me? The mentor I was looking for needed to be an investor with lots of tax knowledge. If you are going to make money to waste it, you can skip the making step and save yourself lots of time. I was looking for someone that had answers to investment and savings questions as well.

If I was going to find another real estate mentor, I would use a simple set of questions for myself. What do I want? When do I want it by? Who do I know or can I meet that will help me to best help myself get it? and when am I going to set up and appointment with that person? In my experience, with the right mentor for you and documented goals, there is nothing the land business cannot provide.

About the Author: Jacob Hart, ALC, is a licensed real estate broker and auctioneer in Minnesota, Iowa, and Wisconsin. His firm, High Point Realty & Auction, specializes in land sales and management of agricultural row crop and recreational ground.  He attended SDSU in Brookings, SD, then studied at the World Wide College of Auctioneering.

1031 Tax Exchanges

Section 1031 Like-Kind Exchanges: Current Threats to A Hundred Year Old Tax Tool

Almost one hundred years ago, Congress enacted Internal Revenue Code Section 1031, permitting deferral of capital gains and recapture tax on 1031 like-kind exchanges. Two primary purposes of the tax law were: 1) to avoid unfair taxation of ongoing investments in property and 2) to encourage active reinvestment. These purposes are even more relevant today in our global economy than they were in 1921. Section 1031 not only permits efficient use of capital to preserve and manage cash flow, it also encourages U.S. businesses to reinvest in their domestic operations, rather than offshoring business activity.

Impact of the Presidential Election on 1031 Like-Kind Exchanges

Fast forward ninety-five years to the 2016 Presidential election. In a surprise finish to a long and sordid year of election drama, Donald J. Trump was elected President and Republicans retained majorities in both the House and the Senate. This trifecta of power centers ratchets up the threat to Section 1031.

Mr. Trump’s refusal to disclose his tax returns during the campaign, and the disclosure of a $916 million tax loss claimed by Mr. Trump in 1995, set off a firestorm of media speculation about tax strategies that may have enabled a tax loss large enough to wipe out his income taxes for up to eighteen years. A plethora of news articles were published, listing various “special interest tax breaks” that ordinary real estate owners would think of simply as common business tax provisions, such as depreciation.  Unfortunately, the §1031 like-kind exchange was swept up in this commentary, mischaracterized as an abusive loophole used by wealthy real estate developers to repeatedly exchange properties and never pay the tax.

This is unfortunate because it is wrong on many levels.  First, Section 1031 is not a loophole; it is a legitimate tax tool used by a broad spectrum of taxpayers including individuals of modest means, farmers, ranchers, small and mid-size businesses, as well as taxpayers at the higher end of the income scale. Second, developers that build or rehab properties and then sell do not qualify for tax-deferral treatment, because their properties are considered inventory, not investment assets. Third, tax is deferred, not eliminated. After reviewing more than 1.6 million real estate transactions over an eighteen year period, a recent study concluded that in one-third of all exchanges, some tax is paid in the year of the exchange, and that 88 percent of replacement properties acquired in a §1031 exchange are actually disposed of through a taxable sale, not a subsequent like-kind exchange.  Tax is ultimately paid on the overwhelming majority of exchanged properties.

The agriculture community has the broadest use of 1031 like-kind exchanges.  Farmers and ranchers use §1031 to combine acreage, acquire higher grade land, exchange breeding livestock and upgrade farm machinery. Retiring farmers are able to exchange their most valuable asset, their farm, for other real estate without diminishing the value of their life savings.

Section 1031 also promotes conservation and environmental goals.  Grants of conservation easements can be structured as tax-deferred exchanges, facilitating programs designed to improve water quality, reduce soil erosion, sustain critical wildlife habitat, and provide recreational green-space for all Americans. Section 1031 makes the economics work so that these landowners can acquire more productive acreage in less environmentally sensitive locations.

Blueprint for 1031 Like-Kind-Exchanges Tax Reform

In June, 2016, House Ways & Means Committee Chairman Kevin Brady (R-TX) and his predecessor, Speaker of the House Paul Ryan (R-WI), announced the “Blueprint for Tax Reform,”  an ambitious Republican plan for radical simplification and complete rewrite of the tax code.

With Republican control of Congress and the White House, a comprehensive tax reform package based on the Blueprint is now expected to be fast-tracked through a process called Budget Reconciliation. Tax reform included in a budget bill that has been agreed upon by both the Senate and House could not be filibustered and would require only a simple majority to pass. The whole process could be concluded within the first few months of 2017.

The authors believe that the Blueprint will achieve three distinct goals:

  1. Create jobs and economic growth
  2. Make the tax code simpler, fairer and less burdensome
  3. Transform the IRS into a kinder, gentler, taxpayer focused agency.

The Blueprint calls for reduction of income tax rates for all taxpayers, with three brackets for individuals at 12 percent, 25 percent and 33 percent. A 25 percent rate would apply to income generated by pass-through businesses, such as partnerships, and a 20 percent rate would apply to C-corporations.  The Blueprint also calls for elimination of the Alternative Minimum Tax (“AMT”) and abolishment of the Estate Tax. Capital gains, dividends and interest income would be subject to a 50 percent exclusion, resulting in effective capital gains tax rates of just 6 percent, 12.5 percent and 16.5 percent.

The path to achieving massive simplification and rate reductions appears to be elimination of most deductions and exclusions in favor of larger standard and personal exemptions.

On the plus side, businesses would be permitted to claim an immediate expense deduction of 100 percent of the cost of newly acquired tangible and intangible business investments, including real estate improvements, but not land. Unlimited net operating losses could be carried forward indefinitely. The flip side is that taxpayers would lose the expense deduction for interest paid on business debt.

Section 1031 and the Blueprint

The Blueprint is silent as to 1031 Like-Kind Exchanges but many of the details are still unknown. There is concern that the tax writers may assume that with lowered rates and full expensing, §1031 would be unnecessary.

It is imperative that 1031 Like-Kind Exchanges be preserved for exchanges of land and other assets that are not covered by immediate expensing. Of particular concern to real estate owners is the potential combined whammy of the inability to expense land value with the elimination of the business interest expense deduction. Given that land values represent approximately 30 percent of the value of commercial and multi-family residential improved properties, and up to 100 percent of agricultural land investments, landowners would be particularly disadvantaged if they had neither the option of a tax deferred exchange nor expense deductions for land acquisition and interest on related debt.

Recent studies on the economic impact of repealing 1031 Like-Kind Exchanges have concluded that without a tax-deferral mechanism, a lock-in effect occurs.  The immediate recognition of a gain upon the disposition of property would impair cash flow and could make it uneconomical to replace that asset.  If property owners are faced with reducing the value of their investments and life savings through capital gains or recapture tax, even with lower rates, they will likely hold onto these properties longer. This leads to reduced transactional activity, slowed rate of investment, and reduced property values. Section 1031 removes the lock-in effect, and permits taxpayers to make good business decisions without being impeded by negative tax consequences.

Proposals to Limit 1031 Like-Kind Exchanges

For the past several years, the Treasury’s annual proposed budgets have included a proposal to limit annual gain deferral under 1031 Like-Kind Exchanges to $1 million per taxpayer and to disqualify artwork and collectibles from tax-deferral treatment.  This Democratic proposal is unlikely to go anywhere in a Republican controlled Congress, but it remains an idea that could be picked up as a “pay for.”

Such a limitation would be particularly harmful to the economic stream generated by like-kind exchanges of commercial real estate, agricultural land and other assets. The value of these assets generates substantial gains. Transfers of large commercial and agricultural properties generate economic activity and taxable revenue for brokers, appraisers, surveyors, lenders, inspectors, contractors, attorneys, accountants, title and property / casualty insurers, architects, exchange facilitators and more. High volume equipment exchanges provide inventories of affordable used assets for small businesses and taxpayers of modest means. Turnover is key to all of this economic activity.

Summary

A broad coalition of organizations, including the REALTORS® Land Institute, the National Association of REALTORS®, and the Federation of Exchange Accommodators are working to make our policymakers aware that 1031 Like-Kind Exchanges needs to remain in the tax code. Like-kind exchanges stimulate economic activity in the United States – property improvements that benefit communities, increase property values, and generate jobs ancillary to the exchange transactions. Recent economic impact studies have quantified that either eliminating or restricting like-kind exchanges would increase the cost of capital, slow the rate of investment, lower property values and reduce transactional activity, resulting in economic contraction of up to $13.1 billion annually.

You can make your voice heard by sending a letter to your legislators, letting them know how important §1031 is to you and your business here or access information to help educate your members of congress.

This article originally appeared in the 2017 Winter Terra Firma Magazine, the official publication of the REALTORS® Land Institute.

Suzanne BakerAbout the author: Suzanne Baker is Executive Vice President and General Counsel of Investment Property Exchange Services, Inc.  She also Co-Chairs the Government Affairs Committee of the Federation of Exchange Accommodators, and serves on its Board of Directors.