Untapped Potential? Hot Spring Deals Pick Up Steam

Mark King and Eric Saunders thought the geothermal reservoir underneath the 1,100 acres they listed for sale outside Telluride, Colorado, might simply interest investors, but the hot water is what propelled the deal. Despite the property boasting ample room for residential development and recreation opportunities, all parties interested in purchasing it were most attracted to its hot springs.

The pair of brokers closed the nearly $7.8 million sale of the Silver Springs at Rico after fielding four bids and interest from 40 different parties. Those parties included onsen [hot spring] operators in Japan, investors interested in geothermal energy production and one suitor who wanted to build an energy-hungry Bitcoin mine on the property.

"If you have the right equation, there's plenty of people looking to buy," said King, of Solutions RE.

Now, King and Saunders hope to sell a similar property, named RW Springs (Ranch Water Springs), listed for $14.5 million in nearby Pagosa Springs, Colorado. The brokers say they have reason to be optimistic based on nearby sales comps: Other hot springs resorts in Colorado and Arizona charge up to $2,500 per night; a 105-acre riverfront parcel in Pagosa Springs recently sold for $6.8 million; and The Springs Resort in Pagosa Springs sold in 2018 to a REIT for nearly $538,000 per key.

"Which is astronomical," King said. "It's owned by a REIT, so it's sophisticated, educated investors. And that's all driven around the geothermal [reservoir]."

The demand suggests that hot springs have gained attention as a niche investment due to their unique characteristics and potential for diverse revenue streams. LoopNet spoke with experts to explore these prospects.

A Hydrothermal Gold Rush?

Hot springs offer a combination of appealing features including geothermal resources, wellness opportunities, water rights and scenic locations.

These properties often boast picturesque natural surroundings and mineral-rich waters. The inherent beauty of these locations can be a major draw for tourists seeking relaxation, wellness and outdoor adventures.

Hot springs have been sought after for their therapeutic properties for centuries. And as wellness tourism gains momentum, investors may see hot springs properties as opportunities to cater to the growing demand for holistic wellness experiences. These investors can capitalize on diverse revenue streams including hotel accommodations, day spa services, restaurants, retail, events and recreational activities.

"There is flexibility," King said.

Hot springs are often also a distinct investment proposition due to their limited availability. Owning a hot springs property can provide investors with a unique asset that stands out in the market.

"There's a steady allure to geothermal water, but it's kind of a niche group," said Scott Miller, a Colorado-based water rights lawyer with Patrick, Miller & Noto PC.

Then there is the energy component. Some hot springs boast geothermal reservoirs deep enough to produce renewable energy. Such is the case in Pagosa Springs, Colorado, which features the deepest geothermal well in the world. It's been used since 1982 to heat local businesses and keep sidewalks clear of snow.

This brings us to RW Springs.

Situated 7,000 feet above sea level in Archuleta County, Colorado, the property's location near the mountain town of Pagosa Springs and its access to the San Juan River enhance its appeal. The area relies significantly on tourism.

But what most helps the property stand out is its well-defined development rights outlined in a long-term development agreement with the county. The 496-acre property is approved for a range of zoning options including up to 1,600 residential units in buildings of various densities, commercial space and hospitality uses. The property's water rights also allow for a golf course and farm-to-table restaurants, which are both heavy water users that otherwise face restrictions in drought-prone areas.

"It really is a rare assemblage of property rights," Saunders, of Telluride Properties, said. "You've got the property itself and its attendant views, but then you also have the mixed-use densities, water and access to a geothermal resource. So, all of that together is what makes it an attractive opportunity for an experienced and creative developer. It's a placemaking opportunity."

What's Water Worth?

This is a question water rights attorney Miller answers often for his clients. The short answer is it depends primarily on volume and location.

First, there is the need to define the water in question. This is done using a flow rate or volume rate. One way to measure this is by cubic feet per second.

"Every water right can essentially be reduced to a consumption component," Miller said. "Once you can define the volume of water consumed in a given year, that becomes the piece that you can buy and sell."

Then there is the demand component. Investors may pay a huge premium for water rights near highly populated cities like Denver, but less in more sparsely populated areas like the western slope of the Rocky Mountains.

"Location, location, location still applies to water rights as well," Miller said.

And to water laws as well. Generally, states east of the Mississippi River follow riparian water rights, which gives landowners equal access to bodies of water adjacent to their properties.

"You'll have a right to use that water simply because it flows through your land," Miller said.

States west of the Mississippi generally follow the prior appropriation doctrine, which limits water rights to the first person who diverts the water for "beneficial use," such as irrigation or mining. Disputed water rights claims are adjudicated in court, where evidence is presented to determine who was first to divert the water. The prior appropriation doctrine is also known as "first in time, first in right."

Miller said that water rights can be bought and sold without the accompanying land but must always be offset to prevent "double-dipping" in the system.

"To do that, you have to make a one-for-one exchange. So, if somebody is going to use your water right at a new location, then you have to stop using your water right at your location to make that water available," he said. "That's how the water rights system stays whole."

Another consideration for potential investors is how tight-knit the water rights community is, Miller said. Water rights transactions can be disorganized given the absence of a centralized market.

"There's no MLS system for water rights," he noted.

Even more than other real estate sectors, most listings gain traction through word of mouth and water rights professionals often rely on personal relationships to close deals.

"If I was trying to sell a client's water, I have an email list of all my closest contacts — 30 or 40 water attorneys and professionals — and I would send out a prospectus of water I have for sale with the list price, on the South Platte River, for example," Miller said. "And that's how the word would get out there."

This article was updated on 12/12/2024