In selling 2.5 NMA, subject to an existing 3/16 lease, someone recommended basing the value on net royalty acres. Can anyone explain what that means?
Net royalty acres is how 99% of buyers value minerals since lease royalty rates can vary. At 3/16, 2.5 NMA is equal to 3.75 NRA.
Dear Ms. Willis,
The way that I was taught to determine royalty acres, was that there were 8 royalty acres per mineral acre. Therefore the total royalty acres under your 2.5 mineral acres would be 20 royalty acres. You own 3/16 of the royalty under those 20 royalty acres, so your net royalty acres would be 3.75 net royalty acres (20 x 3/16).
So would 25 min acres at .25% equal 100 net royalty acres?
It would be 50 net royalty acres. The formula is:
Net mineral acres * 8 * royalty = net royalty acres
25 NMA * 8 * .25 = 50 NRA
Thank you, It's been a long time since I did any real math I got an offer once for net mineral acres. I did not sell. I find it foolish to sell minerals in the first place. I thought the person was pulling my leg. He probably thought I was a dunce too! lol
Before anybody shoots at us, your equation is almost correct. The correct equation is:
Net Royalty acres = Net mineral acres x 8 x (royalty-Non Participating Royalty Interest).
A Non Participating Royalty Interest in this case is hereby defined to be any burden to the royalty interest.
I suggest defining your sale in net mineral acres and then agreeing on a formula to reduce the per acre price to take into account royalty burdens like NPRIs. In my view, an NPRI burden should not reduce the sales price dollar for dollar, because the ability to receive bonuses and the executive rights are worth something.
This is a fine and accurate point Wade makes just above in my opinion.
I usually ask for NPRI burdens that are discovered during the title search to reduce the per acre price by 50%. Buyers usually push back and argue the property is unlikely to be leased again and their is little value in the potential bonuses.
A simpler formula for calculating your royalty acres is:
1/8 - 1.0 royalty acres per NMA
1/6 - 1.33 royalty acres per NMA
3/16 - 1.5 royalty acres per NMA
1/5 - 1.6 royalty acres per NMA
9/40 (22.5%) - 1.8 royalty acres per NMA
1/4 - 2.0 royalty acres per NMA
I have bought and sold lots of mineral and royalty interests and have never used a royalty acre as a basis for computation of consideration. Perhaps others have, but not me. For the most part, in my area of activity, a royalty acre is almost an term in antiquity.
Good Point, Wade.
The royalty acre is the standard unit of measurement in mineral and royalty business, and it will always be used by many mineral brokers (especially landmen) to quantify how much revenue interest is being purchased, which is how offers are ultimately determined. There is nothing wrong with using this method internally to determine an offer amount. However, bringing up the subject of royalty acres with the actual mineral owners is only going to lead to confusion or misunderstandings, in my experience. Mineral owners should negotiate in terms of net mineral acres, and the contract should reflect those terms.
Thank you very much. I see your responses in this forum a lot and you always explain things clearly.
How do you calculate net mineral acres if you don’t have a copy of the lease?
The lease usually doesn’t state NMA, you’ll have to ask the company who owns the lease or have title run by a landman to figure it out.
Thanks but the operator won’t send me the lease and I have already run title.
go to the online government records of the county your minerals are in and you should be able to find the oil contract and the deeds to the minerals which will tell you how much interested you have or how many net mineral acres you have. Most have online records that are filed and obtainable to the public. For example I have 10 acres out of 2560 which is 10/2560= mineral interest of .0039. The contract is 1/6th Royalty rate. take .0039 x (1/6) or (.1667)= .00651 rate of interest from every thing that comes out of the ground. I did the math on top of my head but that's how you do it.