REAL ESTATE 5311 BLOG: Sustainability For Real Estate Developments

The images show night shot of Toronto during Earth Hour
Toronto Image source: Earth Hour 2008, Ivy Images

On March28, 2009 during Earth Hour, initiated by WWF ( http://www.earthhour.org/ ) between 8:30 p.m. and 9:30 p.m. the global lights-out event was observed. We all need to reduce the power we use at home to help save a planet threatened by the overproduction of energy. What we do during Earth Hour is not going to save the planet, but it is going to inspire people to make their lives and surrounding more ‘sustainable’.

The term 'sustainability' peaked on blogs, boards and discussion groups after Al Gore’s “Inconvenient Truth” took home the Oscar for Best Documentary Feature in February 2007. Per Nielsen Buzz Metrics reports, the buzz levels on this term went up by 169 percent in July 2007 versus one year ago. Innovations or actions to promote sustainability make up daily headlines, such as the following, for every newspaper or T.V. channels.

Greenest Computers Rated By PC Mag
300 Schools On Green Building Council’s Certification Waiting List
Dell To Favor Suppliers That Report GHG Emissions
NAHB Certification Program Will Compete With LEED
Target Targets Eco-Friendly Prototypes
or Mitsubishi Has Big Plans for Electric Vehicles

The question that comes to mind is whether ‘sustainability’ is for real or just another buzz word? I will like to share this educational video (click on the video below)
http://www.youtube.com/watch?v=eEFwaQej_0E

Sustainability — the ability to meet our needs without compromising the ability of future generations to meet theirs. Let us ponder for a moment and ask the question - are we really using our recourses wisely? The answer is no. The fast growth in the last few decades have left us with scarcity of natural resources, climate changes, and uncertainty for future generations. Argument here is not anti growth but how judicious we are while using our resources.

This calls for a dramatic change in our lifestyles and carbon habits to resolve this issue. As a real estate student and architect by profession, I know that real estate development has been a big contributor to this problem.

As per US Green Building Council (USGBC), buildings take up:

40% of total primary energy use
72% of total electricity consumption
32% of total CO2 emission
13.6% of total potable water consumption

Building sector leads the global CO2 emission followed by transportation and industrial
This is a huge strain on our eco system. The solution is our…. buildings need to be smarter in the use of these resources or in other words ‘GREEN’.


According to USGBC, green buildings can reduce
energy use by 25-50%,
CO2 emission by 33-39%,
water use by 40%, and
solid waste by 70%.

From the year 2006 to 2010, projected market value of green buildings is going to increase for new construction from $12 billion to $30-$60 billion and for renovations from $130 billion to $240billion.

Leadership in Energy and Environmental Design (LEED) standards established by USGBC has set the benchmark ( http://www.usgbc.org/ ) for certification programs related to buildings and neighborhood development. There are many such certification programs, few of which are:

NAHB national green building program
( http://www.nahbgreen.org/)
US department of energy ‘Energy Star’ program
( http://www.energystar.gov/)
Environmental Protection Agency Green Buildings
( http://www.epa.gov/)

Apart from this, many cities in America adopted their own certification programs. For example, the City of Austin's Green Building Program has been implemented very successfully.
( http://www.austinenergy.com/). In our own backyard, the City of Dallas recently adopted a standard that all new commercial buildings will have to be built to meet the sustainibility standards ( http://www.greendallas.net/).

USGBC, a non-profit trade organization, was founded in 1993. As mentioned earlier, it is best known for the development of LEED rating system and Greenbuild, a green building conference that promotes the green building industry. LEED is a third-party certification program and the nationally accepted benchmark for the design, construction and operation of high performance green buildings. LEED gives building owners and operators the tools they need to have an immediate and measurable impact on their buildings’ performance. LEED promotes a whole-building approach to sustainability by recognizing performance in five key areas of human and environmental health: sustainable site development, water savings, energy efficiency, materials selection and indoor environmental quality.

There are LEED projects in all 50 states and 91 countries and 81,155 LEED Accredited Professionals.

19,957 members of USGBC members includes building owners and end-users, real estate developers, facility managers, architects, designers, engineers, general contractors, subcontractors, product and building system manufacturers, government agencies, and nonprofits.

Now apart from tree hugger approach the million-dollar question for developers is does it cost more to build green and does it payback?
As per Peter Morris & Davis Langdon, the answer is yes. But most of the times the people who are green averse are happy to relate anecdotes of premiums in excess of 30% to make their case not to build green. These numbers are simply not, however, borne out by the facts, as evidenced by many studies of the cost of green building. Even though there is no one-size-fits-all answer to the cost question, it is clear from the substantial weight of evidence in the marketplace that reasonable levels of sustainable design can be incorporated into most building types at little or no additional cost.

Very frequently a comparison is made between the cost of the green project and the original project budget or the original anticipated cost of the project. Most of the studies that use this methodology report average green premiums in the range of 1% to 2% to achieve a moderate level of sustainable design, generally equivalent to LEED Silver rating. Higher levels of sustainability are usually linked to higher green premiums.

An alternative approach, also used in many green cost analysis, is to look at the cost of individual green features, effectively comparing the building to itself without the green features. Most of the studies that use this individual add-on methodology report somewhat higher green premiums, in the range of 2% to 6%, to achieve a moderate level of sustainable design (such as LEED Silver).

Keep in mind these are studies and they can be only used as a guidance in planning and budgeting the project. The real question should not be “How much more will this cost?” but “How will we do this?” Sustainability is not a below-the-line item.

But the cost of building GREEN is reducing every day mainly due to:

1.Bigger market for sustainable products, which help reduce the unit cost of these products due to, increased volume.

2.Also, new inventions and technology is making cost of the green product less. As per the studies published by Photon consulting cost of solar power is racing to be $1/W by 2012.



3. New changes at federal government has made it very clear that achieving energy efficiency is the one the main agenda of this administration. In addition, recently extended and announced tax rebates, grants and programs is the step in the right direction. Further information could be found on US Department of energy website (http://www.energy.gov/) and US EPA website ( http://www.energystar.gov/ )

4. Many state and local government run the incentive programs and tax breaks for building Green. More information is available at DSIRE (http://www.dsireusa.org/). Also many utility providers have rebates available for building sustainable products

5. Many financial institutes like retirement pension funds are asking developer to achieve certain sustainibilty standards to qualify for the funding.

6. Also private funding are demanding for green standards so that the value of their investments is maintained

All these incentives are definitely driving the cost of building green down and adding value to the real estate projects.

How does it pay back?
It pays back owner of the building by
- Reduced operating cost
- Energy savings
- Less maintenance cost due to higher standards in construction
- Owners can demand higher rents
- Fewer turnovers of tenants due to less utility bills and health benefits tenants
- Property retains more value at the point of turnover
- Marketing tool

Green buildings help the tenants or its end user in many ways. It increases the efficiency of the employees due to increased natural light, Better ventilations and less toxic material used for the construction. The students have shown better results in schools that are built based on sustainable principles. The patients have shown faster improvements in the hospitals those are certified by green building programs. The residents in the sustainable communities have shown significant improvement in their health and productivity due to change in their life styles use of environmental friendly materials during construction.


Blair Towns, Silver Spring, MD a development by The Tower Companies is a LEED Gold rated project completed in 2003.
You can visit their website, http://www.blairapartments.com/ and how developer is using the LEED certification as a marketing tool.
Natural Recourses Defenses Council (http://www.nrdc.org/) has conducted a case study for this project, which could be viewed online by visiting
http://www.nrdc.org/buildinggreen/casestudies/blair.pdf

All these benefits to the tenants or end users definitely pay back developers in increasing or retaining the value of their properties.

Apart from financial pluses and minuses, the government is making sure new developments meet sustainability standards. Federal government has made it mandatory for all federally funded projects to obtain some level of LEED certification. The number of state and local governments developing or requiring sustainability standards is increasing everyday. A report published by American Institute of Architects (AIA) in mid 2008, shows that there are 92 cities with green building programs -- or to put that in perspective, over 42 million people live in cities with green building programs.

With the increasing regulations and benefits, developers need to revaluate their spreadsheets. Even if developers do not want to pay the added cost, they will still be able to create sustainable developments with better design, construction and development practices such as:
Selecting site locations near to public transport
Orientations of the building to take advantage of natural light and ventilation
Using environmental friendly and local materials during construction
Emphasis on using right construction practice
Use of native landscape

And the list can go on........

To summarize sustainable development is need of the time and is here to stay, it is in developers’ interest to start practicing it and be a leader before the competition catches on it.

Post by Yogesh Patil, REAE 5311 student

Credits and resources:

http://www.usgbc.org/
http://www.energystar.gov/
http://www.nahbgreen.org/
http://www.dsireusa.org/
http://www.earthhour.org/
http://www.energy.gov/
http://www.greendallas.net/
http://www.austinenergy.com/
http://www.environmetalleader.com/

UrbanPlan Facilitation

Check out Ali's story on the UrbanPlan facilitation:

http://www.theshorthorn.com/content/view/16870/209/

Job/Internship Posting

Ali Samee wanted to pass along some job postings (one in Houston).

http://www.pky.com/hr/careers.aspx

Have you guys been following our two Interns this semester at http://reae5399.blogspot.com? It has been interesting to see the weekly experiences.

REAE 5311 Blog Post: Zoning 101

As anyone involved in real estate can attest to, understanding zoning as it relates to the acquisition of any type of property, is of the utmost importance. This posting is meant to provide a brief overview of zoning and how nonconforming use can affect the property and what remedies exist in order to prevent a situation that is summarized at the conclusion of this essay.
Zoning is the mechanism municipal jurisdictions use to control desired growth and development, while trying to eliminate or at least minimize problems of crowding and land use conflicts. Zoning tells property owners what and how they can and cannot build on their land. Decades of court cases have shown that cities and towns have both a responsibility and a constitutional right to protect the public welfare by placing limits on the uses of private property.2

The history of zoning dates back many years. As cities grew larger and more complex in the late 19th and early 20th centuries, governments became increasingly involved in providing municipal services, promoting the development of public infrastructure, and regulating private real estate development. Also in the latter part of the 19th century, cities began to limit to certain areas within the city those hazardous but necessary business and industrial activities that might cause fires or expose people to disease, harm or noxious odors. Selective prohibition of these uses by geographic location was an early form of land use zoning. Overall, the private sector-not just community groups but also many real estate entrepreneurs-strongly favored the growing number of public laws and codes regulating urban development and land use. They supported zoning restrictions to stabilize real estate markets, increase property values, and encourage new investment because the understood that the restriction enabled them to build or buy property with less risk of unfavorable change on the adjoining lots and the surrounding neighborhoods.2

In order to first understand zoning as it relates to real property transactions the following is a brief overview of permitting, use classifications, and items that need to be collected to perform the necessary due diligence before an acquisition:

Use of property is permitted four ways:
· Permitted by right
· Permitted by conditional/special use permits
· Permitted by variance
· Permitted as an accessory use (manager’s residence within a mini-warehouse)

Generally there are five major types of use classifications:
· Commercial
o Retail, Restaurants, Personal service, Hotels, Office
· Agricultural
· Residential
o Multi-Family, Nursing Homes, Student Housing, Single Family
· Industrial
o Manufacturing, Warehouse, Research & Development
· Planned Development/Special Use
o A use that would not be appropriate generally, or without restriction throughout a zoning district or classification, but, which is controlled as to number, area, location or relation to the neighborhood in which it is proposed. Examples would include nursing homes, restaurants with patios and/or drive thru windows, communication towers, and gas stations
In a transaction, a list of necessary due diligence items should be reviewed:

1. The specific zoning designation of the site, as established by the current municipal code, as well as any prior designations
2. The uses allowed under the zoning designation established by the zoning ordinance and whether the present use of the subject site is legally permitted
3. The minimum yard or setback requirements, and a review of the survey for compliance
4. The building height requirement, whether by number of stories or actual height above ground level, and a review of the survey for compliance
5. The bulk or density restrictions of the property. The relationship of the square footage of the land area versus the square footage of existing buildings would be checked for proper ratio. Specific density per acre requirements based upon number of units, and floor area ratios based upon the total square footage of multistory buildings, would also be considered
6. The formula for determining the minimum parking requirement and the “mix” of existing units on the site. When calculated, comparisons of the required parking count to the actual site count, as shown on the survey. Handicap and compact spaces would also be addressed.
7. Special circumstances to be considered would include legal non-compliance of any of the above factors, the issuance of zoning compliance letters from the municipalities, the existence of variances, council minutes, certificates of occupancy, building inspections, the effect of site plan approvals, airport zoning districts, and businesses serving alcohol, just to name a few.
The variety of types and definitions can be overwhelming, even for professionals. That is why it is most important to pay attention to definitions. Much of the law of zoning is in the definition, in other words, how you can and cannot use the land.
To give an idea, of how definitions can rule the day, consider the movement to zone away fast food chain restaurants. Some towns, in the belief that this is not a good use, have simply banned all formula restaurants, generally defined as restaurants with a set architecture and set menus that have more than a small number of outlets. A developer could have paid big money for a great site at a prime intersection for a national franchise fast food restaurant and then have the zoning rug yanked out from under them with the adoption of a prohibition on formula restaurants.1

Zoning laws are constantly changing but are not enforced retroactively.1 A building in existence at the time a new zoning law is adopted is said to be “grandfathered” or “legally nonconforming” and cannot be declared illegally nonconforming. But if the legally nonconforming structure is destroyed beyond the threshold set forth in the Code, the owner may be allowed to rebuild only in accordance with present zoning laws. There are three zoning conformance status of the site: legal conforming, legal nonconforming, and nonconforming:

In legal conforming, the project meets all zoning district use, area, setback, height, density, and parking requirements according to the most recent zoning ordinance or land use requirements in your jurisdiction. The (legal) nonconforming rebuildability clause will not apply because your project is legal and has 100% right to rebuild in the event of any percentage of destruction.

In legal nonconforming, the project was conforming at the time of construction but due to changes in the zoning ordinance, the governing jurisdiction, or zoning designation, the project is no longer conforming. Jurisdictions have different rules governing legal nonconforming projects. Some allow 100% rebuild in the event of destruction while other require planning commission approval to rebuild, regardless of the percentage of destruction. All are subject to the nonconforming rebuildability clause of the zoning ordinance as they have been granted certain legal protections for rebuild. The following are a few causes constituting legally nonconforming:
· Built prior to the establishment of the zoning code
· Changes in the zoning code over time
· Annexation from one jurisdiction to another
· Subdivision of the property
· Condemnation proceedings (often affects building and parking setbacks)
· Rezoning of the property

The following are examples:
· Legal nonconforming buffer yards- A Florida café that has enjoyed patio seating for years, but current Code now requires a buffer between the property line and any improvements. If the patio area were to be destroyed by storm or fire, it would not be allowed to be rebuilt.
· Legal nonconforming setbacks and parking-An Arizona hospital that was built in the county and later annexed in the city. Differences in code requirements between the two jurisdictions caused setback and parking deficiencies.
· Legal nonconforming to height-A multi-family complex that was built prior to changes in the zoning code, which lowered the allowable building height from three stories to two stories.
In nonconforming status, the project does not conform to current zoning requirements, and did not conform to the requirements in place at the time of construction. In the event of destruction of any percentage or value, the project will require to be reconstructed according to the requirements of the current zoning ordinance. The nonconforming rebuildability clause of the zoning ordinance will not apply to a nonconforming project because the site does not have a legal status. Situations that could possibly lead to a property becoming nonconforming include:
· A change of use (retail to restaurant) done without approvals, which requires additional parking
· Illegal use (retail in residence)
· Re-striping of the parking lot which causes spaces to be lost
· Removal of landscaping to accommodate additional parking or structures
· Conversion of apartment, hotel or nursing home units that exceed the total number approved at the time of construction
· A structure built closer to the property line than what was originally approved
· Construction error
Examples of nonconforming uses include the following:
· Nonconforming to parking-A resort hotel in Michigan was approved with parking to be constructed on an adjoining lot also owned by the owner, the parking spaces were never built, the city never noticed, a certificate of occupancy was issued, and then the owner sold the land
· Nonconforming to density-An assisted living center in Arizona was approved for 85 beds, the certificate of occupancy was issued for 85 beds, and it now has 95 beds by converting other space in the building which was never applied for or approved in the zoning process
· Nonconforming to density and open space-A multi-family site in Georgia was approved and developed on 30 acres, the owner sold 10 acres of unimproved land which caused density, open space, and landscaping problems, which are not easily cured
There are gambles with a nonconforming use: (1) local zoning authorities can change their minds and take steps to gradually cancel the nonconforming use over time; (2) you can lose the right if you substantially change the existing use of the business (i.e., a garage becomes a Blockbuster video franchise), your building is damaged or destroyed (i.e., your garage has to be rebuilt because of a fire), you shut down operations for several months (the length of time varies with local law), you discontinue operations entirely, or you significantly expand your business operations (i.e., your garage now includes an auto parts store)
The following are remedies if the project is nonconforming:
· Fix the problem (example: stripe more spaces, move the encroaching accessory building)
· Apply for a variance or special use permit
· Draw up a reciprocal parking agreement with the adjoiner
· Purchase land from the adjoiner
· Apply for a change in the zoning district

Variances
Variances are a discretionary relaxation from the strict application of certain zoning requirements granted by the Board of Adjustment to alleviate conditions peculiar to a particular property which places an undue burden upon the individual landowner.2 In more simplified terms, a variance is a zoning approval granted by a zoning board of appeals to do something that is otherwise illegal. It is for this reason that in most communities there is real tension between the zoning board of appeals and the separate zoning authority, which may be a planning board, zoning board, or local legislative body. Variances, like special permits, run with the land and attaches to the property and is generally about the use and not the land.1
There are many examples of zoning violations: Overflowing dumpsters, proper landscaping not provided, dumpsters located on parking spaces, illegal banners and signs, loss of striped parking, tenants parking on neighboring property, criminal activity by tenants, i.e. prostitution/drug dealing, graffiti, etc., taking place on the premises with landowner disregard, abandoned vehicles, etc.
Building Violations can include: Building permits not being final, certificates of occupancy not issued usually due to lack of final inspection, elevator violations, tenant complaints for structural problems, such as leaking roofs, cracked walls, faulty plumbing, etc.
Some requests for a variance – such as the same request that everyone else nearby has already obtained -- are a simple matter that can be handled alone. However, if the variance is important, or time is important, and the person does not want to risk getting turned down, or the matter is sort of unique, they may need the assistance of an attorney familiar with local zoning laws and practices. In fact it may also be necessary to obtain an architect or other expert to assist the attorney.

Special Use Permits
In most jurisdictions, special permits are an administrative, not legislative type like variances are. Special permits command that great middle ground between the largely discretionary zoning amendment and the process with little or no discretion which includes not only the zoning enforcement review but other administrative approvals such as subdivision and site plan review.
Protection
When negotiating a contract there is language in the document that will protect the buyer and the seller. This language in the contracts is found under “Representations and Warranties” in order prevent the previous case from happening, assuming both parties are honest:

A. Knowledge
Sellers have become increasingly wary of making any meaningful representations and warranties, and any that are given are likely to be qualified by some degree of knowledge -- "to the best of Seller's knowledge", "to the best of Seller's current actual knowledge without inquiry" and statements that "Seller is aware of no..." are a few examples of the lengths Sellers will go to say very little. Most Purchasers are not looking to set the Seller up for a breach of warranty or misrepresentation suit; they just want to elicit information that is not readily available from other sources. The Purchaser would like to know if there are any lawsuits, condemnations, violations (environmental, building code, etc.), and other pertinent facts about the property, but the Seller is cautious to go on the line for any of these things. The courts interpret actual knowledge to refer to those things of which the one sought to be charged has express information and those things which a reasonably diligent inquiry and exercise of the means of information at hand would have disclosed.4
Therefore, to make a statement to one’s “actual knowledge” implies a duty of inquiry. One common solution that may satisfy both the Seller and the Purchaser is to define “knowledge” and identify a person or persons within the Seller's operations who knows about the Property and its operations. The Seller is then not in a position of having to conduct internal due diligence of its many employees to determine who might have knowledge, and the Purchaser has the person who is most familiar with the Property actually telling something about it.

B. Disclaimer – “AS IS, WHERE IS”
In 1995, the Texas Supreme Court determined that the agreement to sell and purchase commercial property "as is" effectively negates any cause of action for DTPA violation, fraud and negligence, because the disclaimer defeats the element of causation.5 This reasoning has been extended to residential contracts as well.6 To be successful in relying on an “as is” disclaimer, the Seller should verify that all of the following apply:
• The Seller must disclose all known defects to prevent the Purchaser from claiming it was induced to buy, due to Seller’s fraud, misrepresentation or concealment of information.
• The Seller cannot obstruct the purchaser's ability to inspect the property.
• The "as is" clause must be an important basis of the bargain. It cannot be an incidental provision or a part of the "boiler plate" of the provision.
• The Purchaser and Seller must have relatively equal bargaining positions.

C. Disclosures
Regardless of what representations and warranties are made and what amount of disclaimers are required by the Seller to give its concerns, the Seller needs to disclose to the Purchaser any known defects, violations or conditions pertaining to the property (especially environmental or building code violations). A Seller of real estate is under a duty of disclosing material facts which would not be discoverable by the exercise of ordinary care and diligence on the part of the Purchaser, or which a reasonable investigation and inquiry would not uncover.7 The duty to disclose arises when one party knows that the other party is ignorant of the true facts and does not have an equal opportunity to discover the truth.7 However, a Seller has no duty to disclose facts it does not know.8 And a Seller is charged only with disclosing such material facts as to put a Purchaser exercising reasonable diligence on notice of the condition of the property.9 The Seller has no duty to disclose the legal status of the Property (e.g. zoning) to the Purchaser.10
In Conclusion, it is essential that a Seller knows all of the facts about the Property that may be of concern to the Purchaser, and thus should be disclosed in writing to the Purchaser. This is particularly true with respect to environmental conditions of the Property, all of which should be thoroughly and carefully disclosed to the Purchaser. The simplest way to do this is in the Contract itself, or in an addendum attached there. Many lawsuits as well as additional money spent by the developer to remedy the situation can be avoided if the proper and necessary steps are taken by both the Purchaser and the Seller.

Posted by Josh Smith-REAE 5311 Student

References
1 Merriman, Dwight. The Complete Guide To Zoning. New York City: Mcgraw-Hill, 2004.
2 Miles, Mike PHD, et. Al. Real Estate Development: Principles and Process. Third edition. New York City: Urban Land Institute, 2003.
3 Prudential Insurance Company of America v. Jefferson Associates Ltd., 896 S.W.2d 156 (Tex. 1995).
4 Erwin v. Smiley, 975 S.W.2d 335 (Tex. App. – Eastland 1998, pet. denied); Larsen v.Carlene Langford & Associates, Inc., 41 S.W.3d 245 (Tex. App. – Waco 2001, pet.denied); Cole v. Johnson, 157 S.W.3d 856 (Tex. App. – Fort Worth 2005, no writ)
5 Oat Note, Inc., v. Ampro Equities, Inc., et al, 141 S.W.3d. 274, 280 (Tex. App. –Austin 2004, no writ).
6 Smith v. National Resort Communities, Inc., 585 S.W.2d 655, 658 (Tex. 1979)
7 Coldwell Banker Whiteside Associates v. Ryan Equity Partners, Ltd., Cause No.01571-CV (Tex. App. – Dallas 2006, no writ).
8 Robinson v. Preston Chrysler-Plymouth, Inc., 633 S.W.2d 500, 502 (Tex.1982); Prudential, supra at162 (Tex. 1995)
9 Cole v. Johnson, supra at 860 (Tex. App.-Fort Worth 2005). (Refers to a seller of a house)
10 Coldwell Banker, supra.

A Change This Fall

Dear Graduate Real Estate Students,

For those of you who have visited with me at my office, you can see by the piles of projects, exams, and research papers that I have been at UTA for a very long time (10-years to put a number to it). North Texas and UTA have been great places for me, real estate, and REAE@UTA, but I will try a little different challenge this fall. In August, I will move to Central California to help run the Gazarian Real Estate Center.

I will keep my e-mail address ahansz@gmail.com if anyone needs to contact me. Also, as I promised, I will keep this blog active. I have really enjoyed the student blog posts this past year and I think the post topics and quality have been outstanding. Thank you to my bloggers for the good work. I know that others inside and outside of UTA have enjoyed your posts too.

David Gray will be handling questions and concerns about the real estate program going forward and Fred Forgey will officially run the program starting this Fall semester (see the post below for more details).

Cheers,
Dr. Hansz

Message from David Gray Regarding the Real Estate Program

Dear MSRE Student:

The purpose of this message is to inform you that the MSRE program is alive and well and will certainly continue into the foreseeable future. Dr. Andy Hansz is leaving us but Dr. Fred Forgey is joining the College of Business in August 2009 to provide leadership for the program. No changes are contemplated in terms of degree requirements; however, starting Fall 2009 all graduate courses in real estate will be offered at the UT Arlington-Fort Worth campus. The new class schedule will adhere to a primarily Saturday based degree program with elective courses being offered evenings during the week. All courses needed for the degree will be offered at the Fort Worth Center. More details about the class schedule will be communicated to you in the coming weeks.

This course (class) re-location change is being made to better integrate the degree program with industry professionals and raise the profile of the program to a national level. Additional steps are being planned in this regard; information will be communicated to you during the next two or three months so that you can be more fully informed.

At this point if the class schedule and location changes become problematic for you, please contact me at gray@uta.edu or 817-272-3387.

David A. Gray

Associate Dean

Mineral Rights, Natural Gas, and Their Economic Effects.

Mineral Rights: Natural Gas

By: Michael Sanchez

Real Estate 5311 Blog Post

According to the United States Census data, approximately 485,000 new one-family homes were sold in 2008. Of the 485,000 homes sold in 2008, 266,000 were sold in the South region of the United States alone, or over 50%. Usually when someone thinks of a family purchasing a home, they only consider the land and the structure on top of the land; rarely ever do they consider what may lie beneath the land they have purchased. Back before the days of drilling and mining; before natural resources such as oil, gas, gold, coal…etc… became a commercial process, owners would obtain a fee simple interest in the complete property. These would individually be called “surface rights” and “mineral rights”. This complete property ownership is called a “fee simple estate”. A person who owns mineral rights to a specific property may in turn sell, lease, or give the rights to the associated minerals to another entity. This is very common in the United States, and rights to real estate (mineral and surface), are often shared amongst multiple owners. This complete property ownership is unique to the United States, and a small amount of other countries. In most other countries, the rights to the natural resources beneath one’s land belong to the government and the property owner only receives the surface rights.

Mineral Rights: Local Impacts, the Barnett Shale.

Have you noticed the natural gas wells that have appeared sporadically around the area? Many of these have appeared alongside freeways and even around DFW airport. More than 6,000 natural gas wells have sprouted up in the North Texas area! This is largely a result of new technology that has enabled natural gas companies to started drilling into a huge natural gas reservoir called the Barnett Shale. The Barnett shale is huge source of natural gas that stretches over 16 to 21 North Texas counties! It covers about 6,000 square miles and is currently the second largest producing on-shore domestic natural gas field in the United States. Many North Texas residents, universities and commercial property owners are benefiting from associated mineral leases and royalties related to the Barnett shale mining. This lease gives the associated mining company the rights to test and (for a sum of money based on various factors) mine the minerals under the property owners land for a specified period of time. Payments to the owners of the mineral rights are known as royalty payments. This works in a similar way with owners who own the right to coal, oil…etc…

The impacts of the Barnett Shale to the North Texas area have been largely positive. The Barnett Shale has created about 70,000 jobs in the North Texas area, and the economic impact of the Barnett Shale to the North Texas area was significant. The estimated economic output in 2008 was estimated at $11 Billion. Even with the economic collapse this year, the impact remains strong for 2009 at $6.5 Billion. The main contributor to the decrease in oil production is the collapse in oil and gas prices; since reaching their peak in October of 2009, they have decreased around 70 percent. Although natural gas production and prices are forecasted to gradually increase through the year, they are still estimated to be around 40% lower by year end. The Barnett Shale is largely considered long-term resource in the North Texas area, one that will continue to create and maintain jobs through the region, which will contribute to the local economy for years.

Negative Issues: Externalities As a Result of Natural Gas Drilling

As with everything, there are always two sides – especially when it comes to natural resource exploitation. The drilling for natural gas does result in some negative externalities that the surrounding communities will have to deal with. North Texas Natural gas pipeline companies have received negative feedback from nearby property owners that are apprehensive about the impacts the oil rigs will have. Pipelines are often extremely intrusive and require a large amount of land to be laid properly. Furthermore, the pipeline companies are able to use eminent domain powers in order to seize property for the routing of pipelines, due to it being labeled as a “public good”. Other negative externalities include wastewater disposal, traffic from related vehicles, noise, property values, as well as many others. Steps are being taken by state legislation to limit to impact that natural gas exploitation will have. Over a dozen bills have been introduced to give cities and residents more power to deal with the eminent domain issues, pipeline placement, wastewater disposal, truck traffic and other issues stemming from drilling activities. These externality "costs", must be weighed against the associated royalties one may receive by owning a particular set of mineral rights.

Natural Gas: Present and Future

Obviously, natural gas shales exist in other parts of the world other than North Texas. Due to the variations of rock formations and density between the surface and the gas shale, it is often cost prohibitive to drill for natural gas. As new technologies are developed and perfected, the cost to drill and pump the gas out of the earth are becoming less and less. The spike in natural resource prices in 2008 also assisted in companies recouping their drilling costs due to the high price of gas and oil, and thus made the drilling of previously cost prohibitive gas shales more affordable from an economic standpoint. A good example of this can be seen with the Barnett Shale in the North Texas area. However, with the decline of oil and gas prices, coupled with the unprecedented economic collapse of 2008-2009, many oil companies were forced to scale back production. With the demand for natural gas being significantly less than it was last year, North America producers are currently facing a significant oversupply until the demand for natural gas returns to what it once was. This will undoubtedly have an impact on natural gas prices in the near future, which could have a positive or negative effect depending on who you are. Consumers always enjoy inexpensive energy prices, however the producers will be suffering from a loss in profits and having to scale back production and growth until the demand returns.

The Future of Natural gas production remains a mystery to many speculators. Even though it’s easy to say that it will undoubtedly increase due to the world becoming more industrialized; the consensus shift from natural resources to more renewable types of energy as a result of the spike in energy prices in 2008 are becoming more and more commonplace. Crude oil and natural gas, and the associated mineral rights to them may see itself as a dying industry in the near future.

References:

United States Census Data. New One-Family Houses Sold. 2008. <http://www.census.gov/const/soldann.pdf>

Mineral Rights: Basic information about mineral, surface, oil and gas rights. © 2005-2009. <http://geology.com/articles/mineral-rights.shtml>

The Barnett Shale. © 1990-2008. <http://www.thebarnettshale.com/>

Picture of Barnett Shale obtained from: <http://blumtexas.blogspot.com/>

Picture of Natural Gas Rig obtained from: http://image.examiner.com/images/blog/wysiwyg/image/drilling_cropped.jpg

Picture of Stove obtained from: <http://images-cdn01.associatedcontent.com/image/A1369/136940/300_136940.jpg>

Picture of National Natural Gas Map obtained from: <http://www.aapg.org/explorer/2006/11nov/shale_playmap.jpg>

Jim Fuquay. “Barnett Shale impact forecast to be 40% lower in 2009”. Fort Worth Star Telegram. April 4 2009. <http://www.star-telegram.com/business/story/1253207.html>

Dave Montgomery. “Texas Legislature considers bill to allow drillers to use highway rights of way”. Ft. Worth Star Telegram. <http://www.star-telegram.com/business/story/1298748.html >April 3 2009.

Jim Fuquay. “Natural gas producers face North American oversupply until demand returns, study says”. Fort Worth Star Telegram. <http://www.star-telegram.com/business/story/1277322.html > March 29, 2009.