Satisfying A 1031 Exchange With The Balance Of Both - Real Estate & Energy

If you have been diligent in researching how to successfully complete a 1031 exchange employing a Tenant in Common (TIC) strategy, then you owe it to yourself to review the Private Oil & Gas Royalties that are available as a security to satisfy that same 1031 exchange.

If you equate Oil & Gas Royalty Investing with the extreme risk of drilling exploration or the unlimited liabilities involved with working interests then you would have over looked the sector providing ROYALTY INTERESTS from domestic oil fields that have been in steady stable production for decades. Energy investors have been enjoying the benefits of private royalty ownership and “like-kind” exchanges for over 60 years. Court Rulings dating back to the 1940’s have affirmed the opportunity for investors to accomplish tax deferral by exchanging between brick-and–mortar and royalty interest; both of which are forms of real estate. A quick comparison reveals the following:

Private Royalties:

Risk Diversification - Yes – multiple properties

Risk of Capital Call - No

Benefits from Rising Global Energy Prices - Yes

Independence from other Investors in the same Property - Yes

Secondary Markets - Yes

Low Correlation (when compared to interest rates, real estate markets and the economy) - Low

TIC’s:

Risk Diversification - No – one property

Risk of Capital Call - Yes

Benefits from Rising Global Energy Prices - No

Independence from other Investors in the same Property - No

Secondary Markets - No

Low Correlation (when compared to interest rates, real estate markets and the economy) - High

So where does the balance come in?
Many investors are nearing retirement age and they seek above all capital preservation and a steady stream of income to sustain their quality of life. Diversifying holdings to include Oil & Gas Royalties can further spread risk geographically and among assets classes, as well as capitalizing on the potential for higher returns. Reducing risk and increasing return is a wealth strategy we all strive to achieve. At the same time you’ve captured a host of additional benefits a typical real estate TIC investment does not have ash shown in the table above.

How does the economy affect Oil & Gas Royalties?
Supply and demand will always be a key driver in determining the value of royalty programs. Much of the supply side is affected by a limited number of refineries already peaked in production. Reserves have also been a hot button for analysts, especially since they are typically an over stated quantity, not necessarily verified. On the demand side; we’ve been watching the increasing consumptions in India and China. Both the near-term conditions and long-term supply-demand projections make the economics of energy programs very appealing.

How does it all tie together?
Royalties are not a replacement for “Bricks and Mortar” in the 1031 exchange market it is more a coexistent alternative. Each has a specific set of benefits and risks. They both can help the investor increase wealth and retain what they have earned. Having energy in a portfolio can bring a certain peace of mind; i.e. being able to spread out the risk in a commodity that has very low correlation to real estate markets, the national economy and interest rates. It may not be suitable for every investor. Suitability is crucial in determining your strategy of energy and real estate. If it is suitable, you now have real 1031 Exchange Alternatives.

Ricardo E. Jobin is Senior Vice President of 1031 Exchange Alternatives™. He is a retired Naval Officer (1995) and in 2000 attained an MBA in Strategic Management from Davenport University while serving as an executive board member for The Strategy Forum of Detroit. In 2001 Ricardo led a privately held corporation to rank 121st on the Inc. 500’s “Fastest Growing Privately Held Companies in America”. Currently, Ricardo is pursuing studies to attain certification as a “Wealth Strategist” and is a licensed securities agent and a registered representative of SIGMA Financial Corporation, member NASD & SIPC. For more information call 1-800-466-2003 or visit http://www.1031ea.com.