The appraisal of water rights: valuation methodology.(Cover story)

ABSTRACT

This article is part two of a two-part article on the appraisal of water rights. It builds upon the foundation laid in the previous article In The Appraisal Journal titled, "The Appraisal of Water Rights: Their Nature and Transferability" (Winter 2008). The current article presents the valuation methodology appropriate for estimating the value of water rights, both on a stand-alone basis and as the contributing value to the larger parcel. Two case studies are presented to illustrate the methodology and show appropriate adjustments to comparables.

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This article is the second in a two-part series addressing the appraisal of water rights. (1) It presents the valuation methodology appropriate for estimating the value of water rights. The appraisal of water rights on a stand-alone basis is addressed as well as the contributing value that water rights bring to the larger parcel. The rules and regulations that exist in California provide the background for the presentation, and although there is variability among states, many of the principles presented have general applicability.

Appraisal Methodology

A clear understanding of the property interest being appraised is foundational to the entire appraisal process. Appraising the fee simple estate to a tract of land that has an appurtenant water right means that the water right property interest is included in the entire bundle of rights being valued. If one is appraising only the water rights that are appurtenant to a tract of land, then a partial interest in real estate is being valued.

The Dictionary of Real Estate Appraisal defines partial interest as "divided or undivided rights in real estate that represent less than the whole." (2) When valuing a partial interest in real estate there are two potential techniques available: the before and after approach and the takings plus damages approach. (3) The before and after approach compares the value of the proper" with the water right to the value of the property without the water right, with the difference being the indication of the contributing value of the water right to the property. The takings plus damages approach is typically applied in cases where valuing the whole property would be overly complex and the partial interest being valued is only a small part of the whole. This could be the case, for example, where a ranch of 50,000 acres is transferring 100 acre-feet of water rights. (4)