Royalty interest definition
/What is a Royalty Interest?
A royalty interest is an interest retained in the output of a property when the owner of mineral rights enters into a lease agreement. A royalty interest entitles the mineral rights owner to receive a portion of the minerals produced or a portion of the gross revenue from sold production. The holder of a royalty interest is responsible for any production or severance taxes associated with the holder’s share of production. The holder of a royalty interest is usually not responsible for the exploration, development, and production costs of the leased property, so the royalty interest is considered a non-operating interest.
A royalty interest continues for the term of the underlying lease agreement. Once the agreement terminates, the royalty interest is gone.
Example of a Royalty Interest
A landowner (grantor) leases her property to an oil and gas company (lessee) for exploration and production. The lease agreement specifies that the grantor retains a 12.5% royalty interest in the production, while the lessee agrees to bear all exploration, drilling, and production costs.
If the oil and gas well produces $1,000,000 in revenue, then the grantor receives 12.5% of this amount, which is $125,000. This payment is gross revenue, meaning that the grantor does not pay any of the production costs. Meanwhile, the lessee retains the remaining $875,000, but must pay for all operational costs. In this scenario, the grantor’s royalty interest provides passive income without operational responsibilities.
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FAQs
What Types of Minerals Can Generate Royalty Interests?
Royalty interests can be generated from a wide range of subsurface minerals, including oil, natural gas, coal, and metallic ores such as gold, silver, and copper. Industrial minerals like limestone, potash, and phosphate may also be subject to royalty agreements. Essentially, any extractable natural resource with commercial value can support a royalty interest.