Longmont real estate precedent will cost you lots of $$$

Longmont, in Boulder county Colorado, is setting some interesting real estate precedents that could impact the rest of Colorado.  This precedent will be far reaching and will be very expensive not only for residents of Longmont but throughout the state.  Longmont, like many front range communities, is on the forefront of the battle between housing / commercial development and energy extraction.  To eliminate the conflict, Longmont banned fracking which was struck down by the supreme court.  As a result Longmont is taking a new approach that will cost taxpayers millions.

Buy out extractive industries:

The Longmont city council came to an agreement to pay $3 million dollars to mineral rights owners within the city’s boundaries to ensure no “surface disruption” within the city.  Along with three million dollars, the city also allowed one driller to utilize city owned mineral rights and pay the city royalties (source Longmont Times Call).

What does this mean?

The agreement bans “surface disruption” within the city but does not stop drilling within the city limits.  For example, an operator can go 5 feet outside the city limits and drill a mile or two underneath the city of Longmont.  This essentially forces well pads a little farther away from residential and commercial development but does not stop drilling or hydraulic fracturing.

Why was this done by the city?

The city’s leaders are under immense pressure by their constituents to prevent oil rigs from being next to their houses or businesses.  Nobody wants to own a house next door to an oil pad.  It severely decreases your property value by any metric.   On the commercial side, who wants to go to a day spa next door to a well pad?  These conflicts are real and will continue to increase as areas like Longmont expand due to the influx of residents and businesses throughout the front range.

Will this create “moral hazard”?

If this buyout becomes precedent setting I can guarantee that a “moral hazard” will be created.  Why wouldn’t someone who owns mineral rights around let’s say Berthoud approach the city and say they were going to develop the mineral rights inside the city limits.  They could begin putting in well heads even if the area was totally unproductive to force the city to a) pay them money to not drill or b) trade for a more productive lease.  I suspect there will be a mad dash for mineral rights in possibly unproductive areas to get buy outs from cities so that housing/commercial development is not impacted.

Does this agreement really resolve the conflict?

I understand why the city did this buyout but am doubtful this agreement does much to help the conflict. What happens as the city grows?  As more land is annexed the expectation is now for the city to continually buy leases within the annexed areas to protect them from surface disruption.  Where does this end?  Will city taxpayers want to spend millions to buy out new leases or on other items (schools, roads, fire. Etc…).  Will taxpayers now oppose any future annexations due to the prospective surface disruption issues?

Not only does the agreement only provide a short-term fix, it could make the situation far worse for other cities due to the moral hazard issue created.  The conflict between mineral extraction and housing needs/other commercial development will continue to increase as the population of Colorado continues increasing.  Longmont’s solution, although innovative, will exacerbate the conflict going forward.  The only real solution to the conflict is a statewide legislative initiative to try and reduce the conflict.

Resources/Additional Reading

1. https://www.thedenverchannel.com/news/front-range/longmont/longmont-city-council-agrees-to-deal-with-energy-companies-to-end-surface-drilling-in-city-limits
2. http://www.timescall.com/longmont-local-news/ci_31880890/longmont-city-officials-barraged-questions-about-oil-gas

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Written by Glen Weinberg, COO/ VP Fairview Commercial Lending.  Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in the Colorado Real Estate Journal, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.

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