October 27, 2011 —
In calculating the impact of natural gas drilling on local economies, one of the areas that has remained the vaguest is the question of its impact on property values. On the one hand, we have reports that, for instance, rental housing becomes extremely scarce and rents skyrocket in areas with intensive gas drilling activity, which certainly sounds like a plus for landlords. On the other hand, we have reports that real estate sales and values, especially for second homes or retirement homes, have suffered in response to the uncertainties regarding the possible advent of gas drilling in our area, as have renovation and architectural design-related businesses. And obviously, property values in places like Dimock, PA, where homeowners have lost access to potable water, have effectively fallen to zero.
But until very recently, the evidence on this subject has been largely anecdotal. Now, a story in last week’s New York Times, as well as a study done by Tompkins County Council of Governments’ Task Force on Gas Drilling, have helped pin down some of the potential impacts of gas drilling on property values and the real estate market. They focus on problems related to the policies of mortgage lenders regarding natural gas drilling on the land that serves as collateral on their loans.
The article and report find that many lenders are unwilling to extend mortgages on properties on which there are natural gas leases. Others are unwilling to extend such mortgages except under certain conditions, such as a 200- or 300-foot setback from the residence. Such setbacks compare to New York State requirements of only 50 to 150 feet (depending on the targeted formation), creating an obvious problem: even those who have not leased can be forced into technical default on their mortgage by a neighbor who does lease, through no fault of their own.
There are two other factors that could increase the frequency with which such situations occur. The first is New York State’s policy of compulsory integration, according to which any gas driller who can certify that it has leased 60% of a drilling unit (a square mile) can co-opt the remaining 40%. The second is the fact that for many mortgage lenders, the setback requirements apply not only to surface activity, but to subsurface activities, increasing the affected area in the case of horizontal drilling far out beyond the setbacks from the vertical well bores to the extreme length of the horizontal bores.
The combination of these two factors could obviously have the effect of forcing numerous property owners who have no wish to lease into non-compliance with the terms of their mortgages. Properties in technical default on their current mortgages, and/or properties on which it is difficult or impossible to get a new mortgage, could become virtually unsaleable.
So, it looks like the action of the state, in collusion with drilling companies, could result in a significant number of properties becoming unmarketable and therefore worthless.
Sound familiar? It should. It’s called a “wrongful taking.” It certainly satisfies two major criteria: the property would be left with at most “a bare residue” of its worth, and the problem would not be self-created.
A third criterion—whether those who suffer are being unfairly singled out to pay for the supposed good of the whole—is perhaps not so black and white. It’s true that the Marcellus Shale covers a fairly large swath of New York State, so if a lot of properties are integrated it could be argued that too many people are affected in order to count as “singled out.” But let’s face it: if so many people were affected that they couldn’t be perceived as unfairly singled out, that would mean that a vast portion of New York real estate had become worthless—a pretty steep price to pay for any perceived public benefits of chasing after an obsolescent energy source like natural gas.
The bankers—and the investors to whom they wish to be able to sell mortgage-backed securities—have not created this situation because they are sentimentalists or tree huggers. They are businessmen, and many of them have apparently made the decision that land upon which natural gas leases have been signed is in such danger of becoming worthless that they don’t want to take a risk on it.
Think about it.