Buying and Selling Water Rights

0:00 Land without water is worthless. That may sound dramatic, but it's true. And the smart developers, at least in Colorado and the Mountain West, solve their water problem on day one. Well, let's pivot to real estate. I have been playing in a different universe that I'd love to tell you all about. So I tried to find something that was real estate adjacent or that could feedback into real estate but would be a value add depending upon where my path took me. And I went for water rights. I wanted to understand buying and selling water. And I think back as to how I got here and it was a couple different factors and sort of dominoes that sell. I think back to that movie, The Big Short with Michael Blurry or Bury, whatever his last name is.

0:48 And at the very end, he leads this little, little nugget of gold out there. And he says today I'm focusing on buying and selling water. And that comment stuck with me for years. And I tried to figure that out. I tried to buy EF TS for utility companies or whatever. I couldn't figure out how on earth anybody was really buying water. Well, Fast forward to today, call it six or seven years later after that initial seed got planted, I had a couple different projects over the years that had water nuance to them, but it kind of one in one year and out the other and I thought, OK, great, I got through it. The lease got signed, the first rant check hit, we're good, whatever, no big deal. Then when I had a non compete time frame after prologist to sort of sit on my hands and figure out what to do, I thought, OK, well, I don't have any friends in the water business. There's no way I'm going to get my non compete triggered and you know, litigation or anything like that. So I'm going to go play in the water world and see what happened.

1:43 A lot slower than I expected of a start. I will be dramatically honest with you if you think land development deals take long, Water duels be even slower. But the interesting thing is they're even earlier than land deals. The smart developers, at least in Colorado and the Mountain West, solve their water problem on day one. Or at least try to prior to spending money on all the other land stuff. Because I have had a realization that, you know, land without water is worthless. That may sound matic, but it's true. And think about it from your own house, or your office or the bathroom at the train station. Without water. You turn on the spigot, nothing happens. The toilets don't flush, your whatever manufacturing process doesn't work, your lawn doesn't get sprinkler, the crops don't grow even scarier, or the reservoirs don't fill because there's no snow in the mountains. You know, whatever it may be.

2:35 So I spent a few months just cold calling individuals trying to learn what the water industry was and how to employ within it 'cause I there isn't a clear path. There's no water one O 1 do this. I have now made that set of materials that can share it with folks. I've got a really nice water one O 1 sort of buying and selling and historical legal context brochure. I'll send it to you after the call 'cause I think you will put I'm a rabbit hole like I have and find it fascinating. All right, So I ended up finding Hydrosource, which is a water resource brokerage firm. They were to me the right group because they were small. It wasn't a huge corporate stressful entity. There were two senior principals that essentially founders of the company that are nearing, if not already well within retirement years. And I say that not in a disparaging way, but in a value add way.

3:26 To me, very selfishly, it was an opportunity to learn. I'm one of those ever learner folks that just if I'm not learning something new, I'm bored. Maybe it's Abd, maybe it's like, I don't know. So I joined Hydra Source and it's been about two years, a little bit over with them. And at first it started out as here's some very slow, simple learning engagements. Here's a long list of reading materials. Good luck. Let's see what happens. It wasn't necessarily them holding my hand and dragging me through deals. Now pivot to today. They do that, they absolutely hand off transaction opportunities and I'm essentially the administrator on every new opportunity that comes through our door, or so I'm told. And or hopefully we'll get there. We're navigating a path to ownership at some point here. As you can imagine, 80 something year olds want to hang it all up and move on and play with their grandkids as why not going to have grandkids, but I'd love to hang it all up and spend all my day with my kids.

4:28 But so I really dug in and picked up some learning engagements that didn't really cover my mortgage, but gave me that knowledge base that I needed. And I Fast forward to call it the second year of being with Hydra Source. I knew a little bit more. I felt more confident. I was pitching new developers, new supplies, I was getting deeper into the industry and I was having a lot of fun with it. But it still wasn't clicking quite yet, wasn't immediately cash flowing. I'm still working on the second piece of that. And so I kind of paused at the same time of all this water business. I stood up Flanagan Real Estate LLC and started consulting entrepreneurially on my own and chasing land control for my own right at syndication of hopefully vertical development. So it's kind of running this dual world business. Midsummer 2025, I just got stuffed by Adams County and couldn't get through a zoning, a rezoning process. Spent 18 months on it.

5:32 Spent some money, got my earnest money back, dropped control. Anyways, I was miserable from all that capital side of the business wasn't there, at least not for a brand new firm. And so at that point I paused on picking up land control and trying to develop and focus more on water. And then things shifted even weirder for me. I ended up picking up 8 sale listings, which, OK, great opportunity to learn, good opportunity to earn. Some of these I'm never going to sell. It's hyper complex. It's really tricky to sell groundwater out from underneath the development when there's no infrastructure that exists today to pull it out from underneath the infrastructure or the development.

6:14 There's also, you know, conflicting theories of what happens if there's no more groundwater under my property, which doesn't. We won't get into the science of all that. But anyways, I picked up a bunch of sale listings and that in itself was completely new for me because I've always been the buyer builder. So I'm in fact, with the exception of two occasions, not been allowed to even put things up for sale. So I'm now in a scenario where I am actively listing for sale water resource assets and I don't know what I'm doing. Let's stop throw that out there. That was starting mid last year. I admit a lot of progress on most of those listings. I've figured out which ones are valuable to focus on and which ones will get done and which ones probably won't.

6:58 I think that same scenario is applicable to land deals or existing facilities, whatever as well. Not everything can sell, at least not at a value that is worthwhile for the seller sometimes. So I've just been kind of mucking around in this water world and meeting different types of developers. There's your typical corporate Prologis's or the Opus's or you know, the Evergreens, some very common names in the Denver market. But then there's other groups that focus on land and water. And if there isn't a water infrastructure or non standard land component to it, you'll never hear about it, like Resource Land Holdings or Viddlers of the World, which are a water arm specifically for single family housing developers.

7:44 So my network tripled again, which is the same fun I had at Prologis when they marched me all around the West Coast and introduced me to everybody. But my network grew locally, Colorado focused, Douglas County even closer, a lot of activity up in Northern Colorado. And then I spent a good chunk of time consulting and trying to find some water rights down in the Arkansas basin, which very challenging. But my network in Colorado dramatically grew, and it's a different type of individual, different type of entity, different type of team, and it's been very refreshing. At the same time, it's been ungodly slow, as some of the utility folks like to acknowledge.

8:29 They move at a glacial pace. Everybody loves their water puns as well, and they're everywhere. I can't seem to avoid them. When I was with Bro, it was all railroad puns all day, and now I'm like, OK, I've got railroad stuff, I've got water stuff, Who knows where I'm going? Why not? Boy, if I can, heck yeah. I do like Monopoly, but great game. Definitely caused some family disputes. But oh man, yeah, what else can I tell you? As far as water nuance, I would say Northern Colorado is very fascinating as far as where their water comes from and the complexity of it. Same thing with the Arkansas basin.

9:10 What I didn't realize about living in Colorado and on the Front Range. So I live in in Castle Rock, which is on the eastern side of the slopes. I know you know all of this, but for our listeners, they might not in Colorado, the majority of the water falls on the western side of Colorado, but the majority of the population and the political power is on the eastern side. So going back into the 30s, forties, fifties, 60s, you know, last century, what the eastern side of the Rockies was doing was drilling holes to the western side and then pulling all the water to this side. You can imagine if you were a rancher or a farmer on the western side and all of a sudden all of your resources were going somewhere else and you weren't even getting the second use downstream.

9:52 Very concerning. So no industry is without conflict or political challenge. The other nuance to water is, is it's emotional. And that was a real surprise for me. I mean, real estate can be emotional too, but to a different degree. I'll give you an example. So I was for the Southeastern Colorado Water Conservancy District. I was presenting to their board my cost segregation analysis findings. I was doing some nerd math engagement for them, and I was standing up the podium, talk about my numbers, blah blah blah. And one of the board members stands up with tears in his eyes before he even started to speak and asked me how I would feel if I had to think. Sort of tangy piss water that comes out of the bottom of the river every day.

10:37 And I was sort of like piss water, tangy water. What? And he went on to explain to me that he represents a community at the bottom of the Arkansas and they've been paying taxes to get clean water since the 60s and they still don't have any clean water. They drink the 2nd and 3rd and 4th use water as it finally gets to them down the Arkansas River. And he was. Just in. Tears and emotional and asked me how I was going to improve the situation and I'm up there like I'm a numbers guy. Are your reserves within your you know, reservoir system? I am not qualified to answer that question. That's to tiptoe around it. But that was my first real just being blindsided by the emotion of water. And yeah, it's it that was eye opening to me. I've never experienced that type of emotion in any form of my real estate fun over call it a 15 year career. So even with histories and you know, firms that were losing assets to receivership or foreclosure or no emotion he's handed back, done no problem, walk away. Next project.

11:44 Let's go the water business, boy. Wow. Yeah. So interesting. There's some cobble. OK, So it's so funny. We sat down and you said, I'm so glad it's snowing. That's here in Colorado. I it is March and it's probably snowed two or three times this entire winter. So the question bears itself as a water professional, are we screwed? No, no, we're not. It's scary. But what I would tell you is there are career professionals that have been working on this and that we're aware of this and that are actively out in front of it.

12:24 Similar to, you know, how commercial developers get out in front of their entitlements and try to clean all that up as best they can before they, you know, spend on real design or shovels in the ground. The water industry, the municipal folks, they've been very focused on this. So for example, Denver Water Hyper focuses on the 1st snowfall of the year that date and they basically do rain dances and pray for it to come as soon as it could possibly come. And when I learned about this, I didn't understand why until it hit me because they, they just laid it out so clearly that the first snowfall of the year triggers everybody to turn their sprinkles, sprinklers off so they stop diminishing the reservoir capacities and then it starts snowing and all that melts and refills.

13:05 And so this year Denver Water was actively taking proactive measures to sort of maintain their reservoir levels as best they could, even though we had a late start to our first frost and we really haven't had much build up since then. That said, there are municipalities that have a longer horizon outlook than us typical developers. And, and I'm, I continue to wear multiple hats. I don't know how to not have 3 conceptual jobs at once, but they look at it not just in one year, increments out into the future, not even just 5 or 10, but municipalities like really look 50 years out into the future. Denver water is similar decades out into the future. Northern water up in Fort Collins and the Northern Colorado, you know, some municipalities, same thing, decades. So they plan for these contingencies and they have extra reserves and buy water supplies and do their best to store as much as they possibly can, avoiding evaporative loss so that we can ride out the dry seasons because we all know it's getting warmer.

14:07 Climate change is real. Anybody that says otherwise, I they're not sane, so or their full looming styles. So the professionals in the water industry are doing their best to manage it. Yeah, it's a little concerning. And yes, we're going to hear Midsummer sprinkler, you know, rationing type stuff, but it'll be on everybody to work through it and collaborate, not just the municipalities, but their focus. There's some smart people in there, really smart people. That's good. That's good. Yeah. It's totally out of my realm of understanding, but it's like you said it, it impacts all of us more than we know or want to acknowledge.

14:50 Yeah. And not just on sort of the resident side of things, but you know, putting on the developer hat for half a second if I'm building a industrial is not a great example because they're not water heavy uses. Maybe a manufacturing process within a building, but that would be the exception. Really it's the single family housing market, the OR multi family housing where there's bedrooms and showers and faucets and sinks and all that kind of stuff. From a development perspective, we have to figure it out. And it's now one of the initial questions of pursuing a development. Where should water come from? And it's not that we as developers have gotten smarter and we're now thinking earlier in the process. It's because the municipalities say, oh, interesting, in the middle of your pre pre app meeting, they'll say, OK, well your TAC fees are this, but you also have to go out and get us some raw water supplies and bring it to us to dedicate. Municipalities are requiring raw water dedication. So they're putting the problem on the developers to go out and say, hey, you want us to expand?

15:53 You want us to provide utility services to your new 300 home, beautiful community with a decorative fountain at the entrance. That's ill advised in Colorado, but whatever you want all that. Great. Go find the water. That's a big ask, especially for developers that work everywhere else in the country and have never been told that before. I learned that the hard way, too, several years ago. Good thing developers don't have any other headwinds right now, so, right. None and none whatsoever. Yeah. So you know with their free time they can go if you can that out. Well, shame, shameless plug here. There are water brokers that do exist not just in Colorado, but in call it the Mountain West and and further West.

16:34 But let me ask you a question and this is my favorite sort of game to play. How many real estate brokers do you think there are licensed in Colorado? Residential, commercial, farm and ranch, whatever I. Think it's like 37,000 or something. Great guess. I've heard 2000 up to 100,000. My theory is 10. I don't know. I'm sure we could figure this out if we really wanted to, but that defeats the fun of the game. Water brokers? How many water brokers do you think there are? I. Good guess. I think there's 10. OK. So when we were talking earlier about how do I, Sean Flanagan, think I'm going to differentiate myself, my theory was to find something that nobody else is doing that's horribly complex, give it a try.

17:20 So I've done that. The other nuance here is of those 10 brokers that are focused on water and understand the legalities because it's different. You can't just buy it and sell it and move it anywhere you want. How old do you think those brokers are? Average age? Sure. Average 55. Oh you're way too low. The average age of a water broker, in my opinion, is above 75 S These are individuals that have been doing this for decades. They've mastered it. There's nobody new knocking around the door saying teach me these skills and they're looking to retire. Several of them. One of them that supports several municipalities has already formally retired. And he says I'm just a board member now. I just advise people I'm not going to hunt for water for you anymore.

18:04 I'm not going to no knock or no, no call, you know, just cold knock doors. He's like, I'm not doing any of that anymore. So there's less and less of water brokers even physically in existence in the future. That's my theory. I now qualify myself as one of the 10. I am significantly under the age of 75, so I'll be doing this for a while, or at least while I do other stuff as well, 'cause I love to wear 2 hats at the same time, maybe three. Yeah, it's, it's fascinating. It's, it's mind blowing. And Colorado being the headwaters to 6, plus major waters, rivers, streams, whatever you want to call it. We're the most complex of all the states from a legal perspective, but we set a lot of the precedents as well. So Colorado's a great place to be, at least if you're dabbling in water or trying to build stuff or enjoy life. I love Colorado.

18:59 I'm so bullish on this state. You know, everybody said well. Do you do? Things now I'm like, I have enough work here in the states. There's enough product. I get it, it, but in the vein of what you're talking about when it comes to inventory of brokers, something I love is just thinking about the path of least resistance, minimizing friction and then, you know, how can we maximize the outcome? All of that to say right there, you know, I, I am constantly seeking ways in industrial real estate where it's, it's the exact same equation you're doing. But how old is the average broker? The average commercial real estate broker is 55.

19:39 That's why I stole. Ah, OK, you came up with that really fast so that makes sense. I I got to be quick on my stats, but yeah, it's an interesting game to play and it's advantageous. And Someone Like You who has like the joie to like, people don't like difficult things or things that don't have certainty. Yeah. But but. But you're, you're fundamentally a developer, right? Like it's risk and reward and yeah, you could go get a salary job where you have, you know, your W2 pay and and there is nothing wrong with that. Not at all. I wish I. Thought that that was OK but that life is not for me either. I think I'm in the both camp.

20:23 I need some stability in my life and maybe that's AW 2 and a firm that's got a big checkbook to support my development itches. But then also the water brokerage side where you know, it's, it's just like you said, I've got the developer mindset, which I think is as simple as we like to solve problems and developing is nothing but problem solving. Sometimes they're easy, not very often, but sometimes. And most of the time, if you can get through it, there's a big payday at the end if you make smart decisions. It's not guaranteed, of course, but the harder the problems, typically the better the outcome could be. Or at least that's my my fallacy mindset. I don't know if it's accurate or not. We'll see. Time will stop.

21:06 Hey, I'm I'm right there with you.