What is an Override?
Definition
An “override” can have multiple meanings depending on the context in which it’s used:
-
Compensation Context: An override commonly refers to a fee paid to someone higher in the organization, or above a certain amount, typically representing a percentage of earnings or sales. Overrides are often seen in sales-related fields.
- Example: In many sales organizations, a salesperson might be required to pay an override of 10% of their gross commissions to their managing broker.
-
Oil and Gas Lease Context: In the oil and gas industry, an override, specifically called an overriding royalty interest (ORRI), is an estate carved out of a working interest in an oil and gas lease.
- Example: As part of an oil and gas lease negotiation, an attorney might secure an overriding royalty interest requiring a 2% cut of production from the well.
Examples
Real Estate Sales:
- Scenario: John, a real estate agent, closes a deal and earns a commission of $5,000. Based on his agreement with his broker, John needs to pay an override of 10%. Therefore, he pays $500 to his managing broker.
Oil and Gas Lease:
- Scenario: Anna, a lawyer, negotiates an oil lease for a client. As part of the deal, she earns an overriding royalty of 2% on the production from the well. If the well produces $100,000 worth of oil, Anna earns $2,000 from her override.
Frequently Asked Questions
What is an overriding royalty?
An overriding royalty (ORRI) is an interest in the oil and gas production of a lease, which provides the owner a percentage of production revenue without bearing any of the costs of production.
How is an override calculated in sales?
An override in sales is calculated as a percentage of the sales commissions that a subordinate earns, paid to their superior or managing broker according to their agreement.
Are overrides commonly seen in all industries?
Overrides are common in sales and certain extractive industries like oil and gas. They are less common in other industries but can occur in any field where management oversight or negotiated expertise is valued with a percentage of revenues or earnings.
Commission
- Definition: A fee paid to someone, usually a salesperson, for performing a service, typically calculated as a percentage of the transaction amount.
Royalty
- Definition: A payment made to the owner of a resource or property for the right to use that property. For example, royalty payments are made to authors, musicians, and oil and gas leaseholders.
Broker
- Definition: An individual or firm that acts as an intermediary between buyers and sellers, usually taking a commission for their services.
Working Interest
- Definition: An ownership right in an oil and gas lease that comes with the responsibility for the cost of exploration, drilling, and production.
Online Resources
- Investopedia on Commission
- Nolo on Real Estate Brokers and Salespersons
- U.S. Department of Energy on Royalty Interest
References
- “The Law of Oil and Gas” by Richard W. Hemingway.
- “Brokerage and Agency: Your Comprehensive Guide to Real Estate Success” by Shannon King.
Suggested Books for Further Reading
- “Real Estate Principles: A Value Approach” by David C. Ling and Wayne R. Archer.
- “Oil & Gas Law in a Nutshell” by John S. Lowe.
Real Estate Basics: Override Fundamentals Quiz
### What is an override primarily in the sales context?
- [x] A portion of a subordinate's earnings paid to their superior.
- [ ] A commission paid directly to the client.
- [ ] Full payment made to the salesperson.
- [ ] A fee deducted from the sales amount.
> **Explanation:** An override in sales is typically a portion of a subordinate's earnings paid to their superior or broker as specified in their agreement.
### In the realm of oil and gas, what is an overriding royalty interest?
- [ ] An obligation to cover production costs.
- [x] An interest in the revenue from a lease without bearing production costs.
- [ ] Ownership of the land.
- [ ] A full production rights lease.
> **Explanation:** An overriding royalty interest provides a share of the production revenue without any obligations regarding production costs.
### Who typically pays the override in a real estate sales context?
- [x] The salesperson or agent.
- [ ] The client.
- [ ] The buyer.
- [ ] The supplier.
> **Explanation:** The override is usually paid by the salesperson or agent to their superior such as a managing broker.
### What percentage is common for an override in sales organizations?
- [ ] 1%
- [ ] 5%
- [x] 10%
- [ ] 20%
> **Explanation:** While percentages can vary, 10% is a common override in many sales organizations.
### Does an overriding royalty bear production costs in an oil and gas lease?
- [ ] Yes, it bears all production costs.
- [x] No, it does not bear production costs.
- [ ] It shares equally in production costs.
- [ ] It bears half the production costs.
> **Explanation:** An overriding royalty does not bear any production costs, it only earns from the gross production revenues.
### For which of the following is the override usually not applicable?
- [ ] Property management
- [ ] Real estate sales
- [ ] Oil and gas leases
- [x] Regular salaried positions
> **Explanation:** Regular salaried positions typically do not involve overrides, which are more common in commission-based roles.
### In which industry is an overriding royalty interest most commonly found?
- [ ] Technology
- [x] Oil and gas
- [ ] Retail
- [ ] Financial services
> **Explanation:** Overriding royalty interests are most commonly found in the oil and gas industry due to the nature of production and lease agreements.
### What is a key benefit of an overriding royalty interest?
- [ ] Full ownership of the property.
- [x] Revenue without production costs.
- [ ] Exemption from all taxes.
- [ ] Control over production decisions.
> **Explanation:** A key benefit of an overriding royalty interest is receiving revenue without bearing any production costs.
### What affiliations commonly result in overrides within a sales organization?
- [x] Sales agents and brokers.
- [ ] Clients and customers.
- [ ] Suppliers and manufacturers.
- [ ] Tenants and landlords.
> **Explanation:** Overrides typically involve relationships between sales agents and their managing brokers within a sales organization.
### How does an override affect a broker's income in a sales team structure?
- [ ] Reduces their net income.
- [x] Increases their income from subordinates' sales.
- [ ] Has no effect.
- [ ] Deducts from bonuses only.
> **Explanation:** Overrides increase a broker's income as they receive a percentage of their subordinates' sales commissions.