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What Price – Water ?

December 21, 2014 Leave a comment Go to comments

How much the groundwater or surface water on a property is worth has everything to do with where the land is — a reality that makes appraisers cringe when pressed to generalize the appraisal value of water. “The troublesome aspect of water value is that where you are determines what the water might be worth,” notes Dr. Charles Gilliland, research economist at Texas A&M University’s Real Estate Center.

In regions where water is readily available, like the Mississippi Delta or South Alabama, water is not normally an appraisal issue. “Except in isolated cases, adequate water resources are typically available to meet the needs of landowners, either from tributaries, lakes, groundwater wells or the numerous public water systems throughout South Alabama,” says Howard Haynie, appraiser with the FLBA of South Alabama. “Unless the property has an overabundance of water, or insufficient supply of water, limiting its highest and best use, we don’t spend much time considering water in our appraisals.”

Likewise in some areas of Louisiana, a state where water rights are public property and anyone can pump out of freshwater canals, water is not usually a factor in appraising rural property, according to Barry Fontenot, vice president/branch manager with Louisiana Land Bank. “However, in rice-producing regions of Louisiana, water is very important and does have an impact on value of property,” he says.

But in other areas, access to water sources can bring a premium on per-acre values and on the water rights themselves. “Water has been highly contested and debated in Texas. Because there are few rules in place about water value and water rights, and they change continuously, water will remain a very complex issue,” says Jon Mask, vice president/appraiser with Southwest Texas ACA.

Tapping the Value of Groundwater

In Texas, groundwater is the property of the landowner. And until recently, under the state’s “right to capture” rules, landowners could pump as much water from below their ground as desired. But in many areas, new water rules imposed by water districts are limiting how much a landowner can pump.

In many fast-growing and water-challenged regions, the marketing of individuals’ water rights is a growing and lucrative phenomenon, though not a new one. Texas A&M water marketing expert Dr. Ronald Kaiser says that Texas has a long history of marketing water. So what’s driving the rediscovery of this old idea? — Finite surface water access to meet the growing demand by municipalities, golf courses, developers and other large water consumers.

Buy, Sell or Hold

The Edwards Aquifer region of Texas is an example. A 1993 regulation, intended to curb unrestricted pumping from the aquifer, in most cases capped farmers’ potential water permits at two acre-feet for each acre farmed. The rules allow farmers to sell up to 50 percent of their permitted underground water usage rights, but they must maintain the other half with the land. Farmers also can opt to lease their water rights annually, at which time they revert back to the landowner at the end of the lease.

Some are even choosing to sell the land to buyers who want it simply for the water rights, and then lease the land back for farming. And since domestic wells are exempted from the permit rules and can pump up to 25,000 gallons per day

for household use, a farmer could sell his irrigated cropland’s water rights and still have water for domestic use.

“There’s a distinct market for transferable water rights, with buyers typically being municipalities, golf courses and manufacturers,” says Mask. Water leases can generate between $70 and $80 per acre-foot annually, while the outright sale of transferable water rights can bring $1,000 per acre-foot and up.

Although the value of the rights themselves is well documented, how land values will be impacted by holding onto — or transferring — water rights is harder to determine. There have been few transactions to compare, but it can be expected that property values on land with full water rights would be some measure higher than those on property where partial rights have been sold. However, the lower per-acre value will be offset by income from sale of the rights.

Going It Alone or Pooling Resources

When individual ranchers in the Texas High Plains approached the City of Amarillo offering to sell their water rights, the response was lukewarm — too many parties to deal with, too much hassle. But, a Texas Panhandle rancher and businessman knew there was strength in numbers. He pooled half the water rights on some 72,000 acres, purchasing half the water rights from each landowner, then brokering a deal with Amarillo for all of the water rights. The transaction reportedly generated approximately $275 per acre or roughly $22 million, according to Gilliland.

While the farmers found a market and gained an income stream from the water sale, “the impact on land values was negligible, because these are ranchers, not crop farmers, and don’t require applications of irrigation water,” says Gilliland.

This pooling and sale of water rights may portend things to come. Historically, the rule of capture has encouraged quiet and private transactions between two parties. “The challenge is to have groundwater transactions more closely resemble our surface water transactions — out in the public in an open forum with multiple parties engaged,” says Kaiser, who believes co-ops soon will be a common venue for property owners wanting to jointly market water. “Bringing more parties into these negotiations, and making them more public, will cause some consternation among the ag community. But working together as a co-op or through a broker makes sense, because if it becomes too difficult or problematic to get a deal done, the buyers will go elsewhere for water where transaction costs won’t be so high.”

Is Irrigated Land Worth the Extra Cost?

Annual surveys by the American Society of Farm Managers and Rural Appraisers show that, in general, Texas dry-land values can be 40 to 60 percent less than values for irrigated cropland. And in Louisiana, appraiser Barry Fontenot says a farm with an irrigation source can run $100 per acre higher than one without. So, is it wiser to buy less expensive dry land and install irrigation systems, or pay the extra expense for irrigated land?

B.L. Jones III, ARA, senior appraiser with AgTexas Farm Credit Services in Lubbock, cautions buyers to consider the risks. “A property may look promising, but you may buy it, start drilling a well and not have any water or the quality may be poor,” he says. In addition, buyers should factor in the cost of installing irrigation. A drip irrigation system, for instance, can cost $600 per acre and more.

Community Water Versus Wells

The “buyer beware” caution holds also for urban-fringe housing developments, where a home in the country can become a money pit if water is not readily available. While public water supplies often extend into rural areas, with the growth those areas are undergoing, many water systems are taxed to capacity.

James Synatzske, ARA, director of appraisal for AgTexas Farm Credit Services in Stephenville, Texas, follows the rural housing market west and south of the Dallas- Fort Worth metroplex. “Some developers are drilling wells and putting in their own water systems, where each landowner has a meter,” he says. “But just because you have a water line to your property doesn’t mean you can tie into it.” Buyers should talk to their local water district and neighboring landowners to learn about the water system’s track record, availability and cost of meters and line extensions. Some rural water systems do not have the available funds or capacity to expand.

Still today some rural homesite developments require the buyer to drill a private well. Buyers need to be aware of the potential costs and factor them into their new home budget. In Erath County, Texas, for example, drilling a 300-foot well can cost $5,000. Some areas south of the Dallas- Fort Worth metroplex require 800 to 1,000-foot wells that can be almost cost-prohibitive for a single-use homeowner.

What Price, Beauty?

For many, a place in the country might be a lake cabin, acreage for hunting or a riverfront getaway. These landowners may value water largely for aesthetic reasons — and aesthetics can draw a premium. “Property that fronts a river or lake can be valued at twice the cost of non-water frontage,” says Synatzske, who notes that “accessible” water frontage is more desirable than “bluff” water frontage and therefore more valuable.

When buying hunting properties, Alabama’s Haynie says, “The presence of water may be beneficial in terms of promoting greater populations of wildlife. In most areas of Alabama, adequate water resources are available on farms to supply wildlife needs; however, rivers and larger streams provide wildlife corridors rich in beneficial habitat, resulting in greater wildlife population densities.”

Under the right conditions, adding an earthen tank or pond to a property can add value and aesthetics. “Digging a pond can range from less than $2,000 to several thousand dollars, depending on the size, soil and drainage conditions,” says Synatzske. But determining how much a pond will add to the property’s value is not an exact science.

Also, there’s a clear distinction between live water — water that is present 365 days a year — and seasonal water. Appraisers advise buyers to thoroughly research a property before entering into a purchase agreement.

Water — The Mineral of Tomorrow

Water issues are not just a Texas, or southwestern, phenomenon. They are occurring throughout the world as populations grow, along with consumption. Many observers, including a recent Kiplinger Report, predict that privatization of water will be the trend of the future. In fact, more and more landowners already are reserving water rights when they sell land. In the future, all property will be impacted by water — how much so will continue to depend on where the water is located. “In the past, minerals have always been king,” says appraiser Mask. “But in the future, water may fight for the crown.”

Reprint from  Find Farm Credit .com

– Sue Durio

 

Please take note of this article’s publication date. Some of the information may have changed over time

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