28 May 2010

What's our water worth?

They may know in Australia, but they do not in Arizona, and that question is coming up more often...

I got this from MD:
We own an acre+ of undeveloped Commercial 2 land in the middle of xxx, Az., upon which exist 2 commercial water wells operated by others.

Our land is for sale, but the water rights have NOT been included.

We have separate parcel #'s which include all water related easements for each of the two wells, this allows us to retain the land/water rights/income even if the other land should sell. (Which actually occurred 5 years ago re: one of the well sites.)

Our water income has been around $8,000-$10,000/year. No great shakes, but not bad for zero effort! (and yes, we realize, now, that we most probably sold the water too cheap!).

We are in a quandary...still...as to the best decision to make re: selling the above.

Will water become so valuable in the future that selling this now would be extremely short sighted OR is it such a small potatoes deal that garnering a good price and moving on makes sense?????

We have steadily refused all comers who have asked to buy the land WITH the water rights...we just don't know enough about it to make an informed decision...so....any thoughts?
To this, I replied:
Well, there are LOTS of water brokers in AZ. :)

Here's my general opinion: Take the $ if you need to pay the bills or don't want to stay tied there.

If you can wait longer, you can probably make more by leasing your water for 3-5 years and then doing it again.* That assumes that:
  1. Laws don't change to reduce prices.
  2. Demand continues to outpace supply
  3. Your neighbors don't deplete "your" water :)
To which MD replied:
To clarify, we are in direct receipt of the profits and have a contract with a water company who in turn sells to the community. *Don't see where leasing benefits us given our set up.**

We can renegotiate our contract or end it, or effect a transfer of the 'new owners to be' into the existing deal. We are interested in PUTTING A PRICE on the value of the rights, et al. and selling the land/rights as a package.

Just completing the construction of our dream house... Consequently we could happily direct deposit the land/water sales into our new 'money pit'...Thankfully this is not a 'have to' just a 'want to' situation!
...and then I said:
**I was referring to the idea that you can renew the lease with the company every one year, or three years, or ten years. More work if it's more frequent, but more likely that you will get "market price."

What is that price? Some % of the price they charge, I guess :)

A broker will know, but you will never REALLY know w/o an auction, and a one buyer auction will not work for you.

I can see the virtue of rolling it into your land sale; you will be giving up some LT profits for ST cash out.

Every buyer wants to pay less; every seller wants to receive more. Arguments up/down are really only about that, not logic or fact :)
What do you guys think they should do?


The Outsider said...

This is essentially a question about politics. Right now, the price of water is held below the market-clearing price by heavy subsidies through regulation and direct control by public agencies. It's possible to look into the future and say, "That's not a sustainable model. Eventually the pressure on water supplies from that system will force them to increase the price of marginal water, either directly or by deregulating."

But are we actually close to that day? Don't underestimate the incentives of politicians to hold onto their sources of power. It seems pretty likely to me that we'll see more wildly expensive development of supply and continued under-pricing before we see demand-side changes. Which suggests that the value of your water rights won't go up unless it's large enough to attract PUBLIC attention (i.e., is this large enough to be interesting as a municipal supply?).

Another thing to consider. If the scenario David is probably thinking of when he suggests keeping the rights were likely to occur, it would already be included in the market price for your water rights.

I'd be more inclined to reason like this. My personal discount rate is at least 10 percent. That means that if there aren't going to be serious changes in the next ten years or so, I can probably just assume my revenue stream is more or less constant. If I can sell this right for more than $100,000 I'll do it, if not I'm better off keeping it.

Like I said, as a speculative opportunity this is more about politics than about economics and natural resources. If you're not politically connected, it's possible your water right is worth more to somebody else -- and you should sell it to him.

(Boy, I wandered all over the place there! Ah, well.)

Chris Brooks said...

First think you need to know is whether their land is located in an Active Management Area. If it is and they have Type II groundwater rights, they could be very valuable if sold outright. Depending on the zoning of the land, those rights might be most of the value of that land. It's all about location, right? But they should be able to find some comps for groundwater rights in the general area.