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Frequently Asked Questions
How will the investor’s make money from investing in this venture?
The investor’s will make a rate of return on their investment in the water rights acquisition fund as follows:
- The water rights and the acre-feet of water that is controlled by the fund can be leased on short or long term contracts to specific users. This lease amount will vary based upon market rates. Depending upon the amount or percentage of acre-feet as a representation of the total amount of acre-feet owned, that rate of return from leasing can be from 2.4% annual return to over 10%. The lease agreements, the amount paid per acre-foot and the terms of the lease will play a role in the amount of return on the water rights leased.
- It is reasonable to believe that the water rights owned by the Partnership can be sold at any point in time in the future for the same value as paid by the fund or for more money than those water rights were originally acquired. That figure or value will be a function of the fair market value received at the time the rights are liquidated as compared to the original purchase price. This rate, or value of the water rights, in the future is hard if not impossible to predict. The range of expectations on that future value is dependant upon the amount of time the water rights are held, the percentage of the owned water rights that are sold and the ultimate value placed upon those rights at the time of the liquidation. It is time, gain and principal that will determine the rate of return.
- The water rights may also improve their value through reclassification. If the fund buys water rights along with surface rights, then the fund owns the base water rights and the transferable water rights. Through reclassification, some if not the entire base rights can be converted to transferable rights, which could add a significant increase in the amount of water controlled and the ultimate price those rights will bring in the market. The water rights can be reclassified to transferable if the primary use of the land changes in such a manner that the base water classification is no longer a reasonable use of the water.
- The water rights holders may also see a return if the assets that are acquired provide for an opportunity to create a water distribution system or company at a later date. This system or company could distribute or lease their water rights to end users that would in turn pay for the water consumed rather than acquire the rights. Under this scenario, the water rights holders would be actually delivering their water to a specific end user that has entered into a usage or lease agreement for water delivery.
Will we have to drill any water wells or lay any pipelines to be able to sell or lease our water rights after we acquire them?
The water rights to be acquired can be located anywhere within the Edwards Aquifer area of interest. The ability to move or transfer these water rights is not a function of the physical location of the water rights acquired. The water rights acquired provide for the delivery of those rights within the Edwards Aquifer basin on paper from one permitted and approved water rights owner to another ultimate consumer of those water rights. There is no need to run a pipeline, drill a well or provide for any form of physical distribution of our water rights owned by the venture. Any exit point from within the Edwards Aquifer will suffice. The user provides their own method of extraction. The only thing Eckard Natural Resources Group, Ltd. (ENRG) will do is provide the leased rights to use an allotted amount of water based upon our permitted rights under the EAA.
Will there be any physical assets that we have to maintain or operate as the owner of the water rights?
The only management that has to be undertaken for maintaining the water rights will be the paper work involved in acquiring the rights and ultimately leasing those rights to end users. There will be ongoing administration requirements to maintain our permits, legal issues that may change from time to time and of course the active acquisitions and divesting of water rights on behalf of the venture. We will not own pumps, wells, pipe, machinery, etc.
Is there any liability that we will have as Partners in this venture?
Any venture has liability by virtue of the fact that we are in a litigious society. However, the practical matter is that we are in a minimal if not negligible liability position. We simply will be acquiring water rights and then leasing those rights to others. This of course will involve contracts and people. Those two elements alone present a level of risk by their very nature. In comparison to other investments, the ENRG Water Fund would have to be considered at the lowest end of the risk spectrum.
Why would a current water rights owner wish to sell their water rights today versus holding onto their water rights for years to come?
Much of the Edwards Aquifer sits over undeveloped land that is currently being farmed or ranched and has been for years. This land does not generally lend itself to a very fruitful existence as ranch or farmland with major economic ups and downs based upon the markets and the weather. The land owners have scratched out a living for years on land that might otherwise be just void space. With the recognition that water has become such a hot topic and a notable asset, many ranchers and farmers now recognize their ability to sell some of their water rights (the transferable rights) to third parties. This is a windfall that was not available before the Edwards Aquifer was organized under the Edwards Aquifer Authority jurisdiction. This is money they might never see in their life time. Based upon the manner in which the Edwards Aquifer Association (EAA) has allowed transferable water rights to be sold, the EAA has allowed these land owners the ability to profit by selling their water rights without having to sell their ranches and farms. The ability to sell the water rights that they have owned for decades creates a cash windfall that changes the entire economic complexity of a ranch or farm. The proceeds from the sale of these water rights provide these ranchers and farmers with much needed cash. The owners of water rights minerals can now recognize an immediate cash value by selling these rights to third parties like Eckard natural resource Group (ENRG).
What is the expected length of time for retaining our water rights?
Water rights can, and in our opinion should, be retained forever. Water is a precious resource that has limited quantities not only in volumes but in availability and access. With a limitation on most available water rights it can provide a very valuable resource that may not be available to the average investor for acquisition in the future. It is our belief that there may not be Edwards Aquifer water rights available for sale in any degree of substantial quantities in the next five to ten years. It is our assessment that these water rights are being acquired by small groups of investor groups who expect to hold and manage these rights for future use. This limited supply of water rights available to acquire in the open market and the State of Texas mandating limits on future withdrawals from the Edwards Aquifer is pushing up the market demand for Edwards Aquifer water rights. The market is indicating clearly is expects future valuations of these water rights to be much higher than they are today. As the old cliché goes, everything is for sale at the right price. ENRG does not wish to sell its water rights and will most likely not encourage our Partners to do so either.
What is the advantage of acquiring water rights only versus acquiring the water rights along with the surface rights?
If you buy just water rights, then you obviously do not have use of the surface and you will be limited to only a certain portion of the water that is attributed to that land. Water rights are separated into base and transferable water rights categories. The base rights stay with the land (surface rights owner) and transferable rights can be transferred and sourced to other users. Without the surface rights, you only have half of the rights to work with. If you owned the transferable and the land (surface) rights you could file for a reclassification of the use of the land. If approved by the EAA, you could possibly transfer 100% of your water rights and thus create an increased value of your rights. Along with that increase would come added capital costs for the value given to the surface rights and the base water rights. That value could be equal to what is paid for just the transferable water rights. An example of a reclassified land use would be the development of rural farmland into a real estate development. As a farm the water is used for irrigation. Once the land is sold and the surface is developed into a subdivision or non-agricultural use, the water rights allocated to that land are no longer practical for farming. In such a case, those rights may be submitted for approval of reclassification from agricultural use and base water rights to a non-agricultural use and all water being transferable.
Why do we need to protect underground aquifers if we have ground water to use from rivers and lakes?
Virtually all surface water is already committed to specific end-users. Every tributary, lake, stream and reasonable source of water that is not in an aquifer is already allocated to specific users such as municipalities and utilities. The underground sources of water, like the Edwards Aquifer, are what are being aggressively sought now for future allocations of water consumption. Water is the essence of life and without water you will not see cities grow, industrial users create businesses, etc. The end users have to identify the source of their future water and then quickly tie up that water into long-term commitments and supplies before others take that water for their own use. Aquifers are some of the only remaining sources of water for most domestic users. The Edwards is just one of the first to undergo an open administrative oversight with water rights being bought and sold under specific guiltiness and rules.
What is our competition for water supplies that will make our water rights either more or less valuable?
Price sensitivity is always the biggest concern over attracting competition regardless of the product or business. As long as the Edwards Aquifer water is sold or leased at a rate that is as low or lower than the nearest available source of water, then the Edwards Aquifer water will not receive any real competition. The fact remains, that due to economic, social and special interest group issues, the Edwards Aquifer is always at risk of being reviewed as the primary source of water in the areas that sit on top of the Edwards Aquifer. There are other sources of water that come from groundwater or alternative underground water sources such as the Carrizo Springs. The fact is that most, if not all, of the closest alternative water sources are either much more expensive than the Edwards Aquifer water to utilize or the alternate water is very difficult to transport to end-users. These two factors make for limited competition in the immediate future.
Do we own real assets or just a piece of paper in this transaction?
ENRG and its Partners will acquire a deed to water rights and receive a warranty deed. Once water rights are acquired, then the owners will have an assignment of permit, a bill of sale recognizing the acquisition and the warranty water deed for the ground water. It is like any other minerals or fee simple interest in real estate that are acquired in Texas in that you will have recorded ownership of your water rights verified through a deed.
Are there any tax benefits in the ownership of the Partnership units?
The tax benefits are minimal in water rights ownership. Since the ownership and transferring of water in the Edwards Aquifer is relatively new, the tax aspects of ownership of these rights are not as clear as they might be in the future.
How will the revenue distributions be treated from leasing efforts for tax purposes?
Proceeds from the leasing of our water rights will be ordinary income that is passive. The income will be passive due to the fact that the Partnership is limited and the activity is passive with ENRG being the only General Partner in the venture. The sale of any of the water rights owned by our ventures will be treated as a similar transaction to the sale of real estate. The water rights are capital assets and upon sale of such interests, the cost basis is recovered and any excess sales proceeds above that basis is treated as a capital gain. Capital gains are a more favorable income source since this type of income receives a greater and more favorable tax treatment under the Code than other types of income. If these transactions of selling water rights result in a capital loss, then these losses will create a capital loss to offset any capital gains.
How often will revenues be distributed?
Revenues from the income derived from the leasing of the permitted water rights will be distributed annually. The annual distribution will provide a year-end tax summary as well as a profit and loss for the entity. Since most lease agreements for the water rights will be on annual payment cycles, the revenues received will be billed annually and received by the fund annually. This single distribution allows for minimal mailing, postage and overhead costs to provide the greatest and most cost effective manner to manage the fund’s assets. The annual distribution should be distributed by the last week in January of each New Year for the revenues generated from the previous year’s leasing. The check will be mailed by the last Monday of each January for the prior years’ leasing efforts. A full financial report will accompany the distributions along with a summary of all operating costs that might have been incurred. The proceeds from the sale of any of our water rights will also be distributed at the same time as the leasing revenues. The water rights sold in any calendar year will be distributed the first January after the sale has occurred. The interest earned on deposited funds will be another source of value and revenue for the fund.
What makes this venture for acquiring water rights a potentially profitable opportunity in today’s market versus in the past?
The acute awareness of many industrial users, government agencies and municipalities in the last ten years about water shortages due to weather pattern changes, domestic growth in certain markets and overall industrial consumption has highlighted the need for water rights to be monitored and controlled. This control and strict policies have provided a guideline for the use, the extraction and the exchange of water rights ownership that has not existed before. With rules and regulations in place, it allows for a settled law approach at owning, selling and developing water rights that does not exist in virtually any other water supply system like the Edwards Aquifer. The EAA provides for rules and regulations that clearly state what can or cannot be done in dealing with the Edwards Aquifer water. This sense of stability has provided a market that did not exist before.
Why is water so important now and not in the past?
With greater population density and a substantial increase in industrial use over the last half century, water has become increasingly a more vital commodity. The fact that almost all groundwater and sources of water outside the aquifers have been already allotted, it provides for desperate measures to secure future water rights from the limited number of available water sources to ensure growth in certain demographically restricted areas. Without water, growth cannot exist or be sustained. The United States is sending probes into outer space looking for evidence of life by looking for sighs that a certain planet has had water present in the past. Water is the essence of all life. Unfortunately, the amount of growth in our population in certain areas has brought about the consumption and withdrawal of water from surface and groundwater sources that surpass Mother Nature’s ability to replenish that supply to meet that demand. The immediate resolution to future water supply problems is to scramble to identify and control what water is available now. The expense of certain water sources and supplies makes those sources cost prohibitive for short-term realistic solutions. Those solutions that are being sought now are based upon proximity to the end user, the quantity of that source and the ultimate cost of extracting water from that source. Water is expected to be one of the most fought over and desired mineral assets in this country over the next century.
How does the future look for values in the ownership rights of water?
Since no one knows the future, this is an unpredictable question. It is reasonable to assume that with an increase in demand for water comes an increase in the perceived value of that water. The greater the desire for access to the use of a water source provides for a greater desire to either own the water rights to that source or to obtain the long-term rights to use that water. In the last eighteen months, water rights in the Edwards Aquifer have gone up as much as 150% due to demand, limited supply of rights and the realization that new EAA limits and constraints will force water to be a valuable resource. It is our expectation that the water rights acquired today could be substantially more valuable over time provided we do not sustain government market today. Even with intervention, condemnation provisions, like in real estate, are a very real solution to a fair market valuation for water rights. The future is bright but to apply a quantitative value is unrealistic at this pint in time.
What do future leasing opportunities look like for cash flow and the potential of revenue streams?
Water is being sought by every municipal, industrial, ranching, farming and individual user. Water is the essence of life. Like oxygen, we must have water every day to survive. This provides for a great customer base in that everyone is a customer. The search for water permits and water to be committed to specific end users is great. It is our belief that the water rights we will own will be readily marketed to three customer bases. These water rights can be leased to multiple end users that need water for their consumption.
Who decides the price we pay for the water rights?
The market is always the deciding factor in what a commodity is bought or sold for. ENRG management will decide the merits of any water rights that are acquired. We will rely upon our legal counsel for their legal review of the condition of those rights and to run title on those rights. Then the ENRG management team will assess the value or prospective future value of the rights acquired as each asset being reviewed compares to historical, current and overall market comparisons. Each trade may be different and may be subject to special circumstances.
What conflicts can arise in ENRG’s management and it’s decisions to buy water rights?
Obviously, a Partnership provides for a managing Partner (ENRG) to conduct business
on behalf of its Partners. The mere fact that ENRG earns a small fee for bringing the package to market and retains an ownership in the Partnership as a Partner regardless of the Partnership’s financial outcome provides for a conflict. The Partners must rely upon the prior track record of the ENRG management team and its business dealings to ascertain a level of integrity and ethics to reach a level of comfort that any business conflicts will be avoided if at all possible.
Does ENRG currently own or expect to have any water rights that will be acquired by the Partnership?
No. It is our position that we are on the same side as our investors. We wish to seek the best price for buying the most favorable water rights that provide the greatest return on our investment. We do not expect to ever be put into the position of having water rights that we will own and then try and sell to a fund we manage. If a situation arises whereby ENRG has water rights and the fund may wish to acquire those rights, we will utilize a non-biased third party appraiser to ascertain the fair market value and then make sure that the transaction is based upon that appraisal.
How can I get out of the Partnership down the road?
The exit strategy for the Partners is limited. ENRG expects to own or be involved in the water rights acquired for quite some time in not forever. Partners who wish to sell or terminate their relationship with the Partnership should carefully read the offering documents about transferring their ownership of units, or selling of their interest. The Partnership expects to hold the water rights until such time as the management deems the market condition appropriate for liquidation of those rights. If and when the time is right, the ENRG recommendation to sell will be made and the Partnership will be void of any further assets and termination of their entity will be the next step. ENRG makes no assurances as to a readily available market but expects that either a fellow Partner, ENRG itself or an outside source would be very plausible for acquiring an ownership of a Partner who desires to liquidate their position. This is a non-liquid asset and deemed a long-term hold.
If I do elect to sell my interest in the Partnership units, how is my unit interest valued?
Valuation is based upon supply and demand. Just like the water we will own and lease, the units owned in this Partnership will have a finite amount of units available and a specified value based upon the underlying assets owned by that unit. The valuation will be best served by establishing three values: one derived by the Partner, one by ENRG and one independent source. The average of the three valuations is most likely to be the valuation that is fair and accurate. The unit is a commodity that can be valued in the free market. ENRG management will provide a summary of the water market and the various pricing or valuations of water rights based upon comparable transactions. This market assessment will be sent along with the annual profit and loss, the annual revenue check and the tax statements.
How long do the Partners or ENRG expect to own these water right?
The answer that serves ENRG management purposes the best is forever. In our opinion, this is the type of asset that should be held in a family trust forever and passed down from one generation to another for decades to come. The practical manner is that some, if not all, of the Partners may elect to sell when they deem the price is fair relative to their original cost basis and the perceived risk at the time they consider selling. If ENRG does not see a financial advantage in selling their share of the water rights, ENRG expects to hold these rights forever.
What happens, if anything, if the surface owner sells his surface rights?
Surface rights do not directly affect the transferable water rights acquired. The base water rights (one half of the available water rights in the Edwards Aquifer) transfer or stay with the surface ownership. Base water rights are not transferable. If the surface owner sells his ranch or property, then the base water transfers with it. The only exception to this statement is if the primary use of the land is changed from agricultural to development or nonagricultural, then the base water rights can be converted or changed to transferable water rights.
What happens if the water rights we own runs out of water?
The unique feature of the Edwards Aquifer is that it is one of the only self-replenishing rechargeable aquifers in the world. The Edwards Aquifer is recharged through runoff and rainfall. Due to the short time frame for the water to reach the Edwards Aquifer, its estimated life is not less than 200 years. The consistency and reliability of the Edwards Aquifer water as a source is why the State of Texas selected it as one of the only regulated water sources of underground water in the State.
News
09/21/09Investor Conference 2009 A Success
Eckard Companies is pleased to announce another successful Investor Conference, both in terms of the quality of the presentations and speakers, as well as Partner attendance. The Eckard Companies' Investor Conference 2009 was held on September 11th - 13th in San Antonio, Texas at the Hyatt Regency Hill Country.
07/07/09
With National Headlines Looking Down See Why Texas is Looking Up
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David Winans coined the term "Texaplex" to describe the triangular region of Texas that contains 75% of the state's population. Watch the video and see why everyone is talking about the Texaplex.
Contact Info
mailing addressP.O. Box 2039
Boerne, Texas 78006
telephone (800) 527 8895
(830) 755 2112
facsimile (830) 755 9188
info@eckardcompanies.com
