Episode 4: The Montana water market with Chris Carparelli
Episode 4:
The Montana water market with Chris Carparelli
ABOUT THIS EPISODE
Join Chris Carparelli, Montana water rights specialist and real estate advisor for an invaluable intro and insights into the emerging water market in Montana.
From the “true pioneers” of the Montana water market to local market drivers and hotspots to water right buyer/seller representation and pricing considerations — this is one you don’t want to miss.
[01:07] - About Chris Carparelli
[02:22] - Bringing Western Water Market to Montana
[05:30] - Centennial Livestock: “True pioneers” of Montana’s water market
[08:22] - Montana water market drivers and hotspots
[14:18] - Instream flow buyers in Montana
[15:00] - Water right buyer/seller representation
[19:12] - Water right pricing and valuation considerations
[27:00] - Water right due diligence
[33:51] - Closing: “Protect your interests, do your research…”
THE SHOW NOTES
Kristina Ribellia [00:28]
Today I'm sitting down with Chris Carparelli from Montana. Chris is someone who has become a good friend and colleague over the last year. He reached out to me in the early days of Western Water Market and is really responsible for bringing Western Water Market to Montana. So I'm super excited to be sitting down here with him today. Chris, welcome to the podcast.
Chris Carparelli [00:54]
Yeah. Thanks. Thanks for having me on. It's a pleasure to be here. And thanks for those kind words and that introduction.
Kristina Ribellia [01:02]
Absolutely. Could you share with our listeners a little bit more about yourself and your work?
Chris Carparelli [01:07]
Yeah, I'd be glad to. I work for a water resources consulting firm called HydroSolutions and I'm a water right specialist and GIS analyst. I'm based in Helena, but our company is in Billings as well and the work that I do involves a lot of water rights due diligence for property transactions and a lot of water right change applications, and new permit applications. And sometimes some expert research and analysis for basin adjudication, as well as some some water right valuation projects. And then in addition to that, I also am a real estate adviser with Engel & Volkers Western Frontier. And I work with buyers and sellers on all different kinds of property transactions. But as you can imagine, I really enjoy the opportunities to work on transactions where water is a key attribute.
Kristina Ribellia [02:22]
I see you really uniquely positioned in a really great strong place to be assisting people with water right transactions and property transactions that include water rights, since you know both the real estate side and the water, the water rights, water resources side. So super valuable, strong skill set you have. As I mentioned, you I would say, you and HydroSolutions, you're our founding members in Montana for Western Water Market. You reached out to me and really wanted to bring the market to Montana. I was wondering if you could share a little bit about kind of what those needs are that you saw or opportunities in Montana specifically that got you excited about Western Water Market.
Chris Carparelli [03:09]
Yeah, well, we were really excited to become Montana's founding member and in the Western Water Market and we're grateful to you for giving us that opportunity. And, you know, Montana isn't really a place that most people think of when they think of water markets and water transactions. It's definitely far less developed than places like California and Colorado where they've got really robust water markets with with a lot of transactions and a lot of buyers and sellers.
But that being said, we did have a client who owns some water rights that they had been looking to sell, and we thought this was a good opportunity to help them market those water rights. We felt like the water market in Montana would be unlikely to develop if there wasn't some kind of forum, you know, to be a catalyst for that development. And that's exactly what Western Water Market is.
And so I personally hope that it serves as a vehicle that can develop the market here in Montana and personally, I'd like to see agricultural producers benefit from a more developed market that can offer them another potential asset or revenue stream that can increase the viability of their operations — because, you know, my wife and I both come from families with agricultural backgrounds. And you know, Montana is such a strong agricultural state that I think there's a lot of opportunity here.
Kristina Ribellia [05:11]
Well, and could you share a little bit more about your client with these water rights? I see them as having this broad portfolio to make their operations more whole and profitable. Could you describe a little bit more about them and the water rights that they've put on the market?
Chris Carparelli [05:30]
Sure. So the client is Centennial Livestock and they're a cattle ranching operation out of Beaverhead County. And they actually bought a couple of these water rights as an investment. There's three sets of these water rights.
The first is a set on the West Fork in the Madison River. And right now, they're on a temporary change from their historical use of irrigation to an in stream flow use. And that is in order to protect them from non use and abandonment. And these water rights are really interesting because they're a transbasin diversion that originally occurred around the turn of the 19th century. The diversion is from the West Fork of the Madison River and it took water into Metzel Creek into the Centennial Valley. And, you know, really kind of a incredible diversion for that time period. And that creates an opportunity for those water rights to be used either in the Madison Basin or in the Red Rock River Basin. So a unique opportunity there.
And then there's another set of water rights that are the purpose for marketing for mitigation. And those are in the east part of the Helena Valley on Prickly Pear Creek. There's also some groundwater rights with those. That's an area that's rapidly developing for mostly residential use. And so those water rights could be a good candidate for offsetting use that developers might need for development for domestic use.
And then the last set is a set of water rights on Ten Mile Creek and the west part of the Helena Valley and those are on a temporary change from irrigation to instream flow similar to the West Fork in the Madison rights.
And so just want to shout out to our client, Centennial Livestock. They are true pioneers when it comes to the water market in Montana.
Kristina Ribellia [08:22]
It's definitely an honor to be helping market their water rights and to get this Montana market off and running. So thanks so much for the description of those water rights and for sharing a little bit more about your client.
As you know, Chris, but for our listeners, I'm from Washington. This is why Western Water Market is partnering with our local water rights experts. I certainly don't know about Montana water law and the water market there. That's why I'm looking to you and HydroSolutions and others. Could you share a little bit more about what you're seeing with the Montana market? It's rather in its infancy, but are you seeing water rights being transacted currently and if so, where are those occurring?
Chris Carparelli [09:15]
Yeah, so, we are getting a fair number of calls to provide an opinion of value. And, you know, why is that? People are looking to market their water rights and they don't always tell us if they have a buyer lined up or not. But there are clearly people with an eye on marketing their water rights and traditionally water rights are sold in conjunction with the land they're appurtenant to — a place of use — and they are sold as part of a land transaction. And it's not real common to see them sold separately, so to speak or split, but it does happen. And when it does happen, it really is low profile, there aren't a whole lot of people who are privy to these transactions.
I think there's definitely a lot more transactions that are occurring than I personally know about or that our crew here at HydroSolutions knows about because they're typically just kept between buyer and seller.
But in general, I would say that if you're looking for hotspots, it would be places like Gallatin County, Missoula County, Flathead County — places that are high growth areas where you need to offset your use, or your new water developments, for especially residential, domestic use.
Because right now in Montana, there are a number of closed basins, which means that you can't get a new water right. And in order to get a new use of water permitted, you've got to offset those depletions from your use. And so that means either acquiring existing water rights and changing them to mitigation or some other use to offset your use, or if you already have water rights and they just don't have the right parameters to them, you can change those parameters such as point of diversion, place of use, purpose of use, etc.
And so there there are water rights out there that have the purpose of sale or have the purpose of marketing for mitigation. And buyers can go to the owners of those water rights and buy the water, not necessarily the water right and achieve their goals. Or they can go out and try to find existing water rights to buy the water right.
And so, like I said, Gallatin Valley around Bozeman and Flathead Valley around Kalispell, these places are experiencing rapid conversion of agricultural land to suburban use, particularly housing. And that's where I would kind of hone in on as far as areas that would lead the way for water market growth.
One other area that could be a place to keep an eye on is the Big Sky area. So water demand at Big Sky is growing rapidly. And that area is a little different, because it's much higher up in its basin than Bozeman or Kalispell, so it doesn't have as big of a watershed supplying its water. So supply is an issue up there. But also, it doesn't have the extent of historical use up there. So there aren't as many existing water rights that are available to them to acquire and change to meet their needs. So that could be another interesting area to watch.
Kristina Ribellia [13:43]
That's really helpful. Yeah, it sounds like certainly development. So development is starting to and is going to be driving the market there in Montana. I know of a few areas where there's also instream flow buyers or a market for water rights for in stream flow. Have you had any kind of experience with those? Are you seeing that in any certain locations where we may have some of those buyers as well
Chris Carparelli [14:18]
Yes, potentially.
So the two main buyers for instream flows would be Trout Unlimited and the State of Montana Department of Fish, Wildlife and Parks (FWP). Trout Unlimited and FWP, they both have priority areas that they work in where they've got really targeted locations and stream reaches and do targeted outreach to landowners and water right holders in the areas to see if there are opportunities to partner on things like that.
Then also in some instances, there's the US Fish and Wildlife Service who may be interested in some of those types of transactions, however, I will say, there's probably a good chunk of those transactions that are leases rather than sales. And so a lease is going to be a temporary thing where it's 10 years, maybe 20 years. And then the owner of the water right continues to own the water right. Less of those instances would involve sales, although the Department of Fish, Wildlife and Parks will be involved in more of those sales transactions.
And when it comes to those transactions, typically, Trout Unlimited and FWP, they've got enough in-house expertise, that they're pretty self sufficient in executing those. It's really slim to none chance that they're going to hire an outside consultant to shepherd that transaction through for them, but for a seller or leaser, that's looking to engage in one of those transactions it definitely would be helpful to have a consultant to help you navigate that.
Kristina Ribellia [16:54]
Yeah, that's a really interesting point.
I worked for a nonprofit here in Washington, where we were leasing and acquiring water rights for instream flow similar to how you're describing here. I do think it's interesting because the water right holders that we were working with generally didn't have a consultant or a representative really looking after their interests. As the nonprofit project manager, I was representing both the the buyer side and trying to work on behalf of the seller. Which I can see value as you're describing for those water right holders to be working with their own consultants or attorneys that can really help represent their interests. There's some negotiations that certainly take place and it would be helpful for them to have a more kind of not so much well, neutral, but someone on their side of the court for sure.
Chris Carparelli [18:04]
Yeah, I agree.
I think that what comes to mind for me, as far as an analogous situation is conservation easements on land. You know, a property owner is thinking about putting a conservation easement on their land. Not in all cases, but in a lot of cases, they hire an attorney or a consultant to really make sure that conservation easement is going to be something that works for them and in the way that they use their land and doesn't have any strings attached that they may not understand or may discount as far as their significance or whatnot. And so to me, when you're involved in any kind of real property transaction — land, water, what have you — it's really important to have somebody who can help make sure that your interests are accounted for and you don't get hurt by it.
Kristina Ribellia [19:12]
That makes that makes good sense. And I would think especially around the price of water. Right? And making sure that you're getting a true fair market value for your water rights.
What information do you have about the price of water in Montana? Are they made publicly available? What do you know about the price of water there
Chris Carparelli [19:40]
Well, I know that the price of water depends on many variables.
One distinction that I think is really important for people to understand is, are you paying for water or are you paying for a water right? Because that's a significant difference. When you buy a water right, you're buying a property right. You pay for that one time and you own it. You get to use it as long as you own it. And your use is subject to the prior appropriation doctrine and the laws of Montana.
But you can also buy water without owning a water right. In that case, you're paying just for the water. You're paying somebody else who owns that water right for the water and you're paying on some kind of regular basis, whether that's annually or monthly, etc. And in both cases, the unit is the acre-foot. And so your cost is based on a per acre-foot basis.
Kristina Ribellia [20:52]
And what is an acre-foot, Chris, for our listeners who may not be familiar?
Chris Carparelli [20:59]
An acre-foot is a two dimensional area of one acre and one foot deep in water. Its a volumetric measurement
Kristina Ribellia [21:15]
Okay, thank you.
Chris Carparelli [21:16]
Yeah. And so, when you buy a water right, the price is going to be likely in the 1,000s of dollars per acre-foot. But at this point, from the data that we have, it's unlikely to be in the 10s of 1,000s of dollars per acre foot. And the prices paid for water rights are not public information. A lot of times they are confidential, as a condition of the sale. And when you buy water, but not a water right, the price can be less than, often is less than $10 an acre foot on the low end. And, you know, you can go to any number of irrigation districts or canal companies and buy water for less than $10 an acre-foot for irrigation use. It may cost more than that if you're using it for some kind of industrial or municipal purpose.
I'll give you an example. I just have a small irrigated pasture and pay $7 an acre-foot from the Bureau of Reclamation for that water. And in my opinion, that's the best deal in town. Best deal probably in the country. And that information on water pricing from an irrigation district is pretty readily available. It's not a secret. But some of the variables that can influence the price of a water right is a period of use. Whether it's a year round period of use or just a seasonal period of use. If you've got an industrial or domestic use that you're trying to get permitted. And that uses water year round. Having an irrigation water right change to that purpose, that can only be used from May 1 October 15, doesn't get you everything that you need. So that one might be devalued, a little bit. It can value a lot based on location. It can value or can vary on priority date and reliability.
One thing I'll throw out there that people should really be cautious of when they're looking to buy or sell water rights, especially by you know, your priority date, if you've got, let's say, like an 1890 priority date. And you're thinking, Wow, that sounds pretty old, pretty senior. And you don't look into that, you may find out that there are plenty of 1860s, 1870s, 1880 priority dates on that source and 1890 may, in fact be pretty dang junior. And you may be getting cut off pretty early in the year. So in that case, I think that puts a dent in the value a little bit for the for those water rights. The other factor just with economics 101 is just the number and type of market participants. Out in the middle of nowhere, you know, in northeastern Montana, somewhere like that you're you probably don't have a lot of market participants that are competing against each other for water. Whereas in the Gallatin Valley, you likely have increasing number of market participants in a place like that.
Kristina Ribellia [25:26]
For sure. I think it's interesting. Correct me if I'm wrong, you're a real estate agent as well, or advisor? But in Montana, those sale prices for properties aren't disclosed. Is that right? It's a non disclosure state.
Chris Carparelli [25:49]
That's correct. That information is proprietary to the realtors associations. You can get that information, but it's not publicly available. You need to work with an agent to get you that information.
Kristina Ribellia [26:11]
Okay. I know in other places, where that information is made publicly available, you can really look at 100 irrigated acres and what that sold for versus 100 acres that's dryland farming — and what's the price difference and kind of get a value for those water rights that way, but I think it's even trickier there in Montana, with it being anon disclosure state, which is interesting. And that's one of the reasons why I launched Western Water Market and I'm excited to see it in Montana and across the West -- it's really allowing people to put their water rights on the open market to get multiple offers -- to really see what the market will bring. I'll be excited to, to see how those water rights transact for Centennial and other clients that you have coming on the market.
So I recently got an inquiry from someone who's interested in purchasing 150 acres and they wanted to know more about the water and the water rights that were on the property.
My first question for them was, is it an actual water right? Or is it water that you are leasing from an irrigation district or from another source? Kind of how you described before; the value in the difference between having that private property right, and, leasing or having shares of someone else's water right.
So I'm excited, Chris, because we are partnering with you and HydroSolutions in Montana to offer confidential water right assessments.
I'm hoping you can describe a little bit more about these and who might be interested in them, because I'm really seeing, this person that called with this inquiry would really benefit from one of these. I'm hoping you can describe a little bit more about them and how they may be a value for folks.
Chris Carparelli [28:13]
Yeah, I'd be happy to.
So anybody seeking to purchase a property in Montana that has water rights, should definitely hire a professional to do some due diligence on those water rights. It's not uncommon for buyers to take water right abstracts at face value, only to find out after closing that there's serious underlying issues that jeopardize the use of those rights. And, resolving those issues can can require 10s of 1,000s of dollars in attorney fees or consulting fees. And not resolving those issues can result in major degradation in a property's value.
I can give you a recent example for a project that I was working on. We were doing due diligence for someone buying a multimillion dollar recreational ranch property in Montana. And the property had a number of water rights for irrigation and fisheries and some other somewhat unique, beneficial uses. And if you looked at the water right abstracts, you would think everything looked great. And even in terms of adjudication, which is the Montana water courts examination of historical water use prior to 1973. Everything looked pretty good. But we discovered that there were multiple water rights that had not been used for a period of 10 consecutive years. And that put those rights at legitimate risk of abandonment.
And there were also several instances where water was being used on the property in ways that were inconsistent with the water rights. And thus, were not legally defensible.
And these uses were critical to the appeal and the value of the ranch. So it was really important that this client, you know, invest his money upfront, and in that due diligence, because, you know, we were able to inform him about the risks that were lying beneath the surface of his water rights. And at that point, he could make a informed decision about whether he wanted to go through with the purchase of this property, and if so, at what price.
So, if a client hires us to do one of these confidential water rights assessments, we will research one or more water rights in terms of their historical use, and their call priority and adjudication status. And do a query on any ongoing water right cases. And then we'll interpret all this information so that the client can get a better understanding of the sources of risk that there might live beneath the surface for his water, his or her water rights. And so, you know, we've set it up so that these assessments will start with one water right, but we can certainly do more. This was just a way for us to package it for clients with a manageable price tag and also in a way that kind of gives an introduction to one water right that they may have special interest or concern for.
Definitely recommend that you always hire somebody to look at the water rights for you. Always hire a professional because it is such a unique and nuanced world that is difficult to understand if you are a novice or you're not familiar with it.
Kristina Ribellia [32:46]
Yeah, and I think like you're saying, just not taking those, those abstracts — the paper at face value, right, you've really got to dig under the hood and see what's there. So thank you, thanks for sharing that with folks to really understand the importance of doing that due diligence before you purchase the property. There's just devastating stories of that occurring and finding out the water rights aren't valid after the fact. And it's pretty horrific.
So we're excited to be partnering with you on on those confidential water right assessments. And I'll be sure to link those up in the show notes. I know, we're going to have many conversations you and I, Chris. I'm excited, this is just the first of many, but is there anything else you'd like to leave listeners with now?
Chris Carparelli [33:51]
Yeah, I guess. You know, just going back to that theme of you know, protect your interests, do your research, because there's there's a lot at stake. There's a lot of possibilities for accomplishing your goals, as they relate to to water use and water development in Montana. But you really need a guiding hand to help you accomplish those goals because it is fraught with regulatory red tape and location specific nuance. And lots of you know, as they say, in the West, people say it all the time, you know, "whiskey is for drinkin, water is for fighting over" and you can find yourself in a situation like that real quick if you don't do your homework. So give us a call whenever something comes up that you need professional help with when as it relates to water Montana.
Kristina Ribellia [35:01]
Great, thanks, Chris. And what's the best way that folks can reach you?
Chris Carparelli [35:08]
So you can reach me on my cell phone via call or text, that's (406) 302-1889. I'm on LinkedIn, you can look me up there. My HydroSoluions’ email is chrisc@hydrosi.com or you can reach me on my Engel & Volkers’ email is chriscarparelli@evrealestate.com.
Kristina Ribellia [35:40]
Great, thank you. And we'll be sure to link up your contact information in the show notes as well for folks. Chris, thank you so much for being on with me today. And truly thank you for bringing Western Water Market to Montana. I am just so excited to be partnering with you and HydroSolutions and seeing where we can take it. So thank you again.
Chris Carparelli [36:02]
Yeah, the feeling's mutual. And thanks for having me on the podcast and thanks for giving us that opportunity to become Montana's founding member of Western Water Market.
Kristina Ribellia [36:12]
Absolutely. Thanks again, Chris, and we'll talk to you soon.
Chris Carparelli [36:16]
Take care.
Kristina Ribellia [36:18]
Thank you for tuning in to the Western Water Market Podcast. Now remember, water rights are complex and nothing in these episodes are meant to be considered legal advice. To get the support that you need, visit westernwatermarket.com to search and work with water right professional in your state.