Impacts of Water Usage on Land Investor Strategies | with Guest Clayton Pilgrim, ALC

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Intro: Welcome to the REALTORS^® Land Institute podcast, the Voice of land, the industry's leading land real estate organization.

Justin Osborn: Welcome to the Realtors Land Institute podcast, the Voice of Land, the industry's leading land real estate organization.

JO: Hello, this is Justin Osborn, accredited land consultant with the Wells Group Real Estate Brokerage in Durango, Colorado. On today's episode of the Voices of Land podcast, we're talking to RLI member and accredited land consultant Clayton Pilgrim. How's it going today, Clayton? 

Clayton Pilgrim: Good. How are you? 

JO: Oh, I'm good, man. I'm glad you're on today. Excited for everybody to hear what you've got to say about water usage and regulation and effects that investors can have when buying land.

CP: Absolutely. Excited to be here. I Appreciate the opportunity.

JO: Give our listeners a little bit of introduction here about you. Clayton is a third generation Texas farmer and rancher. His background stems from row crop farming, commercial cattle production, logistics, sales, business acquisitions, and advertising. He received his ALC designation from the Realtors Land Institute in 2018 after only 18 months in the real estate business, along with a successful sales record. He's also an appraiser, farm manager and consultant. Clayton proudly serves on many civic community and nonprofit boards. He resides in Paris, Texas with his wife Christie and their two children. He enjoys hunting, golf and raising his family.

CP: Man, that's over the top. I like it.

JO: I know, man, quite the detailed little bio there. After only 18 months, you've got your ALC, that's gotta be like a record in our industry.

CP: I'm sure there's someone or group of folks that have probably done that or better. But coming from the production side, agriculture too, the first time I walked into Century 21 Harvey Properties and talked to Renee and a lot of you know them, Renee and Rusty, but the first thing I saw was hanging on the wall was their accreditation plaque. And I asked the question, I said, what is that? And they said, it's something you don't need to worry about. And so I immediately started worrying about it.

CP: I did my research, got to look in and really dug in on the... And then I think my first Land Conference was in 2017. I'm gonna say that was at in Charlotte. That really got me the fire burning and getting mine done. Obviously, me and you did our LANDU together, so it was tough. Things you really had to put together, and I've still got my book. It's somewhere in the office. Every now and then it gets moved around and I kind of thumb back through it, but there's a lot of work there. But that's kind of the beginning of my career. And after getting that, of course, it's like planting a seed in the ground and then it grows from there. Not only the networking, but the energy, the education, the add-ons that come along with that ALC's been huge for my career.

JO: Yeah, that was fun, man, that, we need to like go back and do some type of LANDU reunion because I guarantee you that we had, looking at the people that were there now and where those people are in their career, when you look at Trent Lister in Montana and Dan Murphy in Lake City, and Joey Burns in Montrose, you in North Texas, it's like the cream of the crop that all came as a result of being at that LANDU event. And so for our listeners that aren't familiar with that, that's where you can basically go through a crash course, 10 day crash course, and get all your accredited land consultant classes in one setting. And it is drinking from a fire hose education, but I highly recommend it, and you will not regret it. And relationships, lifelong relationships are formed from the time that you spend together in that class. So thanks for reminding me of that, Clayton.

CP: Always a fun time. And like I said, the networking is one big piece of it, but we kind of always look at that and stay on that topic. But I think the big thing that people don't take in is really the education and what you're learning as an agent or a broker or... And there were guys in there that had been in their what, 25 or 30 years who have been brokers. They're in there getting their ALC and they're getting their eyes opened. So it's huge.

JO: Never too old to get educated, man. Well, I'm excited to talk about water usage. Irrigation water is so different depending on where you are in the states. But this topic that you've brought up with the water usage and how it's affecting cities and in different municipalities around the country, and the effect it can have on land, is something that I don't see a whole lot of living in rural Colorado, because I'm not near a city, but I'm really excited to kind of hear what you have to say about this. And so just jump in and kind of give our listeners an overview of what water uses are that affect land use as well as land value.

CP: So to kind of look at it in a standpoint of just what are water uses that as a investor or a land agent, let's talk in both terms. Me representing an investor, I'm looking at my investor that's looking to put into farmland, obviously the number one irrigation, that's huge. My development clients that are looking for transitional land and never thought we would say we had transitional land in my area, but we're getting there. So then you look at development and you've got your water for livestock, obviously on your ranching operations or livestock operations, whether that's cattle or goats or whatever, what region you're in, depending on what you're trying to water as far as as producing pounds of protein.

CP: Another one too, this one's huge in your area, but recreation and wildlife, that's a big water use thing. And we see that and we're getting down into South Texas. You got these guys who's way crazy improved hunting ranches and farms down there that they're really trying to produce record book deer and different exotics and things and water's kind of a lighter resource in those areas. Obviously West of 35, that's kind of our line where you start getting into the more area to areas. So water affects all different land types, even though we're not looking at it the same way.

JO: So you mentioned transitional land in your neck of the woods up there in North Texas, and what are you hour and a half-ish outside of the Metroplex? 

CP: Yeah. About nine miles from Dallas Northeast. So like the McKinney, North of McKinney between McKinney and Sherman back east, a lot of that stuff is slowly... But I would say on the investment side of it has really pushed forward. But I would say on as far as actual building, it's gonna take a while. There's a lot of acres there, just a lot of massive amounts of land. However, you've got a lot of large home developers that have already bought some of those tracks and put the plan use development mapping. And they've got everything done within their city or their ETJ or maybe they have a county that they have to... But these planned developments are coming in closer and closer to our area and we actually appraised quite a bit in that North Dallas area.

CP: Amazing to me to see the towns of like Gunter and Melissa and Howe, and these were small farming communities that not 15 years ago were wheat fields and milo fields. And there's still a lot of farming in those areas, 'cause those land parcels are still being used as farm to keep the ag exemption. But kind of opened my eyes whenever we really got to appraising over there because you get to looking at comparables, but you also get to looking at these planned developments and in a development side of it a DR Horton or name all your big home builders, that's what is completely stringent on their dealers is having the available utilities, obviously ingress and egress, and they need, good roads and schools and etcetera.

CP: But if they don't have water, that's the first telltale sign that they're not gonna put in some kind of housing development. So when you gotta client that's looking at some land that's way over that the ag value, and I mean ag value that it makes sense to farm or makes sense to have some kind of livestock production on your now into the transitional standpoint, which you see a lot of our colleagues in South Florida or down in Houston area or Austin area, those tracks of land have way surpassed their ag value where they could be appraised on an ag standpoint. Like if I'm looking at a ranch now and I'm saying, Hey, there's $35 an acre of rent on a $10,000 an acre place, that's not a very good return.

CP: So you gotta look at it on the standpoint, it's a strategic buy for an investor to know that in the next five to 10 years, the appreciation and the turn to the next guy, to the pre-development owner, or maybe it's an end user that's gonna develop itself. It's gonna put all the carrots in the basket and walk away with it where they can go put in a plan development or maybe it's some industrial complex or maybe it's some other... So water is a big piece of that. And it's not just, is there a two inch line by the road? We gotta have enough water to do 130 housing units and a hundred multi-family units and 20 commercial spots. I'm making up numbers as we go, but these big plan developments take a lot of assets and they take a lot of resources.

CP: So water districts, river authorities, municipalities, of course, we got the federal, they got the EPA, waters of the US. We're not gonna say that dirty word right now, but we have the state side, like in Texas we have TCEQ, which they do a little bit of regulating in the sense if we're gonna have a... I'll give you an example, Cooper, Texas, which is kind of one of those that's out there on the outside of the ring right now, that's starting to become something more shiny for an investor as far as transitional land down the road. They don't have water, they don't have the water assets. So it's like, what are you... You're gonna have a private equity come in and put in some kind of utility district, or you're gonna have the City of Cooper try to put in some kinda weighed, overstocked water system to try to help, it's a checks and balances on what they can and can't do. So when we're valuing this stuff, and that's, it's a conversation we have to have with our sellers a lot. And then on water availability, availability of electricity too, all the necessity items do more building or do more construction and development. So we have that conversation a lot. And...

JO: So, when you say they don't have water, is that a situation of the, the town itself is actually literally on one big water well, or is it that they've got central water, they are just maxed out and they don't have any taps available for purchase? 

CP: I'd go with infrastructure, t's what I always say. And let's use Paris for an example. The last five years, we have been... After our public works guys to get real good numbers on our infrastructure because some of our infrastructure was built probably in the '20s. Some of it was built in the '50s. We replaced a bunch of stuff in the inner city, Paris, but the big issue that we had was wastewater. We got to looking at our wastewater plant. This was when I first got on the city council in Paris, and that was when they took us to the plant kind of as a tour, when you're first getting on the council. They drive us out there and I'd been in several of these wastewater facilities whenever we were in the poultry business because that was part of the problem that we had with growing chickens, is you had lots of affluent water or waste and you had to treat it.

CP: And then before it went to a final facility to be treated and, in a wastewater, plant at any of your cities, wherever you are. So we toured this facility and it's literally, it's a model A, man. It's a rust bucket. It's crazy. It was actually built somewhere in the, I believe in the '50s, it was the last time it had been restored. It was part of an army base actually at one time out here. But anyways, we have to look at that. We just did preliminary numbers, and this was back when we first started, and it was gonna be about a $60 million project. Fast forward, COVID, et cetera, et cetera, supply chain, blah, blah, blah. We get to $90 million, now we're at $105 million. Now we finally got it going. We're rebuilding in the same facility in the same area.

JO: But that was a huge undertaking and we're looking at it in our budget just in the city of Paris, which we're about a $30 million, $31 million budget. And our sewer and water's probably closer to, I'm gonna say $28 million. And our taxpayers have to pay for that. But it's also too, it's been a thing that's been kicked down the road for a long time. So as an investor, and I'm looking at it and saying, okay, I've got the funding to build 150 units, and we're gonna look at all the different demographics and the housing studies that are available, and of course, cost of construction, and we land on Paris. One big issue I see with Paris is they don't have a ton of capacity for their sewage. They got plenty of fresh water but sewage is the problem. And you see this infrastructure issue in a lot of town. We had a large company that was coming to look at Paris. They were a billion dollar investment. We had all hands on deck. We all got down to, I think it was us and then I'll just say a community south of us down on 35. The big issue was the sewer plant. And we're not far enough along. If we've had our sewer plant built, we would've probably gotten the company more or less, maybe.

JO: Well, and that's, I'm seeing that all over the place, where I just dealt with that, and here in Durango, Colorado. And it's outside city limits, so we're dealing with La Plata County. And the infrastructure, for us, it's well in septics, but the developer goes to county planning and says, look, we're zoned in the land use code one unit per 10 to 20 acres so we're gonna do 15 acres. And we're gonna go through and we're gonna build these homes on 15 acres. And like most mountain towns were in crazy short supply right now. Way more demand than we have supply. And so we go through thinking this is a no-brainer. County says, if you widen and pave the county road, we'll approve your project. Even though right next door, there's homes on three acre parcels in this other neighborhood. For us to do one home on 15 acres, they say, you gotta widen and pave our county road.

JO: So just like your situation, my developer says very, not the same words, but no, thank you, we'll go somewhere else. So we go across the line over into Montezuma County where Makers and Dolores are. They welcome us with open arms because they wanna see growth. And then it's kind of funny, the next week in the Durango Herald, you see, that there's this affordable housing problem and we can't get anybody to build any housing. And you just wanna beat your head against the wall, 'cause it's like, look, if these towns would have the proper infrastructure in place, not have two 2 inch water lines, actually have metro districts or whatever it takes to have the sewer facilities, we wouldn't have the housing problem that we have in most of these towns across the country, because people wanna build. They're just getting priced out with all the requirements that towns and the municipalities put on them.

CP: The big issue I see, and this, I got my city hat on right now. So the big issue I see, you get into an investor standpoint of, okay, I'm gonna go build in McKinney. Well, you go look at McKinney's bond rating, you go look at their fire rating, you go look at all the different due diligence items that a transitional guy is gonna look at. They're pretty strong. They look good. They're not, which a lot of their stuff's new. Paris for example, we should have put a wastewater facility in 15 years ago, but we had a council that couldn't understand that, or couldn't fathom that we're gonna have to build something that costs 40 or 50 million then. So you look at it and you say, okay, well your usage, your water usage every day, you're gonna turn the faucet on, you're gonna turn the shower on, you have the dishwasher, et cetera, et cetera.

CP: All the restroom entities that you have in the residence, or if you're looking at it, you've got your ag usage, your guys that... Like if I primarily try to invest in ag properties, that's something I understand a lot better. And something I think that is, in my opinion, the next 15 or 20 years is gonna be substantially important, especially with our Western in Texas and western United States is gonna be more regulated on water and what they can and can't do. And so that they're completely contingent on their water. They don't get the rainfall that we get. So I think more and more of that's coming our way. But then you have this transitional issue and this other piece too that's driving up land prices too.

CP: Water usage is huge. And when you have a growth area like DFW, I mean there's what 1100 a day or 900 a day right now. At one time it was like 1500 day or moving into the DFW Metroplex, you're taking that water problem that they have and you're moving it to the areas to where, and y'all see it in Colorado. There are certain valleys and areas where big lakes make sense, and Colorado River Authority or Lower Colorado, you would know the authorities better than me. But we have water districts here. The Northeast Texas Municipal Water District, they'll come in and say, Hey guys, we're gonna build another lake. Well, then you've got every landowner and pitchfork and they're throwing everything they can to keep 'em from coming. But DFW keeps growing and we're using those water assets there.

CP: A good example is California. Some of the best farmland in the United States is located in some of those valleys just outside of LA and Carmel and some of those areas that are just when you get on the coast, it's a little different than when you go just east and you've got some really nice farmland and from grapes to corn and cotton to some of the finest orchards in the world. Are there a lot of them? Not all of them, but some have made it more of a sense to sell their water than they have to grown a crop. And you're growing up, you're growing people, you're growing communities, so you gotta have the water. But where do those offsets of crops and stuff go? Now, right now, we're not in that issue 'cause we're planting...

CP: Well, corn prices get to seven or 750 a bushel. I can tell you what they do here. I know what they do in Iowa and the high states, they plant everything they can plant. Every acre, every [0:21:42.7] ____, because it makes more sense. It makes more money and it's insurable. So you're looking at it on the irrigation standpoint. The more irrigated acres we produce, get a high corn price, you get the production of these other maybe it's soybeans that's taking the hit, or maybe it's corn taking the hit. Maybe it's cotton taking the hit. A fiber, product that we're needing to grow, or maybe it's some other. So as we grow and grow, we're gonna see it more in our country too, because we've built two large lakes in East Texas. I'm gonna say that they're probably 20, north of 25,000 acres of surface water.

CP: I couldn't tell you the exact gallons and acre feet. It's a lot. Boulder Creek Lake, and then they have Ralph Hall pretty close to each other, but they've put a lot of pretty good size ranching in timber and investment properties out of there into other areas. So those guys, 1033 exchange from there, and they go by 30 miles east. Well, that pushes that land price up. Now we have another lake come in. Well, all this water is not for the local community. It's not for Paris. It's not for Ladonia which, bless Ladonia, they haven't grown in years. But that water is being completely piped and pumped to DFW. Same way in Lubbock. Same way in some of your country, your water assets are going to the city. I'm not an advocate for either side. I think there's a plus and minus to both sides, but it's something we have to look at, and then you go, okay, well if we're pumping the water there, they're already in a water shortage and we're at 48 inches to 52 inches of rainfall a year here. So we can fill these lakes back up.

CP: One statistic I found pretty interesting, I was looking at how much water's in the whole world. It's a finite resource. We don't make more of it. We don't burn it. It just goes somewhere else, right? 332.5 million cubic miles of water in the world. Out of that, we're only using one in 100th% of that is for human use that's ready and available. So it's like we're building more lakes. We're taking up more land. We're taking water from assets that are needing produced food and fiber for ag producers, and we're selling it, 'cause we we've got these big cities and municipalities that have taken over. And of course you get into the imminent domain conversation, and all that. It's like where's the other... Why are we not tapping into more resources of really putting some thought into a lot of that water's underground.

JO: What baffles me is that depending on where you're at in the country, you're either in a drought on one side or flooding problems on the other side. And it really baffles me that we can send oil from Alaska or way up north, all the way down to Texas in a pipeline. Why is it that we can't figure out how to send water from east of the Mississippi to west of the Mississippi? That seems like you can't be that hard. The technology is there. What's preventing that from happening? 

CP: And if you would talk to any Delta farmer anywhere on the Mississippi River, they would be all about it because they just get hammered with floods. There's so much water that goes down those rivers. All that river authority through there just is constantly having to... I agree. Why wouldn't there be some drastic pipeline channel or something that would go, but I think then you get into lots of personalities and political, etcetera, et cetera, eventually it'll change. I think it has to, I think in order for a land investor to say, I'm gonna go buy an almond plantation in California, that guy's gonna have to be really careful. That guy's gonna have to be really careful that's gonna go buy a cotton farm south of Lubbock, Texas that's got four pivots on it because he doesn't know if his pivots will be regulated to the point to where he can only put maybe a quarter inch of water a week.

CP: Maybe he can only do so many passes. He may have to change the farming practices that make it a lot less, in my opinion, a lot of that country out west, they've moved it to agriculture in the last 50-75 years. Probably a lot of it. But it's grassland. That's what it's designed to do. And it's dry, there's not a ton of humidity. Cattle do really well out there. We are in East Texas, we grow really good timber. We grow pretty, we're more of a younger yearling type cattle operation, in my opinion, that can get to the, where they need to be fed out, where, of course all the cattle are fed out in the west, pretty much.

CP: You get into, weather that you can't change. And then we go out there and we grow three and four bell cotton for 25 or 30 years, and then our wells start messing up. They start going dry, they start doing the... And it's easy, man. I know a lot of those guys, they run out there. They literally, they get to cut their pivot on and then they walk away. We're gonna irrigate here, supplemental. Corn crop, for example, here, we're gonna roughly use, if we use an acre foot, 325,000 gallons per acre of water, that's a lot. I would say closer to six inches. This year we've got some soybeans under pivots here locally that we've been really paying attention to and watching that we're later in the year. And now it's been a good 30 day drought. They've been running, and an half an inch of water a week is what we're gonna run here. And those soybeans will do everything they're gonna do anywhere else. When you look at it on a west standpoint, those guys are gonna run pivots the whole time.

JO: Have you seen anywhere in Texas where they're starting to put, meters on those pivots? They started doing that in the San Luis Valley up here in Colorado a few years ago, and it just bankrupt a lot of our farmers because they just, they can't afford to do that. Are you seeing water regulations on the farmers in Texas? Like we are.

CP: Certain aquifers, yes, and water districts too. There's water districts in South Texas. There's, of course you have the Ogallala Aquifer and all that out west. Those guys are... Not everybody, but there's certain regions that they've done studies to where their depletion is so bad that they've had to go. And mainly in that Lubbock territory there. And you go out there and they're still just plowing and they plow and they plow and it's like, you get the dust storms and everything, but that's the old mentality and the old farming practice of we're gonna plow it up and then we're gonna irrigate though, we'll just pour water on it to make it happen.

CP: So that, yes, we haven't seen it as far as well regulation here. Now you have your normal Clean Water Act, I believe it is the legislation that regulates you from doing huge industrial type. Like if a company was coming in and they're gonna drill a big water well for production within a company or some kind of industrial, they're gonna be regulated. You have the 404 exemption, when the Clean Water Act for ag use. So we use that a lot for building reservoirs. We do a lot of reservoir. We'll build a however big a reservoir to hold water to run our pivots, 'cause we don't have a ton of groundwater. Really, it's not feasible at this point. We can build a dam and hold however many acres of water we need to make it work.

JO: Well Clayton, let's say we've got a listener that's a land agent. They've got a client that's kind of on the edge of growth. Maybe it's been slow to get there and they need to help, determine highest and best use for their farm or ranch. What are a couple of like action steps? Other than calling up an appraiser like you, what are a couple action steps that that land agent, land broker needs to kind of keep in mind for valuing that property? 

CP: I go by simple supply and demand. There's supply, then demand is even. If there's a high demand, then supply is low. So, water stricken areas, Southwest Texas is a desert. So in those areas, I would be very cautious in going and saying, I'm gonna go buy an operating farm and I'm gonna upgrade the irrigation and the state, 'cause those areas are poised for higher regulation on usage. They just are, and right now, everything's green and we're good. And, they get a big rain but I go back to like 2011 in Lubbock, Texas. Right before the 2011, they had a heck of a crop. Right before that, it was a dust ball. It was so dry, the Edwards Aquifer was way down, the Ogallala was down, everybody was, oh my God. So I think we had one, when did we have our last one in 2021, I guess up here. But we all get dry and all of our lakes get seven or eight foot. So I would really pay attention on areas that are... There's ways to buy in areas there, that are okay. And then also too, you may look at different usage. What is the highest and best use for a low water quality farm in New Mexico? Well, it might be a better deal to go back to grass. Maybe there's some kind of government conservation easement or some kind of program there that would fit that asset better long term.

CP: In my opinion, we need more surface water. Obviously we need more consistent infrastructure to make all this stuff, I guess to make it all growth oriented. But I would say as an agent, if I'm looking... I got a guy that's got, $3 million, we're gonna go buy him a land asset, whatever the four categories, recreation, water, or livestock or development or crops. I'm gonna look at going in areas that first of all have the assets, the infrastructure, and also too just general common sense rules on water, I would say on weather. That's the biggest thing.

JO: Well folks, if you wanna understand more about this topic, reach out to Clayton or find another RLI member near you who understands your geography. You can find them by searching on the Find a Land Consultant tool on the RLI website. And if you want formal training so you can better advise clients on topics such as this, consider taking a LANDU designation course. Multiple course topics are offered throughout the year. Clayton, anything else you'd like our listeners to know about this water topic and how it affects the land use and land value? 

CP: Find a professional. Justin said it the best.

JO: Well, thank you for joining us today, Clayton, and helping our listeners better understand how these issues impact land values so they can properly advise their clients when they are investing in land. And if a listener wants to get in touch with you, what's the best way for them to do that, Clayton? 

CP: I always tell anybody to go to my website, c21farm-ranch.com. C21farm-ranch.com. My cell phone, email, everything's available there. Reach out anytime.

JO: Excellent. Well, folks, be sure to check that out. And for more expertise on land real estate topics, be sure to check out the RLI blog, follow us on social media, and of course, tune in for upcoming episodes of the Voices of Land Podcast.

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