Water Rights What are you Valuing? 1

2Rapid Fire Case Studies – Unique Appraisal Challenges Rapid Fire Content Valuation of a property with Water Rights A Partial Real Estate Interest, or the entire property? Riparian v. Appropriate Water Rights & Ground-Water 2

3Rapid Fire Case Studies – Unique Appraisal Challenges Definitions Fee Simple –Absolute ownership, unencumbered by any other interest or estate (Appraisal of Rural Property, 2 nd Edition, ASFMRA, page 47) Subject only to four powers of government –Taxation –Eminent Domain –Police Power –Escheat A Partial Interest in Real Property (object of seminar) –An ownership of less than fee simple (rights subject to things such as a road right-of-way, power-line easement, etc.) Versus: A Fractional Ownership in Real Property (not covered in this seminar) –Two or more owners having percentage ownerships in the same real property 3

4Rapid Fire Case Studies – Unique Appraisal Challenges Types of Water Rights Riparian Appropriative Groundwater The following will not be addressed in any detail due to the relative limited impact on small market segments Prescriptive ; briefly one can obtain another’s property by merely using it for a long period of time. Federal Reserved Rights; where the federal government reserves land for a specific use, it is implied water rights are reserved in sufficient quantity to facilitate that use. Native American or Pueblo Rights; rights owned by municipalities were successors of early settlements within the original Spanish territories or reservations.

5Rapid Fire Case Studies – Unique Appraisal Challenges Riparian Water Right: 5 The riparian doctrine of surface water is based on English Common Law, giving the owner of the land bordering a lake or stream the right to use the water on contiguous lands. The riparian owners up and down a stream have equal use rights. They are entitled to share the water for reasonable use without seriously diminishing the quantity or quality of the water of other owners. The owners' rights are equal, regardless of location along the stream and the time when each property was purchased. The riparian right does not define reasonable use of guarantee any particular quantity of water. The resulting uncertainty can lead to legal conflict among the owners along a water course. Quality is typically an issue in Riparian states --- not quantity.

6Rapid Fire Case Studies – Unique Appraisal Challenges Appropriate Water Right: Appropriative water rights exist when surface water is transported away from its naturally occurring location and used on lands where it does not adjoin the source water body. These rights generally fall into two categories: Territorial Rights: prior to each state declaring they had jurisdiction over the state’s water, prior filings as ‘ territorial’ are regarded as senior rights and supersede any regulatory process (licensing and permitting). Statehood Appropriation: after each state’s declaration of water right control, the state’s water regulatory agency required users to engage in a license or permitting process. 6

7Rapid Fire Case Studies – Unique Appraisal Challenges Appropriative Water Right (continued) : The appropriative doctrine differs from riparian rights, i.e., does not confer equal rights to all owners of land underlying or abutting the water. The appropriative rights have six key elements: 1. first in time is first in right (date establishes seniority) 2. identifies the source 3. definition of fixed maximum volume, or quantity 4. point of diversion legally defined 5. area and type of beneficial use is described, & 6. the period of use (yearly, say June 15-Sept 15, etc.)

8Rapid Fire Case Studies – Unique Appraisal Challenges Vested Right A vested right is a clause in appropriation law that protects the rights of persons who appropriated water for beneficial use. A vested right can be lost by non-use

9Rapid Fire Case Studies – Unique Appraisal Challenges Non-Consumptive Use water rights are recognized for hydro-power generation, fish propagation, etc., where water is physically diverted from the stream and beneficially used; however, in theory there is no reduction in the amount of water from the source –NOTE: In contrast, there are losses for irrigation –An exception to the physical diversion rule would be prior stream flows to protect fish and wildlife. Beneficial use is recognized in these uses without physical diversions.

10Rapid Fire Case Studies – Unique Appraisal Challenges Groundwater Right: Most state "ground water" laws were developed after the "surface water" laws. Sometimes, ground water doctrines follow or combine the surface water laws of a state. –Resembling the riparian doctrine for surface water, the absolute ownership doctrine states that a landowner can take as much water as desired from beneath the owned land. –The reasonable use doctrine is a modification of the previous principle, since use of ground water can affect other landowners' water supply. This modification limits each landowner to a "reasonable use", recognizing equal rights to ground water resources. –A further modification of the reasonable use doctrine, the correlative rights doctrine states that the landowner's use must be correlated with the use of others, especially during times of water shortage. In times of short supply, each landowner is entitled to ground water in proportion to the percentage of owned land in relation to the other lands overlying that ground water supply. 10

11Rapid Fire Case Studies – Unique Appraisal Challenges An Appraiser’s Dilemma: Facts for ‘rapid-fire’ session: –900-acre lake (600 acres in State #1; and 300 acres in State #2) –Man-made lake on stream producing 10,000 acre-feet annually –Legal owners of property also own a Water Delivery Company that hold a water delivery contract to City A for 3,000 acre-feet annually from pumping station on the lake (upper right) The remaining 7,000 acre-feet is not used and flows across the spillway and continues downstream (below right) –Deed restriction to preserve the water quality above lake with no structures allowed within 0.25-mile of the lake 11

12Rapid Fire Case Studies – Unique Appraisal Challenges The Lake !!!! State-line in blue Red line is property boundary Yellow line is 0.25-mile set-back to protect water quality Pumping station and City A are above the blue line. –No structures below blue line in State #2 –Dam replacement cost ~$ 1 million –Water sales ~$1,750/acre –Dry/Rec sales ~$1,250/acre Client: Federal Agency Rule Set: USPAP & UASFLA 12

13Rapid Fire Case Studies – Unique Appraisal Challenges Water Doctrine Questions How should the appraiser proceed if State #1 is Riparian Doctrine and State #2 is Appropriative Doctrine? How should the appraiser proceed if State #1 is Appropriative Doctrine and State #2 is Riparian Doctrine? If the water law is different in each state, how is the water quantity determined? –Acreage? –Water volume? What is the dam face or the impoundment (dirt)? What is the water? What is the water contract? Should you value the water contract, if so: separately, or part of the whole? 13

14Rapid Fire Case Studies – Unique Appraisal Challenges The Lake (continued) : I called for a legal opinion concerning the water rights with the following conclusions provided: –Water in State #1 and #2 follow Riparian Doctrine. –Once water has been impounded, it becomes the personal property - -- not real property. –The valuation followed using ponded/reservoir/stream frontage as an amenity to the total property. The unused portion of the riparian flow was not considered beyond the amenity since it was not used. 14

15Rapid Fire Case Studies – Unique Appraisal Challenges Client Questions and/or Statements: The impounded water will remain in the lake once the lake is purchased. –Would it not then be owned by the person/entity impounding the water which would then be the United States? –How is it that you can separate the impounded water from the rest of the real estate and not give it a value? –Doesn’t the impounded water add value to the surrounding land? Did the attorney mean that the water would not be valued at all? –We understand that personal property, such as a furniture, etc., would not be valued as it would be removed by the current owner after a sale to the next owner. However, in this case, the impounded water will remain and become property of the next owner. –It just seems that this would have some value. Especially since there is income generated from selling the water to the City. The income from the sale of the water will not remain with the Grantor after selling the property to the United States – it will become income of the United States. 15

16Rapid Fire Case Studies – Unique Appraisal Challenges Appraiser Response to Questions: A real property appraiser’s assignment is to value real property rights in the private sector --- not the value to the U.S. or any other government entity. Stated differently, the question what is the value to another private person or private entity within the marketplace? Secondly, “property rights” are what an appraiser values or the right to use the water; not the commodity (water in this case) because attorney found that the “impounded water” was personal property at the point of impoundment. The dam is real property. What is valued in a real property appraisal is a “riparian water right” or right to use the water --- not the physical volume of water. –Riparian water rights are common to all real properties that abut steams/lakes in States #1 and #2. There is neither scarcity nor a property right specific associated with the subject that would create value beyond a water feature represented by similar sales with similar streams, lakes, and/or dams.

17Rapid Fire Case Studies – Unique Appraisal Challenges Appraiser Response to Questions: the water contract to the City A has value, but as personal property or business value to the water company. –Since the water is personal property it can be valued in any manner that the parties determine to be appropriate. –However, adding the value of a commodity as personal property to the underlying real estate component --- not only mixes the assignment between real estate and non-real estate elements, but represents “a summation” which is prohibited under Yellow Book (UASFLA) appraisal standards.

18Rapid Fire Case Studies – Unique Appraisal Challenges What was the ‘Subject’? Riparian Water Right: The legal property right to use the ‘in-property water’ for private sector purposes within the subject boundary. Dam/Impoundment: Part of the real estate, similar to a lake in the private sector. Water Impounded Behind the Dam: A commodity or physical volume of water; determined to be personal property by the attorney. Water flowing through the property (over spillway): Site amenity, much like non-merch timber that contributes to the appeal of the tract. 18

19Rapid Fire Case Studies – Unique Appraisal Challenges Sales? What type sales are necessary to reflect the physical and economic characteristics of the property? –Live water in a Riparian Doctrine state –What contribution to value does the dam have? –________________?

20Rapid Fire Case Studies – Unique Appraisal Challenges A Different Appropriative Scenario !!! Property #1 and #2 have no water right. –Open ditch delivery is not fenced and Property #1 and #2’s livestock (horses and lamas) have access to ditch-water. –Is there value associated with Property #2 and the ditch-water? If it does, what type of right exists? –What if Property #2 were a second homesite and the owner’s only time of use is June 1 to August 1 each year?