The Moral to the Story of the Dry Lake Granbury

I have been extremely intrigued by the ongoing fight between property owners around Lake Granbury and the Brazos River Authority (BRA).  I was prompted to write this blog post after reading this news article in the Texas Tribune:

The property owners are trying to force the BRA to store a larger volume of water in Lake Granbury so they can use their boats and other water toys.  An empty reservoir also reduces the fair market value of their property, so they’re also angry that they still have to pay property tax on what hasn’t been highest-value lakefront property for a few years now.

But so far, in my opinion, they have not done the one thing they need to do to solve their problem, instead spending a lot of money on irrelevant efforts, and making statements that may hurt the stability of Texas more than they help.  However, this kerfuffle does give us an opportunity to understand how Texas surface water rights work in the real world, and there’s a moral to that story. So let’s take a look.

The BRA is an agency created by the Texas Legislature. Its purpose is to develop and manage the water resources of the entire Brazos River basin.  To that end, since its creation the BRA has paid money to buy water rights and build reservoirs.  The BRA is a self-funding agency. Its revenues from water sales pay all its expenses.

One of the reservoirs it built in the Brazos River was Lake Granbury, in Hood County Texas, circa 1969.  The BRA obtained the legal right from the State of Texas to impound up to 155,000 acre-feet of water in Lake Granbury, but as originally constructed it could only hold up to 129,011 acre feet of water.

The State of Texas owns all surface water in Texas, and holds it in trust for its citizens.  To obtain rights to use state water, one must obtain a permit.  Each permit is limited by a volume of water one can use.  Most permits also restrict what the water can be used for to uses stated in the permit.  These permits are “first in time, first in right” so, when there’s not enough wet water to match the paper water permitted, the most recent permit holders lose the right to water first.

For purposes of this dispute, these are the three critical terms in the BRA’s permits as they relate to Lake Granbury: (1) the date of the permit which establishes its relative seniority; (2) the volume of water authorized for use by the permit; and (3) the type of water use authorized in the permit.  The various water rights in Brazos River water owned by the BRA are in writing and filed of public record.  There is nothing secretive or mysterious about them.

The BRA holds two permits of interest here.  One permit authorizes the BRA to use 64,712 acre feet of water for municipal (that’s indoor household and office use), industrial, irrigation and mining purposes.  The date for this permit is July 23, 1964.  Then the BRA also holds a permit to use up to 10,000 acre feet of water for municipal purposes, 70,000 acre feet for industrial purposes, 19,500 acre feet for irrigation, and 500 acre feet for mining.  The date for these rights is February 13, 1964.  These rights total 164,712 acre feet of water per year, which is more than the 129,011 acre feet of water that may be in Lake Granbury at any point in time.

In this second permit, there is a special condition written into the permit.  It says “Owner [BRA] is also authorized to use the water impounded in Lake Granbury for nonconsumptive recreational purposes.”  But the BRA is not required, in either of these permits, to maintain a minimum volume of water in Lake Granbury.  Nowhere in state law is the BRA required to maintain a minimum volume of water in Lake Granbury.  Nowhere in state law is recreational use of water in a reservoir a higher priority use than another type of use.

This “first in time, first in right” system has been in place for a very long period of time.  Buyers and sellers of water rights, and their lawyers and consultants, have conducted due diligence on the value of water rights, and the need for more or less water rights, using this system.  Those who have played by the rules to obtain more valuable senior water rights, would be punished unfairly if the rules of the game were now changed to move “recreational use” up the priority ladder as compared to the permitted uses.

The only way to secure a minimum amount of water in Lake Granbury for recreational purposes is for those persons who desire a full lake to purchase, for cash, surface water rights in the Brazos River that are older than the rights held by the BRA. This would take acquring rights granted in or before 1963.  It may be necessary to purchase even older rights if someone else (non-BRA) has an older right to use Brazos River water.  But this sort of due diligence is feasible to complete.

Then, consider perhaps creating a non-profit entity whose sole purpose is to manage those water rights in a manner that maintains the most water possible in Lake Granbury for recreational purposes.  This may require TCEQ approval to change the use of the purchased water right to recreational use, but there is a well recognized process for such a change.  Then donate the rights purchased to that non-profit and enjoy the fuller lake.  When someone makes a call on a water right in the Brazos River in the future, defend against the call as allowed by law, to keep the least amount of water from leaving the lake.  There are plenty of issues to argue about within this first-in-time framework, but the framework itself cannot be up for negotiation every time it pinches someone.  The pinch is what creates order, predictability, and value.  The pinch is good for Texas.

The “Save Lake Granbury” property owners have a Facebook support page here:  Interested parties in and around the lake must have some amount of money available to purchase water rights.  They already rounded up and paid $100,000 as an initial retainer for lawyers, with those lawyers saying this battle could cost up to $500,000.  They’d be a lot more likely to have water in their lake if they put that money toward buying water rights instead of paying lawyers.

There is no need to attack central planning, “Austin,” or politicians.  None of those attacks are relevant.  Surface water rights are private property.  The BRA permits clearly identify and define the BRA as “owner” of those rights.  People generally don’t want the government telling us what to do with our private property, Tea Party members in particular, so why would the rules be different for a quasi-private agency, that has purchased private property rights in the free market economy?  Why force any property owner to do something with its property it has never been required to do before?

The solution to the property tax problem created by no water in the reservoir, is to address the assessed value of the property used to calculate property taxes.  The lack of water in the lake is merely a fact, evidence to be used in a hearing to contest those assessed values.  It’s not the conclusion. The assessed value is the conclusion.  In relative terms the property’s assessed value is the dog to the tail of how much water is in the lake.  There is a well known process available to challenge assessed values.  Use it!

And before someone hurls a tomato or three at me, just know this.  My father in law lives on a lake, also managed by the BRA.  He has a boat dock, a boat and other water toys.  We love to enjoy the lake.  But we haven’t been able to get out on the lake the last few years because of the drought.  I understand the frustration this causes.  But trying to change the rules of the game isn’t the right solution.  Paying lawyers big bucks to try to change the rules of the game, with so little chance of success, makes even less sense to me.  Use the money to buy water rights.  Play the game the same as everyone else.

So let’s cut through to the moral of this story, and all those others like it across Texas.  These owners are mad, upset, frustrated, etc., because their expectations and perhaps assumptions that their lakefront property would always front a wet lake, have been dashed.  I get that, and I don’t intend any of this post to denigrate those feelings.  But people who want to purchase lakefront property should include in their due diligence, and factor into their purchase decision, the risk that the lake may dry up depending on drought and the other water rights in that river segment.  There are experts around Texas that can help you do this for whatever lake or river you are considering.  It should be the prospective purchaser’s decision to use them to then decide whether or not to purchase the lot, and to live with the consequences of that decision.

My Theory of Negotiating and Drafting Contracts: Pragmatism Over Perfection

Over my career I’ve experienced lawyers who negotiate deals and draft contracts with primarily one of two general guiding principles: perfectionists and pragmatists.  Perfectionists draft provisions that are completely favorable to their client, taking into account yesterday’s research on the most recent case law.  Obviously these generate objections and proposed revisions.  But then perfectionists defend them to the hilt in negotiations, often relying on the market power of their client to “win” the point.  Can you just imagine what happens when both parties are represented by perfectionist lawyers?

My worst experience with a perfectionist lawyer came when I was representing a buyer of an ongoing business, purchasing one of their competitors.  The selling company had improved real estate, business personal property, vehicles and other heavy equipment.  The owner was retiring, and this sale was his family’s retirement nest egg.  Pop operated the company and mom did the bookkeeping.  Unfortunately, for this deal they hired a lawyer who had just left a downtown Dallas big law firm, whose almost-only client for his career, as best I could determine, was Bank of America.  I had represented the buyer for years.

And so we embarked on what eventually seemed like an interminable negotiation that eventually wound up with parties and counsel in my conference room to hash out the final agreement.  As we began to work our way through the contract, the response to the first change I addressed was “well, that’s a deal breaker” and I could see the sadness in the sellers’ eyes and mannerisms.  Trying to make this deal seemed to be torturing them emotionally, and their lawyer wasn’t helping to ease any of their fears.  In fact he was making them worse.

Fortunately my client knew how to make a deal, so he grabbed control of the conversation for a moment and made sure the sellers understood we were here to make a deal, and we would work to find mutually acceptable ground, but this “everything’s a deal killer” mentality had to go.  And so we labored through the proposed changes, the reasons for the change, the reasons not to change (other than ‘because there’s no deal unless my client agrees’), and several hours later we had a final agreement subject to typing the edits.

The sellers and their lawyer then walked to their cars, which happened to be on the top floor of the building’s parking garage.  My office at the time looked over this parking garage, and so when I retreated to my office to begin the final edits, I saw this lawyer standing with the sellers, engaged in conversation, and the sellers were signing a series of documents.  Later I learned that this lawyer had prepared documents that basically said “I advised you to reject this change, you chose to accept this change over my advice, therefore I have no liability to you if this causes you damage in the future.”  One document for every change they accepted.  Imagine how much this had to destroy the sellers’ faith and confidence in the deal, and ultimately in their decisions about their retirement nest egg.  And how much it cost them in legal fees.

Another time I was representing a seller of real estate improved with mini-warehouses.  So the deal included the real property, the buildings, storage unit leases, and some of the receivables.  My client wanted an “as is” sale.  The buyer had a national portfolio of mini-warehouses and was expanding.  There was no mini-warehouse franchise involved; it was just private parties all around.

In this case the prospective buyer was represented by a lawyer in California with experience in securities law. This lawyer kept demanding terms in the contract practically guaranteeing a minimum value of the ongoing business, including for some period of time after the closing (when the seller would have no control or even influence over how the business was run).  These unusual terms were based on securities laws concepts.  Talk about a perfect deal for the buyer.  My client had built a profitable business, but after closing, all bets would be off.  My client wisely wouldn’t agree to that, and the deal died.

There are a library’s worth of books written about how to pragmatically make a deal.  Let me save you the time.  Understand the risks, and what it takes to succeed, in your business.  Figure out how much risk you are willing to take.  Communicate that to your lawyer.  Hold your lawyer accountable for “overlawyering” the deal.  How do you know what that is?  When the lawyer spends too much time negotiating for less risk than you are willing to take.  It may not hurt to ask, but continuing to push it wastes both time and money.  And when real estate is involved, time IS money.

Have clear, genuine, reasons for proposed changes, and be able to explain them as needed.  Let the explanation serve the larger part of persuasion.  Work to understand the other side’s genuine concerns, and see where both parties say “I can accept that” overlaps.  Move on to the next issue.  And at the end, determine if it’s a deal within your tolerance for risk.  In my opinion, pragmatism closes more deals than perfectionism, and does so less expensively for the client (albeit less profitably for the lawyer).

How I Came to Practice Water Rights Law; In The Beginning

The first water law case I ever got involved in was a CCN fight.  A Certificate of Convenience and Necessity (CCN) is a permit issued by the Texas Commission on Environmental Quality that grants its holder a monopoly power to provide water or sewer utility service to a geographically defined area.  The key word here is “monopoly.”  In return for that power, the CCN holder must provide “continuous and adequate” service to that area.

In my case, a city’s CCN included its city limits, and also included the city limits of an adjacent city.  The CCN City had higher local taxes, in part to manage and maintain its municipal water supply.  Eventually the CCN City felt like it was unfairly subsidizing the smaller city’s water system, because the CCN City could not collect taxes from this smaller city.  This made the smaller city more competitive for economic development projects, robbing the CCN City of a future tax base as well.  The smaller city also had no zoning or development code, and the CCN City didn’t want to see more “substandard” development.

So the CCN City decided to terminate its CCN, and turn off the water supply to the smaller city. The idea was to force the residents of the smaller city to disannex their property from the smaller city, and annex into the CCN City, using a denial of water service as the velvet glove.  Once the property owners annexed into the CCN City, their water service would be instantly restored.

To that end, the CCN City filed its application with the TCEQ to terminate its CCN.  My client filed an objection, as did others, and so the TCEQ sent the case to the State Office of Administrative Hearings (SOAH).  SOAH appointed an administrative law judge to hear the case (similar to a state district court judge with no jury) and come up with a recommendation to the TCEQ.  We ended up going through a three day evidentiary hearing, and the judge recommended that the TCEQ deny the application to terminate the CCN.  The smaller city was saved from extinction.

The CCN City put on their public works engineer, who concocted this hypothetical story that I knew was whackadoodle crazy, due to my experience with how a developer really develops real estate.  And I was determined this engineer was going to admit as much on the witness stand.  Of course, he was just as bent on not giving up the truth of this matter.  So we went to wrasslin.  It took a few hours of cross examination, and one judge-called time-out to let us cool down, for me to finally corner him, ask the question in yes-or-no only terms, and get the judge to order him to answer only yes or no.  Lo and behold, the truth came out.

We all bring our past experiences with us to face new challenges.  So some lawyers have more experience with administrative law, and come at a case like this from that strength.  I had a leg up on the adversaries in this hearing because of my experience with normal real estate due diligence I knew developers conducted before improving property.  And I think that’s one of my strengths.  I’m not a trial lawyer or administrative hearings lawyer first.  I’m a real estate lawyer first and foremost.  Real estate is at the basis of every water right and environmental case.

There are many reasons I enjoy water law so much.  I enjoy persuasive writing, and there is more writing in application and permit processes.  I like to read, which is a good thing because I’ve never seen an area of the law generate so much reading material.  I like the certainty of knowing that scheduled hearings will happen.  In civil trials, the case can take several docket settings before the trial actually occurs.  And I like the complexity of water law.  It sits at the intersection of physics, geology, hydrology, finance, politics, and all the normal real estate principles I’ve learned in the last 20+ years.  I count myself fortunate to have found areas of the law I enjoy practicing.

Drought Update for Texas – July 2013

Mark McPherson reviews the latest drought monitor and seasonal drought outlook, discusses the TCEQ order suspending water rights in a segment of the Brazos River, and takes a look at other effects of the drought around Texas

TWDB Groundwater Rules Project-Part 3

My number 1 concern with the new Texas Water Development Board rules for groundwater planning.

The Draft 2012 TWDB Groundwater Mgt. Rules-Part 1 of 2

In 2012 the Texas Water Development Board proposed new rules for groundwater planning during the next planning cycle(s). If you use, or plan to use, groundwater, these new rules will have a profound effect on your groundwater rights. In this series of videos I explain the pitfalls and challenges of these new rules.