Virginia s Use-value Assessment Program The Use-value Estimation Process

Transcription

1 Virginia s Use-value Assessment Program The Use-value Estimation Process Gordon Groover, Extension Economist and Lex Bruce, Senior Research Associate Department of Agricultural & Applied Economics Virginia Tech (540) groover@vt.edu (540) lbruce@vt.edu Website: October 10, 2018

2 Outline Brief History Why Use-value Assessment? Approaches to estimating land values Income approach Rental rate approach Discussion

3 TY2019: Counties/Cities* with use-value assessment ordinances (Agricultural & Horticultural, Forest, and Open Space) Agricultural & Horticultural, Forest, and Open Space Agricultural & Horticultural and Forest Agricultural & Horticultural Open Space Open Space and Agricultural & Horticultural No use-value assessment ordinance Agricultural & Forestal Districts Only Ag and Hort: 87 counties/cities Forest: 74 counties/cities Open Space: 56 counties/cities Lee Buchanan Dickenson Tazewell Wise Russell Smyth Scott Washington Bland Wythe Grayson Alleghany Rockbridge Fluvanna Nelson Hanover Goochland Amherst Buckingham Henrico Craig Botetourt Powhatan New Cumberland Kent Appomattox Chesterfield Charles Giles Roanoke Bedford Amelia City Prince Montgomery Campbell Edward Prince Nottoway George Pulaski Charlotte Dinwiddie Surry Floyd Franklin Lunenburg Sussex Carroll Patrick Henry Danville Highland Augusta Bath Shenan -doah Page Rockingham Fredrick Pittsylvania Halifax Mecklenburg Clark Loudoun Warren Fauquier Brunswick Fairfax Prince William Rappahannock Essex King William King & Culpeper Stafford Queen Madison Greene King George Richmond Orange Spotsylvania Westmoreland Albemarle Northumberland Louisa Caroline Greensville Arlington Alexandria Isle of Wight Lancaster Middlesex Mathews Gloucester Accomack Northampton James City York Hampton Newport News Norfolk Suffolk Virginia Beach Chesapeake * Counties/Cities are identified from annual use-value reports and may differ from actual implementation. Contact government officials in each county/city for the current use-value implementation. Not all participating cities are identified on this map.

4 Use-Value Assessment in Virginia Virginia use-value taxation legislation was passed in 1972, effective for the tax year Code of Virginia, Title through ), enacted in 1971, authorized use-value taxation with the stated purposes of: Encouraging the preservation and proper use of such real estate source of agricultural, horticultural, and forest products and open spaces within the reach of concentrations of population; Conserving natural resources, prevent erosion, safe water supplies; (continued )

5 Use-Value Assessment in Virginia (continued ) Preserving scenic natural beauty and open spaces; Promoting proper land-use planning and the orderly development Promoting a balanced economy and ameliorating pressures that force conversion of such real estate.preservation for agricultural, horticultural, forestal, or open space purposes. State Land Evaluation and Advisory Council (SLEAC) was created in 1973 with the mandate to estimate the use value of eligible land for each jurisdiction participating in the use-value taxation program.

6 Virginia s Use-Value Assessment Program Virginia law allows for the preferential taxation of agricultural, horticultural, forest, and open space land Eligible land in any of these categories can be assessed at the land s value in use (usevalue) as opposed to the land s market value

7 Eligible Land? Agricultural and horticultural defined by VA Department of Agriculture and Consumer Services (VDACS) Forest defined by Department of Forestry (DOF) Open space defined by Department Conservation and Recreation (DCR) See State Land Evaluation and Advisory Council (SLEAC) manual for details

8 Value in Use? Agricultural Property - The Standard on Mass Appraisal of Real Property International Association of Assessing Officers (IAAO 2012). to use the income approach for If adequate sales data are available and agricultural property is to be appraised at market value, the sales comparison approach would be preferred. However, agricultural land Land rents. nearly every state or province provides for use-value assessment (and usually appraisal), which significantly understates the market value for agricultural property, so the sales comparison approach is usually not applicable. Because of this limitation, it is imperative to obtain good income data and to use the income approach for agricultural land. Land rents are often available, sometimes permitting the development and application of overall capitalization rates. This method, of course, also entails the estimation of And the Code of VA allows for income and normal land rents for unrented parcels. When agricultural parcels include improvements, rental rate the cost approaches or sales comparison models that provide separate building values may be used to determine their value.

9 Value in use, How? Identify components of farmland value? Market Value of 1.0 acre of farmland $7,000 minus Proximity to amenities $2,000 minus Accessibility/distance to the city center $1,000 minus Cost of conversion or development to non Ag use $2,000 minus Growth premium population increase $1,000 leaves Capitalized annual stream of net income (rents) from farming $1,000 Capozza, Dennis R. and Robert W. Helsley The Fundamentals of Land Prices and Urban Growth. Journal of Urban Economics. 26 (3):

10 Procedures for Estimating Agricultural and Horticultural Values in Use

11 Two Approaches 1. Net income Capitalized (Income Approach) Original model developed by Marshal (VT), Fraher, (TAX), Seward (VDACS), Poole (VT Grad Student) ~ Rental rates Capitalized (Rental Rate Approach) Implemented in 2010 by Groover and Bruce

12 Crop Budgets Income Approach Ag Census Composite Farm Capitalization Rate Soil Index Use-value Estimates Federal Payments Income approach for each County Task: How to create an annual stream of net income that will be capitalized? How? Build on secondary/published data Use Net Returns = Income - Costs How? Define a representative farm (composite farm) based on current Ag Census for each county Create an enterprise budget for each crop to yield Net Returns (NR) Identify crop-based federal payments Define Capitalization Rate Apply soil index Final Estimates

13 Income Approach Baseline Data - Ag Census Ag Census Crop Budgets Composite Farm Capitalization Rate Soil Index Federal Payments Conducted and published by National Agricultural Statistics Service (USDA/NASS) Published every 5 years Current Ag Census 2012 (released in 2014) Use the following for each county Number of farms reported Individual crops grown e.g., corn, wheat, pasture Acres reported for each crop grown Use-value Estimates

14 Income Approach Composite Farm Crop Budgets Ag Census Composite Farm Capitalization Rate Soil Index Use-value Estimates Federal Payments Define - Composite Farm (CF) A.K.A. Average Farm For each reported crop: Divide acres by number of farms (Acres Farms) If the values is >0.50 ac, included in the CF If 0.50 ac, excluded from CF Statewide there are 16 crops that are included in at least one county reported farms => more land owners Eight CF crops, e.g., corn+silage, cotton, hay+haylage, pasture, peanuts, soybeans, watermelons and wheat.

15 Composite Farm - Income Approach Ag Census 2012 AgCensus Based on 335 farms Crop Budgets Composite Farm Capitalization Rate Soil Index Federal Payments Crop Reported Acres Alfalfa 0 Barley (D) Corn 10,889 Cotton 35,711 Hay 1,143 Pasture 4,876 Peanuts 7,024 Potatoes 0 Pumpkins 0 Snap Beans (D) Soybeans 29,968 Sweet Corn 8 Tobacco 0 Tomatoes 2 Watermelons 214 Wheat 12,329 Double-cropped (-) 12,434 Total Cropland Harvested 89,730 Composite Farm Acres Example for Corn = 10,889 ac / 335 farms 3 = 33 acres of corn in the Composite Farm (CF) (-) Use-value Estimates

16 Income Approach Crop Budgets Crop Budgets Ag Census Composite Farm Capitalization Rate Soil Index Use-value Estimates Federal Payments Created for all CF crops Based on VCE enterprise budget format Yields and Prices -> NASS Seeding and lime rates > VCE recommendation N,P, & K inputs are based on yielddriven nutrient removal rates (International Plant Nutrition Institute) AgFrist -> short-term interest

17 Income Approach Crop Budgets Crop Budgets Ag Census Composite Farm Capitalization Rate Soil Index Use-value Estimates Federal Payments Pesticides -> Pest Management Guidelines (PMG) Application costs > custom rates Machinery usage and costs -> A. Society of Ag and Biological Engineers equations Fuel prices -> U.S. Dept of Energy Crop insurance -> USDA-RMA Labor hours function of machinery hours Labor rate -> NASS Note: Budgeted Net Returns lag 2 years, e.g., Tax Year 2019 reflects 2017 data

18 Income Approach Ag Census Composite Farm Example Budget Corn Grain no-till TY2019 Corn: Yield = bu/ac * Price = $3.80/bu = $ Net Crop Insurance = $42.04 Total Income = $ Crop Budgets Capitalization Rate Soil Index Use-value Estimates Federal Payments Net Returns = Income - Costs NR = $618 - $606 = $12/ac Pre-Harvest Costs: N Lb Price = $0.41/lbs = $60.56/ac Total (All Pre-Harvest) = $391/ac Harvest Costs: Labor, fuel & oil, drying, hauling = $110/ac Fixed Costs: Machinery and Overhead = $105/ac Total Costs = $606/ac

19 Crop Budgets Income Approach Ag Census Composite Farm Federal Payments Olympic Averaging The Net Return for each CF crop requires 7 - years of crop budgets 7-year Olympic Averaging drops the highest and lowest values and then straight averages the remaining 5 values Corn Grain example Capitalization Rate Soil Index Use-value Estimates Corn Crop Budget TY2013 $ TY2014 $ TY2015 $73.93 TY2016 $0.00 TY2017 $72.65 TY2018 $41.27 TY2019 $11.92 Olympic AVG $81.48 Highest Lowest

20 Crop Budgets Income Approach Ag Census Composite Farm Capitalization Rate Soil Index Use-value Estimates Federal Payments Federal Payments USDA-FSA provides data for program crops by county receives payments for corn, cotton, peanuts, soybeans, and wheat. Annual payments = Payment/crop acreage For example in TY2019, received $915,112 in federal payments for corn. TY2018 $525,805/10,889 ac = $48/ac TY2019 $915,112/10,889 ac = $84/ac

21 Income Approach Olympic Averaging Ag Census Corn Grain example TY2013-TY2019 Crop Budgets Composite Farm Capitalization Rate Soil Index Use-value Estimates Federal Payments Corn Federal Payment TY2013 $19.09 TY2014 $17.50 TY2015 $27.62 TY2016 $1.24 TY2017 $ TY2018 $48.29 TY2019 $84.02 Olympic AVG $39.31 Lowest Highest Corn Budget $ $ $73.93 $0.00 $72.65 $41.27 $11.92 $81.48 Corn Net Return for TY2019 Oly AVG Fed Pay + Oly AVG Budget $ $81.48 = $ Highest Lowest

22 Income Approach Ag Census Composite Farm Final Net Returns County TY2019 Composite Farm weighted NR by crop acreage Crop Estimated Net Return CF acres Weight (e.g. corn 33/269 = 0.12) Final$ Crop Budgets Capitalization Rate Soil Index Federal Payments Corn $ Cotton $ Hay $0.01 Pasture $0.01 Peanuts $ Soybeans $ Watermelons $0.01 Wheat $59.72 Final Net Return (per acre) $ $ $ $ $ $ $ $ $ Use-value Estimates Reflects double-cropped wheat (37)

23 Crop Budgets Income Approach Ag Census Composite Farm Capitalization Rate Soil Index Federal Payments Capitalization Rate Why use Capitalization Rate? Cap Rate = Net Return Value Farmland Farmland Value = NR Cap Rate $100 per year 10% = $1,000 Cap Rate = Interest Rate + Property Tax Federal Land Bank long term interest rate - AgFirst (7 year average) Effective Tax Rates for all counties - VA Department of Taxation (7 year average) Use-value Estimates

24 Crop Budgets Income Approach Ag Census Composite Farm Capitalization Rate Soil Index Use-value Estimates Federal Payments TY2019 Cap Rate Components Interest Rate statewide (7yr Avg) Property Tax (7yr Avg) Total without risk Crop loss due to Flooding 5% Use Value TY2019 Total With risk Use Value = Net Returns Cap Rate Use Value without risk = $ Use Value without risk = $2, Use Value with risk = $ Use Value with risk = $2,730.93

25 Income Approach Ag Census Composite Farm Adjustments for Soil Capabilities USDA Land Classes for Ag use Land Capability Classes Productivity Index Class I - Excellent cropland 1.50 Crop Budgets Federal Payments Class II - Good cropland 1.35 Class III - Average cropland 1.00 Capitalization Rate Soil Index Use-value Estimates Class IV - Below average cropland strip cropping only, hay 0.80 Class V Good Pasture, hay 0.60 Class VI Pasture 0.50 Class VII Very limiting - Pasture only 0.30 Class VIII Not suitable to agriculture steep or wet 0.10

26 Crop Budgets Income Approach Ag Census Composite Farm Capitalization Rate Soil Index Federal Payments Indexing for Soil Productivity Land Class Reported Acreage Productivity Index Weighted Acreage 1 11, , , , , , , , , Total 106, ,133 Use-value Estimates Soil Index Factor 106, ,133 = 1.239

27 Crop Budgets Income Approach Ag Census Composite Farm Capitalization Rate Soil Index Federal Payments Adjusting to Class III land Why? Data reflects average soil productivity for each county Values are adjusted to reflect Class III productivity Use Value TY2019 Use Value = Use Value Soil index Without risk = $2, Without Risk Class III = $2,314 With risk $2, With Risk Class III = $2, Use-value Estimates

28 Final Estimates Cropland TY2019 Weighted Cropland AVG Pastureland Weighted Pasture land AVG Weighted Ag. Land AVG I II III IV I-IV V VI VII V-VII I-VII VIII w/out Risk 3,470 3,120 2,310 1,850 2,890 1,390 1, ,030 2, w/ Risk 3,310 2,980 2,200 1,760 2,760 1,320 1, , Note: Final estimated values are rounded to the nearest $10 The Class III w/out risk estimate of $2,314 is reported as $2,310

29 Rental Rate Approach TY2019 Starting 2009 NASS published rental rate data annually* for Cropland Irrigated cropland Pasture land County rental rates for TY2019 (NASS) Cropland = $79/acre Irrigated cropland = $100/acre Pastureland = $27.50/acre *Sometimes biennially based on NASS funding

30 Rental Rate Use Value TY2019 Rental Rate Cap Rate = Value Cropland $ = $1,303 Irrigated Cropland $ = $1,650 Pasture $ = $454 Rental Rate Estimates are published annually not averaged over time

31 Income Approach and Rental Rate Approach: Compared Income Approach (w/out risk) Rental Rate Approach TY2019 Cropland (I-IV AVG) $2,890 Cropland $1,303 Pastureland (V-VII AVG) $1,030 Pastureland $454

32 Rental Rates TY2019 Table 1: 2017 cropland and pastureland values based on NASS 1 capitalized rental rates Jurisdictions Counties Capitalization Rate Cropland Irrigated cropland Rental Rate $/acre Value $/acre Rental Rate $/acre Value $/acre Pastureland Rental Rate $/acre Value $/acre Chesapeake , sep 318 Greensville , sep 342 Isle of Wight , sep , , Suffolk , sep 318 sep = Southeastern District Pasture

33 Chesapeake Use-value Estimates: Type III Land (w/out risk) Selected Jurisdiction Comparison (Tax Years 2010 to 2019) $/acre 2,800 2,600 2,400 2,200 2,000 1,800 1,600 1,400 1,200 1, Greensville Isle of Wight Suffolk Tax Year

34 $30,000 Real Net Farm Income Virginia $/farm (Index 2009=100) $25,000 $20,000 $15,000 $10,000 $5,000 $- Source: USDA/ERS Farms and Land in Farms and USDA/ERS Farm Income and Wealth Statistics

35 Thanks! & Discussion & Questions? usevalue.agecon.vt.edu