Water Rights Valuation

Water rights valuation is an important aspect in the appraisal business, especially here in the Central Valley, because the majority of business here is farmland related. Water cannot be used without the legal right to its capture and use. The legal right to capture and use water is called "water right" (Water Rights). The appraisal methodology for estimating water rights first includes an understanding of the property interest being appraised.

Appraising the fee simple estate to a tract of land that has an appurtenant water right means that the water right property interest is included in the entire bundle of rights being valued. If one is appraising only the water rights that at are appurtenant to a tract of land, then a partial interest in real estate is being valued (The App. of Water Rights). There are two techniques available for when appraising a partial interest: The takings plus damages approach and the before and after approach. The before and after approach compares the value of the property with the water right to the value of the property without the water right, with the difference being the indication of the contributing value of the water right to the property (The App. of Water Rights). The taking plus damages approach is applied when it would be difficult to value the property as a whole and also would be worthless because the partial interest is a smaller portion than the whole property.

There are three approaches to figuring out the value of water rights through appraisals: Sales Comparison Approach, Cost Approach, and the Income Capitalization Approach. The first one, Sales Comparison Approach, is the most reliable indicator of value if there are comparable properties that you can assess. The elements or comparison are highest and best use, water

quality, location, property rights, season of use, location, and nature of legal right. I will only talk about a couple of them. A highest and best use conclusion and an identification of the larger parcel are always required. A water right itself cannot be the larger parcel. The larger parcel will always be the land to which the water right is appurtenant. The highest and best use also must always be for the land (The App. of Water Rights). Another element is waterquality. Any buyer that is planning to use the water for urban consumption is very interested in obtaining higher-quality water. Buyers want to minimize treatment costs for there water because it takes away from the businesses profit. Higher-quality water has a lower concentrate of salt and an absence of other suspended solids, dissolved minerals, and chemicals. Irrigators concerned about long-term buildup in the soil of salts and other substances also may pay a premium for high-quality water (The App. of Water Rights).

Because water is considered an improvement to the land, the cost approach and be of great value when estimating the value of water rights. If the potential of replacing surface water with groundwater exists, then the cost of developing the groundwater resource can be considered a replacement cost for the surface water (The App. of Water Rights). The appraisal must gain knowledge on the following if he is going to use this approach: Any legal restrictions in regards to groundwater use, the depth to useable groundwater and variations from season to season, any trends to levels of groundwater, and pumps in the area and associated costs during pumping operations. The costs associated with conservation measures can provide indicators of water value. On some occasions, the cost approach is the only approach that is available to appraisers because of the lack of comps in the market.

The last approach is the Income Capitalization Approach. The overall net income from a farming operation involves all of the factors of production, including the efforts of the farmer, to produce the income (The App. of Water Rights). A better sign of the contributing value of the water can be found by comparing the income from leasing non-irrigated land with the income from leasing irrigated land. The value contribution of the water is isolated from the other aspects of production.

In the end, water rights valuation can be difficult to obtain and access. It seems no situation is alike and you have to start from scratch in each valuation project.

Resources

"The Appraisal of Water Rights: Valuation Methodology. (Cover Story) - Entrepreneur.com" Business & Small Business. Web 25 Oct. 2010. www.entrepreneur.com/tradejournals/article/179535025.html

Water Resource Appraisal and Water Rights Valuation. Web. 25 Oct. 2010. .

www.waterbank.com/Water Resources Valuation and Client List.html