1031 Oil and Gas: Oil and Gas Tenant-in-Common Properties
Comparing Oil and Gas to TICs and associated Taxes
* purchase of O&G assets can provide investors with portfolio diversification
* diversification can be prudent because there is low correlation historically between O&G property value and commercial real estate property value.
* Individual real estate properties often carry local/regional risk
* O&G assets also can serve as a hedge against rising energy prices.
* Generally, energy properties are more liquid than TICs
Like Tenants in Common property (TIC), oil and gas properties (O&G) produce a monthly cash flow, require little management and have intrinsic value. However, unlike conventional TICs, they are diversified both by geography and product and generally do not require investors to sign personal guarantees. Most O&G replacement properties enjoy cash flow from a combination of oil and natural gas production. Because the O&G market is worldwide, or at least regional, they also generally minimize locale-specific economic trends and operator-specific business issues.
Additionally, purchase of O&G assets can provide investors with portfolio diversification, especially if an investor has a significant portion of his or her net worth in real estate. This diversification can be prudent because there is low correlation historically between O&G property value and commercial real estate property value.
While O&G production properties are not risk free, risk of investment is comparable to real estate TIC assets. The monthly production capacity in any given O&G property tends to average out to a known rate, and income fluctuation is mostly dependent on energy pricesthe higher the price of energy commodities, the greater the income.
Having O&G assets in your investment portfolio may help distribute or diversify risk away from factors that may devalue other kinds of assets. Individual real estate properties often carry local/regional risk because they are often strongly tied to local economic and development trends whereas ownership of geographically diverse energy-based investments offers a degree of insulation from local trends. O&G investments are instead often subject to production risks and O&G market risk. O&G assets also can serve as a hedge against rising energy prices. Other portions of your portfolio would tend to decrease as energy prices increase (certain stocks/certain real estate). Moreover, long-term performance history of O&G properties has shown only weak (or negative) correlation to Wall Street.
Although private placements are generally limited to investors who are not buying with a view to distribution, there can be a number of situations where an investor can need or desire liquidity. Generally, energy properties are more liquid than TICs. Partial or complete divestment can often be accomplished rapidly through a variety of existing and established methods, ranging from direct transfer/sale (usually 15-30 days), to online auctions (typically lasting 30 days), to traditional auctions through specialized auction houses (typically around 60 days) or divestment/brokerage firms (usually 45-60 days). The options in the liquidity spectrum for energy assets offer turn-around that can be as little as two weeks, and put your offerings into active, highly-competitive bidding environments to optimize the sale price of your properties.