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UPDATED: There Will Be Gas: Shale Strike Brings Wildcat Mentality in Louisiana

Property Frenzy, Fighting Erupts After Huge New Natural Gas Field Discovered in Shreveport
June 25, 2008
The folks in the Shreveport - Bossier City area of northwest Louisiana weren't around in the Gold Rush days of 1849, but they are getting a taste of what it must have been like, including the hullabaloo and skirmishing that occurs when hundreds of millions of dollar are at play.

A frenzy of commotion was touched off there three months ago when Chesapeake Energy Corp. announced the discovery of a massive natural gas field in the Haynesville Shale in Louisiana. Some people believe that it may be the largest onshore natural gas field in North America. Chesapeake claims simply that it could potentially have a larger impact on the company than any other play in which it has participated.

The Oklahoma City energy company isn't alone.

(Editor's Note: This story was updated at 9:20 am Thurs. June 26 with additional information regarding the disposal of the Shreveport Industrial Park.)

"The big energy players have now leased close to 2 million acres, and are gearing up to bring in an estimated 50 to 100 rigs between now and the end of 2009. They would move faster but the rigs aren't available, but they will be here for many years," Bill Sale, CCIM, president of Sale Commercial Properties in Bossier City, told CoStar Advisor. "As you can probably surmise … there is a lot of excitement."

Energy companies have hired hundreds of "landmen" to work the area. Competition among these companies and their landmen has resulted in many land owners receiving offers to lease their mineral rights, some for significant sums of money, and has created a "gold rush" atmosphere, according to the Shreveport Mayor's office. Two energy companies in particular -- PetroHawk Energy and Chesapeake -- have been particularly aggressive in approaching property owners about locking up mineral rights to landowners' properties.

And while the primary activity is focusing on the mineral rights, it is also having an impact on above-ground property values - both positive and negative.

Above-ground real estate values are probably not affected, "except where the mineral lease includes a right to drill on the property. Then that could have a negative impact," Scott P. Sealy, chairman of Sealy and Co., a commercial brokerage firm based in Shreveport and active throughout the South, told Advisor. "As to investment demand, the additional dollars from the mineral leases will certainly have a positive affect. The additional capital will increase demand for investment properties from local investors, which will tend to keep cap rates at a lower level than an ordinarily balanced capital market."

But don't tell Robin Rodriguez that the discovery is not having an immediate impact in property value increases. Rodriguez is managing member of Anglo-American Financial in Charlottesville, VA, and Cordell Funding LLLP and chairman of Stonegate Bank in Miami. Rodriguez specializes in asset-based lending and debtor-in-possession financing to companies that are unable to obtain sufficient financing through conventional bank sources.

Rodriguez's lending activity brought him in a convoluted fashion to controlling the outcome of Shreveport Industrial Park, a nearly empty 42-year-old, 956,735-square-foot Class C industrial distribution building at 9595 Mansfield Road in Shreveport.

Last fall, Rodriguez's Cordell Funding sued indicted Miami developer Edward H. Okun to recover millions it loaned to Okun prior to when Okun's finance and real estate empire collapsed into numerous bankruptcy actions. Cordell had initially sued Okun in a New York state court, but a federal judge transferred the suit to the U.S. Bankruptcy Court in Manhattan, where Gerard McHale, the court-appointed Chapter 11 trustee of Okun's 1031 Tax Group, was selling off Okun's assets.

As part of that bankruptcy case, McHale turned over the rights to the Shreveport and other Okun facilities to Cordell Funding, which was owed $17 million. McHale said at the time the properties were too expensive for the bankruptcy court to maintain.

That was all before the natural gas discovery.

Rodriguez ended up with a diamond in the rough and is chafing at McHale's latest bankruptcy action filed this month. McHale has filed a motion to have the bankruptcy judge of the 1031 Tax Group vacate part of the order giving Cordell Funding rights to the Shreveport property. At the same time, McHale has asked the bankruptcy judge to approve a mineral rights lease with PetroHawk Energy.

McHale's latest bankruptcy action shows just how the natural gas discovery is turning properties with little value into gold mines. According to court papers, the amount that could potentially be reaped by the Shreveport Industrial Park for entering into a mineral rights lease ranges from $30 million to $57 million.

"We did contest the relief request yesterday," Rodriguez told CoStar Advisor, "and it is my understanding that the judge is requiring the Trustee to sign the foreclosure judgment and will allow it to go up for sale. However, the judge will want us to go back to court before the sale and will have an evidentiary hearing some time in July with expedited discovery."

"The judge told them they have a very heavy burden to overcome and that he is very concerned with the prejudice to us and the potential loss of the film tax credits," Rodriguez said.

Rodriguez added that prospective buyers have already approached him.

Who gets that money, whether it is Rodriguez or the hundreds of creditors of The 1031 Tax Group, will eventually be determined by the bankruptcy court.

Shreveport itself could be the big winner, overall.

Bill Sale of Sale Commercial Properties in Bossier City put the overall impact into perspective.

The Haynesville Shale find compares in scope to the Barnett Shale development in and around Fort Worth Texas, he said.

Sale said according to a report prepared for the Fort Worth Chamber of Commerce outlining the economic impact of the Barnett Shale play on that area, there was a permanent job increase of more than 83,000 from 2001 through 2007.

"The northwest Louisiana MSA [metropolitan statistical area] has approximately 185,000 existing jobs," Sale said. "If, like the Barnett Shale play, we increase by 83,000 additional jobs - a 45% increase in a six-year period - the effect on all types of real estate would be dramatic."

"Does this mean that Shreveport-Bossier City is actually on the verge of a 50% to 80% increase in commercial property demand," Sale asks. "It's hard to comprehend."
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