Water Asset Management deals prompt Colorado water law review

WAM has operated legally within the confines of Colorado’s water speculation laws, but public concerns have resulted in a work group considering the need for ‘investment water speculation’ laws.

A Colorado State Senate work group tasked with identifying strategies to strengthen state laws against water speculation following investments by Water Asset Management has proposed eight “concepts” for review instead of formal recommendations.

The concepts include a tax on profits derived from sale or lease of water rights previously purchased for speculative purposes, a prohibition on payment for non-diversion of water and elimination of tax benefits for land from which water has been removed.

“Further concept development could result in a proposed law that is both effective against speculation at a large scale and minimizes drawbacks to a degree that is acceptable to the General Assembly,” the group wrote in its report to the Interim Water Resources Review Commission.

The 22-member work group included representatives of local agricultural, environmental and recreational communities, as well as water rights attorneys. It was created in 2019 by State Senator Kerry Donovan in response to concerns raised by constituents following media reports, one of which included a non-profit Community Radio for Northern Colorado story that identified $16.6 million in investments by WAM to acquire more than 2,000 acres of irrigated Colorado farmland. Donovan did not respond to messages seeking further detail.

The work group report explained Colorado is currently evaluating potential demand management programs that would provide for temporary, voluntary and compensated reductions in consumptive water use as part of efforts to ensure compliance with the Colorado River Compact. Temporary fallowing programs are a focus of investments by New York-headquartered WAM, which did not reply to messages seeking further detail.

The work group report authors acknowledge that “speculation” is a “term of art” in Colorado water law, and the terminology and specifics of the distinction they seek to define between “traditional water speculation” and “investment water speculation” can be confusing.

Existing state laws, they explain, prohibit traditional water speculation, which refers to trying to secure the right to use water without a specific plan and intent to put the water to beneficial use. Those laws are enforced largely through water court reviews triggered only when a water right is appropriated or changed, or when a claim for diligence is made for a conditional water right. According to the report, such review is not normally conducted upon conveyances or purchases of water rights.

“Colorado’s legal definition of ‘speculation’ thus generally does not expressly cover the sorts of appropriations and purchases of water rights that provided the impetus for SB 20-048 [which created the work group],” they wrote. “Some people perceived those businesses to be more concerned with generating a profit based on changes in the market value of water rights than with using the water, and hence described those purchases as ‘speculative.’”

The report details 19 potential concepts explored by the work group and explains that a lack of consensus kept the group from formally recommending any for implementation.

Further recommendations under study

In addition to concepts mentioned above, those highlighted as promising for further study included creation of a right of first refusal for the purchase of water rights for long-term irrigation use for public benefit by a public entity created for the purpose, and a tax on water rights transactions after an established maximum water price has been exceeded.

The group also recommended further study of a requirement that water be tied to the irrigated land unless it is being changed to a new land use; a state-wide process to identify investment water speculation, and encouraging local government to “police” such investments through existing permitting procedures.

WAM managed $363 million across various water-focused investment vehicles as of late February, according to a late March regulatory filing. A July 2020 filing showed its Water Property Investor II fund had raised $104.6 million from 49 LPs, which include the New Mexico Educational Retirement Board.

According to an April 2020 presentation to the State of Connecticut Investment Advisory Council by consultants Meketa Private Markets, WPII’s strategy calls for a portfolio with 70 percent water-rich farmland and 30 percent water-resource assets like water rights, storage assets and conservation credits. WAM will seek to monetize those assets, according to Meketa, through sale or lease of water to higher-value municipal, industrial or environmental consumers.

A source familiar with the firm told Agri Investor WAM is currently seeking up to $500 million for the third iteration of its Water Property Investor vehicle.