The California Drought: Water Access Rights and Real Estate

The story of California is written in water and gold. From the beginning, the state was seen as having the climate for world-sustaining agriculture. Its boosters looked at its ports and saw the access for America to spread into the Pacific, and then to the world. California was the dream of American expansion. What its cities and great fields needed, though, was water. The most elemental fact of life and nature was the great engineering challenge needed to bring the state to life. All real estate rights, then and now, have been based on the ability to get water.

It was never easy. California had to create huge diversions and dams from several other states, channel water across the vastness of the land, and build huge aqueducts to water Los Angeles and the great cities of the south. It created enormous systems to feed its fertile soil. That’s starting to catch up with the state, however.

California has entered a period of sustained drought, which could get worse as the years go on. The great mountain snowpacks have shrunk to record low levels. Aquifers are shrinking. The state, which has imposed water restrictions, is going to have to figure out what to do with the water they have left, and that could have a huge impact on real estate.

Water Rights and Where to Invest

The most important thing that California has had to decide throughout its history has been water rights. With a finite supply and a huge population, who gets water determines where cities get built. It was akin to the railroad boom: where the road went by, towns sprung up.

It goes deeper than that, however. Water rights are distributed by usage, and historically, they have gone to the farmers. Because of the enormous role that California agriculture has played and the prevalence of water-intensive crops like almonds and lettuce, they have gotten the bulk of the water. That might be changing, though, as redistribution schemes are being seriously discussed (often angrily) for the first time.

Water rights were once based on claims and who could do the most with it. There is an element of that, but they are now based on seniority. People who have been watering and maintaining the land for longer have a stronger claim on the water. Agricultural areas have an unequal distribution. This might change, but for now, the old system survives.

The interesting thing about water rights, on which the state was built, is that cities have long had the short end of the stick. For all the hand-wringing (often justified) about the huge amounts of water being used by Los Angeles, San Diego, and Orange County (particularly coming through the enormous aqueduct system), they have shown that they can engage in sustainable water programs. They have also had storage systems that can help them weather, so to speak, the drought.

That said, not every town was created equal, and not everywhere has had the same system. Many smaller agricultural towns are facing a double hit. If water supplies are curtailed and agriculture is impacted, areas that once were thriving might become ghost towns. Real estate investors might want to look elsewhere.

Additionally, not every city and town has an adequate storage system. Some rely on wells, which can be depleted through overtaxing or mismanagement, in addition to natural drought.

Tips for the Real Estate Investor

So what does this mean for you? For people looking to obtain a hard money loan in order to invest in real estate, whether that is through fix-and-flip rehab jobs, ground-up construction, or anything else, there is great opportunity, as there is in any crisis.

For one thing, don’t panic. There will be a lot of doom-and-gloomers who will tell you to disinvest, but that is dangerous. This is a serious problem and we need serious solutions, but California isn’t going to be abandoned. We’ll discuss specifics more in the nest post, but you should know that this is going to open up space in cities that have better planning, who have embraced sustainability, and who have proper water supplies.

So you need to do your research. When looking to invest, ask yourself these questions:

  • Is the town fed through an underground well or does it have a replenishable storage/delivery system? Towns that don’t have a way to store their water will be lower on the totem pole.
  • Is it an area that has seniority in terms of water rights? People will stay in an area if there is a reason to. Zones that have farms that still get a lot of water will continue to have a population and a need for storage.
  • Is the town near a farm area that is based on water-intensive crops? There is a political movement to curtail the water rights of huge, intensive crops like almonds and lettuce. That may or may not be fair, but the anger is real, and that could move into action. That can impact the future of a town.

The crisis is both real and serious, but California will not die. As real estate investors, you know that there are troubled times and easier times. You also know that troubles build the need to move quickly and intelligently. You have a plan based on the changing conditions. A hard money, equity based loan can help you turn that into a reality.

Your real estate assets are your best investments for the future. At Socotra Capital, we’re proud to be the premier direct hard money lender for California real estate. Contact us today to learn more about how we can help.

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