Water Markets – Articles

Water Markets - CAP Canal with mountains in distance. Photo credit

Recent Water Market Activity in Arizona

Two articles published in Journal of Water reported on two recent surface water market transactions in Arizona.  Both transactions aim to transfer Colorado River surface water from less populous rural areas to the Central Arizona Water Conservation District (CAWCD).

As cities continue to grow so does their thirst for water and the need to look beyond to alternative or new sources of water.  Rising demand is often partially satisfied through groundwater mining or a heavy dependence on groundwater pumping.  When pumping becomes unsustainable or there are imposed regulatory restrictions, water transfers may be necessary for sustained growth and economic productivity.

With a significant portion of Arizona’s surface freshwater coming from the Colorado River (about 40% of total surface water withdraws; 2.8 million Acre-Feet/Year) the notion of transferring water as a long-term- strategy should raise concerns.  A 2017 study published by the USGS finds the river’s flow has diminished by about seven percent over the past 30-years due to rising temperatures and increased evaporative loss—among other factors.  To put this departure into context, this magnitude of decrease in Upper Colorado River Basin (UCRB) flow is approximately 24% of the allotment of UCRB flow to California, or 38% of the allotment to Arizona, or 353% of the allotment of UCRB flow to Nevada.

This article highlights two recent water transfers in various stages of completion.  Both aim to transfer water rights from rural western Arizona to the rapidly growing tri-county CAWCD.  The transfer destination is relevant—Arizona’s three largest cities, Phoenix, Tucson, and Mesa are all located in this region.

We take a snapshot look at the funding mechanisms behind the transfers and discuss some observations and challenges facing water market activity.

Central Arizona Water Conservation District (CAWCD) – The Town of Quartzsite

The Central Arizona Water Conservation District (CAWCD) Board of Directors has approved a 25-year renewable lease agreement to secure additional Colorado River water from the Town of Quartzsite.  Under the proposed agreement, CAWCD will lease the town’s 1,070 Acre-Feet/year 4th Priority Colorado River entitlement. Entitlement is another way of saying that there is a vested right to appropriate water of a given quantity, from a location for a beneficial use.

The water entitlement has not been used in the past due to high costs associated with constructing a pipeline that would need to span 20 miles to get water to where it’s needed. The deal will be structured this way—the CAWCD will make a one-time lease agreement payment of $30,000 and, during the initial term, will pay $1,700/AF.


Water Markets - Arizona Map including CAWCD Boundary and Mohave Valley

During the extension period, the price could increase to $2,470 Acre-Feet. The agreement must be approved by the Secretary of the Interior as part of the Bureau of Reclamation’s approval of the agreement.

The CAWCD was created in 1971 pursuant to state law to provide a means for Arizona to repay the federal government for the reimbursable costs of construction of the Central Arizona Project (CAP) and to manage, operate and maintain CAP.  Over time as water infrastructure, allocation and governance challenges change so have the statutory authorities and responsibilities of CAWCD.  A component of those authorities and responsibilities now includes the management of strategic and other reserves—hence sourcing additional water.

The CAWD covers a populated tri-county (Maricopa, Pinal, and Pima) in the southern region of the state and includes Phoenix, Tucson and Mesa.

Mohave Valley Irrigation and Drainage District

The Mohave Valley Irrigation and Drainage District (MVIDD) is set to purchase land and water from Water Asset Management LLC and Water Property Investor LP. The package is comprised of seven farms totaling 2,2023 and 13,929 Acre-Feet of Colorado River diversion rights.  Of the approximate 14,000 Acre-Feet, roughly 82% by volume are 4th Priority rights under subcontracts with MVIDD, while the remaining 18% are considered perfected rights.  Total cost is $34 million dollars.

As of March 6, the Mohave County Supervisors voted unanimously to approve $20,000 to file for court standing in opposition to the deal expressing concerns over asset stripping (water being removed from the county in this instance) their ability to provide for future needs.

According to a recent article in the Daily Miner the property transaction is currently in the due diligence period, which includes discussing the development of a rotational fallowing program with MVIDD, extending farm leases and reviewing the title report. Closing is contingent upon MVIDD approving the agreement.

Where Does the Funding Come From?

The funding for both market transfers will come from the Central Arizona Groundwater Replenishment District’s Water Rights and Infrastructure Account Reserves (CAGRD). The CAGRD Water Rights & Infrastructure Reserves, is governed by ARS §48‐3772(7)(d) and ARS §48‐3779(H) and includes both Committed and Restricted Funds and carried a $48 million dollar balance as of June 2017.  If you are still confused as to what exactly CAGRD does, here is the simple answer– the division of CAWCD that carries out the district’s groundwater replenishment authorities.

The real estate – water – nexus affects the timing and revenue of water supply projects. For CAWCD the housing market directly impacts the utility’s ability to generate revenue.  This revenue is important not only to carry out day-to-day activities but also to augment reserves that ultimately partially fund the CAGRD and its mission to build, operate and maintain underground storage projects.

Observations and Discussion

There are several interesting things worth noting about these two water market transactions. Foremost they underscore some of the truisms and challenges of water markets in the western US.  Water scarcity in the arid and semi-arid southwest is being exacerbated by population growth, rising temperatures and heavy reliance on groundwater. Water rights are typically transferred from rural and agricultural areas to metropolitan areas that are more densely populated.

Both transactions employ creative financing using complex institutional arrangements. Many transactions involve state or federal authorities either as direct purchasers or as regulators of transactions among other users. Water transactions are complicated and include jurisdictional externalities, including transactions costs, which are not considered into the price of water.

Water prices are localized.  When examining these two transactions the going price of Colorado River surface water diversions per acre-feet is $1700- $2440 regardless of priority status (perfected – 4th priority) with anticipated increases.

The Mohave Valley transfer highlights the fact that institutional investors are purchasing farmland as a water rights investment strategy—farmland with onsite access to water has demonstrated strong annual returns.

Public-Private Partnerships is a concern of rural communities because it brings up fears of the private sector asset stripping. In other words, strategic water resources planning and management of one geographic area may be at odds with the future needs and economic activity where the water is being transferred from. Some water transfers may be beneficial to rural communities. The Quartzsite water market transaction appears to provide the town with a path forward to generate additional revenue to improve water infrastructure including its distribution system and to address other needs. What’s still unknown are the long-term effects versus the short-term financial gains.



The Value of Water

An Uncomfortable Nexus between Value and Price

I have yet to encounter a person who denies the importance of water. Instinctively we know we need water to survive and thrive. Water is essential for life and health. Water is a defining characteristic of Earth and it’s abundant in the universe.

Of all the molecules in the universe, the one most important to humanity is water.

Water is the third most abundant molecule in the universe, after hydrogen gas (H2) and carbon monoxide (CO). About 71 percent of the Earth’s surface is covered by water.

The distribution of water is so extensive we tend to call water by its unique source, like Lake Mead, the Mississippi River, or Sierra Nevada snow pack. We appreciate water because of our personal experience. In this sense, water is implicit. It’s used in language to illustrate a description like an unspoken truth.

Water off a ducks back.

Come hell or high water.

You never miss the water until the well runs dry.

Essential Water

The challenge we face is recognizing the new reality of water in the 21st Century. Water molecules are abundant in the universe but clean fresh water is much rarer.

Only about 2.5 percent of the Earth’s water is fresh water. Nearly all of that water (98.8 percent) is in ice and ground water.

The story of water being cheap and abundant in the American West was brought to you by federal government projects and state subsidy, pots of money which have all but dried up. The burden of new supply and maintenance has been localized and transferred to consumer buyers.

We shouldn’t be surprised to find property owners and enterprises of all sorts engaging in water transactions when new or additional water supplies are needed. Water is essential for our economy. The availability of water underpins property rights, food, energy, and the security of the public good. From steak to the Internet, from a farm to Silicon Valley, all depend on available water. Water is essential to our social and economic prosperity.

14% Annual Water Market Growth in Texas

Those of us fascinated by water markets are the first to admit the lack of comparable data is a problem for the future security of water. That is why we developed a data model to track and analyze water transactions. Our pilot project started in Texas because it’s one of the largest and fastest growing water markets in the country.

Wholesale water purchasing in Texas has increased markedly in the 21st century growing on average 14% a year. By 2014 the amount of water purchased grew to 4.2 million acre feet in Texas, about 29% of total state-wide water use in that year. 36 million acre feet has been purchased, about 16.5% of total state-wide water use.

Texas Water Development Board Annual Statewide Water Use

Water transactions include the lease or purchase of water rights, and the purchase of physical water supply.  Spot contracts are one-time and may be for temporary supply or permanent acquisition. Term contracts are long-period acquisition agreements with service periods typically 30-100 years.

Water Markets; growth in annual water buying 2000-2014

Price of Water

Wholesale transaction data is useful to evaluate the market value of water because each contract is independently negotiated. The price paid for water rights or supply is determined by arms-length negotiation, very different than retail rates.

What is the price of water? The question is a pain point, like “what price are we going to have to pay now”? Psychologically we are braced for bad news when we hear the words price and water used together. Yet, most of us have bought a bottle of water at a convenience store. We see a bottle of water priced like a Coke, $1.50 for 16.9oz, and willingly pay. The price of water matters when you are the one doing the buying.

Cities are leasing water rights to secure water permits for large scale groundwater projects. Developers are tasked to secure the water before they can get a building permit for a new real estate development. Deep pocketed investors are investing in future water supply by buying up farm land. Corporate acquisitions and mergers come with water rights that are not priced into the value of the purchase.

If the owner of a Farm and Ranch property is approached to lease their water rights how are they supposed to evaluate the offer without price data? What is the opportunity cost? If that same owner decides to sever the water rights from the surface estate, how is an appraiser supposed to evaluate the water rights? How is the sale price of the property to be determined? Water is not currently priced into real estate. It’s as if the availability of water is assumed and that is a mistake. The price of water matters because what is a property worth that has no water?

Comparable Data

Our proprietary database records the year a water contract was executed, or the last amendment. The data comes from analysis of about 5,000 water contracts. By looking at the year water contracts were executed we can see water scarcity (extreme weather insecurity) is a motivating factor for buyers. Drought isn’t the only motivation of buyers but there are clear leaps in volumes secured contractually during extreme weather events.

Water Markets; Water Buying and Drought

The Importance of Groundwater for Property Markets

The trends are clear, water is increasingly secured through wholesale transactions and groundwater is an important source for future water supply.

Overall, since 2000 there has been 140% increase in the total amount of new water guarantees based on volumes transacted. 2.3 million acre feet for the 30-year period between 1970 and 1999 increasing to 5.56 million acre feet for the 15-year period between 2000 and 2014. A formal spot market has also developed.

The most significant finding is the 1,138% increase in groundwater guarantees. Groundwater rights and supply contract volumes increased to 2.26 million acre feet between 2000 and 2014.

The water market is widespread. Many different segments within real estate are affected including commercial, industrial, farm and ranch, residential, and undeveloped land.  There are an estimated 30 million properties with water features and rights. Ownership and control of groundwater is an emerging hot spot in real estate.

344% Increase in Groundwater Prices

Volumes aren’t the only thing that’s been increasing. As groundwater markets heated up so have the prices paid for wholesale water. The average price paid has gone up 93%, from $250.95 per acre foot to $485.52 per acre foot. The price for groundwater increased 344% to $2,425.25 per acre foot. We isolate for the price paid specifically to acquire the water right or water supply in a given year, excluding other costs wherever possible.

Groundwater prices are driving the increase. Surface water prices actually declined on average between periods, falling to $99.75 per acre foot.

Water Markets; Texas Water Prices 2000-2014 all sources of supply

Note the pull-back in prices in 2014. A quick look at weather data shows the end of 2014 was the start of what would be a wet and rainy period.

[A] record-breaker for Texas, according to State Climatologist John Nielsen-Gammon.

From Sept. 1, 2014 through Wednesday, the average rainfall across Texas was 75.17 inches, topping the previous record of 74.85 inches that occurred in 1942.

The drop in water prices appears to be due to fewer transactions and cheaper price. When it’s raining it’s a buyer’s market for water.



Water and Oil Markets Don’t Mix

We’ve all heard the expression “Water is the New Oil”. It’s a cliché expression, repeated often and little understood. It’s a headline that misleads us to think oil market strategies govern the provision and supply of water. Water investing has a lot more in common with real estate than it does oil.

Water markets differ from oil markets in some pretty important ways. Oil markets are globally connected, where prices are set on exchanges. There is a national pipeline distribution system moving supply across the country and to global distribution. I’ve heard it said before, if New York City had the same water supply issues as the western US a water exchange would’ve been established when the first commodity exchanges launched.

Federal Reserve Crude Oil Prices WTI

Picture with me for a minute what water prices would be if water was in fact like oil. In this example we see a small family of 3 people using 5,000 gallons per month. Their water use is the lowest in their neighborhood because they do not have an irrigation system. If water prices were set like oil prices the water bill for this family would be billed in barrels from prices set on global exchanges. At $60 per barrel our family’s monthly water bill would be $7,143.

Our example is a little silly but it illustrates key differences between water and oil markets.

Water Markets are Hyper-local

There is no national grid moving water through trunk lines from, say, Texas to New York like you find with oil and gas. In fact some of the most difficult water delivery projects I’ve seen, the ones with the highest risk of failure, involve moving water supply between a few counties within a single state. The level of controversy caused by these projects brings up colorful images of Mary Shelly’s famous story Frankenstein, angry mobs with pitchforks and torches.

Water Price Data

Significant difference between water and oil is the availability of water price data. The price of water is not transparent, some call it down right murky.

There are a few ways to consider price and water. A common approach is to look at an urban utility bill. Take this example from Circle of Blue. This is an example comparing 30 big cities and the price paid for access to water supply.

Utility rates are often set with regulatory oversight from a public utility commission and don’t have any detail on the supply chain of water sourcing and delivery. The number of actors in this market mean a survey of even 100 retail rates for the largest cities obscures the majority of water market actors.

There are approximately 153,000 public drinking water systems, more than 80 percent of the U.S. population receives their potable water from these drinking water systems.

Wholesale transaction data is useful to evaluate the market value of water because each contract is independently negotiated. The price paid for water rights or supply is determined by arms-length negotiation, very different than retail rates. Water transactions include the lease or purchase of water rights, and the purchase of physical water supply.

From a case study we did on Texas water transactions we see there are wide price spreads to acquire water at lower volumes. Prices tighten above 10,000 acre feet per year. There are several reasons for the price spreads but weather, especially drought and rain cycles, can impact the sales price at the time of negotiation.

Price of water in Texas by volume purchased 2000-2014

Water markets are widespread and also appear in property transactions where water is an important motivating factor of the buyer. Water is not explicitly priced into real estate but it is a key right supporting beneficial use of a property.

Water is a Real Estate Niche

Water investing has a lot more in common with real estate than it does oil. Historically a water right, in-and-of itself, is not especially transact-able. And yet the possession of water rights is highly valued. Why is this? Water is married to real estate, the two property rights are a symbiotic fit.

Water is a buttress resource, necessary for productive use of every kind of property. In places where the supply of water cannot be taken for granted water is a real estate niche. The water market is widespread. We estimate 30 million properties with water features and rights in the United States from our work developing Many different segments within real estate are affected including commercial, industrial, farm and ranch, residential, and undeveloped land.

Water Markets - Wheel Line Irrigation Open Source Wiki Commons

Water Shortage and Economic Loss

Water certainty is important. Without water certainty, there are real declines in economic output and value added diminishes.

To illustrate the importance of certainty let’s focus on irrigation water shortages in a four-county region in Texas called the lower Rio Grande Valley. Before we get into the details of the case study let’s suppose for a minute you are a farmer growing a high-value specialty crop (i.e. vegetables, citrus or sugar cane in this study) that depends on the timing and availability of water use. As you plan for the current crop year, you and your neighbors are talking about the uncertainty of water supply and anticipated water shortages that will affect your ability to irrigate. How long would it take you to make a decision to change the type of crop you plan to grow if you have the option to switch to a different lesser valued crop, one that is less water intensive?

The answer always depends but is likely sooner rather than later because actions will be made based on the producer’s marginal cost curve, the cost to produce one more unit of a good at a given market price for that good. When water is in short supply the real cost of acquiring water goes up which impacts margins. For the larger economy, any uncertainty in the availability of water is significant because small changes can cause shifts in behavior (i.e. growing a lower value crop, water transfers) driven by anticipated water shortages. These farm-scale level decisions add up to a loss in economic productivity for much larger geographic areas.

Economic Loss in the Lower Rio Grande Valley

Most people don’t know may not know this fact, but the southern portion of the Rio Grande River is largely fed by rivers that originate in northern Mexico. Any shortage in the delivery of water impacts farming all through the southern border of Texas. A paper published by the Texas A&M AgriLife Extension estimated the economic impact of irrigation water shortages of Texas’ Lower Rio Grande Valley (LRGV), an area that relies heavily upon irrigated agriculture. The area suffered water shortages starting in 1992 when Rio Grande River treaty obligations were not met. The United States and Mexico have a long-standing treaty in place which governs available supply to both nations from the Rio Grande River waters. Surface water shortages began because Mexico started undersupplying the average minimum annual amount of 350,000 acre-feet (based on a 5-year cycle).

$395 Million Lost Economic Output

The Texas A&M analysis estimated the total economic loss of irrigated crop production lead to an estimated $394.9 million loss in economic output (2012 dollars). Likewise, the loss of irrigated crop production in the LRGV region generated a loss of $217.61 million in forgone value added. In terms of employment, the loss of irrigation results in an estimated loss of 4,840 jobs that depend on the production and sales of agricultural commodities for some portion of their income.

As large as these numbers are we should consider this is the loss for a small four-county region of the lone-star state. The analysis only includes the farm-level sale of crops, such as transportation, storage, processing, packaging, and marketing. The estimates based on the modeling used in this study are specific and limited to direct economic impact and do not consider losses external to farm production.  There are other economic costs wrapped up in water administration systems which are important to consider in the broader context of economic valuation.  For example, the opportunity cost of water abstraction, downstream or lower priority benefits lost to upstream demand. Similarly, secondary economic impacts of water transfers experienced by buyers or sellers.

Irrigation Dependent Farm Land

The Texas A&M study only focused on a small four-county spot in Texas. Why should you care if don’t live in the Lower Rio Grande Valley? Consider the economic impacts as you look at a map that shows how many western counties depend heavily upon irrigation (orange to red). All counties shown in red have a significant amount of cropland area all susceptible to the water uncertainty. Roughly one-third of the United States.


Water Markets - Map United States Acres of Irrigated Harvested Cropland


Public Policy Challenges

Also consider these western states are governed by institutional frameworks that were intended to address issues surrounding equitable apportionment—fair, reliable sharing of water within a specific historical context. The rules that govern water allocation vary location by location and tend to defer to historical evidence of production, not adaptive management. Diminishing snow packs, reduced streamflow and earlier spring-runoffs are further complicating the challenges of managing water.

How will regulating agencies and farmers address the issues of certainty?

Periodic severe droughts and population growth are not going away. Water scarcity issues such as irrigation water shortages will continue to get worse, not better in the arid and semi-arid part of this country. As water scarcity issues continue to become more common how will institutional frameworks respond to the economic losses associated with water shortages? At the farm-scale, what impact will the uncertainty of water have on cultural practices?  How will crop selection, the timing of planting and geographic distribution of where crops are grown shift over time in the context of available water supply?




Water Markets - landscape photo of Reno Nevada - open source picture

Water Developers Investing in Water through Real Estate

Case Study: PICO Holdings Inc. (“PICO”) and their subsidiary Vidler Water Company (“Vidler”)

PICO Holdings, Inc. (“PICO”) is a publicly traded holding company. Its subsidiary is Vidler Water Company (“Vidler”), a water resource developer.

PICO’s Fish Springs Ranch project is one example of water driving investment in Farm & Ranch Real Estate. Fish Springs Ranch was purchased by Vidler to build a water production system for Commercial and Residential projects in Reno, Nevada. Creative financing structures are used to satisfy the requirements of local stakeholders. Water Developer business model is impacted by Commercial and Residential Real Estate development timelines.

Full Disclosure

Water Markets LLC has no relationship with PICO or Vidler.

Project Background

In 2007, PICO announced the completed construction of a water development project where 8,000 acre feet per year is sourced from Fish Springs Ranch and supplied to new developments north of Reno, Nevada. It’s a typical example of a public-private (P3) groundwater infrastructure project. In this case the private-sector secures water rights, finances and builds the new infrastructure. Ultimately the project assets are deeded to the public-sector to operate and maintain as part of their existing water delivery system.

Water-Real Estate Nexus Investment Strategy

Vidler purchased Fish Springs Ranch, a 7,360 acre ranch with 12,984 acre-feet of permitted water rights in the Honey Lake Valley north of Reno, Nevada. The security of the permitted rights combined with the anticipated productivity of the water supply made Fish Springs Ranch an attractive investment for Vidler.

PICO 2007 Press Release:

Significant population growth is expected to continue in the Southwest. Long-term, this will drive the demand for new housing…exacerbated by demands for new supplies of water, which may not be available for all developable properties.

As such, we are also seeking to acquire well-located property that is prime for development in selected markets … We are particularly interested in opportunities where we can create additional value by utilizing Vidler’s expertise in developing new supplies of water.

Notice the Strategy is to Invest in Water through Real Estate

Significant population growth, strong housing demand, and low inventory are driving this investor’s interest in water markets. Notice the strategy is to invest in water by purchasing Farm and Ranch property nearby new growth and development. These kinds of water development projects are attractive investments and have the potential to bring in hundreds of millions of dollars to the investors over the long-term. In the short-term Vidler is responsible for the upfront costs and assumes all the risk until the project perfects, when the wet water begins to be delivered.

According to Gate City Capital Management, a shareholder in PICO, in a 2016 report to their investors:

Vidler owns a 51% stake in the Fish Springs Ranch and also has a preferred return entitling Vidler to collect the first $165 million in proceeds from water sales. In the mid-2000’s Vidler financed the construction of a 35-mile pipeline to transport the water at Fish Springs Ranch to the North Valleys, a set of communities about 10 minutes northwest of downtown Reno.

Creative Financing

All politics are local and so is the negotiation of a water supply contract. A unique part of the Fish Springs Ranch project appears to make it the responsibility of the private-sector to sell water credits to developers, who will in turn dedicate the water to the local water utility presumably in exchange for a building permit. The rights are held in trust by the public-sector until commercial developers purchase the credits.

This type of project financing structure works well for all involved as long as the real estate market is strong. The utility is provided a schedule to ramp up volume payments only when it needs it and not before. For PICO Fish Springs Ranch water supply project, the sales will increase only as commercial and residential development projects ramp up.

This must have caused PICO some mid-term hurt considering the housing market crash happened only a few months after completion. Bad timing!

Water developers hit hard by the 2008 downturn

By 2011 the Fish Springs Ranch project was years behind schedule and PICO’s shareholders needed to be told that it was going to take time to realize perfection. The tone of the official guidance is bleak which shows the depressed mood of the stalled project which was caught in limbo. Buyer contracts were completed, financing secured, construction complete, and the water development project was stalling because the water was not actually being delivered yet.

According to SEC filings:

A prolonged continuation of the significant and sustained downturn that the homebuilding industry has experienced will materially adversely affect our business and results of operations.

We may not be able to realize the anticipated value of our real estate and water assets in our projected timeframe, if at all.

The fair values of our real estate and water assets are linked to growth factors concerning the local markets in which our assets are concentrated and may be impacted by broader economic issues.

Finally Crossing the Finish Line

The 2008 market crisis appears to have slowed the perfection of the Reno project by ten years. Now in 2018 they are very well positioned to provide water, nearly without any competition, to a fast growing area to the North Valleys of Reno, Nevada.

After a sharp downturn in construction activity following the Great Recession, the Reno area is undergoing a rapid economic expansion, as companies such as Tesla, Switch, eBay, and Amazon have all opened facilities. Following the construction of the pipeline, the Fish Springs Ranch now has a near-monopoly on the water supply to the North Valleys.

At the Company’s 2016 annual meeting, Vidler professionals noted they expect the current pace of residential and commercial construction to result in the sale of over 8,000 acre-feet of water rights in the North Valleys by the middle of 2018.



The Anatomy of a Water Right

The Dual Nature of Water Rights

Water rights are a complicated matter.  Water rights governance challenges are often enmeshed with strain created by government limitation or restriction and private users. Ensuring the best use of water for society is invariably complex due to the dual nature of water rights—they are centrally a public resource, but the laws and rules which govern its use emphasize private rights to use it.

One of the complex challenges of water governance is to ensure the best use for society of a scarce and valued resource in the face of shifting societal values, climate change, and competing uses. There are other issues as well that further complicate things including uncertainties in science and policy including infrastructure investment, development and maintenance, the adjudication of water rights and surface groundwater interactions—to name a few.

On the policy side consider the relentless challenge of population growth coupled with geographic mismatches of location and availability of water—a hallmark of the Western United States. About 86% of Westerners live near cities with much of the water dependency coming from groundwater mining of aquifers or surface water diversions from rivers like the Rio Grande and the Colorado River who’s snow pack and flows are down considerably when compared with their historic averages. What’s the takeaway? Water scarcity can result from these geographic and temporal mismatches of supply and demand.

Why should you care about any of this you may be asking? You should care because the relationship between population growth and stress on water supplies is not linear— increased human populations often result in reallocation of current resources rather than the development of new water sources. To understand how the reallocation of scarce water resources through various institutional arrangements are taking shape across the west and southwest you must know the basics of how water rights are governed.

How are Water Rights Managed?

There are several different legal frameworks for allocating developed ground and surface water in the United States.

Water Markets - Water Rights

These frameworks have largely been shaped by physical conditions such as geology, topography, vegetation and climate, but also historic settlement patterns, culture, custom, economic activity and changes in how society values water.  We will not delve into minutia of layered legal strata that plague water governance systems such as Correlative Rights, Federally Reserved Rights, Pueblo Rights or localized governance structures. We won’t discuss groundwater either. To get a better sense of what water rights we provide a brief overview on the two predominant legal systems for the appropriation of surface water rights in the United States and then focus on Prior Appropriations for illustrative purposes.

Riparian Rights, based on English common law, and Prior Appropriations which developed to address the needs of miners staking claims in the arid west. Riparian rights are based on shared uses of water by landowners of land adjacent to waterways, streams and rivers—a sensible approach for the Eastern United States landscape known for heavy rains, temperate climate and private landowners.

Prior Appropriations, often referred to as a “first in time, first in right” system developed in the much drier Western United States and emphasized transferability and security of access to flows above shared uses.  Both mining and agriculture in the mid-19th century on federally managed public land in the West posed pragmatic challenges that couldn’t be addressed adequately by the common-law doctrine riparian rights. A key distinction that distinguishes prior appropriations from riparian rights is that senior water rights take precedence when stream flows are insufficient to serve all users.

What are the three key components of a Prior Appropriations Surface Water Right? 

The prior appropriation doctrine varies somewhat from state to state, although it’s recognized to have three general requirements to appropriate water: (1) intent to apply water to a beneficial use, (2) the water must be diverted from a natural course, and (3) the water must be applied to a beneficial use. A beneficial use is any use recognized by the state as being an appropriate use of water, such as agriculture, municipal, oil and gas, industrial, and recreation. Beneficial use as a concept is arguably the most important of the three as it serves as the basis, measure and limit of an appropriative right (Benson et al., 2014).

What is a Water Right?

Let’s break this down and unpack what a water right is.  In simple terms a surface water right is a property right.  It is a legal entitlement authorizing water to be diverted from a water source, or a point of diversion(s), such as a river or stream and put to a beneficial, non-wasteful use. Importantly, the holders or owners of the right do not necessarily own the water itself but rather the right to use it as an usufructary right.

A further breakdown of the various components of a prior appropriations surface water right reveals that there is more than meets the eye.  For example, a water right may have one or many points of diversion, one or many places of use, with one or more types of beneficial use with varying amounts of total water diverted or put to beneficial use on an annual basis.

Water Markets - Water Rights

Water rights have components that are interconnected. The components form relationships that can be one-to-one, one-to-many or many-to-many.  These relationships may vary depending on the regulating agency or agencies, statutory law, federal law, as well as other local guidelines. A point of diversion, place of use, beneficial use, amount diverted can be modified or changed over time, further adding to the legal strata of a water right through various designations of legal type or legal status.  In addition, time or priority date of the right will affect its legal priority during times of shortage.

Water rights are complicated. Ensuring the best use of water for society is a complex challenge due to the dual nature of water rights.  Water is a fundamentally a public resource, but the laws and rules which govern its use emphasize private rights to use it. The challenge is coupled with scientific and policy uncertainties and compounded by externalities such as population growth and water scarcity driven by geographic and temporal mismatches in supply and demand.  Over time, our continually shifting values and scarcity issues will challenge our existing laws and shape how we manage and reallocate our precious resources.



Benson, Reed D.; A. Dan Tarlock; James N. Corbridge Dr.; David H. Getches; and Sarah F. Bates. “Water Resource Management.” 2014.

Christian-Smith, Juliet, et al. A twenty-first century US water policy. Oxford University Press, 2012.

Fort, D. D. (2002). Water and population in the American West. Human Population and Freshwater Resources: US Cases and International Perspectives, Yale School of Forestry and Environmental Studies Bulletin Series, (107), 17-24.

Water Markets; Almond Farm

Water – The Hot New Real Estate Investment

Water is the new hot real property investment and billions of dollars are flowing

Billions of dollars are flowing into real estate by value investors looking for productive land with secure water rights. It’s a hot long-term investment and our research will help you understand how to spot where water is a motivating factor in a buyer’s decision.

Water adds to the attractiveness of any property deal. Water is what we call a buttress resource, absolutely essential for every kind of property use and generally less transact-able on its own. Water is impactful as a real estate niche. Where you find properties with water rights you find an opportunity to provide valuable insight to turn prospects into leads and develop long-term relationships with buyers.

Agricultural land is a smart strategy to invest in water

Do you remember the move “The Big Short”? If you haven’t watched this I highly recommend it. It’s about the 2008 market crash. A savvy investor named Michael Burry did a lot of research and discovered a market moving trend in real estate. He ended up making billions by shorting the US housing market.

Michael Burry realizes that a number of subprime home loans are in danger of defaulting. Burry bets against the housing market by throwing more than $1 billion of his investors’ money into credit default swaps.

At the very end of the movie are the words: “Michael Burry is focusing all of his trading on one commodity: Water.” But the viewer is left wondering how is he going to invest in water as a commodity?

“I believe that productive agricultural land with water onsite will be very valuable in the future and I’ve put a good amount of money in that…a significant amount at this point.” Michael Burry

We’ve all heard of the food-water nexus but I bet you haven’t thought about how that plays out as an investment strategy. What does it mean to invest in water?

Investors like Michael Burry appear to have taken a step back from the normal business of the water industry and noticed something interesting about the relationship of water to agricultural commodities. The water footprint of a crop is an indicator of “water rich” farmland, for example it takes 368 gallons of water to produce a pound of almonds. Investing in almond farms is a strategy to invest in water.

When Burry was interviewed by New York magazine about his water investment thesis, he stated that:

Transporting water is impractical for both political and physical reasons, so buying up water rights did not make a lot of sense to me. What became clear to me is that food is the way to invest in water” – Michael Burry

According to the segment, Burry is investing in almond farms. Why on earth is he investing in almond farms you might ask? Well, it turns out that growing almonds requires lots of water and when water shortages take place farmers will sometimes walk away which results in even less supply of almond growers, and therefore almonds.

What Mr. Burry noticed about the transportation of water is so insightful. There are real challenges to develop wet water for delivery to an end buyer. It’s one of the most complicated and specialized businesses out there, which is why real estate developers are increasingly looking to water developers to take care of this requirement. Even in places with large established water utilities, developers of residential and commercial properties may be required to provide the water rights before receiving building permits.

Successful water development generally requires huge upfront capital investments and years of relationship building. Investors in these projects may change over time depending on their risk reward tolerance. Ultimately success is only hurdled once the water starts flowing, a common term used for this is “perfected”.

I’ve seen projects that took 10 years to position themselves in the market, in possession of executed contracts in place with a buyer, encounter significant and long delays between the time of contract execution and perfected revenue. These kinds of delays can cause investors to get very jittery. All that said, once the water starts flowing they are remarkably stable revenue generators with end user commitments that can last 100 years.

Investing in farmland is in many ways a much more attractive proposition for an investor that needs immediate profit, through the sale of the agricultural crops or livestock, and a long-term value play on the ownership of the water and land.

What’s the value of agricultural land with no water?

Those of us that work in water will be the first to tell you there is risk. Smart investors know there is risk in the longevity of the available water supply if they invest in agricultural land. Evaluating the certainty of water supply requires local expertise to provide the best information available to determine the “firmness” of water.

Firmness involves both the legal producing rights and physical available resources (a combination of the weather and storage reserves). The best first step to gather water rights and asset information is to research known water rights on and surrounding a property of interest. This is why we built, to make quick work of otherwise really painful research. We add to our database all the time so if there is place you need information get in touch with us.

80% of farmland is owned by non-farming investors!

Long-term investors see farmland as a way to invest in food demand. As a direct result these investors are heavily invested in water. Investing in water through farmland is a strategy employed by large institutional investors.

In the past several years, institutional investors and a handful of publicly traded real estate investment trusts have poured…billions into agriculture properties nationwide.

Over the past 25 years, the annual return on farmland has averaged 11.5 percent, according to the National Council of Real Estate Investment Fiduciaries’ Farmland Index. That’s nearly 4 percentage points better than the Standard & Poor’s 500 averaged over the same period.

That helps explain why non-farming landlords hold roughly 80 percent of the 353.8 million acres farmed in the United States, according to the U.S. Department of Agriculture. Those landlords collected $31.2 billion in rental income in 2014.

The geographic extent of farmland as an investment is breathe taking. Take a look at the analysis we did on the percent of land acres in each county categorized as farm land. Every bit of color on the map shows agricultural land. Red is the color for those areas with the highest percent of land in a county dedicated to farmland.

Source data:

When you take into account federal government land ownership, the percentages for the entire western United States are actually more attractive than it seems from this map because the federal government owns a lot of property in the west. In Nevada, for example, the federal government owned 56.7 million acres in 2017 according to the Department of Interior (, this is about 80% of all the land in the state of Nevada!

Ownership is a broad term. In its strictest incarnation ownership means full title to use and dispose of something. Control over the natural resources can be transferred to another party for use and profit without title transfer. In fact, this is the basis for most surface water transactions which are also considered to be commonly accessible but held in title by the government. (Government means federal, state, local, regional, and special districts.)

Productive Farmland with Water is a Smart Investment

Long-term investors see farmland as a way to invest in food demand. And they are investing in large dollars. Take a look at the example of TIAA. The Teachers Insurance and Annuity Association of America (TIAA), formerly TIAA-CREF, is a Fortune 100 financial services organization that is the leading provider of financial services in the academic, research, medical, cultural and governmental fields. TIAA has over 1 trillion dollars of assets under management.

In 2014 and 2015, investment funds spent more than $2 billion on U.S. farmland, according to Institutional Investor…Last year [2015], TIAA-CREF raised $3 billion for a global farmland-investment partnership, upping the firm’s farmland total to more than $5 billion.

Despite those sorts of numbers, institutional investors have yet to make a big dent in domestic farm ownership…It’s estimated that institutional investors own less than 1 percent of the U.S. farm market. But experts say that share is growing, partly because so many farmers are reaching retirement age… lots of times, the people selling come from the same generation that’s selling to commercial developers.

Investing in water through real estate is a core motivation behind a pool of deep pocketed buyers. There are an estimated 30 million properties with water features and rights. Understanding the power of water in the buyer sales funnel can help you begin to spot when water can be a successful niche to help you close more deals.