Valuing water rights

Prior appropriation example via
Prior appropriation example via

From The Colorado Real Estate Journal (Brett Bovee):

Water rights tied to properties can come in all sorts of flavors, but some of the most common are mutual ditch company shares, nontributary groundwater rights (sometimes referred to as Denver Basin rights) and units in a regional water storage project (such as Colorado-Big Thompson units). All of these types of water rights have different characteristics and associated value.

The most common way to value a water right is to document comparable sales. This is similar to methods employed in other real estate sectors. The difficulty with water rights is finding other sales, which transferred water rights that were indeed comparable to the subject water right of interest. You wouldn’t call a two-bedroom bungalow and a seven-bedroom estate comparable just because they are both houses in close proximity.

The same type of attribute information is important in valuing water rights. Aspects such as reliability, transferability and location (buyers) all factor into a water right’s value. When accurately comparable sales can be found, they provide the best indication of value. This is the most common valuation technique employed in areas with active water rights trading such as the Front Range.

Another method is looking at the potential income that could be generated from having the water supply that a water right provides. This often is applied to agricultural lands, by comparing the added value of being able to irrigate and grow higher-value crops, instead of dryland farming. For most other water uses, the analysis of income is complicated by other business, resource and manufacturing inputs.

A third method is looking at a replacement cost if the water right and the associated water supply were not available. For example, if a water user did not have ownership of a mutual ditch company share, what would the cost be to develop and utilize a new groundwater well? Another example is to consider the costs associated with a municipality acquiring and developing alternate water sources. The replacement-cost approach basically informs what the value of a water right might be by looking at the additional costs incurred by a buyer if they chose a different water right or source. In the residential real estate world, it would be like valuing a newly constructed house by looking at the cost of an old house plus the cost of the remodel and repairs.

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