Real Estate Brokers and appraisers have a fiduciary duty to their client to represent truthfully all material facts related to a transaction. In our new world of water scarcity, satisfying this duty becomes increasingly complex especially for agricultural real estate. The Sustainable Groundwater Management Act (SGMA) only increases the complexity. As SGMA restricts a farmer’s last reliable source of water, agricultural real estate transactions will be highly scrutinized based on the water resources available or not available to the property. SGMA not only impacts the valuation of the property but also what needs disclosure in order to avoid post-sale problems.
SGMA’s Influence on Property Values
In this world of water scarcity property value is viewed in a new way. Agricultural properties with subsidence issues, low precipitation, and a high reliance on groundwater look much less profitable because they present a higher risk than parcels with a secure source of water. On the flip side, properties that may be considered low value for many crop types may find rising values based on their water assets due to a less risky water position. Based on these and myriad other scenarios, a real estate professional should entertain new questions surrounding water risk:
- How easily can the property recharge groundwater?
- Is the property in a flood zone?
- Does the water district allow farmers to import, save, or transfer water?
- Under SGMA, how much groundwater can this property pump?
Easily identifying these complex property characteristics early on in the due diligence process tee-up real estate professionals for success and protect the Ag community against unforeseen water risk.
Mitigating Water Risk
The SGMA causes uncertainty and increases water risk in an era defined by water scarcity. Real estate professionals have an opportunity to help their agricultural customers identify and understand water risk. SGMA mandates the creation of new local government agencies called Groundwater Sustainability Agencies (GSAs) to regulate groundwater pumping through Groundwater Sustainability Plans (GSPs). The GSPs for overdrafted basins are due January 31st, 2020 and the GSPs for medium and high-priority basins is January 31, 2022. This is a perfect time to begin preparing for this significant shift in groundwater regulation!
There are five fundamental ways for real estate professionals to mitigate water risk:
- Research water rights
- Research potential water supplies available to the property
- Understand soil conditions on the property
- Keep tabs on the local GSA
- Understand how that property is situated compared to surrounding properties.
Water Rights Research
Wading into water research is no small feat. There are many times where data will be difficult to find or require multiple steps to piece the relevant data points together. Typically, you will need track down the following for a property:
- Application ID
- Right Holder
- Type of Water Right
- Priority Date
- Amount of Water
With the above scenario you are missing some information, but what are we really looking at anyway?
- Application ID: Number assigned to each water right application and easy way to identify a water right.
- Right Holder: The Legal entity in possession of the water application, permit, or license.
- Type of Water Right: The main types are Riparian or Appropriative.
- Priority Date: This is the date a water right application was submitted to the State Water Resources Control Board and may determine which right holder has a stronger claim to water.
- Amount of Water: This is the amount of water the right holder is entitled to use if it is for the same type of purpose they listed on their water right application.
As shown above, you may only know a right holder name like “Beri Farms Too” or maybe you only know the general area where you want to look for potential water rights. To understand the potential water risk and value of a property, you will need to research to fill in the blanks. For example, if Beri Farms Too has an appropriative right with an older priority date, they have a stronger water right which means when the State Water Resources Control Board reduces the amount of water available to that area, Beri Farms Too is likely less impacted than Beri Farms. Beri Farms can continue to grow crops, Beri Farms will need to scramble to find new sources of water or fallow land.
Supplies the Limit
When researching a property, you will need to know if water is available on the property which are either surface water supplies or groundwater supplies. The mutual water company or water, including irrigation, district delivers surface water supplies. These are government agencies with varying budgets that charge water users a fee for water deliveries. If a property is not served by a water district, also known as a “white area” because it would be a blank looking space on a service map, that means that property will have to make arrangements to get surface water or exclusively rely on pumping groundwater. Getting information on the cost of surface water, amounts available for purchase, and how water purchases are regulated requires figuring out which water district has jurisdiction and then contacting that water district for more information.
Pumping groundwater has long been a practice on agricultural parcels due to fluctuations in surface water supply. The groundwater safety net will be severely restricted in most of the high and medium priority groundwater basins, meaning a parcel that relies solely on groundwater pumping in a high priority basin is in a riskier position than a property that does not rely on groundwater or is outside of a high priority basin. You need to overlay the data on surface water you get from the water district with the understanding of SGMA’s basin priorities to begin painting a property’s water supply picture.
As you can see in the map above, AQUAOSO is tracking basin priorities. You can quickly compare basin priority to water district surface supplies so you communicate those potential risks and integrate that knowledge into your workflow.
Soil is Critical
Soil provides nutrients to plants and regulates water flows. A standard like the Storie Index breaks soils into classes to make it easier to understand crop productivity on a property. Whether crops are viable on a piece of property is vital to understanding the value of the property and whether there is a financial risk in pursuing a specific agricultural operation. However, the soil, at the surface and below, offers its own potential risk.
Whether or not an agricultural property can bank water, which means storing water underground for later use or for recharging a groundwater basin, is essential due to the increased need for maintaining groundwater basin health and developing alternate sources of water. The Soil Agricultural Groundwater Banking Index was developed by the University of California, Davis to indicate areas where farms could best participate in active recharge efforts. Depending on how the GSA regulates a basin, participating in recharge programs may be incentivized with groundwater credits for future use of groundwater supplies. High SAGBI rating and a favorable Storie Index rating on a property better prepare that property for future challenges.
AQUAOSO allows you to combine both ratings on a property to know which properties have better or worse Storie Index and SAGBI ratings.
Groundwater Sustainability Agency
GSAs are special districts that have jurisdiction within their defined boundaries to regulate groundwater pumping. GSA powers include creating a GSP, constructing groundwater allocation schemes, creating rules on groundwater trading, and charging fees for anything related to groundwater. Because GSPs are in early-stage, non-public drafts, keeping up to date on who is involved with GSAs in areas where you tend to do business and how they are planning on regulating groundwater is key to knowing what the near-future holds for the agricultural community.
In the meantime, AQUAOSO has gathered GSA meeting highlights and a map of the GSA boundaries so you can know which GSAs to focus your attention on instead of the 200 plus across the state.
Comparing Apples to Apples
Many make it through a large portion of the water research journey after sifting through water rights records, water supply data, surveyed soil data, and scouted the GSAs. However, the water risk due diligence process is not quite finished. The next step is comparing properties in the same area or compare properties with similar characteristics located in different water districts and GSAs. Typically, you would need to go back to water rights and do the research circuit again, and again, and again. Additional due diligence requirements include:
- Physical inspection of buildings
- Deed restrictions, covenants, easements
- Financing,
- Land use restrictions
- Environmental hazards
- Other stacks of information that eat away time
There must be an easier way! AQUAOSO increases your ability to efficiently compare properties in an area with all the research you need to understand the water risk picture. Comparing parcel information, water, soil, and geographic location will cut your research time down exponentially as more properties enter the research mix!
Helping the Agricultural Community
Agricultural real estate professionals are part of a larger agricultural community that faces a one-two combo of Water Scarcity and SGMA. Check out our whitepaper entitled “Lending a Hand to California Agriculture” where we discuss the risks, realities, and rewards of assisting farmers in mitigating risk. In the end, helping your clients avoid water risk is also helping you avoid business risks by reducing your liability and attracting more clients as a trusted source of water risk information.