In 2011, Harvard University and a small private company began buying up rights to the West’s most important water source: the Colorado River.
Within a year, they owned nearly 13,000 acres near the small Riverside County farming community of Blythe.
Farmers in Blythe and the surrounding Palo Verde Valley are supposed to keep getting water even after nearly everyone else in the Southwestern United States runs dry. That’s thanks to a complex and bizarre system of water rights that California, six other states and Mexico use to share the Colorado.
Harvard’s partner in the deal was Los Angeles-based Renewable Resources Group, a quiet but increasingly important developer of water, energy and farming projects. Renewable has found ways to speculate on and make lots of money from land deals that involve water.
In the past several years, Renewable has helped sell 33,000 acres of land to California’s most powerful water agency, the Metropolitan Water District of Southern California.
In 2015, Metropolitan bought the land around Blythe and the water that comes with it for $255 million. Tax filings suggest that was twice what Harvard and Renewable had paid for the land just a few years earlier.
Within months, Renewable was wrapping up another deal with Metropolitan. This time the company was working on behalf of a Swiss insurance company.
By spring 2016, Metropolitan had agreed to pay $175 million for 20,000 acres of farmland south of Sacramento. Again, Metropolitan paid a premium for the land – and again, Renewable was reaping the rewards. A 5-year-old appraisal showed the land was worth about half what Metropolitan paid.
Both deals set off alarm bells across the state, largely because of Metropolitan’s involvement. Fear and hate of the Los Angeles-based water district runs deep in state water politics.
Metropolitan, which delivers water used by 19 million Southern Californians, defends both recent deals as necessary to help secure water supplies for the state’s most populous areas.
But tax filings, a previously confidential real estate appraisal and memos from closed-door Metropolitan board meetings raise fresh questions about both deals. They suggest Metropolitan may have overpaid by millions of dollars and, in turn, unnecessarily increased the cost of water for customers across the region, including in San Diego.
Renewable’s role in both deals also largely escaped notice.
Now, Renewable may be working on another deal that could rearrange the distribution of water in California forever.
Operating under two different names, the company now controls thousands of acres of land in another place with special ties to the Colorado: the Imperial Valley.
Remarkably, farmers there can use more of the Colorado than anyone else. All told, the Imperial Valley, with less than 200,000 people, has rights to as much Colorado River water as Arizona and Nevada combined.
With very little fanfare, Renewable is now one of the largest private landowners in the Imperial Valley. For now, the company says it wants the land for farming, but its recent history suggests it eventually hopes to make money from the valley’s water rights.
Cole and Ari
Cole Frates met Ari Swiller playing basketball in Los Angeles around 1999. Both men were just barely 30-somethings but with impressive resumes.
Swiller had worked on both of Bill Clinton’s presidential campaigns and on Capitol Hill. At that time, Swiller was out West handling politics and fundraising for billionaire investor Ron Burkle, a Clinton associate.
Frates was a developer in the obscure but lucrative international water industry.
In 1999, Enron bought Frates’ company, Samda, which did water projects in the United States, Argentina, Cyprus and Saudi Arabia. After about a month, he transferred to Enron’s water-related spinoff, Azurix.
Frates spent about a year and a half there before he left.
Within a few years, Frates and Swiller decided to go into business together. They called their new company Renewable Resources Group.
Frates and Swiller declined to be interviewed for this story. Their personal history is based on depositions the men later gave in a lawsuit and brief resumes they submitted while working with public agencies.
They’ve worked together under many names across California. ReNuable, ReNu, Homer LLC and Western Development and Storage are just a few.
Even for those who do business with them, their various company names can be confusing. Dan Bartel is the assistant general manager of a Bakersfield water agency that signed a deal with Homer.
“Homer aka Renu aka ???” he wrote in an email to Voice of San Diego when asked about his agency’s relationship with Renewable.
In 2011, Frates’ name began appearing on deeds to buy land in Riverside’s Palo Verde Valley.
On paper, Frates was working with a company known as Verbena. The company was buying land from the investment arm of the Church of Jesus Christ of Latter-day Saints, which is a major landowner across the West.
Few people realized Verbena had a big-name silent partner. Harvard’s investment arm was the majority owner of Verbena, according to nonprofit tax filings the university made.
Between 2011 and 2012, Verbena became one of the largest landowners in the Palo Verde Valley.
While farming there is profitable, the company had its eye on another prize: the water.
Frates and Swiller began shopping around an audacious plan.
The Plan
Water had been leaving the Palo Verde Valley since 2005, after the Palo Verde Irrigation District and Metropolitan came up with a way to idle farmland in the valley. The practice, known as fallowing, is controversial. Farmers get paid to stop irrigating their fields. Then unused water is sent somewhere else that needs it, Southern California cities in this case.
The program depended on cooperation from farmers. For the most part, that wasn’t a problem – Metropolitan paid them millions. But Metropolitan knew there was a more dependable, easier and cheaper way to get the water: Just buy the land.
It knew this because in 2001 it paid $41 million to buy 16,000 acres of Palo Verde land from San Diego Gas & Electric. Metropolitan then leased the land to farmers, with one big catch: They had to fallow their fields whenever Metropolitan asked, since they were now on its land.
Since Metropolitan generally has rights to whatever Colorado River water Palo Verde doesn’t use, a bucket of water unused in Palo Verde is a bucket of water that can be used by Metropolitan.
Metropolitan had even tried to buy the land that Renewable eventually bought from the Mormon church.
Renewable entered the mix with a wildly different idea. With nearly 13,000 acres in hand, Frates and Swiller began trying to create their own sort of fallowing program. That’s according to a confidential memo that Metropolitan staff later prepared, obtained by Voice of San Diego through a public records request.
Renewable tried several times to transfer water from its land near Blythe to the Central Valley, a giant swath of farmland over 300 miles away.
To be clear, the Central Valley doesn’t touch the Colorado River – at all – but farmers everywhere need water. The Central Valley’s two main water sources are rivers running down from the Sierra Nevada mountains and water pumped up from underground aquifers. Thanks to droughts, stricter environmental regulations and the farmers’ own overzealous pumping, both sources are now less reliable and more expensive.
Renewable saw a business opportunity. What if these farmers could buy water from the Colorado?
According to Metropolitan, Renewable offered to sell Palo Verde water to several water agencies in the Central Valley, including the Fresno-based Westlands Water District.
If Metropolitan is the state’s most powerful water agency, Westlands is a close runner-up. Westlands is probably the only Central Valley agency with a realistic chance of pulling off such a spectacularly complicated deal.
Renewable would fallow its Palo Verde land. That’s where the problems began. Normally, according to the Colorado River rights system, that water would then automatically become Metropolitan’s for free.
Renewable still wanted Metropolitan to take the water, but with a twist. Metropolitan would agree to give up water it gets from the Sierra and allow that water to stay in the Central Valley.
Metropolitan had to agree to all of this, since it’s the only major water agency with physical and legal access to water from both the Colorado River and the Sierra.
At first this may sound like robbing Peter to pay Paul, but Central Valley farmers would suddenly have more water than they had before, while Metropolitan wouldn’t have any less. What would be in it for Renewable and Harvard? Since Colorado River water is cheaper than Sierra water, Renewable could sell the water in the Central Valley at a markup.
Renewable looked at the West’s arcane system of water rights, and saw a chance to make money from its absurdity.
But there was a problem with the plan.
Metropolitan said no.
Plan B
After Metropolitan passed on Renewable’s water trading idea, Renewable and Harvard offered to sell off all the Palo Verde land.
Riverside County property tax records indicate Renewable and Harvard likely paid the Mormon church between $10,000 and $11,000 an acre for most of the land. The Mormon church’s investment arm, Harvard and Renewable declined to comment on the terms of the deal.
Four years later, Metropolitan bought the land for $20,000 an acre.
Metropolitan justified the purchase, which was unanimously approved by its board, by citing other people’s interest in some sort of Palo Verde deal, including from Westlands and also Saudi interest in buying land that comes with water rights.
Metropolitan also figured that paying farmers to fallow land would end up costing $15,000 to $21,000 an acre over the next few decades. If Harvard and Renewable hadn’t sold the land, they could have still collected payments from Metropolitan for fallowing the land. So Metropolitan bet that even by paying a premium for the land at the time, it would save money in the future.
“We expect to probably be in Palo Verde Valley for generations to come,” said Metropolitan’s general manager, Jeffrey Kightlinger.
Soon after the Palo Verde deal closed, Renewable and Metropolitan were back negotiating over another major chunk of important California real estate.
The Delta Islands
In January 2011, tragedy struck a Renewable site. An experienced crop duster pilot, Steve Allen, was flying over Webb Tract, one of the strange inland islands formed amid the convergence of rivers in the Sacramento-San Joaquin River Delta.
Since the mid-1980s, investors have wanted to take Webb Tract and another nearby island known as Bacon Island and turn them into reservoirs. Basically that involves flooding the islands and using them to store water.
This idea kept running into obstacles.
In 2007, the islands’ owners, an American subsidiary of Switzerland-based Zurich Insurance Group, turned to Frates for help.
Zurich hired Renewable-affiliated Western Development and Storage to look at new ways to make money from the land. Their agreement made clear the more money Zurich made on any deal, the more Renewable would make.
One idea was to turn the land into a wind farm. So, they hired another company to put up a 197-foot tower to measure wind currents.
The tower didn’t have any warning signs on it, making it nearly invisible for pilots. The tower broke the wing off Allen’s plane.
It crashed, and he died.
The tragedy led to changes in state law. Now such towers must be marked.
The crash also prompted a lawsuit against Renewable and others by Allen’s family. They eventually settled for $6.7 million.
In the course of the lawsuit, Renewable turned over documents and made comments that shed light on the company’s inner workings and, more specifically, on how much it thought the land in the delta was worth.
One such document has been long sought by critics of Metropolitan’s deal in the delta: an appraisal of the land.
Zurich asked real estate experts at San Diego-based Cushman & Wakefield to appraise the delta land, some 20,000 acres in all.
In December 2010, Cushman & Wakefield said the land was worth $93 million.
If the reservoir project ever happened, it could be worth $750 million, according to the appraisal. That number was hard to believe, even to people who stood to make money from the project.
In 2014, Roger Dreyer, a Sacramento lawyer who represented the Allen family, deposed Swiller, Frates and his sister, Lloys Frates, who also worked at the company.
Dreyer asked Swiller whether the land could really ever be worth $750 million.
“It’s higher than what I think, but I wouldn’t tell Delta Wetlands that,” Swiller said, referring to Zurich’s subsidiary, Delta Wetlands Properties.
Zurich also had an attorney in the room.
“OK,” Dreyer said. “Well, I think you just did.”
“Sorry,” Swiller said.
Nevertheless, Renewable tried to sell the project to Metropolitan for hundreds of millions of dollars, Kightlinger said. Metropolitan never had much interest in the island-flooding idea, though.
Renewable also explored other ways to make money off the land for Zurich.
With the help of Doug Boxer – former Sen. Barbara Boxer’s son – they looked at whether they could capture carbon dioxide on the islands.
They, of course, looked at wind energy, but decided to stop work on that after Allen’s death.
“The enormous tragedy had a chilling effect on both the morale inside of my shop, and I’m sure – and just the whole thing around it was a terrible thing,” Frates told Dreyer in the deposition. “And so I – it was – I mean, it’s just something that I don’t think anybody wanted to do anymore.”
But, it turns out, Gov. Jerry Brown’s plan to build a pair of tunnels to move water from Northern California to Southern California ran through part of two islands Zurich owned.
Metropolitan was doing everything it could to make sure those tunnels were built.
Now, Metropolitan was interested in Zurich’s land.
When Metropolitan paid $175 million to buy four delta islands and part of a fifth island in spring 2016, Central Californians freaked out. People living in and around the delta said Metropolitan was working on a “water grab.” The Sacramento Bee said the agency had just “parachuted into enemy territory.”
Metropolitan also caught flak from its southern flank.
Officials at the San Diego County Water Authority asked to see an appraisal of the land in 2016. For years, San Diego water officials have been fighting with Metropolitan and accusing it of wantonly spending money. Metropolitan said it didn’t have one.
About a year later, Kightlinger said publicly he’d seen a 4-year-old appraisal of the land. When San Diego officials filed a public records request to get a copy of that document, Metropolitan again said it didn’t have one.
When Voice of San Diego sent Metropolitan the appraisal that Renewable turned over in the plane crash case, Kightlinger said he wasn’t sure if that was the one he’d seen.
Still, he defended the deal. Metropolitan had examined the sales price of other delta land, though it’s not clear if that land was truly comparable to the islands.
It’s also apparently rare for large chunks of land in the delta to become available.
“There was nothing quite like it in the delta,” Kightlinger said.
Plus, he said, buying the land spared the state what could have been a lengthy dispute with Zurich when the state or Metropolitan went to build the tunnels.
But now the tunnel project is on hold. Despite a big push by Metropolitan and Brown last year, Gov. Gavin Newsom is reconfiguring the project, a delay that could last who knows how long.
Metropolitan recently agreed to sell part of one of the islands to the state. Between the money it borrowed to buy the land and the property taxes it now pays, Metropolitan is losing about $7 million a year.
On to Imperial
Over the past several years, two companies – Alphabet Farms and Imperial Farming – have been buying up farmland in the Imperial Valley.
Renewable controls both.
Collectively, the companies own about 16,000 acres of land in the valley, according to Imperial County property records.
Alphabet Farms alone is the second-largest property taxpayer in the county. As of June 2018, the company owned land with an assessed value of about $180 million. (The name Alphabet Farms comes from Renewable’s way of naming the various ranches it owns – Ranch A, Ranch B, Ranch C and so on.)
The Imperial Valley covers a half-million acres of Imperial County and has a right to 2.6 million acre feet of Colorado River water. That’s enough water for nearly 8 million Southern California homes.
Speculators have been going after Imperial’s water for years. If enough farmers fallowed their land, there’d be a lot of water that could be sold elsewhere in the state.
In the 1990s, billionaire investors known as the Bass Brothers bought up 40,000 acres in the valley. They apparently thought they could fallow land and sell the unused water to the San Diego County Water Authority.
Except water rights in Imperial don’t work quite like they do in Palo Verde and some other irrigation districts in the West. The Imperial Irrigation District holds the valley’s rights in trust, meaning the water can’t be moved anywhere outside of the district without its approval. That makes it the most powerful political player in the county.
That doesn’t mean arm-twisting can’t work, though. After the Bass Brothers sparked San Diego’s interest, water officials here worked for years to strike a deal to get water out of Imperial. San Diego eventually agreed to pay the Imperial Irrigation District. For years, IID has taken that money and paid its farmers to use less water, which frees up water now used in San Diego.
Renewable’s intentions are far from clear.
“In the Imperial Valley farming community, it’s no secret that we are Alphabet Farms and Imperial Farming,” Renewable spokesman Tom Eisenhauer said in an email. “Working with a number of local growers, we’ve produced crops spanning the range of what Imperial Valley agriculture offers, from alfalfa and Bermuda, to lettuce and onions, to lemons and dates.”
It’s true that Renewable is farming in Imperial and elsewhere in the state. It owns both Sun World, a major grape grower, and Woodspur Farms, the country’s largest grower of organic dates.
Yet Frates and Swiller’s history of water-related deals suggest they may be trying to do something with the land beyond using it for farming. Renewable’s chief operating officer, Nicole Neeman Brady, is now a member of the Colorado River Board of California, an eight-member board that represents the state in discussions and negotiations about management of the river. Eisenhauer said she does that in her personal capacity.
Almost everyone in the West is betting that when push comes to shove, the key to making sure cities have enough water is to pay farmers to fallow their land or farm with less water. There is also money to be made selling water from one farm to another.
A snowy winter recently spared the Colorado River and the millions of people who depend on it a first-ever water shortage. But climate change is going to make the already overused river increasingly undependable. So, farmers and other companies with water rights could soon be making a lot of money.
That’s what Kightlinger assumes Renewable is up to in Imperial, some sort of deal like the one it tried to pull off in the Central Valley with Palo Verde water.
“I think they are still just trying that same game,” Kightlinger said.
A Westlands spokeswoman said she was “not aware of any ongoing discussions.” Renewable didn’t comment on its future plans.
If the game doesn’t go Renewable’s way in Imperial, Metropolitan doesn’t seem interested in buying the company’s land this time.
Renewable also may not own enough of the valley yet to make a huge difference even if it could fallow its land and sell off the water. Kightlinger said someone would need 50,000 acres or more to free up enough water to make a deal worth it for Metropolitan. It’s possible Renewable may have options on more land in Imperial, because such options don’t have to be disclosed the way land ownership is.
So far, farmers in Imperial do not seem to be panicking about the company in their midst.
Part of that, though, may be because they don’t realize how much Renewable has already done.