Liquid Assets: How Colorado Water Brokers Deal With a Drying Market

Gregg Campbell has been a “water broker” in Colorado for nearly 50 years. His first piece of advice: “Don’t get into this business. It’s a very hard way to make a living.”

Water rights in the West have drawn more attention in recent years as headlines highlight prolonged drought and the interstate conflict over the Colorado River and other vital water supplies. In Colorado, where water laws and engineering practices are arcane, water brokers play a vital role in facilitating the transfer of water rights to investors and municipalities. But as Campbell, of Denver-based HydroSource Inc., and his longtime business partner, Gary Barber, attest: water is a sellers’ market today and the number of potential deals seems to only decrease with time.

“A lot of the low-hanging fruit is already gone,” Campbell said.

Campbell primarily represents buyers, who are typically municipalities and land developers, in their pursuit of acquiring water rights. Barber usually represents sellers, who are typically farmers. When they’re lucky, Campbell and Barber match-make their clients.

Unlike other real estate assets, there is no multiple listing service for water rights. Campbell says he’s never had to pay for advertising. Instead, HydroSource relies on private contacts including water engineers, lawyers, municipal representatives, farmers and mutual ditch companies (whose shareholders own pro rata shares of agricultural water rights) to find and develop leads.

“That’s probably the first place I go. By phone or email, I say, ‘I’m looking for such and such water,’” Campbell said. “Typically, when a municipality hires us, they have a shopping list because there are only so many water rights that they’re able to get into their system.”

Barber works more often with sellers and will do more site visits to appraise their water rights.

“We’ll start in a consulting situation where they say: ‘Tell me what my water rights are worth.’ Sometimes they’re not worth anything and sometimes they’re worth a lot,” Barber said. “It’s kind of like being an antique dealer in some ways.”

Colorado generally follows the “prior appropriation” doctrine, which limits water rights to the first person who diverts the water for “beneficial use,” such as irrigation or mining. The prior appropriation doctrine is also known as "first in time, first in right." Because of this, older water rights are inherently more valuable.

Barber likened this to boarding a plane operated by an airline that prioritizes passengers who check in earliest. He also describes the limited pools of buyers and sellers in the Colorado water market, and how they negotiate, as a standoff.

“Sometimes it functions as a very efficient market, but really it’s more like a monopoly [run by] the municipality that’s gonna take on the water, versus a cartel, which is the farm community who all know they’re under that same irrigation system,” Barber said. “So, we want it to be a market and it often functions like a market, but it’s really a monopoly dealing with a cartel.”

This dynamic, among others, leads to challenges in water brokerage.

Water rights deals often take a long time to transact because they require a lot of due diligence. Campbell says that if he’s lucky, only 20% to 30% of his attempted deals even close.

“There’s a high mortality rate on transactions, mainly because of the flaws inherent in water rights, and the process that buyers have to go through to vet those water rights to make sure that they can use them for their intended purpose,” he said.

Adding to that is the growing scarcity of available water rights. Like Campbell said previously, most of the “low-hanging fruit,” or senior water rights on prime land in the path of development, is already spoken for in Colorado. That means deals are moving toward areas that are not prime development plots, with water controlled by farmers who are reluctant to sell. Barber said that many farmers will tell you that their water rights are their retirement plan.

“Ultimately, to convert the water right from an agricultural water right to a municipal water right, you have to take the water off the farm,” Barber said. “And that’s the great tension in all these western states: How many more rooftops do we need and how much farmland are we going to dry up?”

Water appraisals are another tricky business, with historical water usage and consumptive patterns heavily influencing the value and transferability of water rights.

“You can sell your ditch shares to another farmer along the ditch, but he’s going to use it for agricultural and irrigation use. And that only has a certain value,” Campbell said. “The real value comes in conversion to either municipal or industrial uses. And to determine what that value might be, we have to go through that historical consumptive use analysis because that’s the common denominator: How much water was historically consumed by this particular shareholder on this particular farm?”

In Colorado, these examinations often occur in a water court adjudicating the transfer or conversion of water rights.

“There are probably 20 different factors that are looked at by water engineers as to the historic consumptive use, and any one of those factors can adversely affect the value of that water,” Campbell said.

For example, if said water was transferred to a different location 150 years ago but wasn’t approved by a water court, which adjudicates water transfers, then all diversions for the last 150 years are illegal, he said. This highlights the need for meticulous analysis and experienced professionals to navigate these challenges successfully.

As for pricing, the most valuable water rights today in the state are for shares in the Colorado-Big Thompson Project, which can be used in northern Colorado for agriculture or redeemed with many municipal water providers, Barber said. These shares are in the range of $90,000-$100,000 per Historic Consumptive Use acre-foot. Conversion of active agricultural water rights to municipal water rights falls in a range of $40,000 to $60,000 per Historic Consumptive use acre-foot. An acre-foot of water is enough to cover an acre of land one foot deep, or about 326,000 gallons. Consumptive water uses diminish the source and are not available for other uses.

Water rights in Denver’s south metro area are about $3,500 per acre-foot plus $2,000 per acre-foot or more to construct a well, Barber said. Delivery via pipeline to a municipal provider can double the cost, so Denver Basin aquifer water delivered into a municipal system is $10,000 per acre-foot with a future need to be replaced in 40-50 years.

New investors interested in water rights or rural land in the American West should understand that water is a complex and highly regulated resource. Learning the local water laws, regulations and market dynamics is essential before making any investment decisions. Here are a few key points from Campbell and Barber to consider:

1. Take your time: Water deals take longer than traditional real estate transactions. Water rights are governed by a variety of laws and regulations, and navigating the legal and administrative processes can be time-consuming. Patience is crucial in this field.

2. Consult professionals: Work with experienced water attorneys, engineers and brokers who deeply understand local water rights and market conditions. They can provide valuable guidance and help you navigate the complexities of the water market.

3. Understand the value drivers: Water rights derive their value from factors such as their source, location, historical use and priority within the water rights system. Scarcity and demand for water in a particular area also play a significant role in determining value. Familiarize yourself with these factors and how they affect water rights in your target region.

4. Consider long-term viability: When investing in water rights or rural land, consider the water source's long-term viability and potential uses. Assess the risks associated with changing regulations, population growth, climate change and other factors that could impact water availability and demand.

5. Community engagement: Recognize that water rights are often deeply connected to the local community, culture and economy. To understand their perspectives and build relationships, engage with local stakeholders, including farmers, water users and regulators. Respect the cultural and historical significance of water rights in the area you are investing in.

6. Diversify your portfolio: Consider diversifying your water rights portfolio by investing in different types of water rights, sources and geographic locations. This can help mitigate risks associated with changing conditions and regulations in specific areas.

7. Conduct thorough due diligence: Before investing in water rights, conduct comprehensive due diligence to assess the quality, reliability and marketability of the water rights. This may involve reviewing legal documents, conducting site visits, analyzing water availability and seeking expert opinions.

Again, water rights are unique assets that require specialized knowledge and careful consideration. Investors can make informed decisions regarding water rights and rural land by thoroughly understanding the local water market, consulting with experts and taking a long-term perspective.

Water rights brokerage has a high barrier to entry because of the multidisciplinary knowledge required just to understand the basics.

“You virtually need a degree in water law and civil engineering,” Campbell said. “But then, of course, you have to learn the real estate aspects of it.”

Highlighting the experience necessary to enter the field, HydroSource also has a junior partner named Curt Bauers, who joined the firm after nearly 30 years of water resources engineering.

As for himself, Campbell entered water brokerage after working as a civil engineer for the Denver Board of Water Commissioners, eventually becoming the city’s chief of water rights acquisition, protection and development.

He moved to the private sector after the Environmental Protection Agency vetoed the Two Forks Dam in 1990, a proposed 1.1-million-acre-per-foot water reservoir at the confluence of the north and south forks of the South Platte River outside Denver. The EPA agreed with conservationists who argued that the dam’s construction would lead to unnecessary damage to wetlands and wildlife areas.

“That got me thinking that the era of large municipal water projects was over, because of the environmental issues involved,” Campbell said. “And I thought it was an opportunity to get involved on the private side and create public-private ventures to maximize the efficient use of the water we had, rather than developing new water.”

After working on a few private deals, Campbell realized he was a “deal junkie” and moved full-time into brokerage, establishing HydroSource.

Barber is a Colorado native who started as a leasing agent in Tysons, Virginia, with experience as a Dulles Greenway toll road development manager. That work involved water management, which led to a return to Colorado to work exclusively in water brokerage.

“It is the Rubik’s Cube of real estate, trying to figure out all the different components of it,” he said.