Volume 7 - Opinions of Counsel SBEA No. 20
Agricultural exemption (agricultural production requirement) (conversion - lease of mineral rights); Separate assessment (leasehold interests) (minerals; oil and gas rights) - Agriculture and Markets Law, §§ 301, 305; Real Property Tax Law, §§ 102(12)(a), 502; 9 NYCRR 194.11:
The leasing of mineral rights for the purpose of oil and natural gas exploration has no immediate impact on the exempt status of land receiving an agricultural exemption. Exercise of the rights resulting in a conflicting use will constitute a conversion.
Oil and gas rights should be separately assessed where they relate to property which qualifies for this exemption and result in a value exceeding that of similarly constituted property without such rights.
An energy development company is seeking leases of mineral rights for the purpose of oil and natural gas exploration. The areas sought for leasing are within agricultural districts wherein property owners qualify for agricultural value assessments (9 NYCRR 194) pursuant to section 305 of Article 25AA of the Agriculture and Markets Law. We have been asked what effect a lease of mineral rights will have on land eligible for an agricultural value assessment.
The purpose of Article 25AA is set forth in section 300 containing a declaration of legislative findings and intent:
Agriculture in many parts of the state is under urban pressure from expanding metropolitan areas. This urban pressure takes the form of scattered development in wide belts abound urban areas, and brings conflicting land uses in juxtaposition, creates high costs for public services and stimulates land speculation. . .. It is the purpose of this article to provide a means by which agricultural land may be protected and enhanced as a viable segment of the state’s economic and environmental resource of major importance. (Emphasis added.)
In order for such farmland to be eligible to receive an agricultural value assessment, the land must be used in agricultural production. An agricultural exemption may be granted where such land is located within an agricultural district (§305) or, if not located within a district, the land is subject to an eight year commitment to continued agricultural use (§306). If land is receiving an agricultural exemption by virtue of being located within an agricultural district and it is converted to a use other than agricultural production, then the converted land’s eligibility to receive an exemption ceases and a roll-back tax is imposed (§305(d); 9 NYCRR 194.13). Similarly, if eligible land is subject to an eight year commitment to continued agricultural use, and it is converted to a nonagricultural use, the eligibility of all of the land subject to the commitment is terminated and a penalty tax is imposed (§306(2); 9 NYCRR 194.14).
The essential question addressed by this inquiry is whether the leasing of mineral rights for the purpose of oil and natural gas exploration results in a conversion to a use other than agricultural production.
Article 25AA does not define the term “converted” or provide any express guidelines to aid in ascertaining precisely when land is deemed to be converted to a use other than agricultural production. Prior Opinions of Counsel (4 Op. Counsel SBEA No. 119; 6 id. Nos. 66 and 71) establish the proposition that “an outward or affirmative act changing the use of the subject property” will constitute a conversion. Nonuse of the property disqualifies it from receiving an agricultural value assessment but does not constitute a conversion. Whether there has been a conversion of land to a nonagricultural use will always depend on the facts of the particular case.
The mere act of leasing mineral rights for the purpose of oil and natural gas exploration would not change the use of the subject land. Assuming that the lessee does not immediately exercise his rights under the lease, there may be a period of time after the lease is signed during which agricultural production will be conducted in the same manner that it was before the lease was signed. To the extent that the lessee may never exercise his rights under the lease, the use of the land in agricultural production will remain completely undisturbed. Thus, while the mere act of leasing mineral rights for the purpose of oil and natural gas exploration creates the potential for a nonagricultural use on the subject land, it does not, without more, result in a change to a nonagricultural use. Thus, the leasing of mineral rights for the purpose of oil and natural gas exploration has no immediate impact on the status of land receiving an agricultural exemption.
If, however, the lessee chooses to exercise his rights under the lease and enters upon the land for the purpose of conducting explorations for oil and natural gas, a different situation is presented. In this instance, the activities of the lessee may conflict with the land’s use in agricultural production. For example, the right to extract subsurface minerals may consist of a right to remove coal, natural gas, petroleum, or any other mineral. If coal could only be removed by strip mining, i.e., by removing the top soil, then agricultural production could not be performed on such land at the same time. The strip mining of coal is a use which conflicts with agricultural production. On the other hand, petroleum and natural gas may be extracted by drilling relatively small wells upon the surface land. These wells generally will not interfere with agricultural production on the surface of such land except in small areas adjacent to each well and possibly small areas occupied by roads or pipelines. Thus, the extraction of natural gas or petroleum from beneath farmland may be compatible with simultaneous agricultural production on the surface of the land. It should be noted, however, that the erection of pumping facilities, pipelines and other installations will result in the conversion of the land actually used for these purposes. The precise effect of such a conversion will depend upon whether the converted land is located in an agricultural district or subject to an eight year commitment to continued agricultural production.
If the subject land is located in an agricultural district any any portion of it is converted to a nonagricultural use, only the converted portion of the land will cease to be eligible to receive an agricultural value assessment (§305(d); 9 NYCRR 194.13). In addition, a roll-back tax for the preceding five years will be imposed on only that portion of the land that is converted. The amount of the roll-back tax will be equal to the difference between the amount of taxes that would have been imposed on that portion of the land actually converted over the preceding five years had an exemption not been allowed and the amount of taxes that were actually imposed.
If land subject to an eight year commitment to continued agricultural use is converted to a nonagricultural use, all of the land that is subject to the commitment will lose its eligibility to receive an exemption and a penalty tax equal to twice the taxes that will be imposed in the year first subsequent to the conversion on all of the land that was subject to the commitment will be imposed (§306(2); 9 NYCRR 194.14).
The leasing of mineral rights for the purpose of oil and natural gas exploration raises another, more subtle issue. Namely, should the value of oil and gas rights be deducted from the full value of the farmland in determining the amount of the exemption thereby increasing the amount of the final taxable assessment to the value of the mineral rights plus the agricultural value ceiling?
For taxation purposes, the term real property includes the land itself and the mines, minerals, quarries and fossils in and under the land (Real Property Tax Law, §102(12)(a)). Oil and gas rights are regarded as real property for taxation purposes (General Construction Law, §39; 4 Op.Counsel SBEA No. 77). The full value of real property at its highest and best use includes the value of mineral or oil and gas rights for purposes of real property taxation.
Agriculture and Markets Law, section 305(1) (b) provides, in part, the amount of the exemption from taxation for eligible land is:
That portion of the value of land utilized for agricultural production within an agricultural district which represents an excess above the agricultural value ceiling as determined in accordance with this subdivision shall not be subject to real property taxation.
The agricultural value of land is its value used only as farmland. The agricultural value ceiling is subtracted from the assessed value of the property at its highest and best use to determine the exemption (§305(b); 9 NYCRR 194.11).
In general, it is not necessary that the owner of the land lease, sell, or otherwise benefit from his oil and gas rights in order that the value of such rights be assessed for purposes of real property taxation. However, an assessor should be very careful not to overvalue the mineral rights in unproved land (those which are not known to contain oil or gas), as such rights may have little more than nominal value. Additionally, since we have determined that these compatible mineral rights may be assessed, it is within the assessor’s discretion to assess such rights separately from the value attributable to the surface land (4 Op. Counsel SBEA No. 77). Accordingly, where it may be shown that property which may qualify for an agricultural value assessment, which because of subsurface oil and gas rights has a value exceeding that of similarly constituted property without such rights, it is our opinion that the oil and gas rights should be separately assessed.
August 18, 1980
NOTE: But see Opinion 10-45.