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hoa and minerial rights

Started by BobJ1 • 39 replies • 3932 views

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BobJ1 (Texas)
Posts: 4
Posted:
we have a commons area of 15 arces, on the deeds to our property our deeds have lot # and states&part of common area.we have found GAS WE SOULD THE MINERIAL RIGHTS FOR $330,000 PLUS ROYALTIES OF ABOUR $24,000 PER MONTH OUR BOARD CLAIMS THIS THEIR MONEY,I BELIVE IT SHOULD GO TO THE HOME OWNERS AS THEY OWN THE PART OF THE COMMONS AREA.WE ARE IN TEXAS A VERY OLD H.O.A.WOULD YOU HAVE ANY THOUGHTS THANK YOU
BruceF1 (Connecticut)
Posts: 2,535
Posted:
Wait a minute.......

WHO sold the mineral rights? Who is WE? What homeowners own PART of the common area? By definition, ALL homeowners should own ALL of the common area. I'm confused.
RobertR1 (South Carolina)
Posts: 5,164
Posted:
Bob,
I have a comment if I read you correctly. Don't even hang around here trying to resolve your issue. You really need a Professional advisor, one you all have complete trust in. You are talking big bucks here and God knows how complicated this is going to get. You say you have even sold some rights. Just a guess but as a group of owners you don't want to go about this piecemeal, you meed a complete package you all can approve of. I am happy for your good fortune, and wish you all the best.

If you are at odds with your Board, try finding out by sitting down with them and understaning where they are coming from. You all should have the same goals, as you all own a share in the common property. Remember, if you don't reach agreement with all owners of the common property, you have a major hurddle to overcome, this will not be a majority rules decision nor a Board rules decision, this will be a decision that involves real property that runs with the land, and the courts will be involved, sure as you are wearing a six shooter on each hip,
MaryA1 (Arizona)
Posts: 7,043
Posted:
Quote:
Posted By BobJ1 on 07/18/2008 8:25 PM
we have a commons area of 15 arces, on the deeds to our property our deeds have lot # and states&part of common area.we have found GAS WE SOULD THE MINERIAL RIGHTS FOR $330,000 PLUS ROYALTIES OF ABOUR $24,000 PER MONTH OUR BOARD CLAIMS THIS THEIR MONEY,I BELIVE IT SHOULD GO TO THE HOME OWNERS AS THEY OWN THE PART OF THE COMMONS AREA.WE ARE IN TEXAS A VERY OLD H.O.A.WOULD YOU HAVE ANY THOUGHTS THANK YOU

Bob,

Are you in a condo or planned community? In a condo assn each unit owner owns a portion of his unit and an undivided or joint ownership of the common area; however in a planned community the member only owns his residence; the common areas are owned by the HOA. I would think only the owners of the common area could reap the benefits of selling the mineral rights.

But, boy would I love to own that 15 acre parcel!
BobJ1 (Texas)
Posts: 4
Posted:
SOORY I WAS NOT VERY CLEAR EACH OF THE 614 HOMES IN THE SUB STATE THAT THE HOME OWNS PART OF THE COMMON AREA. OUR BOD MADE THE DEAL FOR THE COMMON AREA WITHOUT A VOTE OF THE HOME OWNERS.AND YES ALL 614 HOMES OWN THE COMMONS AREA AND SHOULD HAVE VOTED ON THIS.IN ADDITION TO THAT AGREEMENT EACH HOME OWNER DID A SEPERATE AGREENMENT FOR THEIR PROPERTY ON GAS RIGHTS. OUR BOD CLAIMS THERE DEAL IS FOR THEM ALONE TO DO AS THEY SEE FIT AND THE GOOD OF THE HOA THEY REFUSE TO PUTT HIS TO A VOTE. A TOTAL MESS.THANK YOU FOR YOR INPUT
BobJ1 (Texas)
Posts: 4
Posted:
I WOULD AGRRE BUT OUR DEEDS AND THE TAX ROLE STATE,"AND PART OF THE COMMONS AREA.THANK YOU FOR YOUR INPUT
GlenL (Ohio)
Posts: 5,491
Posted:
Bob GET AN ATTORNEY ASAP this is not the place to get these types of answers. Mineral rights are a complex legal issue especially when they might actually produce something of value. While I would assume that the money would go to the HOA from the common areas what can then be done with the money would just be a guess depending on what the documents call for and since most documents are silent on this type of windfall until it is adjudicated it's anybody's guess. Does your deed grant you the mineral rights for what is under your property? One bit of advice though, don't sign anything until a lawyer looks it over. Second bit of advice don't let the proposed windfall tear your community apart to the point where the lawyers get all the money.
Studies show that 5 out of 4 people have problems with fractions
RobertR1 (South Carolina)
Posts: 5,164
Posted:
Bob.
Read the above post very carefully. You waste anymore time ignoring this advice, you do so at your own peril. You are headed for the last sentnce as stated above, in fact, I suspect you or fellow owners are out spinning around doing more damage than good. Good intentions will not cut the cheese here. I also suspect, like a lot of posts, we are being hand fed a selective bunch of facts and non-facts. It is obvious this has been going on for some time and many discussion have been held by many different people. It would not even help us if we sat in on all those meetings. Above, Glen writes in Block letters. "GET AN ATTORNERY ASAP."
That specifically means he is calling your attention to something important, VERY IMPORTANT. It now depends on how much you want to contribute to the solution, or, my guess would be, how much you have to offer. Up to now, others have received some professional advice. They seem to be way ahead of you in the Race for the Chips.
KirkW1 (Texas)
Posts: 1,665
Posted:
Bob,

First please turn off the caps lock. It would be easier to read with no uppercase then with all uppercase.

But it would seem at first that the board sold something that doesn't belong to them and you should get an attorney if for no other reason then your BOD is not likely to give heed to what we say anyway.

While I suspect the BOD could get away with selling the rights for the 15 acres and declaring that to be HOA money, the rights of each property remain the possession of the property owners.

All the same, I would advocate that the sums of money you mention remain with the HOA to fund its activities. And you should put limitations on how much can be spent without a general meeting. Here is how I see the breakdown:

The initial money would represent $527.46 for each house. The monthly amount is equal to about $39.09 per house. Since you have 15 acres of common area I would guess that you do not live in a low income neighborhood. If this is the case, then neither amount is a lot for each house to receive in a check. But the amounts could be quite significant to the operation of the HOA. In fact, I would hazard a guess that this would pretty much eliminate dues as your HOA now stands. Or you could instead use it to expand amenities though I would advocate that it also fund reserves on said expansion.

All the same, your BOD is headed for legal action. And I think it would be better to recall them then have to fund a lawsuit. Especially since said suit could likely either delay the deal or put the total sum into an account that nobody can touch while it the suit is settled.
MaryA1 (Arizona)
Posts: 7,043
Posted:
Bob,

Glen has offered very sound advice -- GET AN ATTORNEY ASAP!!! Even if the BOD has hired an attorney to handle this I would suggest all the homeowners get together and hire their own attorney. Shouldn't amount to that much if the cost is split between all the members. This is a topic best left to legal minds to sort out.
MicheleD (Kentucky)
Posts: 4,491
Posted:
GAS rights?

Not OIL rights?

MaryA1 (Arizona)
Posts: 7,043
Posted:
Yeah, I noticed that too, Michele. When I saw TX, I naturally thought OIL!
BobJ1 (Texas)
Posts: 4
Posted:
yes gas rights
KirkW1 (Texas)
Posts: 1,665
Posted:
North Texas is going through a HUGE boom with natural gas. While there has long been some natural gas production in the area, it has become known that the supply of natural gas in what is now known as the "Barnett Shale" is huge. In addition, the ability to drill horizontally has become the norm and so gas can be extracted from huge areas with a very small footprint.
SusanW1 (Michigan)
Posts: 5,202
Posted:
Our private subdivision has 250 homes AND several common areas around the sub. The streets and canals are owned by the HOA, having been deeded over by the original owner of the land. Lots were then sold off, and "members" get water, roads, etc.

If oil or gas were "discovered" on any of the commons areas, the Association would administreate the money (revenue), but if there was not a Reserve Fund plan or a plan for the money, it would have to be divided up between the members. That's how a not-for-profit operates. All revenue must be designated for use. Any "excess" belongs to the residents.

RobertR1 (South Carolina)
Posts: 5,164
Posted:
Susan,
Haven't got a clue about this kind of stuff, just curious.
Isn't the restriction as you wrote it , and I have no idea, open ended in that as long as the Board can come up with a plan" to use the money, they are no restrictions?
SusanW1 (Michigan)
Posts: 5,202
Posted:
The Members should decide. For example: vote to build a community center OR return $20,000 in "overage revenue" to each Member?

What one do you think would pass?

When there is an unexpected incoming large revenue, it must be designated for use, otherwise, it gets dividey up between all.

BruceF1 (Connecticut)
Posts: 2,535
Posted:
I think everybody has forgotten about the IRS.

I hate to rain on the parade, but you don't think the IRS is going to let you keep all of that windfall, do you?
KirkW1 (Texas)
Posts: 1,665
Posted:
Quote:
I hate to rain on the parade, but you don't think the IRS is going to let you keep all of that windfall, do you?

There will be income tax on the windfall, but that is no reason to not make good use of it. Upset doesn't even begin to describe where I would be if my HOA board decided to turn down such a windfall just because of income tax. Even if you pay 28% tax on it, it is still better then not having an income at all.

Certainly it could change which of the tow forms you file. But again, focus on the gain not on the tax.
MaryA1 (Arizona)
Posts: 7,043
Posted:
Quote:
Posted By BruceF1 on 07/21/2008 5:40 AM
I think everybody has forgotten about the IRS.

I hate to rain on the parade, but you don't think the IRS is going to let you keep all of that windfall, do you?

Bruce,

To file the 1120H, at least 60% of the assn's gross income for the tax year must consist of exempt function income (which is primarily assessments). So if this "windfall" amounts to more than 40% of the total income, they would have to file the form 1120 and be subject to paying the 30% tax rate on their TOTAL income. Although the tax rate is also 30% on the form 1120H it is only computed on non-exempt function income and a $100 standard deduction is given. Many assn's end up having no tax obligation at all.
MaryA1 (Arizona)
Posts: 7,043
Posted:
Quote:
Posted By SusanW1 on 07/21/2008 5:15 AM
The Members should decide. For example: vote to build a community center OR return $20,000 in "overage revenue" to each Member?

What one do you think would pass?

When there is an unexpected incoming large revenue, it must be designated for use, otherwise, it gets dividey up between all.


The HOA should think twice b/4 just arbitrarily returning any of this "excess income" to the members. To qualify as an HOA under Title 26, Section 528, and file the tax form 1120H (specific to HOAs), ". . .no part of the net earnings of such organization inures to the benefit of any private shareholder or individual." This is why assn's that want to file the form 1120H will deposit any excess assessments in the reserve account at year-end. However, if the assn chooses to file the form 1120, any excess assessments may be returned to the members, however, the members must vote on this and make the decision whether to receive the excess assessments or apply them to the next year's assessments.

Nonprofit corps are not designed to make distributions to the members; rather any excess income is used to further the goal of the organization. The purpose of a nonprofit org. is to benefit (1) the public, (2) a specific group of individuals, or (3) the membership of the nonprofit. HOAs fit into the last category.
MicheleD (Kentucky)
Posts: 4,491
Posted:
This is an incredibly informative discussion!

In Kentucky the only "mineral" rights we'd have to worry about is if somebody found a bourbon "still" hidden in the common area somewhere!

BruceF1 (Connecticut)
Posts: 2,535
Posted:
Quote:
Posted By BruceF1 on 07/21/2008 5:40 AM
I think everybody has forgotten about the IRS.

I hate to rain on the parade, but you don't think the IRS is going to let you keep all of that windfall, do you?

BruceF1 (Connecticut)
Posts: 2,535
Posted:
Quote:
Posted By KirkW1 on 07/21/2008 6:58 PM
But again, focus on the gain not on the tax.

I didn't lose sight of the gain. It just appeared to me as though everyone had lost sight of the fact the association might not see 100% of it. If you don't plan for that possibility, you may be sorry later.
BruceF1 (Connecticut)
Posts: 2,535
Posted:
Quote:
Posted By MaryA1 on 07/21/2008 7:03 PM
To file the 1120H, at least 60% of the assn's gross income for the tax year must consist of exempt function income (which is primarily assessments). So if this "windfall" amounts to more than 40% of the total income, they would have to file the form 1120 and be subject to paying the 30% tax rate on their TOTAL income. Although the tax rate is also 30% on the form 1120H it is only computed on non-exempt function income and a $100 standard deduction is given. Many assn's end up having no tax obligation at all.

I am aware of this, but $330K is a lot of money (and that doesn't even include royalties which are $24K per month. What is Bob's HOA's annual budget? For $330K to be 40%, then their present budget (assessments) would have to be $495K per year to come out to 60%, or about $806 per year per home (614 homes)(or about $67 per month per home). Now, that's not much. Our HOA assessments per home are more than that. So, they might be OK. But, I have seen annual assessments far less than that for some HOAs that post in this forum. So, if Bob's assessments are in that category, then $330K could be significant.
BruceF1 (Connecticut)
Posts: 2,535
Posted:
Mary,

And, carrying the arithmetic a little further, just for fun:

The 60/40 point is $825K total income if the nonexempt income is $330K. (330 = 40% of 825 and 495 = 60% of 825).

Case 1 - Assessments exceed 60% of total income. Let's say they are just barely over at $500K. Then, the association pays 30% tax on only the $330K. That's $99K, so they are left with $231K out of the $330K. (I've neglected the $100 exemption. It's peanuts compared to $330K and amounts to $30 less tax.)

Case 2 - Assessments are under 60%. Lets say assessments are $470K so that total income is $800K. Now they have to file Form 1120 and pay tax on the entire amount, so that's $240K. Thus, they are left with $90K out of $330K.

So, let's hope their assessments are more than $806 per year per home.
GlenL (Ohio)
Posts: 5,491
Posted:
Let's hope they get some competent legal representation and tax advice and don't squander their good fortune fighting among themselves.
Studies show that 5 out of 4 people have problems with fractions
MaryA1 (Arizona)
Posts: 7,043
Posted:
Bruce & Glen,

Your calculator must be smoking, Bruce.

Doing a little more calculating. . .

If their exempt function income does NOT amount to 60% they will be faced with filing an 1120 and paying a 30% tax rate on their TOTAL income. Not knowing what their total income is, I've only calculated the tax obligation on this "windfall". The assessment income x 30% would have to be added to these figures.

1) $330,000 for selling the gas rights x 30% = $86,400
2) $24,000/m royalties x 12 m $99,000
3) $24,000 for only one m $7,200

I agree, they better not only find a competent attorney, but a good financial planner and CPA. They will need to invest this money to recoup some of the loss of tax obligations. And, we don't even know if they are obligated to file a state tax return. I don't know if TX has state income tax or not.
MaryA1 (Arizona)
Posts: 7,043
Posted:
Sorry, I transposed the figures for # 1 & 2. Here are the correct figures:

1) $330,000 for selling the gas rights x 30% = $99,000
2) $24,000/m royalties x 12 months x 30% = $86,400
CharlesB10 (Texas)
Posts: 4
Posted:
Bob-

There is no question that this is a big mess. There is a serious legal question, based on your facts as described, as to whether or not the severance of the mineral rights is even valid. I can't imagine the company would have purchased it without a vote of the membership. I suspect it's Chesapeake Energy so I would be interested to know.

Very interested in knowing how this turns out.

Charles W. Branham, III
http://www.branhamlegal.com/news.php
CatherineB (Louisiana)
Posts: 1
Posted:
Does anyone have experience with HOA and minerl/royalty rights in Louisiana? If the association did not recieve 60% of its income from dues due to royalty income, and thus lost its tax exemption for one fiscal year, but maintained the 60% income requirement the next year, would the tax exemption continue?
GlenL (Ohio)
Posts: 5,491
Posted:
Catherine, this too is something that should be discussed with an attorney.
Studies show that 5 out of 4 people have problems with fractions
DonnaS (Tennessee)
Posts: 5,671
Posted:

Glen,

The original post was dated in July 2008. Hopefully this has been resolved. It is too bad that we don't get follow ups on these really interesting questions.
MaryA1 (Arizona)
Posts: 7,043
Posted:
Catherine,

I believe the answer to your question would be yes. The exemption is a requirement for filing the HOA tax form 1120-H. The corp. tax form 1120 can also be filed. I would recommend consulting a CPA who would be better able to answer your question and also determine what tax form is best for your HOA.
RobertR1 (South Carolina)
Posts: 5,164
Posted:
Mary,
Sometimes you are scary, knowing all this crap. It is not human.
JanetK1 (Georgia)
Posts: 2
Posted:
Our Declarant gave mineral, oil, gas, timber, and water rights, to the maintenance man which was the first person to move into the neighborhood. This was rolled up in a trust agreement, his home deed is subordinate to the trust agreement. The declarent failed to plat common area whatsoever, but we have been paying HOA fees for 20 years. This discovery came about when the board , I was President, had to replace fences and other amenities to keep up with the 2012 mandates on reserves. We have two retention ponds, previous boards refused to implement a storm sewer policy. Our insurance agent is related to the maintenance man. Realtors living here refused to upgrade for amentities they cannot see from their house. I looked at the Court House and found the engineer, realtors, builders and VIPs were all given mineral or drilling rights. More than 67 % of 117 have mineral rights or work for the declarant. I'm in a neigborhood of PHD's who's comments are like "what are you going to do. Everyone is corrupt!" . I looked, some were given mineral rights too. The maintenance man has a pending sprinkler permit, but has never had one until I pressed the issue. The maintenance man gets 50% of the budget and 100% of the business. Declarent owns the majority of the neighborhoods in the City. This isn't a neighborhood is it?
TimB4 (Tennessee)
Posts: 21,046
Posted:
Janet,

It's best to start a new thread rather then reactivate an old thread.
The original issue from 2008 is likely resolved.
Even though it's similar, new questions should be asked under new topics as this keeps things easier for everyone to follow.
JanetK1 (Georgia)
Posts: 2
Posted:
Thanks. Do I retype it under general or can ypu move it?
MarkM31 (Washington)
Posts: 556
Posted:
Bets you do it yourself
TimB4 (Tennessee)
Posts: 21,046
Posted:
retype or copy and paste.

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