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Rapid Fire Case Study – Valuation of Water Shares – Western US

Rapid Fire Case Study – Valuation of Water Shares – Western US . Mark S Sonderby, ARA. The Valuation of Water Shares in the Western States. By Mark Sonderby, ARA. Introduction . Definitions Types of Shares, Classes, By-Laws Location and Market (Supply-Demand) Considerations

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Rapid Fire Case Study – Valuation of Water Shares – Western US

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  1. Rapid Fire Case Study – Valuation of Water Shares – Western US Mark S Sonderby, ARA

  2. The Valuation of Water Shares in the Western States By Mark Sonderby, ARA

  3. Introduction • Definitions • Types of Shares, Classes, By-Laws • Location and Market (Supply-Demand) Considerations • State Law and Regulations • Approaches to Value

  4. Definitions • Market Value • Personal Property • Appurtenance • Water Right – www.blm.gov/nstc/WaterLaws • Water Share – State Rules, Regulations, Law Reference: Dictionary of Real Estate Appraisal, 5th Edition, Appraisal Institute, 2010

  5. Market Value • The most probable price that the specified property interest should sell for in a competitive market after a reasonable exposure time, as of a specified date, in cash, under all conditions requisite to a fair sale, with the buyer and seller each acting prudently, knowledgeably, for self-interest, and assuming that neither is under duress. Reference: Dictionary of Real Estate Appraisal, 5th Edition, Appraisal Institute, 2010

  6. Personal Property Identifiable tangible objects that are considered by the general public as being “personal” –for example, furnishings, artwork, antiques, gems and jewelry, collectibles, machinery and equipment; all tangible property that is not classified as real estate” References: Dictionary of Real Estate Appraisal, 5th Edition, Appraisal Institute, 2010, and USPAP 2010-2011 Edition

  7. Appurtenance Something added or appended to a property that then becomes inherent part of the property and usually passes with the property when title is transferred Reference: Dictionary of Real Estate Appraisal, 5th Edition, Appraisal Institute, 2010

  8. Water Rights A right to a definite or conditional flow or quantity of water, usually for use at stated times and in stated quantities, e.g., for irrigation or for hydro-electric power development. A water right may be a right acquired by prescription, e.g., arising from the open, notorious, and undisputed use of water for the statutory term of years; a right acquired by appropriation, e.g., a grant from an agency of government with the right to distribute the un-appropriated surplus waters of the state; or a riparian right under the common law of doctrine of riparian ownership of waters that wash land. Reference: Dictionary of Real Estate Appraisal, 5th Edition, Appraisal Institute, 2010

  9. Water Rights Law - Wyoming • Founded on the doctrine of prior appropriation, “first in time, first in right” • All natural waters within the state are property of the State • State Engineer regulates and administers the State’s water • Application Process “inchoate right”– Board of Control reviews & approves • Once approved, and no disputes, “Certification of Appropriation” is issued and is known as having adjudicated water right • Discourages and prohibits the sale of water rights (when they are attached to the land) Title 41, Water; Wyoming Statute

  10. Water Share - Wyoming • All water shares are recognized as “Secondary Supply” and are permitted • Can be recognized as appurtenant if went through an application process • A Reservoir Permit is issued to impound waters of the State – “Beneficial Use” • Allocation of interest in the reservoirs capacity is in the form of shares and must specify the volume of storage (must file annual reports with the state) • Priority date relates to the date of original construction, even though may show a filing date. Cannot be used or transported outside the State. Title 41, Water; Wyoming Statute

  11. Considerations in an Appraisal Growth By-Laws Location Demand Snowpack • Understand and Define the Market • Distribution • By-Laws and Class of Shares • Economics • Supply • Demand • Growth • Precipitation

  12. More to Consider in Appraisal Capacity Min Pool Shares Acre Feet • Total Capacity • Number of Total Share holders • Calculate acre feet per share • Dead pool • Minimum or Natural Pool

  13. Exercise • Paul is appraising 20 Class A, and 30 Class B Reservoir shares in Deer Haven Reservoir Company. He obtained all the information he could from the owner who did know the total number of shares, but did not know total capacity, or how many acre-feet each share contained. He has sales from the same reservoir, but he did not verify with the sellers-buyers the number of acre-feet per share conversion. The owner was able to provide copies from the reservoir company by-laws which says Class B shares are subservient to Class A shares and equal in acre-feet. The President and other officers for the reservoir company are either on vacation or on the mountain for the weekend. He needs to deliver report by Monday morning to his client. 1. The total number of shares in the Deer Haven Company are listed on the face of the certificate as 1,374 Class A, and 700 Class B. Each share is worth $1 on the stock certificate. What other information does Paul need to calculate the number of acre-feet for each share?

  14. Exercise • Paul is appraising 20 Class A, and 30 Class B Reservoir shares in Deer Haven Reservoir Company. He obtained all the information he could from the owner who did know the total number of shares, but did not know total capacity, or how many acre-feet each share contained. He has sales from the same reservoir, but he did not verify with the sellers-buyers the number of acre-feet per share conversion. The owner was able to provide copies from the reservoir company by-laws which says Class B shares are subservient to Class A shares and equal in acre-feet. The President and other officers for the reservoir company are either on vacation or on the mountain for the weekend. He needs to deliver report by Monday morning to his client. 1. The total number of shares in the Deer Haven Company are listed on the face of the certificate as 1,374 Class A, and 700 Class B. Each share is worth $1 on the stock certificate. What other information does Paul need to calculate the number of acre-feet for each share? Total Acre-Feet Capacity of the Reservoir

  15. Exercise 2. Paul is able to get total capacity from the States Water Division website. In the annual report it states dead pool storage exists in the reservoir due to silting and poor design. The total capacity is 2,000 acre-feet and the dead pool is 200 acre-feet. How many acre-feet are in each share?

  16. Exercise 2. Paul is able to get total capacity from the States Water Division website. In the annual report it states dead pool storage exists in the reservoir due to silting and poor design. The total capacity is 2,000 acre-feet and the dead pool is 200 acre-feet. How many acre-feet are in each share? 1,800 Acre-Feet/2,074 Shares = /.86789 Ac-Ft./Share

  17. Exercise 3. The area has experienced drought conditions the past 3 years, and last year’s carryover is so low that there’s only a 1,265 total acre-feet stored for the upcoming irrigating season. The state has a “first in time, first in right” doctrine. The location of ranch is good on this ditch is 1st in the drainage, but Kelly is first (50 Class B shares) on the ditch, Dow is 2nd (40 Class B shares) and this owner is third. Can the owner use any of Class A water this year? Can Dow use Class B water shares? Can the owner use any Class B water shares?

  18. Exercise • The area has experienced drought conditions the past 3 years, and last year’s carryover is so low that there’s only a 1,265 total acre-feet stored for the upcoming irrigating season. The state has a “first in time, first in right” doctrine. The location of ranch is good on this ditch is 1st in the drainage, but Kelly is first (50 Class B shares) on the ditch, Dow is 2nd (40 Class B shares) and this owner is third. Can the owner use any of Class A water this year? Can Dow use Class B water shares? Can the owner use any Class B water shares? Total Shares = 1,265.0 Acre Feet

  19. Exercise • The area has experienced drought conditions the past 3 years, and last year’s carryover is so low that there’s only a 1,265 total acre-feet stored for the upcoming irrigating season. The state has a “first in time, first in right” doctrine. The location of ranch is good on this ditch is 1st in the drainage, but Kelly is first (50 Class B shares) on the ditch, Dow is 2nd (40 Class B shares) and this owner is third. Can the owner use any of Class A water this year? Can Dow use Class B water shares? Can the owner use any Class B water shares? Total Shares = 1,265.0 Acre Feet Class A = 1,374 x .86789 = 1,192.5 72.5

  20. Exercise • The area has experienced drought conditions the past 3 years, and last year’s carryover is so low that there’s only a 1,265 total acre-feet stored for the upcoming irrigating season. The state has a “first in time, first in right” doctrine. The location of ranch is good on this ditch is 1st in the drainage, but Kelly is first (50 Class B shares) on the ditch, Dow is 2nd (40 Class B shares) and this owner is third. Can the owner use any of Class A water this year? Can Dow use Class B water shares? Can the owner use any Class B water shares? Total Shares = 1,265.0 Acre Feet Class A = 1,374 x .86789 = 1,192.5 72.5 Kelly Class B Shares = 50

  21. Exercise • The area has experienced drought conditions the past 3 years, and last year’s carryover is so low that there’s only a 1,265 total acre-feet stored for the upcoming irrigating season. The state has a “first in time, first in right” doctrine. The location of ranch is good on this ditch is 1st in the drainage, but Kelly is first (50 Class B shares) on the ditch, Dow is 2nd (40 Class B shares) and this owner is third. Can the owner use any of Class A water this year? Can Dow use Class B water shares? Can the owner use any Class B water shares? Total Shares = 1,265.0 Acre Feet Class A = 1,374 x .86789 = 1,192.5 72.5 Kelly Class B Shares = 50 22.5 Shares to Dow

  22. Sawmill Reservoir Dome Lake Park Res.

  23. Appraisal Methods • Cost Approach • Sales Comparison • Income Approach

  24. Cost Method • Few or No New Reservoirs Built • Reservoir Expansion in 1998- WY (Cost $12,000/Acre Foot) • Government Dollars Involved • NEPA Process • In Stream flows • Engineering – Army Corp.

  25. Sales Comparison • Requires Sales • Research intense and costly • Often difficult to share particulars • Buyers or Sellers not knowledgeable • Unit of value not understood • Class Shares – Bylaws not understood • Many are not arms length

  26. Sales Data

  27. Income Approach • No leasing before a sale transaction to extract rate • Few Leases at all to compare in today’ market • 15 years ago some Park Reservoir Water was leased at $20 per acre-foot • Summer of 2006 around 200 shares leased for $175 per acre foot. If compared to sales ($3,500 per share) would lend a rate of around 5% but is only one indication.

  28. Conclusion • Questions? • Thanks for Your Time Today • Enjoy the Vision 2012 Conference

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