California’s recent legalization of recreational cannabis appears to have spurred increased agricultural land values on the North Coast from Sonoma to Humboldt County.
Although cultivation and use of cannabis for medicinal purposes has been legal in California for two decades, the legalization of recreational cannabis creates untold opportunity for expansion of the existing market. The prospect of cashing in on this burgeoning market seems to have sparked the interest of land speculators and would-be cannabis farmers and entrepreneurs.
This heightened demand for agricultural land on the North Coast is expected to translate into increased marijuana cultivation in well-established agricultural areas (through conversion of existing crops to cannabis), as well as potentially in areas not currently developed for agricultural use. The additional volume of cannabis cultivation will likely increase competition for surface water and groundwater resources, especially in areas where wine grape vineyards are converted to cannabis. Certain state regulatory requirements may further constrain the availability of water and intensify conflicts over water.
Increased Land Values
The trend of increasing land values on the North Coast is reflected both in land-sale data for Sonoma, Mendocino and Humboldt counties and in anecdotal evidence from landowners and brokers operating in the so-called Emerald Triangle of Humboldt, Mendocino and Trinity counties.
In its 2017 trends reports, the California Chapter of the American Society of Farm Managers and Rural Appraisers observed that the “legalization of recreational cannabis in California has created an emerging market in the coastal areas of California.” The report explains that legalization has brought cannabis growers out of the hills and into competition with cultivators of other crops for established agricultural land. The report notes that insufficient time has passed since legalization to address valuation issues or clearly track any trends. However, it acknowledges that legalization is having an impact on land values in the Emerald Triangle.
Data obtained from AcreValue (www.acrevalue.com), a database of agricultural land and water right sales, reveals that during the first half of 2017 the average price for land planted with grapes in Sonoma and Mendocino counties — both attractive locations for outdoor marijuana cultivation — increased markedly. In Sonoma County, the average price per acre for this land increased by a modest 32% (some local zoning changes regarding cannabis cultivation may also have impacted land values). But in Mendocino County, the average per acre value for this type of land increased by 200%. A general survey of land sales in Humboldt County between June 2016 and July 2017 also reveals a dramatic increase in land values beginning in late 2016. Though one can only speculate about the influence of cannabis legalization on these land values, the timing of the increases — shortly before the Adult-Use of Marijuana Act (AUMA) was approved by voters in late 2016 — certainly suggests a strong correlation, especially in Mendocino and Humboldt.
Landowners and real estate brokers in Mendocino and Humboldt counties have likewise reported significant increases in land prices and noted the proliferation of land sale advertisements openly marketing property to would-be cannabis farmers. In an April 2017 article, The Press Democrat in Santa Rosa reported that a real estate agent specializing in the sale of ranches in Mendocino and Humboldt estimated land prices had increased by 30% to 40% over the past year or two in those counties. Other brokers estimate the increases to be even higher. Properties with the right conditions for cannabis cultivation or with existing grow operations have been fetching the highest prices. Websites specializing in property listings for existing cannabis farms or land suitable for cannabis cultivation are also adding new dimensions to the market.
Increased Competition for Water
The conversion of established agricultural cropland to cannabis cultivation and the potential for cannabis crop expansion to undeveloped land are likely to spur greater competition for surface water and, to some extent, groundwater. This is especially likely to be true in the wine growing regions of Sonoma County and in parts of Mendocino County where both surface water and groundwater supply can be scarce, especially during drought conditions like those experienced between 2012 and 2016.
Converting vineyards to cannabis crops is likely to increase water demands because outdoor-grown marijuana is estimated to require up to two times more water than grapes on a per acre basis.
This competition for water resources may be further intensified by implementation of two regulatory schemes that mandate water supply identification and management — licensing requirements within the Medical and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA) and the Sustainable Groundwater Management Act.
MAUCRSA was passed by the Legislature and signed by Governor Jerry Brown in June 2017. It is intended to create an integrated regulatory framework for state regulation of cannabis licensing and sale. It builds on AUMA by incorporating portions of the 2015 legislation adopted for medicinal cannabis. MAUCRSA requires applicants for a cannabis cultivation license to identify the water source for their operation as one of the following: (a) water provided by a retail water supplier; (b) surface water diverted pursuant to an existing water right (riparian right, a pre-1914 appropriative right, or an appropriative right issued by the State Water Resources Control Board), or a pending application for a Water Control Resource Board-issued appropriative right; or (c) groundwater extractions. Applicants who will rely on a surface water right must provide documentation of that right.
In the past, many cannabis farmers in the Emerald Triangle have relied upon unauthorized surface water diversions for irrigation. For these farmers, the water supply identification requirement poses a threat to the viability of their operations, which unfortunately may deter them from seeking a license. Non-filers may increase competition for water because unauthorized diversions reduce the overall availability of water so parties with lower priority water rights are at a greater risk of receiving little to none of their water requirements in a given year.
For cannabis cultivation in the limited number of areas on the North Coast where groundwater is the primary source of irrigation, increased competition for water may be further exacerbated by implementation of the Sustainable Groundwater Management Act. Beginning no later than 2022, certain groundwater basins will be subject to regulation under a groundwater sustainability plan that will identify specific actions required to ensure groundwater withdrawals are balanced with groundwater recharge and that long-term groundwater basin sustainability will be achieved. Depending upon the terms of the groundwater sustainability plan, the agency responsible for its implementation may have the power to, among other things, require measuring and reporting of groundwater extractions and limit or prohibit some extractions. This regulation may further reduce the available supply of water.
Conclusion
Legalization of recreational cannabis is adding another high-value crop to bolster North Coast agricultural land values, but with both increasing competition and regulation, water supply may become a crucial component of land deals and cannabis farming in the coming years.
Courtney A. Davis is an attorney at Allen Matkins. Her practice focuses on land use, water rights and renewable energy development. She counsels clients on project entitlements, planning and zoning, Coastal Act permitting and California Environmental Quality Act compliance. Her water practice covers water rights permitting, regulatory compliance and basin management planning. She can be reached at
cadavis@allenmatkins.com. A version of this article was originally published in The VIEW, a quarterly publication dedicated to real estate in the Bay Area.