Series: Colorado Water Law Basics #18 - Valuation of Water Rights
Most of the senior water rights in Colorado are associated with irrigation of agricultural lands. Not only are those senior water rights highly sought after by municipal interests to serve the growing population, particularly along the Front Range, but many farmers are aging and don’t want to continue farming their land. The senior water rights that have been used to irrigate their lands are sometimes the most valuable asset the farmer owns, often referred to as the farmer’s “401(K).”
For any reasons related to the sale of water rights, or to the establishment of a conservation easement on land, it is important that water rights are valued, similarly to how appraisers value land and improvements on the land. While the sale of water rights for a change of use is referred to as “buy and dry” because the land will be permanently fallowed as the result of the sale of the water rights, conservation easements are popular as they allow the continuation of irrigation on the land but require a similar water rights valuation process as the conservation easement provides a tax benefit to the farmer based on the value of the water rights.
While appraisers routinely value the land and improvements associated with a sale or a conservation easement, they are sometimes hesitant to value the water rights associated with the land, as it involves a specific process that requires an engineering assessment consistent with Colorado water law.
Typically, a sale of irrigation water rights or the establishment of a conservation easement on the property involves an evaluation of the historic use of the water right to assess both the diversions of the water right and the portion of that water right that has been consumed, resulting in a depletion from the historic stream flow. Only the historic depletions are the subject of water rights valuations, which is why engineering analyses are required to quantify the portion of the right to be valued.
The description of this process, which typically involves a “change of use,” was provided in LWS’ July 14, 2020 blog. This process requires the following steps:
Diversion records
Means of diversion
Climatic data
Crops grown
Aerial photography interpretation
Assessment of crop consumptive use
Assessment of irrigation return flow patterns
The ultimate objective of the engineering analysis of historic use is to quantify the amount of water consumed by the use of the water right, as that is the measure of how much of the water right can be changed or can be valued as part of a conservation easement. In the valuation process, the historic consumptive use of the water right is the measure upon which comparable sales are based.
In a water rights valuation, comparable sales are based on previous sales of rights of a comparable seniority and in the same general geographic area. As with real estate in general, the axiom of “location, location, location” also applies to water rights valuations. For example, a senior water right located on the South Platte River near the Denver metropolitan area has a far different value than a similar priority right that is located downstream near Sterling. The same is true of a water right in the South Platte River Basin versus a similar right in the Yampa River Basin. In addition, a water right with a 1900 appropriation date does not have the same value as an 1865 water right. In fact, far from it. On top of all of that, the use of the water right also dictates the value of the right; not all water rights with the same priority date and the same direct flow rate have been historically used in a comparable manner which, in the case of a right that has not been used to its full beneficial use, is commonly referred to as a “paper right” (see the LWS blog from 10/13/2020 on “paper water”).
As you can see, getting to the point of applying comparable water rights sales is a complex process best left to engineers that specialize in these types of analysis. It requires specific expertise to understand what water rights sales are actually comparable to the right(s) being assessed for valuation. For example, senior direct flow water rights in the South Platte River basin can sell for under $5,000 per acre-foot (“/ac-ft”) to upwards of $40,000/ac-ft depending on location and use, while senior direct flow water rights in the Upper Arkansas Basin typically are valued more in the $6,000 to $15,000/ac-ft. Transbasin water rights, such as Colorado-Big Thompson water and Twin Lakes water from the Colorado River Basin can command even higher valuations. Since each valuation is very much tied to site specific conditions related to the water right and its use, these are just ranges and there is no guarantee that a specific right will fall within this range or where it will fall in this range.
The types of water rights being valued will also vary greatly. The most valuable water rights are typically senior direct flow rights, i.e., ditches, while shallow tributary well rights are generally less valuable. Surface water storage rights can also be quite valuable depending on the volume of storage available and the appropriation date of the right. Deep nontributary/not-nontributary water rights of the Denver Basin are generally of the lowest value due to the finite nature of the resource and the knowledge that water levels are declining in the aquifers. LWS has conducted numerous water rights valuations of these types of water rights in the South Platte, Arkansas, Rio Grande, Colorado, and Yampa River Basins.
If you are in need of any water resources engineering services related to assessing the historic use of your water rights and/or the valuation of these rights, please give LWS a call at 303.350.4090 or email any of water resources specialists listed below. We will be happy to talk to you about your water resources challenges and develop a proposal tailored to your needs, free of charge.
Bruce Lytle, P.E. bruce@lytlewater.com
Chris Fehn, P.E., P.G. chris@lytlewater.com
Ben Bader ben@lytlewater.com
Anna Elgqvist, EI anna@lytlewater.com
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