Understanding Water Rights: What They Are and Why They Matter
Water rights are a type of property right; specifically, it is the right of a land owner to use water from sources like streams, ponds, rivers, or groundwater. Determining who owns water rights is country and state-specific.
Water rights vary based on the region, with some areas treating groundwater and surface water identically under the same regulations, whereas in other regions, they are treated separately. Essentially, water rights fall into two main categories: use-based and land-based rights.
Water rights that are attached to a piece of land can often be sold. Think of it as selling an easement (for example, the right to build a driveway on your land leading to another property), or mineral rights (like granting a company permission to drill for oil on your land). To better illustrate, imagine you have a tree full of ripe apples that you don't eat, but your neighbour loves apples. You could sell your 'apple rights' to your neighbour, allowing them to pick the fruits of your tree.
East vs. West
In the United States, there are two completely different systems for determining who owns water rights. Most of the eastern states use riparian water rights. With riparian rights, the land owner whose land touches the body of water (such as a river or pond) are allowed “reasonable use” of the water. They can’t divert the river and they can’t use so much of the water that they negatively impact other riparian owners.
Many western states employ a system known as prior appropriation. Essentially, the first person to utilise the water for a beneficial purpose (like farming), retains the rights, even if it harms other landowners. 'Western Water Rights and the U.S. Supreme Court' by James Davenport provides an in-depth understanding of prior appropriation. For those seeking immediate knowledge, consider checking out this informative online article.
These systems address surface water rights such as the right to use water in a lake or stream. Underground water rights come in a couple of forms as well. Under absolute ownership (or the rule of capture), you can drain as much water as you want from underneath your land, even if the aquifer you are draining extends under many other parcels. The more common practice is the American rule which allows you to drain as much as you can as long as you are not wasting the water or have some other negative motive.
Water rights get litigated heavily. Several concepts come into play such as common law, public trust doctrine, and eminent domain (because the government forbids taking property from a land owner without compensation).
California employs a complicated 'hybrid' system that combines elements of riparian (rights based on property adjacent to water bodies) and prior appropriation principles. Here, property owners with water rights can sell them, often involving intermediaries like real estate agents or landmen, who initiate the transaction by consulting ownership records. If you're intrigued by California's unique process, dive deeper into our comprehensive guide on the subject here.
Websites such as waterrightexchange.com, watercolorado.com, and waterbank.com serve as neutral marketplaces or brokerages for water rights. They provide an online platform where sellers can list their water rights for interested buyers. These platforms can expedite the process and offer greater exposure, helping sellers find prospective buyers quickly and efficiently. Check out our guide to understand how these virtual marketplaces work and their benefits.
The most notable water rights deal out there is billionaire T. Boone Pickens selling his water rights of land he owns over the Ogallala Aquifer in West Texas for $103 million to 11 nearby cities including Amarillo and Lubbock. He sold the right to drain 65 billion gallons of water a year from underneath his land. What he did should form as a template for what someone else can do to make money selling water rights.
Cashing in on Water Rights: A 3-Step Guide to Profit
1. Purchase a vast expanse of rural land with underground water. This example uses Texas, however, this strategy can be applicable in many regions. Surface water law often involves intricate details and restrictions, while the potential access to underground water can be considerably greater. In Texas, for instance, the rule of capture permits drilling for water beneath your parcel, even if the water spreads across other properties. The land can be entirely rural, with its principal value vested in its water. Indeed, any additional land value can increase the purchase price and consequently, your annual taxes.
2. Practice patience. The demand for water is one of the few certainties in life, along with death and taxes. Consequently, monitoring any activities by neighbours that might affect your potential water resource is crucial. For instance, if a neighbouring land owner begins drilling, or even implies they might, it might be time to spring into action yourself, or consider selling your water rights.
3. Negotiate a water right sale. The most common buyer is going to be local municipalities or water districts within 50 miles. However, you can always threaten to build a pipeline (enormously expensive) or truck the water to another jurisdiction to gain leverage.
3. Offload the water rights, but retain ownership of the land. The land could potentially serve other purposes such as hunting or ranching. In regions like Texas, mineral rights could prove as lucrative as water rights, provided fortune favours you. Hidden treasures like the Barnett Shale might be unearthed in the future, or advances in technology might enable the exploration of already known shale formations.
In Conclusion, Profiting from water rights involves strategizing and patience. It can be an intriguing venture for those willing to wait and see, monitor regional activities, and seize opportunities when they arise. When navigated carefully, it could turn the tide towards a profitable investment journey. So why not dive in and explore the potential that water rights have in store?