An interview with Wolf Hanschen of Peregrine 1031 Energy Partners
Most exchangors are aware that they can both buy and sell residential and commercial property in a 1031 exchange. However, there are alternatives to these common forms of real property. Wolf Hanschen is the Co-Founder and Managing Director of Peregrine 1031 Energy Partners. Peregrine 1031 assists clients who are looking to diversify part or all of their 1031 exchange proceeds into more than traditional real estate via oil, gas, water and mineral right royalties.
Below is a brief interview with Mr. Hanschen outlining the basics for any potential exchangor who might be looking for a less traditional form of real property to utilize as part of their exchange.
1. What type of investor are Oil, Gas and Mineral rights best suited for?
Mineral rights, or royalties, are often known as “mailbox money,” delivering monthly income directly from the operator to your mailbox. Investors who are looking for a very passive, non-managed type of property would do well with royalties since royalty owners have no part in the operations, liabilities, and expenses of the wells in which they own under.
2. What is the advantage of Oil, Gas and Mineral rights in comparison to standard residential or commercial real estate?
Because royalty rights are harder to acquire by nature (most owners choose to never sell), it’s hard to buy at scale. This makes the asset class less interesting for the big Wall Street money that have chased yields with traditional brick and mortar real estate, thereby compressing the cap rates to near all time lows. Royalty ownership behaves much like that of a triple net real estate property, but with annual returns often double what investors are finding in that market. Mineral rights are also a non-correlated asset class to markets such as stocks and bonds, which adds another layer of diversity to one’s overall portfolio while also providing a natural hedge against inflation. Finally, the depletion allowance in the tax code affords royalty owners a tax-shield of 15% of their gross income each year.
3. What involvement is required of the royalty owner? –
Almost none. It’s extremely “hands off” by design. By definition, royalty owners share in none of the day to day operations of the oil and gas wells; nor do they share in the costs or liabilities involved in such operations. Once a royalty owner is set-up within the “owner deck” of an operator, the checks (or direct deposits) will be issued once a month with a 1099 being sent every January.
4. Are there any complicated steps involved in a 1031 exchange if I were to acquire Oil, Gas and Mineral rights as replacement property?
Identifying a royalty property is a bit more complex than identifying a standard real estate address, city, and state. The IRS typically likes to see a complete listing of all wells on the property so as not to be ambiguous about what the exchangor is identifying. Peregrine handles all of the heavy lifting on the ID process. Other than that, the closing of a royalty property is very straightforward and can often be completed in a matter of weeks.
5. What are the major risks of this type of investment, in your opinion?
The two biggest unknowns with royalty ownership are production and pricing. We are able to largely mitigate production risk (how much oil or gas is left in the ground) through third-party engineering analysis that incorporates all known data about the producing wells and forecasts out a minimum reserve life of 30+ years. We’re therefore left with commodity pricing as the biggest unknown in the equation, making it the biggest risk to consider. A royalty owner’s monthly checks rises and falls each month as does the price of oil and natural gas. Because we have no control of the broader energy markets and the resulting prices, we have to assume that our income will fluctuate up and down throughout our ownership of the property. With prices for both oil and natural gas near 3 year lows, we feel that the downside risk from a pricing standpoint is fairly limited
6. Should I want to eventually sell my royalty interest, what is the process?
Liquidating a royalty interest is similar to the process in selling a piece of commercial property. It usually takes about 90-120 days to go through the course of finding a new buyer for the cash-flowing asset which Peregrine can help with if the investor choses to use our firm (we deed the properties direct to the clients so they can control their own hold / liquidation timeframe without being tied to any other investor).
7. How can I get more information?
Start by visiting our website at www.peregrine1031.com. There is a great 5-minute intro video that helps educate clients on the history of royalty ownership and where it might be a fit within a 1031 exchange. After that, give us a call at 214-483-1997 so we can answer any follow-up questions you have.
We have worked with Wolf and Peregrine 1031 in the past and had an excellent experience. We do not receive any compensation or benefit from Peregrine 1031 in recommending their services. We encourage each exchangor to do their own due diligence and confer with their tax and legal advisors.
We Can Help
Atlas 1031 Exchange has been accommodating tax-deferred exchanges of all kinds for more than 17 years. We are fluent in the rules and regulations of IRC Section 1031 and able to help you navigate your exchange.
Contact us today to discuss any questions you may have. Call our office at 1-800-227-1031, email us at info@atlas1031.com, or submit your question through the online form at the top of this page.
