2008 Ag and Timber Cap Rates
County Appraisal Districts (CADs) must use a 2008 capitalization (cap) rate for agricultural productivity valuation of 10 percent and a 2008 cap rate for timber productivity valuation of 9.86 percent.
Background
Qualified agricultural or open-space land and timberland are taxed based on their productivity value instead of their market value. The cap rate is one of many factors used to appraise qualified agricultural and timber lands. Other factors also affect the final productivity values, including local agricultural trends, income and expense information, property characteristics, and the property’s agricultural use. To determine productivity values, the CAD calculates the typical property owner’s income generated by the land and subtracts certain expenses. This result is commonly known as net-to-land. CAD’s divide the average net-to-land for a 5-year period by the annual cap rate to arrive at the land’s productivity value. A higher rate will result in lower values, everything else being equal.
Cap Rate Calculations
For agricultural or open-space land, Section 23.53 of the Tax Code requires CADs to use a cap rate that is the greater of 10 percent or the interest rate specified on the previous December 31 by the Farm Credit Bank of Texas plus 2.5 percent. The bank’s interest rate on December 31, 2007, was 7.09 percent. With the 2.5 percent added, that rate became 9.59 percent. Since 10 percent is the greater rate, the 2008 cap rate is 10 percent.
CADs must use a 2008 timberland cap rate of 9.86 percent, the average of the current year’s interest rate plus 2.5 percent (9.59 percent) and the prior year’s cap rate of 10.13 percent as required by Section 23.74 of the Tax Code. Under this law, one year will be added to the average each year until a five-year average is attained. A five year average will be used as the timberland cap rate from that point forward.