As water becomes scarce in California, public agencies are looking for new sources and opportunities to provide water to their communities. When the government identifies these water sources but confronts reluctant vendors, sometimes eminent domain becomes necessary. This is currently happening in the Antelope Valley, where the Rosamond Community Service District recently approved the passage of a resolution of necessity to acquire water rights to agricultural land by eminent domain.
The district faces shortages in its future water supplies and is limited in the amount of groundwater it can use to serve its customers. The identified property is near an existing water distribution system, and the district could not find another vendor willing to secure sufficient water rights to cover the shortfall. It appears the owners are considering challenging the district’s right to take the property, and if the district is successful there will be a big battle over the value of the water rights. The district approved funding that would provide up to $ 17.5 million to acquire the water rights, which would be reimbursed through tariffs passed on to customers.
The valuation of water rights is a complex analysis which depends on a number of factors. In addition to determining existing real water rights and their transferability, the assessors also consider:
- the quality of the water and its suitability for various uses (agricultural, municipal or drinking water);
- the costs of water extraction, including necessary upgrades that must be installed to secure access;
- the reliability of the water source, including its priority in the watershed in the event of low water levels; and
- alternative water supplies in the region, which dictate the supply and demand and the price buyers and sellers will pay for water in the geographic vicinity.
Once these factors are established, appraisers typically use methodologies applied to traditional real estate valuation, such as the revenue approach, the comparable sales approach, or the cost approach. For example, when valuing water use rights, an appraiser might consider the anticipated revenue stream from the rental of water, discounted to present value. Alternatively, an assessor could examine other comparable water rights transactions and make the necessary adjustments to determine the appropriate value of the water rights. Or, under a cost approach, an assessor could analyze the cost of developing an alternative water supply.
Rights that provide a reliable water source, give access to high-quality water, have minimum limits on portability, and have few options for alternative water sources will end up fetching the highest price.