Natural gas producers exploiting Pennsylvania's Marcellus Shale play and landowners leasing to them have encountered an unexpected complication in the Farmland and Forestland Assessment Act or what Pennsylvanians call "Act 319". Act 319 allows owners of land that is devoted to "agricultural use", "agricultural reserve" or "forest reserve" to pay real estate taxes based on a lower assessed value. The reduced assessment applies to land only, not improvements, but can yield quite significant savings.
Real estate taxes in Pennsylvania are imposed by school districts, county government and local government, but the assessment of the real estate value--on which the tax is based--is administered by the county assessor. The law allows the county assessor to value land enrolled in the Act 319 program at its agricultural or forest value rather than its unrestricted fair market value, which often will include some value for development potential and thus be higher. While the program is administered by each county assessor, the assessor is bound by the requirements of the Act. For example, the Assessor may not impose additional eligibility requirements.
When land is enrolled in the program the land owner executes a contract or covenant that is recorded in the office of the recorder of deeds of the county in which the land is located. The land will then remain subject to the preferential assessment until there is a voluntary termination by the owner or a "change of use". A change of use means a change in the use of all or part of the land such that it is no longer eligible for the program, i.e., it can no longer be classified as agricultural use, agricultural reserve or forest reserve. The owner of the enrolled land is required to notify the county assessor at least 30 days before a change of use. When the change of use occurs, the owner is obligated to pay the taxing authorities an amount equal to the tax savings the owner realized during the year of the change of use and during the preceding years (up to six), plus interest for that period on the tax savings amount at the rate of 6% per annum. This is called a "rollback".
The law allows several specific uses to be conducted on enrolled land without causing a rollback due to change of use . Among these are the lease of up to one half acre of the land for a cellular communications tower and the use of up to two acres of land for commercial sale of agricultural products. Natural gas production is not one of the specifically excepted uses.
Assessors in some counties have determined that they have no choice under the Act but to declare the addition of natural gas production use to a property as a "change of use" and impose the rollback. The financial impact of this on any particular property can be significant, but will depend on the amount of land in the program, whether the land is owned in distinct parcels such that only a portion of the land might be subject to the rollback, the number of years enrolled, the amount of tax savings that has accrued, and other factors.
Landmen will review titles and tax records before accepting leases to determine if properties are enrolled in Act 319. Landowners of enrolled properties will examine proposed or existing leases to determine if the obligation for a rollback is imposed on the producer or the owner. While the statute imposes the rollback on the owner, the obligation to pay is negotiable. Assessors should be consulted for their interpretations of the effect of gas production on eligibility. Assessors can quickly run calculations of the rollback amount so the parties to a lease can determine the financial impact of the rollback.
There has been public discussion of a possible legislative change to allow natural gas production as a use that would not trigger a rollback. The rationale for such a change would be sound. Among other things, the withdrawal of natural gas is a valuable right for the owner and important for the Commonwealth and the nation, gas exploration can often be done in a way that is not materially disruptive of certain agricultural production activities, and the economic benefits of natural gas production often will help the owner maintain the land in farming which is, of course, the purpose of Act 319.
Anticipating such legislation makes negotiation of a lease somewhat more complicated, since the limits of what will be allowed by the legislative exception if adopted cannot be known.
In Marcellus production the amount of disturbance initially can be significant, but the site is eventually returned to a predominantly natural condition; so typical cropland may not be greatly impacted by natural gas production. However, storage facilities, compressors and other improvements would yield a different result. In regard to forestland, there is the obvious consideration that the land used for the initial and perhaps the long term gas production activities will remain unsuitable for forest use; i.e., the trees are removed and the area remains clear. For this reason, it is possible that a legislative exception for natural gas production will require a partial rollback for the area impacted by the gas production, similar to the exception for a two acre "splitoff" for subdivision of a residential lot. So delineating the limits of impact by the gas production could be important. Again, this is all speculation until an exception is adopted, but some speculation and pre-planning at the time of lease signing could be helpful later.
For owners whose land has already been subjected to rollback due to gas production, the part of the land that remains eligible (is not affected by the natural gas production) should remain enrolled, though a boundary of the ineligible use must be established. For owners who have a gas production lease on their land that is not enrolled in Act 319, but want to enroll, the Act does allow for the enrollment of the entire tract, though the ineligible gas production land will not receive the benefits of Act 319 and the boundaries of that area must be set at the time of enrollment.
If an owner has land subject to a lease but the lease does not limit the area of potential disturbance, it would seem necessary for the owner to negotiate boundaries with the leaseholder so that the requirements of the Act can be met for the land that is eligible, and to avoid a future rollback of the whole tract; however this is an area that should be discussed with the assessor and reviewed with counsel to consider the owners options.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
