My View: What Governor Hobbs’ water policy really means for Arizona development

To judge by some recent headlines, you might think Arizona – and developers in the state – are in the midst of a ruinous water crisis. 

“Arizona Faces an Existential Dilemma: Import Water or End its Housing Boom,” said Time magazine. “New Arizona development projects paused due to dwindling water supply,” said another from Fox10

For the record, Arizona is not out of water. A construction moratorium has not been issued by Gov. Hobbs. 

The real headline would not grab the attention desired by many major outlets, but Arizona has a long tradition of effective water management and conservation, and the governor’s latest policy move is much more limited in scope and effect. Still, there are significant implications, and many open questions. Here’s what business leaders in the state and those elsewhere looking to do business in Arizona need to know. 

What Gov. Hobbs’ policy entails 

On June 1, Gov. Hobbs directed the Arizona Department of Water Resources to “pause approvals of new assured water supply determinations that rely on pumping groundwater” in the Phoenix active management area, or AMA. This was largely in response to projections showing a 4% deficit in the region’s groundwater supply over the next 100 years.

The practical effect is that developers will need to identify an alternative water source to groundwater (municipal or utility assured water supplies, CAP water, or an alternative source) to obtain a new certificate of assured water supply for a new subdivision in the Phoenix AMA.

Again, this limited action was taken over a 4% deficit projected over the next century. Whether the action is excessive or justified is a policy question, but many agree that the message was widely misunderstood, creating risk for Arizona’s economy. For that reason, it is important to clear up the following common misconceptions:

  • This pause will only impact proposed developments within the Phoenix AMA – not the rest of the state. 
  • Further narrowing the policy’s applicability, large portions of the land within the Phoenix AMA are served by a supplier with a designation of assured water supply, and many new subdivisions may be added to such designation upon approval of the applicable municipality or utility. Subdivisions within these water service areas do not need to obtain a certificate of assured water supply if the water provider offers a written commitment to supply service. These areas include the vast majority of cities within the Phoenix metro area, like Avondale, Chandler, El Mirage, Glendale, Goodyear, Mesa, Peoria, Phoenix, Scottsdale, Surprise and Tempe.  
  • The new policy will not affect certificates of assured water supply already issued for the approximately 80,000 lots currently under development. With that said, it is important to note developers must not make “material changes” to the existing approved plat, as defined by the state’s administrative code.    

Although the assured water supply certificate requirement is applied most often to residential uses, the law does not expressly limit this requirement to housing. While there are some limited exceptions to the requirement to obtain these certificates for mining and industrial uses, the requirement applies to all subdivided lands that fall under the definition of “subdivision” set out in Arizona law.

So what’s next?

Contrary to splashy headlines, there’s ample reason to be optimistic. Ongoing advancements in technology, conservation and water augmentation are on track to more than compensate for the 4% deficit cited as reason for the new policy. Gov. Hobbs herself recently announced a $40 million investment of American Rescue Plan Act funds for water conservation, infrastructure and sustainable groundwater management, and last year, Gov. Ducey signed landmark legislation appropriating $1.2 billion for the Water Infrastructure Finance Authority of Arizona, and empowered that state agency to, among other things, buy new sources of water and build new infrastructure to import water into Arizona.

There do remain several open questions, including, will the state provide a measurable goal related to the 4% projected deficit that, if reached, would rescind the current pause? Not to mention, what was once a largely ministerial diligence item in most Arizona real estate transactions will now become more complex. 

The hope is that the state’s water resources department will administer this new policy in a thoughtful and expedient manner that will allow development in the affected areas, while continuing Arizona’s historic commitment to water conservation. After all, from the creation of the Central Arizona Project by Sen. Carl Hayden and the enactment of the 1980 Groundwater Management Act, to Gov. Ducey’s allocation of over $1 billion toward future supplies, Arizona has actively managed its water supply and leads the nation in comprehensive water management and conservation. Why would we stop now?

Jason Wood is Phoenix office managing partner at Quarles, acting as a strategic legal and business advisor to a range of institutional and private sector clients nationwide; Eric Wanner is a partner at Quarles, whose practice focuses on commercial real estate transactions.

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Jason Wood

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Eric Wanner

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