Determining Fair Market Value

1. Sales comparison method
This method involves comparing the subject water right with similar water rights that have been leased. While this approach is relatively straightforward, the lack of sufficient sales data for comparable water rights may preclude this method for most transactions, at least until more transactions occur.

2. Land price differential method
This method compares the value of agricultural land with water rights to land without water rights and is a useful addition to the sales comparison approach in regions where the leasing of water rights is relatively uncommon. The difference in value between irrigated and non-irrigated land represents the incremental value attributable to the water rights.

3. Income capitalization method
This method is used to estimate the agricultural value of water in its current use by determining the contribution of irrigation water to net revenue from agriculture production. The approach provides a reliable method for determining the foregone agriculture revenues resulting from production losses due to the reduction of the available water supply resulting from a water lease. This approach provides an accurate reflection of on-farm conditions by considering the physical characteristics of the land, irrigation application, delivery system, and crop yields under irrigated and non-irrigated conditions. This method accounts for the avoided costs of production.

4. Replacement cost method
This method involves determining the cost users are willing to pay to develop new water supplies, such as a well. In a well-functioning market, the price of a surface water right will not exceed the cost of drilling and operating a well – assuming that ground water is available and of comparable quality. Thus, a water right’s value may be limited by the costs of obtaining water from an alternative source.