How Will Fracking Affect Your Property Value (and Mortgage)?
Homeowners and landowners living in fracking hotspots should know how a gas lease can impact their property value — and their mortgage.
Fracking, or hydraulic fracturing, involves horizontal drilling to access hydrocarbon-bearing shale formations located thousands of feet beneath the earth. Fracturing technology stimulates the well by injecting fluids (usually water, sand and chemicals) at high pressure to break apart the rock and release the natural gas.
Currently, a debate is raging over whether fracking is the answer to U.S. energy problems or a serious threat to the environment and public health. Advocates say fracking is safe and that this billion-dollar industry will create jobs and help move the country toward energy self-sufficiency. Opponents argue that methane gas and other chemicals used in fracking can escape and contaminate groundwater. And while natural gas burns cleaner than coal at the power plant, its production may create more greenhouse gas emissions through leaking wells and gas fields.
Fracking has been going on for more than 50 years, but the discovery of the Marcellus Shale in the northeastern United States has thrust it into the spotlight. Estimated to be the second largest natural gas deposit in the world, this area includes much of New York, Pennsylvania and adjacent states, and their governments are grappling with pressure from groups on both sides of the debate. New York currently has a moratorium on fracking while awaiting further review of its environmental impacts.
Fracking and property values
It’s hard to say where the fracking dispute will lead, but what homeowners and landowners can find out now is how their property may be affected by a gas lease — a legal contract between a landowner and a company granting the latter the right to explore, drill and produce subsurface oil and gas.
In an economic assessment report on shale drilling published in August 2011, the New York State Department of Environmental Conservation (DEC) found that natural gas development “would have an overall regional effect of increasing property values” due to the increased economic activity as construction and production workers moved into the area. But the report also suggests that residential properties located close to new gas wells “would likely see some downward pressure on price”— reason enough for some property owners to oppose fracking in their neighborhoods — especially if they don’t own the mineral rights to the land.
Often, surface rights to a tract of land are separated from the rights to the underground minerals. Owners of severed minerals are forever entitled to extract those minerals from the surface property. Surface-only property owners may not forbid mineral owners from such development but still have basic rights and can receive compensation for damages arising from surface operations.
Gas leases and mortgages
Property owners without mineral rights needn’t worry about their mortgage being affected if the separate mineral owner signs a gas lease at a later point. “This cannot be a default of the mortgage,” said Kent Siegrist, an oil and gas attorney based in Tulsa, OK. “Neither party [mortgagor or mortgagee] can be held accountable for the actions of a third party.”
Landowners with mineral rights to a tract of land (especially one that’s adjacent to land with a producing well) could see their property values rise, and signing a gas lease may lead to royalty payments. However, some banks in New York have been wary of granting mortgages on properties leased for gas drilling, and Fannie Mae and Freddie Mac require borrowers to ask for consent before signing a gas lease. But Siegrist says that mortgage restrictions on the execution of gas leases can be checked ahead of time, and if the lender tries to invoke a restriction or declare a default after a mortgage has already been signed, “the landowner would have a bona fide cause of action against the lender.” He also notes that a lender benefits from a gas lease on mortgaged property because bonus proceeds and revenue from gas production are subject to lien.
Tips: Before you sign a gas lease
Consult your state’s guidelines Oil and gas regulations vary from state to state. Some states even have compulsory integration statutes that may allow drilling on your land even if you own mineral rights and choose not to sign a gas lease.
Consider the environmental risks Anti-fracking groups have raised concerns over the environmental impacts of shale drilling, and celebrities such as Josh Fox, director of the 2010 documentary “Gas Land,” and actor/activist Mark Ruffalo have leveraged their fame to bring national attention to this issue. The DEC has regulations in place to protect against pollution, and fracking proponents emphasize that wellbore failures are atypical, but hydraulic fracturing does involve hazardous materials. Earthjustice, an environmental law firm, identifies fracking accidents reported across the country.
Negotiate your gas lease In addition to the cash bonus (up-front payment) and royalty payments (share of gas production from your property), you have some say as to the location of access roads for moving heavy equipment to the drill site, and to reclamation plans and compensation for damages. An oil and gas attorney can assist you with negotiations.
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