To: Honorable Mayor and Members of Town Council
From: Mark Marlowe, Castle Rock Water Director
Matt Benak, Water Resources Manager
Sheri Scott, Water Resources Program Analyst
Title
Resolution Approving the Water Rights Brokerage Agreement with Stillwater Resources & Investments, Inc. [Box Elder Well Field]
Body
________________________________________________________________________________
Executive Summary
The purpose of this memorandum is to request Town Council approval of a resolution (see Attachment A) approving the Water Rights Brokerage Agreement with Stillwater Resources & Investments, Inc. (Stillwater).
Through various public meetings in 2012, Town Council considered the risks, benefits, and costs of proposals submitted to help the Town import renewable water, including a hybrid option that coupled the WISE project with the Box Elder project. In October 2012, Town Council directed staff to further pursue this hybrid alternate water supply solution for between 3,000 acre-feet and 4,000 acre-feet by negotiating proposed agreements with WISE and Stillwater. On February 19, 2013, the Town passed a resolution to enter into a two-year brokerage agreement with Stillwater to help the Town implement the Box Elder Creek proposal.
Stillwater has been the Town’s water broker since that time. Since 2013, Stillwater has helped the Town purchase or put under contract 1,805 acre-feet of water. All of the water has been purchased within the planned budget. Total brokerage fees to date have been $796,250 and total investments in water rights have been approximately $11 million. The Town is still seeking at least another 700 to 800 acre-feet of water rights. As such, we still have the need for a water broker. Stillwater is a qualified water rights broker experienced in the acquisition of water rights for municipal entities. Stillwater has been developing similar scale water supplies for clients since 1987. In 2015, the Town negotiated a First Amendment to the Water Rights Brokerage Agreement extending the term by two additional years, to 2017.
At this time, Staff feels it is necessary to develop a new Agreement to meet the Town’s current water brokerage needs for the Alternative Source of Supply Project. The key terms of the new agreement are outlined below:
1. The term of the agreement is for two years;
2. The brokerage agreement only applies to water leases for water rights located north of the City of Denver;
3. The Town does not have to pay Stillwater for water rights acquired on Plum Creek or Cherry Creek; and
4. Addition of Alternative Transfer Mechanisms (ATM) to minimize permanent buy-and-dry effects on agricultural property.
Staff recommends that Town Council approve the Water Rights Brokerage Agreement with Stillwater Resources and Investments, Inc. to allow Stillwater to continue to act as the Town’s agent for the purposes of identifying and recommending water rights essential for the hybrid solution to the Town’s Alternative Source of Water Supply Project.
History of Past Town Council, Boards & Commissions, or Other Discussions
On January 25, 2017, the Castle Rock Water Commission voted unanimously to recommend approval of the Water Rights Brokerage Agreement to Town Council.
Discussion
After an extensive Request for Proposal (RFP) process, the Town selected the proposal advanced by Stillwater and Box Elder Creek Properties, LLC (Box Elder) including potential water rights and property acquisition on the Box Elder Farm for further evaluation and implementation. As part of this project, Town staff entered into a two-year agreement with Stillwater in February 2013 and amended the agreement in February 2015 to extend the agreement for another two years. Stillwater has been providing assistance to Town staff, professional consultants, and outside and in-house Counsel in the identification of targeted water rights purchases for the Box Elder project. To date, the Town has acquired 770 acre-feet of renewable water rights with the purchase of the Rothe property under the agreement and is in the due diligence period for additional 1,035 acre-feet of water rights in the Lost Creek Basin. Additionally, the Town closed into escrow on the Box Elder Well Field on November 30, 2016. To help the Town evaluate the different recommended water rights, Stillwater will continue to prepare a written summary of proposed acquisition terms for any prospective water supplies. Stillwater will also help, on the Town’s behalf, negotiate the purchase price and terms for the remaining 700 acre-feet of prospective water rights acceptable to the Town. Town Council will be advised of recommended targeted purchases prior to presentation of formal purchase contracts.
Stillwater shall be compensated for the services on a commission basis when the Town acquires interest in a prospective acquisition based on one of the following:
1. Purchase - The Town shall pay Stillwater, at the time of closing, a Brokerage Fee of 5% of the purchase price as evidenced by the closing statements.
2. Lease - The Town shall pay Stillwater, at the time of lease execution, a Brokerage Fee of 5% of the aggregate rents for the first 10 years of the lease payments.
3. Option - The Town shall pay Stillwater a 5% Brokerage Fee of each non-refundable option payment, contemporaneously with such option payment.
a. Any Brokerage Fees paid on option payments that are credited towards the total purchase price shall also be credited towards the total Brokerage Fee.
b. For any option term longer than one year from the end of the “Inspection Period”, if the Town does not terminate the option prior to the end of the “Inspection Period” or close on its acquisition, the Town shall pay Stillwater a Brokerage Fee as calculated above in 1 or 2.
4. Other Acquisition - Alternative Transfer Mechanisms (ATM) were included in the amendment to the agreement to minimize permanent buy-and-dry effects on agricultural property. ATMs were identified in Section 6.4 of the 2015 Colorado Water Plan as an option for permanent agricultural dry-up. These acquisitions will be negotiated separately with Stillwater.
5. Brokerage fees will only apply to water rights located north of Denver.
6. Stillwater will not be paid commission for water rights purchased by the Town on Plum Creek or Cherry Creek unless a separate agreement is made.
Staff finds that these financial parameters are within the range Stillwater has operated on other projects including a recent project with a public entity.
The term of the Agreement is for two years unless otherwise extended by mutual agreement. The Town shall have the right to terminate this Agreement at any time for any reason with 60 days prior written notice to Stillwater. Stillwater shall be entitled to Brokerage Fees on any of the Town’s water acquisitions provided:
• The Town placed the water acquisition under contract during the term of this Agreement; or
• Within 180 days after this Agreement expires or is terminated for any reason other than default of Stillwater, the water acquisition is one on which Stillwater submitted a Term Sheet or a written description of the prospective water supply during the term of this Agreement, and such prospective water supply was approved by the Town in writing.
Town staff did not believe it was fair to Castle Rock Water customers to be required to pay a brokerage fee to Stillwater Resources for any water rights acquisitions that Stillwater Resources did not provide assistance such as water rights that could become available along Plum Creek or Cherry Creek. Therefore, this new agreement limits brokerage fees to be paid only for water acquired north of Denver. Any additional WISE supplies acquired are also not subject to this agreement.
Budget Impact
The 2017 Alternative Source of Supply budget estimates an additional 700 acre-feet of water rights purchases budgeted for in 2018 through 2020 for approximately $8 million. The 5% brokerage fee for Stillwater would account for $400,000 of the budgeted amount for water rights acquisition.
Staff Recommendation
Staff recommends that Town Council approve the Water Rights Brokerage Agreement with Stillwater to allow Stillwater to continue to act as the Town’s agent for the purposes of identifying and recommending water rights essential for the hybrid solution to the Town’s Alternative Source of Water Supply Project.
Proposed Motion
“I move to approve the Resolution as introduced by title.”
Attachments
Attachment A: Resolution
Exhibit 1: Brokerage Agreement