Property Tax Rollbacks from Oil and Gas Operations

Written by John McFarland of the Oil and Gas Lawyer Blog.

The Texas Land & Mineral Owners Association Newsletter recently published an article disclosing that the Zavala County Appraisal District has denied agricultural-use special appraisal value for land used for oil-pad sites and frac ponds. One owner who challenged the re-appraisal got the District to agree that, if a well pad is not fenced, it won’t deny the ag-use appraisal for pad sites. But fenced frac ponds, it said, don’t qualify.

When there is a “change of use” of land classified as ag-use or open-space use, the law provides that the change of use results in a “roll-back” of property taxes for five years. The owner is assessed tax based on market value for the five years, plus interest at 7% per annum. This can be a big hit for property owners. For one property owner in Zavala county, the assessed property value went from $73/acre to $2,000/acre. And, once a special use value is denied, it may take years after the oil company ceases its use of the property before the owner can re-gain the special use value.

Landowners should consider a lease provision shifting the risk of this re-appraisal to the lessee. Such a provision might read as follows:

If Lessee’s use of the Leased Premises results in loss of any exemption or discount allowing payment of ad valorem tax based on the property’s use (or non-use), Lessee agrees to reimburse Lessor for all excess ad valorem taxes assessed as a result of Lessee’s use, including roll-back taxes, interest and penalties. Such payment shall be due to Lessor within thirty (30) days after Lessor’s written notice to Lessee; such notice shall provide copies of the ad valorem tax statements received by Lessor and Lessor’s calculation of the additional ad valorem taxes for which Lessee is responsible. Such obligation shall be a continuing obligation for as long as such excess ad valorem taxes are owed by Lessor, even if such taxes continue to be owed after expiration or termination of this lease or Lessee’s cessation of use of the portion of the Leased Premises as to which such excess ad valorem taxes were assessed.

This would be a good issue for the next Texas Legislature to address. Thanks to Texas Land & Mineral Owners Association for alerting its members.

TLMA is an advocacy and educational association for Texas land and mineral owners. It holds an annual conference, issues a quarterly newsletter, lobbies for and against legislation, and files friend-of-the-court briefs on issues related to land and mineral rights. I recommend to all my landowner clients that they join the association.