Water

[Edd Gillespie]

We in the arid rural areas of the west have the occasion to appraise irrigated land from time to time. Here's the background for you guys in the riparian states. Water is taken from the streams and rivers or from wells and applied to the land to get crops to grow and it works quite well and has for over a hundred years. Colorado early on established a system of "place & time" water law that requires appropriation and beneficial use. Yes, you can own water here. Now as you might suspect that law has evolved and become quite complex. In the evolution of the law it has been established that there is a hierarchy of uses. Number 1 is people (ie. the needs of households is paramount). Number 2 is industrial, 3 is agricultural and 4 is recreational. Who can argue with that? But farmers control a lot of water and Denver and Colorado Springs are growing. Does that sound like some tension might be building?
In some areas of the state individual farmers in 1860 or so were unable to appropriate water from the streams and so they formed a specially created legal entity called a mutual ditch company and constructed large ditches with multiple lateral ditches to divert water and irrigate vast acreage. To be a part of these mutual ditch companies the farmer had to own or lease land under (ie. served by) the ditch and he had to have shares in the company. He then could irrigate his land to the extent that his shares permitted him to do so. Since this scheme was conceived, shares have been freely transfered (sold, leased, inherited, traded , etc.) up and down the ditch between the farmers in that system. The rules of transfering vary from ditch to ditch, but basically the water stayed in the company system.
Then in the fifties maybe sixties enterprising farmers in the Southeastern part of the State, tired of unreliable water flows initiated an effort to bring water out of the Colorado River water shed across the Continental Divide into the Arkansas River water shed. Then in the eighties Aurora (a Denver suburb) purchased a great number of the water shares in the Colorado Canal that irrigated a lot of land in Crowley County. Once control of the company was gained the water was diverted at the headwaters of the Arkansas River into the Platt water shed to encourage growth in Aurora.
I hope I have put you in the ball park. Now for the fun part, appraiser-wise.
There are still some remaining mutual companies and the shares are being sold or optioned to various municipalities and some speculators and the amount of money being exchanged is astronomical. Farmers definitely can sell their water and make more than they ever will farming.
Water rights are legally a part of the real property bundle of rights and can be conveyed by deed and encumbered by a deed of trust. Water shares on the other hand are not quite water rights (even though they are carelessly mis-defined as such much like the terms modular and bungalow have been misused), land irrigated with water shares is assessed higher than dry land-water shares are not assessed. Realtors sell land and water shares together as irrigated acreage. Appraisers appraise water shares and land as a unit. So Realtors, assessors and bankers are all in what I see as an out of focus property rights confusion.
But then I come along and I'm swimming up-stream with people yelling in my face, kind of like LeeAnn's life in oncoming traffic.
These water shares are personal property, period. The land is real property, period. Water shares are conveyed (leased, sold, etc.) by certificate and encumbered by assignment (and I think a UCC is required as well for perfection). And you guys know already how land is conveyed and encumbered.
I maintain the water should be valued as personal property and the land as real property. I also believe that is best way to alert the client very clearly (most of them are lenders) that he is dealing with some separate security issues and a significant portion of the value is tied up in personal property. Also I think USPAP requires us to appraise the personal and real property separately.
This view is not meeting with very much enthusiasm folks, and the only argument I hear in rebuttal is that appraising my way (ie. separating real & personal property in the context of water shares) has never been done here before. To me it looks natural. No violence is done to the bottom line and the client is alerted and warned that the water (which is an increasingly valuable component of value) can be easily conveyed away and the value of the subject diminished significantly with no legal recourse if the collateral securing the loan is not perfected correctly.
So, what do you think? Mix it up and avoid the controversy or stick to my guns and try to educate an unwilling crowd? (including Realtors that are making every effort to ensure I don't get involved in any transaction where a water share is included) There goes that part of the business along with the give me comps and make my value guys. Will it ever stop? Do Realtors not get a commission on personal property or what? Do lenders want to be ripped off or what?
The real question is do you think water shares are personal property (how can you possibly think otherwise after this dissertation), and if so how to appraise it on a URAR? I think these call for self-contained reports and I don't hink anybody wants to pay for them.
Or do you think I'm all wet? Sorry for the pun!

 

[Elliott]

Water is a commodity. Real estate is the ownership
of rights. I see the access to and the use use of water as
one of those rights.

But that's just the way I see it.

elliott

 

[Nancy Wyatt]

Whoops

 

[Nancy Wyatt]

Personal Property!!!!!!

I do not use sales where water rights are included. I take that back. I have used them but have adjusted for the water rights. There is a water rights appraiser in Brighton that I have contacted in the past to get values on shares. The price of the shares can vary widely and can be bought and sold independently from the land.

You can not use the sales of comparables where the water rights are included unless you know the $$ of the shares. It is a big deal here in CO. I have nailed appraisers on reviews that have inflated the subject's value because they used these comparables.

The good news is-we've gotten a lot more rain this year. I do not know how 1 good year of precip has effected the price of the shares if at all.

Ed-Do you do farm and ranch appraisals? I've never been to SE CO, so I don't know the landscape.

 

[Richard Carlsen]

Interesting concept.

Understandable to me what you are talking about when you substitute mineral rights for water rights.

However, I'm not sure that they would fall under personal property. If they are part of the whole bundle of rights normally associated with ownership of real property, they are a "Right". The definition of "rights" is a claim to title or interest in anything that is enforceable by law.

It seems what you are attempting to deal with is the valuation of a segment of those original rights that have been split off or acquired either by the riparian owner or by prescription or appropriation based on your doctrine of beneficial use. However, they were acquired, the problem appears to be "What to call them."

I don't think that personal property is the right terminology. Nowhere in the bundle of rights of real property ownership is personal property considered one of the rights.

Why not just call them what they are; Water rights. Since rights are a claim to title, or interest in anything that is enforceable by law just call them Water Rights and be done. I think you are walking down the path that would say that if it isn't real property, it must be personal property. However, just because these rights can be valued separately, like our mineral rights up here, does not make them personal property. Rights are something you can or cannot do with property, be it real or personal.

Thanks for the background on your situation out there. It helps me understand the doctrine of beneficial use much better.

 

[Ray Miller]

Edd,

Having been in "Water Court" a few times in Co., Mt. and Az. I can understand where you are coming from.

I think it is more complex then your stating.

I think some could be personal property and some run with the land real property. Or in some case either/or.

As I understand it, I had waterright lets say out of Wilber Creek so many CU.ft. this was water that ran with the land, but could also be sold down Mt./Valley and left the ranch a bit dry.

Then if that water run in to the Blue Ditch and I did not hold shares in the Blue, it was no longer my water. I could not pull it out of the Blue for use below the Blue even though I owned land below the Blue. I could bridge the Blue and bring it across and use it.

If I owned water shares in another Ditch say the Independent and the water did not start on my ranch. But I had bought shares for additional water source. I could sell/transfer those shares. I think those shares would not run with the land. But would be personal property as the water did not start on my land.

But once the water is sold it can never be used on that land again. Poor ranch just dries up.

Then you have which rights are senior. X number of people can own water rights, but the oldest is the most senior. So if you have a dry year or so. Your rights are 1906 and my are 1890. You may or may not get any water at all. You may not have rights coming, because water is lacking. There are those rights personal property or real. If ditch rights I would think again personal, if land ownership right with x number of CU.ft. then could be real.

Am I just going in circles?

 

[Mark K]

I don't live in an area affected by these situations, so if what I write makes no sense, kindly disregard. At the risk of over-simplification, it appears that you can have various scenarios in the valuation process:

1. Value the land with no water rights.
2. Value the land with the water rights.
3. Value only the water rights.

If I'm thinking correctly, the water rights are tied to land ownership, hence become one of the rights in the "bundle of rights" theory. Similar to an easement. Can you buy, sell, lease, mortgage, etc. this particular individual right of ownership interest in the subject property and do you have to be a landowner to own the water rights? If so, they seem to be real property.

Or are the water rights attached to the water source and not the subject land?

From an appraisal standpoint, it seems that any appraisal for land that is affected by this situation, you would have to value it in two parts; the land and the water rights valued separately in the appraisal. Or if separated with different ownership, you could value either interest individually.

I don't think I'd be trying to change the status quo concerning the legal definition of "real" vs. "personal" property involved in the issue without having significant input from a legal specialist in this area.

In this area, the only basis for comparison is timber land or agricultural rowcrops (corn,soybeans). Sometimes land is sold with the seller retaining the rights for the next timber cut or the fall harvest. I'm sure that generally this a transferable right, similar to a lease, and it could be valued separately from the real estate. And since it is tied to the real estate, I'd call it something less than fee simple but still an interest in real property.

It also seems similar to the sale of ground affected by things like conservation easements, non-development covenants or easements, etc. I can own the easement rights and this gives me a legal interest in the land.

Considering the court battles that have taken place concerning this issue, I'm sure there is legal precedent somewhere that will reveal the answer.

If you start trying to unilaterally change established appraisal methodology you might find yourself out of work pretty quick.

 

[Edd Gillespie]

You guys-I tried to tell you there are water rights and there are water shares. The distinction is part of the problem. I understand the distinction and I think it is significant in appraising. One is real property like mineral rights the other is not-its more like having the barn full of top soil that your going to spread on the land.
Now, what about appraising the mixed real & personal property? What do you do when it is important to the transaction and everybody else wants to believe its all real property?

 

[Ray Miller]

Water rights run with the land. Real Property

Water shares are just that a share of water stock, that may or may not produce water, depending on snow melt of water from another source that is brought on to the land. Personal Property.

But then don't you need to look to how senior the rights are with the land< How senior the rights are in the shares to find value?

 

[Edd Gillespie]

Ray,
I'm not sure how to operate all of the features this thing has to offer so I didn't put in one of those neat little boxes with your words in it. You're on the right track with your analyses (according to my thinking anyway), but from where I am in this discussion seniority doesn't matter and it doesn't matter if there is water in the ditch or not. Those are both important and would definitely have a bearing on value as well. But, my problem is that water shares are personal property, the community wants to believe they are real property and they don't want to know different. Before I started this post, I talked to an appraiser who does most of the farm land in the area. He said he understood the distinction I was talking about and unless he is dealilng with a client who is sofisticated he just values the land as irrigated and doesn't mention the water shares as being personal property at all, or if he does it is buried somewhere in the report. He doesn't call attention to it. Wouldn't be well received, he indicates.
Don't we have an ethical duty to blow the whistle? I think the community (part of whom are very influential and can affect my future viability) is just flat wrong on this, but I'm pretty much alone so far. I can explain it to the uninitiated and I would swear they understand it perfectly and then they'll say, "Well my land is worth more because I have water shares." I can't make a dent in this rock.