Wall Street Spends Millions to Buy Up Washington State Water

WINTHROP, Okanogan County — Follow the water and you'll find the money.

That's how it often works in the dusty rural corners of Washington, where a Wall Street-backed firm is staking an ambitious venture on the state's water.

Crown Columbia Water Resources since 2017 has targeted the water rights of farms on tributaries of the mighty Columbia River.

This March, the company sealed a $340,000 deal for Douglas County water.

The same day, it paid $1.69 million for a farming partnership's water in Columbia County.

Two months later, the company spent nearly $1.61 million near Walla Walla.

Piece by piece, the company's lawyer, Mark Peterson, is constructing a portfolio to span the state, building out a plan he hopes will untangle the arcane world of water rights, and thrust it into a 21st-century free market.

Worldwide, as temperatures rise and aquifers dry, investors are increasingly bullish on water, and buying vineyards, farms and ranches for what's underneath or flowing through.

In Washington state, there's little water left unclaimed, according to the state Ecology Department. In the future, scientists expect less snowpack, more variable precipitation and .

Amid a changing climate, a population boom in Washington and churning development, Peterson's client plans to buy, lease and sell water in a privately operated water market of its own creation. Crown's activities here are unprecedented in scope for a private firm.

The company's aggressive pursuit of water could put it in the vanguard.

Or it could all evaporate.

Ongoing negotiations between the U.S. and Canada over the Columbia River could shift flows, potentially draining demand.

Crown has faced regulatory scrutiny from the state Ecology Department. And in emails, some officials privately expressed concern over Wall Street influence on water markets.

Some critics fear business models like Crown's could lead to speculation or consolidation.

"We're potentially allowing a marketplace to develop here that could be pretty destructive in the future," said Paul Jewell, a policy director for the Washington State Association of Counties. "With a growing population and growing need for water, we're going to be beholden to private interests with a profit motive for something that's supposed to be a public resource."

Meanwhile, the company's attempt to buy water from a local family farm partnership in the Methow Valley riled nearby residents, ranchers and farmers, who were concerned that selling the water downstream would permanently end its use in their community and that their lifestyles might dry up.

"If you start selling your water off, you're going to lose agriculture and that is losing your character, I believe," said Craig Boesel, a Winthrop cattle rancher whose family homesteaded the land in 1889.

Wall Street and water

Peterson hails from Wenatchee, where the town's namesake river meets the Columbia.

After leaving for college in Seattle and law school in Portland, Peterson returned to Wenatchee as a small-town attorney who took on "pretty much anything that walked into the door."

The market led him to water law. He soon began to view Washington's arcane system as inefficient and wasteful.

"Washington state is way behind" among Western states, Peterson said.

For years, he's eyed the 1,200-mile Columbia River, the irrigation superhighway of Central Washington, as an opportunity.

The valleys alongside the Columbia grow each year a cornucopia of high-value crops: apples, wine grapes, cherries and hops among them. When irrigated, Washington cropland is among the most valuable in the country, according to the United States Department of Agriculture.

Crown Columbia's parent company, the Spokane-based Crown West Realty, acquired two commercial farms in 2014 and 2016 for more than $46 million, hiring Peterson to consult on water.

Petrus Partners, a Manhattan-based investment firm, controls Crown West Realty. The company's founders have reported at least $298 million in investment offerings under the Petrus name, according to U.S. Securities and Exchange Commission filings. The company's website says about half of its capital comes from "retired partners of Goldman, Sachs & Co." and that its real estate arm was founded to "capitalize on distressed investment opportunities following the collapse of the housing bubble."

In Petrus and Crown, Peterson saw opportunity: The companies had money, management experience and enough distance to take a 10,000-foot view.

"They invest in anything that will turn a profit," he said.

And Peterson saw fields of profit along the Columbia.

"Most of the ground in Eastern Washington is cultivated, but a lot of it is dry farms. If you irrigate the ground, you can get six, seven times the yield for the land," he said. "People are clamoring for water along the main-stem Columbia."

Farms on the fringe

An arcane system that dates back to the late 1800s governs Washington's water.

In the earliest days, "you make a claim by sticking a piece of paper on a tree or in a public place that says you have the right to withdraw a certain amount of water," said Jonathan Yoder, director of the State of Washington Water Research Center and professor of economics at Washington State University.

Fast-forward more than a century: Water rights, now managed by the Department of Ecology, are measured down to the molecule, Peterson joked.

In Washington, water is a public resource that can't be owned. But the right to use water is exclusive and treated like a property right.

The state keeps a sprawling online database of water permits, claims and certificates, including some that rely on photocopies of century-old paperwork. Water rights left unused for five years can be lost, or relinquished, for others to use.

During drought, the agency can restrict the use of some water rights to aid fish. Older water rights receive priority.

No longer are hammers, nails and paper sufficient to acquire water. Now, a coterie of pricey lawyers, consultants and engineers make a living on the process.

Where there's a constraint, a market could develop, Yoder said.

"New water rights are hard to come by," Yoder said. "How else are you going to get water? You're going to buy it."

Water rights transactions are notoriously hard to track. The state does not keep centralized data on water sales, said Harry Seely, of the consulting firm WestWater Research. Sales are often tied to land or farm assets. Water rights sales are subject to real-estate excise tax, but they aren't always recorded and categorized in the same way. Market research often relies on word of mouth.

Where there is scarcity in Washington, Seely said water rights sales can fetch between $500 to $6,500 per yearly acre-foot, which is roughly equivalent to half the volume of an Olympic-size swimming pool. Crown spent $3,000 per yearly acre-foot for most of its water in Columbia County, according to a seller.

In other Western states like Colorado, where shortages are more acute, prices have stretched higher, fetching as much as $60,000 at auction for less than an acre-foot of water each year, according to the Northern Colorado Water Conservancy District.

In Washington, small water banks have operated locally for years, often redistributing large water rights to new uses nearby.

Peterson's vision for Crown Columbia is bigger. It would allow water to be distributed across much of the state, which he thinks would be more economically efficient.

Agriculture has changed in the century since lawmakers began regulating water. Modern irrigation systems are more efficient, can send water farther and pump it uphill.

Farms have consolidated. The largest 4.4% of Washington farms, which are 2,000 acres and larger, operate about 74% of the state's farmland, according to a Seattle Times analysis of 2017 Census of Agriculture statistics. Those farms also own an increasing percentage of the state's irrigated land.

"In the tributaries, the farms are small. It's hard for them to be economically viable at scale," Peterson said.

These farms do have valuable water rights, which could be worth more downstream. Crown wants to buy and lease the rights of farms on the fringe, leave their water in stream and let gravity deliver it to the Columbia, where it could quench the thirst of vineyards, orchards or be used for ecological purposes.

"We'll sell to anybody," Peterson said.

Peterson's concept hinges on rights held in the state's Trust Water Rights Program, which allows users to park inactive water rights with the state to avoid losing them.

The program is designed, in part, so the Ecology Department can use parked rights to keep more water in streams, which helps fish struggling with waters too low or too hot.

For Crown, the program serves as a "vault" to protect its holdings, Peterson said. Crown eventually plans to operate a clearinghouse for water -- buying, leasing and selling it. But before new water uses can begin, the parked water must be validated and approved by the Ecology Department.

Over the past two years, Peterson and Crown purchased at least $4.7 million worth of water rights across several rural counties, according to real estate tax records, placing some in temporary trust for terms of 20 years. Crown has reached agreements to market other entities' water, too, Peterson said.

The company controls about 7,000 acre-feet it could lease or sell, Peterson said. This summer, it made its first loan of 600 acre-feet of water, to a Walla Walla-area farmer, he said. Each acre-foot was priced at $200 for one year.

But not every transaction has gone so smoothly.

A fight in the Methow

In the Methow Valley, water nurtures the land and the colorful personalities who depend on it.

So when retired lawyer Mary McCrea, of Twisp, last June discovered fine print in the Methow Valley News' legal section that spoke to a local ranching family's plans to sell water away from the valley, it left her gobsmacked.

She had worried for years that outsiders would come for the valley's water.

Crown's draft application, published online, sought to transfer the ranching family's water right to trust and allow for future water use from the Chewuch River, near Winthrop, to the mouth of the Columbia River, more than 500 miles downstream.

The Lundgren Limited Family Partnership's claim dates back to 1907, according to the legal notice.

A 1910 agreement with the Chewuch Canal Co. allows the Lundgren partnership to transport water using the company's canal, which snakes across the landscape for more than 13 miles and delivers water to about 185 shareholders with farms, ranches and homes in the Winthrop area.

The draft application sought to place in trust the right to as much as 97 percent of the canal's flow at any one point in time.

After the local paper, the Methow Valley News, published stories about the potential deal, "it was the talk of the town, at least in my circles," said canal shareholder Betsy Smith, of Winthrop.

Those circles have changed for Smith, who is a veterinarian and the matriarch of a sheep-ranching family.

The construction of Highway 20 in the late 1970s, which spills past granite spires in the North Cascade mountain range, now connects the valley with Washington's urbanized west side. A migration of money and burst of second-home construction amid the Methow's dry Ponderosa pines followed, changing the complexion of the bucolic valley.

The Methow has become a hub for climbers and skiers. In summer, tourists swarm the streets of Winthrop, carrying ice cream cones between the saloons and general stores fashioned as an homage to the American West.

"The economy now isn't necessarily based on agriculture," said Casey Smith, 27, son and scion of BCS Livestock, the sheep-ranching operation. "It's based on recreation and tourism. But it's beautiful here because it's a green landscape."

Still, many livelihoods depend on irrigation.

An early May visit found those who work the land in the throes of "frantic springtime," as Roger Rowatt, the president of the canal company, called the beginning of the irrigation season.

Days before, Rowatt, a miller, farmer and cabinetmaker who sports a white ponytail and an arrowhead goatee that points to his chin, kicked off the frenzy when he opened a sluice gate on the Chewuch River, allowing water to flow into the canal and down to shareholders.

"It's a dry year," said Brian Larson, a local orchard manager scrambling to fix a water pump before new trees arrived for planting. "Water is everything."

A few miles away, the Smiths were coaxing sheep into a neighbor's pasture.

"We graze on all irrigated pasture. Without that, we wouldn't have food for the sheep," Casey Smith said.

To him, water is a community resource. It galls him that someone would try to remove the "lifeblood" from the place he loves.

"We don't know what's going to happen in five to 10 years. Having water will be increasingly valuable as the climate here gets warmer, drier and hotter," he said. "One of the things that surprises me is that anybody that would be from this community, and embraces their community, would try to sell their water rights to someone far away."

Like others, Rowatt fears water sold away will be removed from the Methow forever because it's more valuable for agriculture in prime growing areas that can produce a higher yield for each acre.

"To sell out water and dry out an agricultural community to line the pockets of investment bankers, yeah, that bothers me," he said.

Water, a public resource, shouldn't necessarily go to the highest bidder, Rowatt said.

Peterson says the community misunderstood.

The application reflected the Lundgrens' historic water claim, not the amount of flow Crown hoped to utilize, he said. Leaving water in the stream would help Chewuch River fish, he said. Water deposited with Crown could be leased or purchased by valley residents, too.

"If they wanted to preserve a community asset, this is the way to do it," he said.

He balked at concerns over Crown's private-equity backing.

"To say that somebody coming from New York with money must inherently be a bad thing ignores the realities of everyday life anywhere in America," he said.

Earlier this year, Don Lundgren, who was attempting to sell the water right, told a reporter he did not understand the interest in his water deal and declined to make further comment.

"Aggressive acquisition"

As Crown pursued water, the Ecology Department grappled with its acquisitions.

The department's Office of the Columbia River, whose mission is to aggressively pursue water solutions and find new supply for the basin, approved the company's original trust water rights agreement in 2016.

Peterson credited Tom Tebb, the office's leader, for helping develop his concept.

"We're trying to facilitate the movement of water to its highest, best use," Tebb said.

Other parts of the agency have closely scrutinized Crown's water transfers, overturning local water decisions that were favorable to Crown. Ecology also opposed parent company Crown West Realty in court when it attempted to place millions of dollars of water into trust from wells at another of its real estate holdings, a Spokane industrial park.

Crown's activities have stirred internal debate within Ecology.

"Overall, I think it is not a good sign that our Trust/Banking programs attracted Wall Street attention," wrote Ying Fu, of the agency's Spokane office, in an email thread about Crown Columbia's Methow deal. Fu expressed concern that profits would be made on water held in "state sponsored 'banks.'"

Dave Christensen, Ecology's water resources policy and program development manager, last winter commissioned the University of Washington's Evans School of Public Policy to study water marketing.

"We are hearing (and have) concerns that continued aggressive acquisition and marketing will cross the threshold into outright speculation (if it hasn't already gotten there)," Christensen wrote in a memo to staffers.

Christensen said in August the agency was investigating whether the trust water-rights program was contributing to potential speculation or being used for purposes outside of the Legislature's original intent to improve stream flows and to allow water-rights reallocation. The department also is evaluating water banking, he said, and would make policy recommendations on the programs next year.

Jewell, the policy adviser for Washington's counties, said he grew concerned over how water markets were operating in his last job as a Kittitas County commissioner. In his county about a decade ago, as development boomed, local, private water markets were able to command high prices without much competition. Jewell helped the county start its own water bank to compete and lower prices. He said the Ecology Department needs to be more proactive as companies acquire and consolidate resources.

"Ecology has really been a spectator in watching these water markets develop, and I honestly think pretty naive, in not taking a more active role in managing the system," Jewell said. "If they don't get ahead of this developing market, they could find themselves on the outside looking in pretty quickly."

Dust settles in the Methow

Perhaps it's the Methow's beauty that has protective valley residents spoiling for civic showdown.

"There's a history in the Methow of organizing," said Rob Crandall, a canal shareholder who operates a nursery for native plants. "You're not going to steamroll us."

"That's their happy place," Peterson said with an eye roll.

The community has doomed many a development project with serious financial backing, perhaps because the projects had serious financial backing.

In the 1970s, valley residents fought plans for a ski resort.

Over decades, opponents wore down the Aspen Ski Co., ran a Bellevue group out of $12 million and town, too, and then boxed out a developer who had pivoted the ski project to a 560-home resort and golf course.

The project was ultimately doomed over water rights.

Once again, Methow residents rallied. Dozens turned out to local meetings about the Lundgren transfer. The canal company hired a Harvard-educated Winthrop lawyer, Natalie Kuehler, to object for her "fiercely protective" community.

Kuehler found the Lundgrens' original claim was not filed with Ecology until 1998. She wrote to the department, arguing the claim was junior to the canal and the river's instream flow rule, which is essentially a water right for the river itself.

Ecology agreed, making the water claim much more likely to be restricted.

"The monetary value took a deep dive," Kuehler said.

This August, more than 14 months after Crown applied to put the Lundgren water right into trust, Crown pulled out.

"The Chewuch Canal Company did win this battle," Rowatt said. "The issue is not over. Crown Columbia and people like them are trying to buy up every drop of water they can and move it out of the valley."

McCrea is now pursuing statewide legislation to restrict the ability to transfer water out of local watersheds, which could foreclose Peterson's dreams of a water market spanning much of the state.

As the climate warms, few forecast water decreasing in price. But more than money is on the line when bets are made on its future.

Information from The Seattle Times' archives is included in this report.