Economics of Compensation

The 42

The Economics of Compensation Offers for Pipeline Easements in Texas

As stated earlier, the compensation element of an easement agreement is important, but not necessarily the most important aspect of the entire agreement. With that context, we examine some of the specifics about the compensation, or “offer” associated with the easement agreement.

For this discussion we will use two primary sources of market data, all of which are in the public domain, and freely available. One source, The Real Estate Center at Texas A & M University provides data, and analysis for rural, and other properties in Texas, and the University of Texas UT Lands system, which is a resource for specific information on pipeline easement pricing on university lands.

This is the link to the TAMU Rural Lands data:

https://www.recenter.tamu.edu/data/rural-land

This is the link to the UT Lands Data:

http://www.utlands.utsystem.edu/forms/pdfs/rate_damage_schedule.pdf

Using the TAMU resources, we find that in 2014, the most recent year for which complete valuation data is available, that land in Brewster, and Presidio counties, LMA 8, had a “nominal” median value of $450/acre, and a “real” median value of $80/acre.

Sparing the lesson in economics, the difference between the “nominal” and “real” values is a the result of a technique called normalization, used to remove the effect of price fluctuations and inflation from a data series – in other words, this normalization technique is deflating the nominal, or market price of the land asset to a normalized value. For our purposes, the “spread” of $370 between the 2014 nominal median value, and the 2014 real median value, per acre represents the effect of price fluctuations that occur as a function of time, the number of acres sold in any given transaction, and the effects of inflation/deflation in the larger economy.

From this, we can use the $80 “real” value as a per-acre price floor. If we are granting an easement, based on a 50-foot permanent easement width, a linear foot of easement represents 50-square feet of area. An acre is approximately 43,560 square feet. A one linear foot easement is thus approximately 0.00114 of an acre, and at $80/acre, a single linear foot of easement would have a “floor” value of $0.091 (slightly less than 10-cents per linear foot). At the “nominal” value of $450/acre, a linear foot of easement would be valued at approximately $0.5165 (slightly more than 50-cents per linear foot).

The UT Lands data, pages 5 (roads), 6 (pipeline permanent easements), and 7 (maintenance of pipeline easements are the relevant source for how the University prices easements on university lands. Specifically, the table on page 6 provides starting points for pipelines of various diameters, in a price per rod format.

Table “B” on page 6 provides per-rod rates in for pipelines from less than 6” in diameter to greater than 24” in diameter. Using the data for 24” or greater pipelines, we can derive the price per rod of a 42” pipeline, based on its diameter, and the linear foot of permanent easement as a ratio of that for a 24” line. Note that a “rod”, a surveyor’s term, is a linear distance measurement that equals 16.5 linear feet.

One direct method is to convert the per-rod value for a 24” diameter line to an equivalent value for a 42” line, representative of the proposed Trans-Pecos Pipeline affecting Brewster and Presidio counties. At $90/rod for a 24” line, using a scaling factor of 1.75 (a 42” line is 1.75 times the diameter of a 24” line, based on the ratio of diameters, 42/24 = 1.75), we find that one potential price for a 42” line is $157.50/rod, or converted to linear feet, approximately $9.55/linear foot.

Other methods use a value per inch of diameter formula to arrive at a price per linear foot. Common prices in the active shale gas areas in Texas, including the Barnett, and Eagle Ford Shale regions range from $1.00 per inch of diameter per linear foot to $2.00 per inch of diameter per linear foot. For example, using the latter figure, a 42” line would generate a price of $84/linear foot, or $1,386/rod based on the calculation 42 x 2 = 84.

The fourth sources of data include the price a landowner paid for the affected property, and sales data from private and public transactions for area land – more recent “comparables” are better than older sales data – this information is available from the county appraisal district, the county assessor-collector, and deed information filed at the county court, with the county clerk.

The three enumerated sources, including TAMU Real Estate Center, UT Lands, and Barnett / Eagle Ford Shale region give us a wide spread of basic pricing and valuation data, for a 42” line:

  • TAMU data: from approximately $0.10 to $0.51 per linear foot, on the basis of a 50-foot easement
  • UT Lands data: about $9.55 per linear foot, for a 50-foot easement
  • Barnett / Eagle Ford Shale Region data: between $42 and $84 per linear foot, for a 50-foot easement

The TAMU data reflects only “raw” value, aggregated over all property in the LMA 8 region for Brewster and Presidio counties.

The UT Lands data reflects valuation based on a 10-year easement period, “all in”, including damages associated with the construction easement (installation) and the use of the permanent easement. This valuation excludes ingress/egress (roads), remainder damages, and maintenance-related damages, which are negotiated separately. Note also that this valuation is the minimum published valuation – the negotiated, or final values are higher.

The Barnett / Eagle Ford Shale Region data is an “all in,” averaged market value, providing a rule-of-thumb basis for valuing an easement offer. This method lumps together the damages associated with the temporary construction easement, the 50-foot permanent easement, any remainder or special damages, and any ingress/egress damages. It is probably most representative of a real-world, pragmatic method of evaluating an easement offer.

Using basic statistics, from the five data points ($0.10, $0.51, $9.55,$42, $84), the average value per linear foot is $27.23, and the median value is $9.55.

From this analysis, the suggested “best”, and most representative value of one linear foot of easement would be the median, or $9.55 per linear foot.

In turn, it is likely that offers less than the median are not representative of fair market value.

On the basis of a 10-year duration, 50-foot wide permanent easement, for a 42” diameter pipeline, exclusive of remainder or special damages, ingress/egress damages, or other factors, the $9.55 per linear foot value represents a good starting point for negotiating compensation.

At this point, it is important to emphasize the following:

Compensation for an easement, and the offer for an easement agreement is a one-time payment, covering all instant, and future damages. There is no recurring payment stream associated with a pipeline easement.

It is extremely important to keep this fact front-and-center in assessing and analyzing the compensation offer for an easement. Many landowners are led to believe that the pipeline easement offers a recurring revenue stream to the Grantor, and in some cases misrepresentation is made that the Grantor will be the financial beneficiary of a recurring royalty payment stream, or other recurring revenue stream by granting the easement. This is not true – there is no recurring payment stream associated with the easement!

Other factors to consider in evaluating the offer are:

  • remainder damages: remainder damages is the compensation associated with any reduction in value that results from grant of the easement. For an example, consider a landowner who owns a full section of land, bounded by north, south, east, and west fence lines. A pipeline easement is proposed along the western boundary of the property, running parallel, with the west fence-line, from north to south. The easement centerline is 100-feet from the west fence-line. When the pipeline is completed, the 50-foot permanent easement would leave a 5,280-foot strip of land, 75-feet wide, to the west of the permanent pipeline easement. Because an easement precludes building any permanent structures, any deep-rooted vegetation, or crossing the easement with infrastructure like irrigation lines, that 5,280-foot by 75-foot wide portion (the remainder) of the property is reduced in value. In this case, the acre equivalent is 9.09 acres – a reasonable offer of remainder damages might be the “real” value, $80 per acre, multiplied by the number of affected acres, in this example 9.09 x $80 = $727.27, or about $730.
  • special damages: this part of the compensation is associated with losses that may be the result of construction, for example demolition of a barn, outbuilding, septic leach field, tank or pond, or any object in the proposed right-of-way that would be removed as a result of installing the pipeline, and the presence of the 50-foot wide permanent easement. Special damages may also be associated with the loss of revenue from productive activity on the property that result from construction or related activity, for example construction occurring during hunting season may result in the loss of revenue from seasonal hunting leases. Other examples include the loss of grazing or forage that may necessitate bringing in supplementary hay or feed, or the destruction of crops prior to harvest. Compensation for special damages is unique to each easement agreement, and the valuation of this offer depends on things like the value of a structure, the cost of relocating a tank, or the cost of transport and price of feed, among many variables.
  • Ingress/egress damages, and ongoing damages associated with maintenance of the easement and pipeline. The easement must be periodically inspected, to detect leaks in the pipeline. It is maintained, either by mowing, or by application of herbicide, or a combination of these vegetation control methods. If surface facilities are present, periodic access may be required. During construction, sometimes the use of existing roads on the property is requested, involving movement of vehicles, including heavy construction equipment on these roads. The wear-and-tear on these roads is something the landowner should be compensated for. If it is necessary to relocate livestock during mowing or herbicide application, the landowner should be compensated. These items need to be evaluated, and factored into the easement offer.

The next sections of this document cover elements of a typical easement agreement, and specific items of concern, or areas of attention that a landowner, or Grantor should pay close attention to.