Beyond Water Rights: How We Evaluate Long-Term Water Viability in Farmland Acquisitions

When most investors evaluate farmland, they focus on the crop, the location, and the yield history. These matter. But in our experience, water is among the variables most likely to affect whether an investment performs as underwritten — or quietly disappoints over a 10 to 20 year hold.

The challenge is that water risk is rarely obvious at the surface. Brokers advertise water access in broad terms. Due diligence checklists confirm it exists. But the real questions — how reliable is it over a decade, what does it cost to access, and what happens in a drought year — require a much deeper examination.

Availability First, Cost Second

The first filter we apply when evaluating any property is availability, not cost. In our view, a cheap water source that fails in a dry year can be more costly than an expensive one that delivers reliably. Agricultural water stress doesn't announce itself gradually — a single drought season can cause permanent crop loss, particularly in young orchards where trees haven't yet developed the root depth to tolerate stress.

To assess reliability, we review historic hydrologic data, evaluate the property’s access to surface water from irrigation districts, and analyze applicable basin sustainability plans. In California, that means understanding the Sustainable Groundwater Management Act (SGMA) — a framework enacted in response to widespread aquifer overdrafting and ground subsidence in the Central Valley that was causing serious, irreversible infrastructure damage and adversely impacting drinking water quality.

SGMA's goal is to bring critically overdrafted basins back into balance by ensuring recharge and extraction rates are matched over time. For investors, this policy has meaningful implications: properties in affected basins may face pumping restrictions, and groundwater that was historically available on demand may become subject to allocation limits or offsetting requirements.

Understanding Water Rights Seniority

Not all water rights are equal, and understanding the differences requires careful analysis of the often opaque descriptions. Senior rights generally mean first use and higher priority for allocation diversions during supply-constrained years. Farms located down the road from each other can have meaningful differences in water reliability if they are located in irrigation districts with different priority rights. In some cases, seniority within an irrigation district is also classified and can affect on-farm water availability.

Increasingly, infrastructure risk and environmental constraints are gating issues for water reliability. In California, land subsidence has caused some major conveyance canals to have their delivery capacity decline by as much as 60%. Land-based fees are being raised to pay for the necessary construction fixes for these issues that can affect bottom-line returns. Some districts may have senior priority to water but may not receive their full allocation due to regulatory factors limiting deliveries in dry years to support wildlife and ecosystem health.

Water security may hinge on where a given property sits in the priority stack when supply is limited. A property with junior rights may have full access in a wet year and meaningfully restricted access in a dry one. Underwriting a property as if average-year water availability persists throughout drought conditions is a common and costly mistake.

Irrigation districts also have their own infrastructure to regulate distribution and groundwater pumping, and the rules vary considerably between districts. We spend significant time during diligence mapping exactly how a property's rights are documented, exercised, and what recourse exists when supply is constrained.

The Dual-Source Strategy

Our preferred approach to water risk mitigation is acquiring properties with access to two independent water sources — typically surface water from an irrigation district alongside owned or accessible groundwater. The logic is straightforward: surface water availability tracks precipitation, while groundwater provides a buffer in dry years when surface allocations are reduced or eliminated.

Equally important, we manage water consumption with discipline to avoid reliance on either water source and maintain maximum flexibility. In years of abundant surface water, we avoid over-relying on groundwater — both to preserve aquifer levels and to remain in good standing under SGMA compliance frameworks. In critically overdrafted basins, 100% of our water strategy is dual-sourced, or we require the property to have access to transferable groundwater credits that can be used when surface supply is unavailable.

This approach adds complexity and sometimes cost. At the same time, this dynamic usage reduces the likelihood that a dry year forces difficult choices between crop survival and long-term water viability.

When Water Sufficiency Is Overstated

Some of the most important water due diligence isn't about rights or sources — it's about economics. A property can have legally sufficient water access and still be operationally unviable if the cost to pump exceeds the margin the crop provides.

We've evaluated properties where the wells are simply too deep to pump economically at scale, or where diesel-powered infrastructure creates operating costs that can compress or eliminate projected returns. These issues don't show up in a broker's water summary — they show up in utility bills and equipment audits during diligence. We consider a thorough review of pumping costs a non-negotiable part of every evaluation.

Water quality is the other dimension that frequently goes unexamined. In our due diligence process, we have encountered properties with elevated nitrate levels in groundwater — an issue that, if undetected, can cause significant tree defoliation and long-term crop damage. That experience is why water quality testing is a non-negotiable step in our evaluation process. Water rights documentation addresses legal access — it says nothing about water quality.

Why Half of Our Passed Deals Are Water-Related

When we reflect on the deals we've declined, water is the leading reason — accounting for roughly half of all passes. The pattern is consistent: water access is described in vague terms by the listing broker, the due diligence reveals specifics that weren't disclosed, and the economics or risk profile no longer justify the price.

The categories we see most frequently: ambiguous rights documentation with unclear seniority, pumping infrastructure that is either too costly or too unreliable, over-reliance on a single groundwater source in an overdrafted basin, and mismatch between the crop's water requirements and what the property can reliably deliver across a full weather cycle.

None of these are necessarily deal-killers in isolation — many can be resolved or priced in. But each requires the kind of detailed operational knowledge that only comes from years of managing water-intensive permanent crops across multiple drought cycles. That knowledge gap is where we believe rigorous diligence — going beyond what standard checklists surface — is most essential.

In some cases, these issues don’t surface until we’re already in escrow. When that happens, we’ve walked away from deals rather than proceed with unresolved water risk — the long-term downside of getting water wrong outweighs any short-term cost of exiting a transaction.

To deepen our capabilities in this area, we recently added Bryan David to our team as a Senior Associate. Bryan brings nearly five years of experience at WestWater Research, where he led sourcing and diligence for farmland and water investments and built valuation models incorporating crop performance and water reliability across the Western U.S. His background in water rights analysis and regulatory risk in California agriculture directly informs how we approach the questions outlined in this piece.

This piece reflects the views of our investment and farm management teams based on direct operational experience. It is intended for informational purposes and does not constitute investment advice. References to past experience and deal outcomes are illustrative only and are not indicative of future results.