A New Path to Water

For decades, proving a 100-year water supply has been a prerequisite for building new subdivisions in the Phoenix metro area. In late 2024, Arizona put a new option on the table, the Alternative Designation of Assured Water Supply (ADAWS), and if you read our last ‘Phoenix CRE Brief’, you saw that this month, the first designation under these rules was approved. Here's what it means for development in the region.

The Problem ADAWS Was Built to Solve

Arizona law requires that before homes in a subdivision can be sold in an Active Management Area (like Phoenix or Pinal), the developer must show that water will be physically available for 100 years. Historically, this was proven through groundwater modeling, running a computer simulation to show that wells wouldn't run dry or drop below set depth limits over a century.

That process hit a wall:

• In 2019, the Arizona Department of Water Resources (ADWR) released a model for the Pinal AMA showing the aquifer couldn't support existing commitments for 100 years.

• In June 2023, ADWR released a model for the Phoenix AMA projecting a 4.86 million acre-foot shortfall over 100 years.

Under the existing rules, if the model shows a shortfall, the state cannot find that groundwater is physically available. This effectively froze new groundwater-dependent subdivisions in parts of the Valley that weren't already served by a designated water provider.

What ADAWS Does

ADAWS provides an alternative method for municipal water providers (cities, towns, and private water companies) to obtain a 100-year Designation of Assured Water Supply without relying on the standard groundwater model.

Instead of modeling, it uses a formula-based approach:

1. Start with a baseline. Take the provider's actual groundwater use in 2023, plus the projected demand of any already-issued but unbuilt subdivision water certificates in their service area.

2. Multiply by 100. That becomes the "grandfathered" 100-year groundwater volume, deemed physically available by rule.

3. Apply the 25% offset. For every acre-foot of new, non-groundwater supply (surface water, treated effluent, etc.) added to the designation, the grandfathered groundwater volume is reduced by 25% of that new supply, multiplied by 100.

The trade-off is straightforward: the state stops requiring the provider to pass a modeling test it can no longer pass, and in exchange, the provider commits to bringing in renewable water and gradually reducing groundwater dependence.

Key Requirements at a Glance

How It Compares to the Other Pathways

Arizona now has three ways to satisfy the assured water supply requirement:

ADAWS doesn't replace the other two options. It fills a gap for providers in areas where the standard groundwater model no longer supports new designations.

What Happens After Approval

Once a provider holds an ADAWS designation, individual developers within that service area no longer need their own Certificate of Assured Water Supply. Instead, they obtain a written commitment of service from the designated provider, which is sufficient to get the state real estate approvals needed to sell lots.

The provider's obligations are ongoing:

• Annual reports to ADWR on water use, demand, and well depths

• Mandatory 15-year review - the provider must re-demonstrate compliance with all assured water supply criteria using whatever standards are in effect at that time

• Modifications for any changes to the water portfolio, with the grandfathered volume declining over time as groundwater is actually used

What happens if a provider fails the review?

If ADWR finds during the 15-year review (or any subsequent review) that the provider no longer meets the assured water supply criteria, for example, if their total supply has fallen below the 100-year requirement for current and committed demand, or if they failed to build required infrastructure on schedule, the Director has the authority to modify or revoke the designation after an administrative hearing.

The downstream effects matter for development:

• For the provider: A revocation means they can no longer issue written commitments of service to developers for new subdivisions within their service area. They would need to cure the deficiency and reapply, or developers would need to find an alternative path (such as obtaining individual Certificates, if feasible).

• For new development: Without a valid designation backing the provider, the Arizona Department of Real Estate cannot issue the Public Reports that developers need to sell lots. New subdivision sales in that service area would effectively stop until the water supply issue is resolved.

• For existing residents and committed development: If a provider’s designation terminates or is revoked, they do not lose the legal authority or obligation to serve their existing customers. Existing residents and certain committed developments are classified as "designation uses." This term is legally defined as:

  • All water uses served by the municipal provider on the date the designation lapses or terminates.

  • All recorded lots within the service area that were not yet being served but received final plat approval on or before that date.

The 15-year cap (shorter than the terms typical of traditional designations) is designed specifically to function as a regulatory checkpoint, giving ADWR the ability to course-correct if a provider isn't following through on its commitments to transition toward renewable supplies.

The First Approval: Arizona Water Company

On March 4, 2026, Governor Hobbs announced the first ADAWS designation, awarded to Arizona Water Company in the Pinal AMA. Key facts:

• It was the first new 100-year designation in the Pinal AMA in over 20 years

• The designation covers projected demand for over 80,000 new homes

• The approval combined grandfathered groundwater for existing customers with renewable supplies for new growth

• It demonstrated that a private utility (regulated by the Arizona Corporation Commission) can meet the framework's requirements

What's Still Unresolved

The ADAWS rules are in effect, but they face legal and practical questions that haven't been settled yet.

Active litigation

A lawsuit, Montenegro v. ADWR, brought by the Arizona House Speaker and the Home Builders Association of Central Arizona, challenges the 25% substitution requirement on several grounds:

• Statutory authority: Plaintiffs argue the 25% offset goes beyond what the law authorizes. They contend the statute only requires a provider to show water for its "proposed use" (new demand), not to offset historical groundwater use.

• The math: Plaintiffs frame the 25% offset as effectively a 33.3% surcharge on new development, since a provider needing 75 acre-feet for new homes must acquire 100 acre-feet total.

• Rulemaking process: The suit alleges ADWR didn't provide adequate cost data to support the 25% figure during the rulemaking process, as required by the Administrative Procedure Act.

• Constitutional questions: Some opponents have raised the possibility that the offset is an unconstitutional exaction, a government-imposed condition that lacks a sufficient connection to the impact of the development it's imposed on.

Long-term water supply

The CAGRD's obligation to replenish groundwater on behalf of its members is projected to triple by 2044 as large ADAWS providers enroll. Whether the district can secure enough renewable water on a shrinking Colorado River to meet those obligations is an open question for long-term planning.

The Bottom Line for Development

ADAWS reopens a path for large-scale residential development in parts of the Phoenix and Pinal AMAs where growth had effectively stalled due to groundwater modeling results. It shifts the water supply burden from individual developers to regional water providers, and it requires those providers to bring renewable water to the table.

The framework is functional, the Arizona Water Company approval proves that. But the legal challenges to its core mechanism (the 25% offset) and the long-term question of whether enough renewable water exists to fulfill the commitments being made are factors that anyone involved in development planning should be tracking.

This summary is based on the legal and regulatory analysis of the ADAWS framework as of March 2026. It is informational only and does not constitute legal advice.

If you want to walk through how this applies to a specific property or submarket, just hit the reply button.

Thanks,

John & Ramey