'A Lot Of Sticker Shock': How Denver Developers Can Navigate Water Access Challenges

There is fierce competition for developable land in the Denver metro area and beyond. But if the land doesn’t have access to water, just how valuable is it?

Colorado’s steep population growth over the past decade has induced the need for further residential and commercial development. However, in a climate that’s no stranger to drought conditions, this has proved to be a strenuous process, leaving developers with the task of balancing land availability with ample water access, said Jed Sonnenshein, attorney and director at law firm Otten Johnson Robinson Neff + Ragonetti PC. 

“Local governments struggle to keep pace with processing and approving entitlements and addressing other land use issues, creating a lengthy approval process,” Sonnenshein said. “The need to establish water service on a project-by-project basis, in addition to typical entitlement challenges, throws everyone for a loop.”

New entrants into the market are surprised to learn that they may be responsible for bringing the water resources required for service to their projects, in part because Denver doesn't have a single large-scale provider serving the larger metro area, Sonnenshein added.

"Once cost comes up, there’s a lot of sticker shock,” he said.

The availability of water service, as well as the prerequisites that need to be satisfied before a developer can get water service for their project, can vary drastically among jurisdictions, Sonnenshein said. 

Some Colorado towns, such as Lochbuie, may require developers to purchase water rights from preapproved sources and transfer them to the jurisdiction itself — ensuring that it has enough water to support such a project. Alternatively, other jurisdictions, such as Erie or Fort Lupton, may have a “cash-in-lieu” of water dedication policy in place, where developers can make a cash payment directly to the jurisdiction to obtain the water service necessary to develop the project. 

Dedicating water, as opposed to paying cash-in lieu of dedication, can be challenging, Sonnenshein said. 

“If you’re in the real estate business, you don’t want to also find yourself in the water-sourcing business,” he said. “This process is technical and complicated, not to mention the uncertainty that may arise with finding the water to acquire in the first place.”

For developers conducting project diligence or considering a new project, the first step is to determine what water rights may be included in the acquisition as part of the purchase price, Sonnenshein said. A seller may have already dedicated sufficient water to the municipality during the entitlement process or already satisfied a cash-in-lieu requirement.

“In that case, it’s not unusual in a land transaction for the cost allocated to the water to exceed that of the real estate,” he said.  

If a dedication requirement remains unsatisfied, the developer needs to determine the service provider’s conditions for water service. There is very likely going to be some kind of dedication requirement in addition to a standard tap fee that is typically paid when building permits are issued, Sonnenshein said.

The ideal way to satisfy any water dedication requirements is to pay cash-in-lieu of dedication, but that's not always going to be an option in each jurisdiction.

If cash-in-lieu is available, another important factor to consider is that the cost to acquire water varies widely between jurisdictions. This can depend on a few factors, including water abundance, local water rules and regulations and more. 

For example, the town of Dacono, located in the northern outskirts of the Denver metro area, accepts a cash-in-lieu fee on a project-by-project basis, at approximately $39,000 per residential lot, with cost varying based on lot size, Sonnenshein said. In many areas served by the South Adams County Water and Sanitation District, the cash-in-lieu fee for a single lot is approximately 50% less than Dacono’s cost.

“We’ve also had situations where service providers do not have sufficient supply or capacity to serve new development, and as result a jurisdiction puts a complete moratorium on new construction and permits,” he said. “This will halt development at any stage of the process, rendering a project unusable until the moratorium is lifted.”

As a result, the importance of making water access part of a developer’s initial due diligence cannot be overstated. Developers of various levels of sophistication have closed on land in the Denver area with certain assumptions, only to find out post-closing they cannot get the water service they were counting on, Sonnenshein said. 

Developers considering projects where water supply, infrastructure capacity or cost is a concern must protect themselves contractually, he added. Thus, partnering with local land use counsel that understands the various moving pieces of the local development and entitlement process can help to ease some of the shock and confusion associated with establishing water service in the area.

“You should understand the land use component, and whether you can incorporate certain design considerations during the entitlement process that may lower the water cost of a project,” he said.

Some jurisdictions may allow a lower cash-in-lieu payment or dedication requirement if reclaimed water is used for landscaping, or if use restrictions are applied to encourage the use of drought-tolerant plants, Sonnenshein added.

“It’s helpful to have familiarity with particular local government policies and the staff you’re working with,” he said.

As the state continues to grow, Sonnenshein said local jurisdictions need to continue to strategically consider how they can best entitle property and allow for water access. Instead of dedicating water or paying a cash-in-lieu fee based only on lot size, with larger lots automatically carrying steeper fees, jurisdictions should instead consider the projected intensity of use, he said.  

“A 5K SF lot with a generous lawn is likely to use more water than a 8K SF lot that uses xeriscape,” he said. “If we offer a smaller lot that fits a smaller product, that home is going to use less water, which is beneficial from a sustainability perspective. We're also incentivizing the developer because they can spend less on water, drive density and make a more affordable product for the consumer.”

This article was produced in collaboration between Studio B and OJRN&R. Bisnow news staff was not involved in the production of this content.

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