Appraising Water Rights Factors Affecting Value. Patricia K. Flood, P.E., Certified General Appraiser Wright Water Engineers, Inc.

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1 Appraising Water Rights Factors Affecting Value Patricia K. Flood, P.E., Certified General Appraiser Wright Water Engineers, Inc. December 8, 2011

2 Water Rights Valuation Water Rights Engineering Hydrology Water Supply Planning Civil Engineering Construction Cost Estimating & Financial Calculations USPAP Ethics Rules

3 Water Units Depiction of One Acre Foot (AF) 1 Acre 1 - foot 1 AF = 325,850 gallons 1 cubic foot per second (cfs) for 1 day = 1.98 AF 1 cfs = 449 gallons per minute (gpm)

(FIRREA) Minimum Appraisal Requirements State

4 Savings and Loan Crisis Congress passed the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) Minimum Appraisal Requirements State Licensure/Certification Adoption of Uniform Standards of Professional Appraisal Practice (USPAP)

5 Appraisal Standards Uniform Standards of Profession Appraisal Practice (USPAP) Uniform Appraisal Standards for Federal Land Acquisitions (Yellow Book) Disclosure Requirement

6 Colorado Appraisal Licensure Requirements exclude Any person who conducts appraisals of water rights or of mineral rights

Water Change Costs Water Quality Revegetation Costs/

7 Factors Affecting Value Location, Location, Location Distance to Market Reliability Previous Transfers Water Change Costs Water Quality Revegetation Costs/ County 1041 Review Retail Sales of Hydraulic Fracturing Water

8 First Question: For agricultural lands, is a separate water rights appraisal needed?

9 Process of Water Rights Valuation 1. Defined Value, Typically Market Value 2. Identified Interest 3. Value as of a Given Date

knowledgeable seller to a willing and reasonably knowledgeable buyer, with neither acting under any compulsion to buy or sell, giving due

10 Market Value Market value is the amount in cash, or in terms reasonably equivalent to cash, for which in all probability the property would have sold on the effective date of the appraisal, after a reasonable exposure time on the open competitive market, from a willing and reasonably knowledgeable seller to a willing and reasonably knowledgeable buyer, with neither acting under any compulsion to buy or sell, giving due consideration to all available economic uses of the property at the time of the appraisal. Uniform Appraisal Standards for Federal Land Acquisitions, 2000 (Yellow Book)

certificates Groundwater Decreed or Underlying Specific

11 IDENTIFICATION OF WATER RIGHTS INTERESTS cfs ownership or shares in mutual ditch company represented by stock certificates Groundwater Decreed or Underlying Specific Property Important to have Rights Identified in Letter of Engagement

12 ITEMS INCLUDED IN APPRAISAL REPORT 1. Client and Intended Users, by name or type 2. Intended Use 3. Description of the Property 4. State Property Interest Appraised 5. Definition of Value and Source

13 ITEMS INCLUDED IN APPRAISAL REPORT 6. Effective Date of Appraisal and Report Date 7. Scope of Work 8. Highest and Best Use Analysis 9. Describe Valuation Approach 10.State assumptions and conditions 11.Signed certification

14 Appraisal Report Options Self-Contained Summary Restricted Use Difference is level of detail but all as per USPAP

15 Water Right Evaluation Review Decree Review Ditch Bylaws (Restrictions on Transfers?) Physical Inspection of Property River Headgate Irrigated Lands

16 Water Right Evaluation Know the Water Right its Historical Consumptive Use (HCU) Land Area Crop CU Need not met by Precipitation Historic Diversions

17 Example - Expectations vs. Reality Let s See: 5 cfs Water Right 6 months ~ 180 days 1 cfs = 2 acre feet per day 5 cfs = 10 AF per day 180 days x 10 AF/day = 1,800 AF C-BT Water ~ $10,000 per acre foot 1,800 AF x $10,000 / AF $18,000,000

18 Here s what we found 200 Acre Farm, 150 Acres Irrigated Somewhat junior water right Unit CU = 1.33 AF per acre 150 acres x 1.33 AF/Acre = 200 AF $6,000 per AF 200 AF x $6,000 / AF = $1.2 Million

19 Water Neighborhood Regional water setting for the subject water rights Boundaries of the neighborhood will be the area that influences the value of a subject water right. Area from which comparable sales data will be sought Supply and demand for water rights

20 4. Maximally Productive 3. Financially Feasible 2. Legally Permissible 1. Physically Possible Highest and Best Use Tests Highest and Best Use Tests

21 Treated Water Sales to Oil & Gas Producers Water Provider $/1000 $/AF City of Fort Morgan $ 5.85 $ 1,906 City of Fort Lupton ,642 Keenesburg ,629 Hudson ,906 City of Greeley , ,532 North Weld Co ,168 Water District

22 Valuation Approaches 1. Sales Comparison Approach 2. Cost Approach 3. Income Capitalization Approach

23 Sales Comparison Approach Heavy reliance on sale comparison approach Water sales not recorded as land Active and inactive market Locate sales through network County Clerk records may give leads Price per acre foot consumptive use or diversion? per share?

24 $8,000/unit ~ $11,430/AF

market Locate sales through network County Clerk records may give

27 Sales Comparison Approach Heavy reliance on sale comparison approach Water sales not recorded as land Active and inactive market Locate sales through network County Clerk records may give leads Price per acre foot consumptive use or diversion? Adjustment considerations

28 Example Comparable Sale Transaction No. 4 Water Right Lock Ditch Sellers Ochs Brothers Purchaser Stream Security Water District Fountain Creek Water District 10 County El Paso County Diversion Location Point of Diverson at Chilcotte Ditch with Alternate Point of Diversion at FMIC & Stubbs & Miller Date 2/25/2010 Special Warranty Deed Reception Quantity 164 AF Price per af $ 6,500 Avg Annual Diversion 1,859 Dry Yr Diversion ,848 Comments Change Case 06CW117 09/21/ cfs Priority #45 Abandoned Chilcott Ditch Carriage Agreement Comparable Water Right - Name Source Struct ID Lock Ditch Fountain Creek 584 Subject Amount cfs Decree Amount cfs Priority Adjudication Date Appropriation Date Adminis tration Number /15/ /31/ /15/ /31/ Adjustments March 2011 Price $ 6,663 Increased at rate of CPI-U of 2.5% Decreed Use 0 Similar Location 1,000 Inferior, Do have a Carriage Agreement with FMIC which compensates partially for location downstream 25 miles Seniority 3,000 Inferior to subject Priority Review 0 Similar Indicated Value Priority 10 10,663 Indicated Value Priority 10 (Rounded) $ 10,700 per AF historical consumptive use

29 Example Comparable Sales Adjustment Grid Transaction Water Right Fountain Mutual Chilcott Ditch Crabb Ditch Lock Ditch Irrigation Company Company Priority/Priorities 4,7,11,17,21,28,29, 41,168 27,39,172 16,131 15,22 Purchaser Various Various City of Fountain Security Water District Date Price per AF HCU $ 15,429 $ 6,000 $ 3,379 $ 6,500 Adjustments Time of Sale (Adjust to 2011) $ 15, $ 3,639 $ 6,663 Decreed Use (200) - 2,750 - Location 0 2,000 2,000 1,000 Seniority, Yield 0 3,000 3,000 3,000 Storage (2,500) Review N.A. N.A. N.A. N.A. Indicated Value $ 13,114 $ 11,150 $ 11,389 $ 10,663 Priority 10 Round to $ 13,100 $ 11,150 $ 11,400 $ 10,700

30 Cost Approach May be appropriate to use Purchase of contract water plus cost of facilities to deliver water Reasonableness check

31 Income Approach Estimate new annual income Capitalize to obtain present worth of annual income

32 Reconciliation Income Approach Example for Farmland Step 1. Determine Annual Net Income 100 acres x 3 Tons/acre = 300 Tons $120/Ton Gross-$70/Ton Expense = $50/Ton Net 300 Tons x $50/Ton Net = $15,000 per Year Step 2. Select Cap Rate & Calculate Present Worth Capitalization Rate = 4%, Term = 100 years Equal Series Present Worth Factor = $15,000/year x = $367,575 $3,676 per acre for land and water

33 Reconciliation Income Approach for Farmland Example Cont d Step 3. Determine Water Indicated Value Non-irrigated land $276 per acre Leaving $3,400 per acre for water Consumptive Use is 1.5 acre feet/acre Indicated Price per Acre Foot = $2,270

34 Reconciliation

35 Certificate of Value Signed by Appraiser Unbiased Analysis and Opinion No interest in water right Compensation not Contingent on Value Opinion Final Statement as to Value

36 Questions?

WATER DUE DILIGENCE:

WATER DUE DILIGENCE: What real estate attorneys should understand about water rights due diligence when their clients are purchasing property with water rights I. A brief history of salient Colorado water