SURE Lease Ad Valorum Tax: Getting Chesapeake to Pay

The SURE lease states that CHK is responsible for paying the Ad Valorum Tax bill that was recently received. What steps are you taking to make sure that CHK pays the bill?  I was told by the Carroll County Treasurers office that they could not bill Chesapeake directly. Has anyone contacted CHK about this?  Planning to send a letter with a copy of the lease and the bill to CHK via registered mail unless someone has a better idea? Thanks for your input!

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Permalink Reply by Cheryl on February 10, 2015 at 2:35am

The Ad Valorem tax rate on mineral property varies from state to state. Best I can tell, ours works out to about 3.7% in a formula that looks like this:  Land Value x 35% = taxable land value.  Taxable Land Value x 3.7% = Ad Valorum tax due.  Your county/state may calculate differently, so you'll have to contact your Auditor's office to learn more. Once again, in Ohio, the Ad Valorem tax is in addition to your regular real estate taxes, so be sure to plan ahead and set aside enough money for taxes!

Permalink Reply by Cheryl on February 9, 2015 at 5:04pm

I agree that an Ad Valorem tax is not a property tax.  But there is a difference between the Ad Valorem tax and severence taxes.  The severence tax is based on product that comes out of the well, while the Ad Valorem tax is based on the property's added value because of the resources in the ground. The Ad Valorem tax has to do with the market value of mineral reserves, and is reassessed every year on the remaining value of the reserves.

Permalink Reply by Dexter Green on February 9, 2015 at 5:41pm

"BTW, an ad valorem tax is not a property tax."

It really is.  It's a value-based tax on any personal property.

Permalink Reply by Cheryl on February 10, 2015 at 2:40am

This is true. If you google "Ad Valorum Tax" you'll find that its used in many different ways, for many different purposes.  As it relates to minerals, I guess the important thing is to understand that it is separate from and in addition to your regular real estate tax bill.

Permalink Reply by John on February 8, 2015 at 5:14pm
That's what I thought. I guess that is what I am a bit confused by. There is a clause that says they must pay ad Valerom taxes, and in the very next clause states they only have to pay the DIFFERENCE in increase in property taxes. So which one is it? Unless I am missing something those two clauses contradict each other.
Permalink Reply by Cheryl on February 8, 2015 at 5:28pm

Ad Valorum tax is NOT real estate/property tax, but is, instead, a tax based on the value of the resources.  In Ohio, it is separate and in addition to your property taxes. If you are receiving royalties, you will get a tax bill that will be in addition to any real estate taxes and will be identified as an Ad Valorum tax bill. 

The second paragraph you referred to in the lease discusses what happens if your real estate taxes increase because of oil and gas activities/structures/etc. That would be totally different than the Ad Valorum tax.

For a well that went into production in June of 2013, the Ad Valorum tax bill has just arrived in our mailbox January 2015.  CHK is responsible for paying this tax bill.  We will pay the (large) tax bill and seek reimbursement from CHK this year, but I'm hoping for a way to get them to pay the tax directly in the future so that I don't have to send a demand letter every year.  I would think they could work it out with the Auditor/Treasurer to be billed for taxes that are their responsibility.

Permalink Reply by John on February 9, 2015 at 1:43am
Cheryl- thanks so much for the info. Very informative. So once you receive the first ad valorem bill is that something you should receive on a yearly basis?
Permalink Reply by Cheryl on February 9, 2015 at 11:58am

Yes, that will be an annual tax bill that you'll get when you get your real estate tax bill.

Permalink Reply by Dexter Green on February 9, 2015 at 5:43pm

"Ad Valorum tax is NOT real estate/property tax, but is, instead, a tax based on the value of the resources."

Half right.  It's a tax on personal property.  In this case minerals.  Your real estate taxes are by definition ad valorem taxes.  

Permalink Reply by Frank Walker on February 9, 2015 at 5:56pm

You know, Dex, I think you're right about that second part!  Can't say as I ever thought about it your way before, though.  But, sure, real estate taxes are just another kind of ad valorem tax.  Like I wrote above to Jesse, there are a great many varieties of ad valorem taxes;  it's a big, broad category of taxation which is, as you ably pointed out, not confined alone to considerations of minerals.  Far from it!

Real estate taxes are ad valorem taxes.  Severance taxes are ad valorem taxes,  But severance taxes are not real estate taxes any more than real estate taxes are severance taxes.  Just because the two both fall under the broad heading of ad valorem taxes, does not make them the same.

Permalink Reply by Dexter Green on February 10, 2015 at 3:17pm

Severance tax is not ad valorem as it is based on volume and not value.

Permalink Reply by Frank Walker on February 11, 2015 at 2:28am

Gosh, Dex, I surely hope you're right.  It would be wonderful.  But I think I'll have quite a bit of trouble selling that thinking to my Lessee!

After all, only price stands between volume and value.  I'm not at all sure that's gonna be a large enough fig leaf to save me, or to save other PA landowners!

Still, I'm willing to concede much might depend, for each of us individually, on precisely which company our Lessee is.

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