The (Green) Land Rush Is On!  But Is There Enough Water?

January 5, 2018
Written by: Courtney A. Davis, Allen Matkins Leck Gamble Mallory & Natsis
By Courtney A. Davis, Allen Matkins Leck Gamble Mallory & Natsis

Although cultivation and use of cannabis for medicinal purposes has been legal in California for two decades, the recent legalization of recreational cannabis use creates untold opportunity for expansion of the state’s cannabis market (notwithstanding that the cultivation, sale, and use of cannabis remains illegal under federal law). The prospect of cashing in on this burgeoning market seems to have sparked the interest of land speculators and would-be cannabis farmers and entrepreneurs, spurring increased agricultural land values on California’s North Coast from Sonoma to Humboldt County.

This heightened demand is expected to translate into increased levels of marijuana cultivation, both in well-established agricultural areas (through conversion of existing crops to marijuana) and potentially in areas not currently developed for agricultural use. This may, in turn, heighten competition for surface water and groundwater resources, especially in areas where wine grape vineyards are converted to cannabis. Certain state regulatory requirements may further constrain the availability of water and intensify conflicts over water.

Increased Land Values
The trend of increasing North Coast land values—apparently driven by the prospect of cannabis cultivation—is reflected both in land sale data for Sonoma, Mendocino and Humboldt counties and in anecdotal evidence from landowners and brokers operating in the so-called “Emerald Triangle”—Humboldt County, Mendocino County and further inland Trinity County.

The California Chapter of the American Society of Farm Managers and Rural Appraisers, in its “2017 Trends Report” (http://www.calasfmra.com/trends.php), observed that the “legalization of recreational cannabis in California has created an emerging market in the coastal areas of California.” The report explains that legalization has brought cannabis growers out of the hills and into competition with growers
of other crops for established agricultural cropland. While the report notes that insufficient time has passed since legalization to address valuation issues or clearly track any trends, it nonetheless acknowledges that legalization is having an impact on land values in the Emerald Triangle.

Data obtained from AcreValue (https://www.acrevalue.com), a database of agricultural land and water right sales, reveal that during the first half of 2017 the average price for land planted in grapes in Sonoma and Mendocino Counties—both attractive locations for outdoor marijuana cultivation—increased markedly: 32 percent in the former (where some local zoning changes may also have affected land values), but by 200 percent in the latter. A general survey of land sales in Humboldt County between June 2016 and July 2017 also revealed a dramatic increase in land values beginning in late 2016. Though one can only speculate about the influence of cannabis legalization on these land values, the timing of the increases (shortly before the Adult Use of Marijuana Act (AUMA) was approved) certainly suggests a strong correlation.

Landowners and real estate brokers in Mendocino and Humboldt Counties have likewise reported significant increases in land prices and noted the proliferation of land sale advertisements openly marketing land to would-be cannabis farmers. In a March 2017 article¹, Santa Rosa’s The Press Democrat reported that a real estate agent specializing in the sale of ranches in Mendocino and Humboldt Counties estimated that land prices had increased by about 30–40 percent over the past year or two. Other brokers estimate the increases to be even higher, with properties with the right conditions for cannabis cultivation or with existing grow operations fetching the highest prices. Websites specializing in property listings for existing cannabis farms or land suitable for cannabis cultivation are also adding new dimensions to the cannabis land sale market.

Increased Competition for Water
The conversion of established agricultural cropland to cannabis cultivation and the potential for cannabis crop expansion to undeveloped land is likely to spur greater competition among water users for surface water, and to some extent groundwater. This is especially likely to be true in the wine-growing regions of Sonoma County and in parts of Mendocino County, where both surface water and groundwater supply can be scarce, especially during drought conditions like those experienced between 2012 and 2016. Conversion of vineyards is likely to increase the demand for water, because cannabis is estimated to be up to two times “thirstier” than wine grapes, meaning that outdoor cannabis cultivation generally requires more water than wine grapes on a per-acre basis.

This competition for water resources may be further intensified by implementation of two regulatory schemes that mandate water supply identification and management: the licensing requirements of the Medical and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA) and the Sustainable Groundwater Management Act (SGMA).

The MAUCRSA requires applicants for a cannabis cultivation license to identify the water source for their operation as one of the following: (1) water provided by a retail water supplier, (2) surface water diverted pursuant to an existing water right or a pending application for an appropriative right issued by the State Water Resources Control Board, or (3) groundwater extractions.

In the past, many cannabis farmers in the Emerald Triangle have relied upon unauthorized surface water diversions for irrigation. For these farmers, the water supply identification requirement poses a threat to the viability of their operations, which unfortunately may deter these growers from seeking a license. Non-filers may actually further increase competition for water because unauthorized diversions reduce the overall availability of water, so parties with lower priority water rights are at a greater risk of receiving little to none of their water requirements in a given year.

For cannabis cultivation in the limited number of areas on the North Coast where groundwater is the primary source of irrigation water supply, increased competition for water resources may be further exacerbated by implementation of the SGMA. Beginning no later than 2022, certain groundwater basins will be subject to regulation under a groundwater sustainability plan (GSP), which will identify specific actions required to ensure that groundwater withdrawals are balanced with groundwater recharge and that long-term groundwater basin sustainability will be achieved. Depending upon the terms of the GSP, the groundwater sustainability agency responsible for implementing the plan may have the power to, among other things, require measuring and reporting of groundwater extractions and limit or prohibit some extractions. This regulation may further reduce the available supply of water, which will in turn intensify competition among users for that limited supply.

Conclusion
Legalization of recreational cannabis is adding another high-value crop to bolster North Coast agricultural land values, but with both increasing competition and regulation, water supply may become a crucial component of land deals and cannabis farming in the coming years.
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¹ http://www.pressdemocrat.com/news/6815049-181/advertisements-openly-lure-marijuana-growers.

About the Author
Courtney Davis is an attorney at Allen Matkins, where she is a member of the Land Use and Environmental and Natural Resources practice groups. Her practice focuses on land use, water rights, and renewable energy development. She counsels clients on project entitlements, planning and zoning, Coastal Act permitting, and CEQA compliance. Her water practice covers water rights permitting, regulatory compliance, and basin management planning. In her free time, Courtney enjoys exploring the natural beauty of the North Coast.

This article also appeared in The VIEW, the quarterly newsletter of Commercial Real Estate Women San Francisco (CREW SF). CREW SF’s mission is to develop and advance women as leaders in the commercial real estate industry. It is dedicated to changing business’ gender trends and closing the parity gap by giving women in real estate the support, resources, and opportunities they need to connect, influence, and lead. For chapter news, events and membership information visit crewsf.org.