Follow-up

From Larry Wood: Email October 27, update and explanation about the money and the leasing

Timing

I think timing is a concern, but it is not an emergency. We're sitting exactly atop the place they want to drill, and our priority geologically is only surpassed by some locations in Susquehanna County. In addition, Pennsylvania is very lax about permitting the Gas companies to draw water out of the rivers to feed the wells - this is the reason there is no drilling currently in NY State where the Marcellus potential is at least as great as here. So, they want the gas, and they're here to stay.

We have a good process for deciding underway, I think we should just keep it underway. Don't rush, but........don't dither either. We're doing a good job at a good pace, and if we continue I'm confident that we'll get the lease we want with the money we ask for.

Money/Legal

For info on the money/legal stuff please refer to the earlier email "3b - Money - Corporate and Legal Structures". This summarizes the high points of why it's good that Merryall Manse, Inc. has strong restrictions on what it can do with its money, and why the bonus money should go directly to it and be under those restrictions. It also discusses why its good that we set up another firm to handle the royalty money, should any ever come in. I stress - if any should ever come in.

Origins of this idea

This money/legal structure was developed over a flurry of phone consultations between myself, Dick Farley (accountant in Towanda) and Paul Florenz (lawyer who created the current corp for us) over the course of two weeks. Between Dick's understanding of the rules by which the IRS and PA tax corporate entites, and Paul's unique understanding of our equally unique corporate structure, we came up with this solution.

The suggested structure:

1st entity: Our original "restricted money" entity: Merryall Manse, Inc. which is a non-profit non-membership corporation taxed at approx 39%

The Bonus money goes here and is spent on the Manse.

2nd entity: Our new "non-restricted money" entity: Merryall Manse Minerals (for example), which is a Limited Partnership corporation taxed at whatever tax rate the partners are taxed at. Partnerships need partners. In this case there's one partner - Merryall Manse, Inc. So, the income is taxed at Merryall Manse, inc. rate of 39%.

The royalty money, should any ever come, goes here, and is spent on anything that its sole partner, Merryall Manse, Inc. wants to.

How we actually do it: The mechanics of implementing the solution are:

  1. Before we lease, we create the the limited partnership, for example, Merryall Manse Minerals.
  2. Merryall Manse, Inc. sells the gas rights to Merryall Manse Minerals for their market value which is what is being offered by the gas company ($3,500/acre or whatever they end up offering).
  3. Merryall Manse, Inc. sells the gas rights for market value, but asks for no money down - in effect, offers to finance the entire sale to Merryall Manse Minerals; and Merryall Manse Minerals then can make payments whenever it can manage to do so.
  4. Merryall Manse Minerals will pay the State its transfer tax of 2% (that's what the State is happy about, and why it must be sold for market value) but not until it files taxes.
  5. Merryall Manse Minerals then leases the rights to the gas company and receives bonus money at some point.
  6. When Merryall Manse Minerals receives bonus money it then pays the bonus money to Merryall Manse, Inc. minus any money owed to the state and paid to the acountants and lawyers and whomever else needs to be paid in order to make all this happen.
  7. Now Merryall Manse Minerals sits, empty of money and owing no taxes, holding a lease for gas, waiting for royalties to come, if ever.
  8. Merryall Manse, Inc. now has the bonus money, minus the expenditures it took to make all this happen.

Email October 26, 2009: Re: Clean and Green

When drill permitting began for the Marcellus Shale two years ago, land parcels with clean and green status had that status revoked only on the 5-acre pad that was used for drilling and all the back taxes were paid only on that portion. Many people who leased, then got drilled on actually paid more in back taxes to have the drill pad than they received for the lease. Future leases began to include a clause that provided that the gas company pay the back taxes and that is now the norm.

Now the revocation of the clean and green tax status has been revised to the entire parcel on which the pad is located.

However, the clean and green status on our land is not affected by our stipulation of a no-disturbance-lease. It's revoked only if you have drilling actually on the property. That's from the assessor's office in Towanda.