Cap Rate for Special Valuations Determined
Setting the Capitalization Rate for Ag and Timberland
Qualified agricultural or open-space and timberland are taxed on productivity rather than market value. The aim is for landowners to realize property tax savings to encourage them to continue to produce vital agricultural products, such as livestock, cotton, timber, milk and corn.
The capitalization rate (cap rate) is one of many factors used by county appraisal districts (CADs) to value agricultural and timberlands. Other factors also affect the final productivity values, including local agricultural trends, income and expense information, property characteristics and the property’s agricultural use.
The Texas Property Tax Code, §§23.53 and 23.74, set out the methods for determining the cap rate used to calculate agricultural and timberland values. To determine productivity values, CADs calculate the typical property owner’s income generated by the land and subtract certain expenses such as property taxes and the cost of fencing and irrigation wells. The result is commonly known as net-to-land. CADs divide the average net-to-land for a five-year period by the annual cap rate to arrive at the land’s productivity value.
In 2012, CADs must use a cap rate of 10 percent for appraising agricultural or open-space land and a cap rate of 8.44 percent for appraising timberland.
Agriculture land cap rates
For agricultural or open-space land, Property Tax Code §23.53 requires CADs to use a cap rate that is the greater of 10 percent or the interest rate specified on the previous Dec. 31 by the Farm Credit Bank of Texas plus 2.5 percent. The bank's interest rate on Dec. 31, 2011, was 3.76 percent. With the 2.5 percent added, that rate became 6.26 percent. Since 10 percent is the greater rate, the 2012 cap rate is 10 percent. Over the past 20 years, the cap rate has ranged from a low of 10 percent to a high of 12 percent.
| Year | Percent |
|---|---|
| 1992 | 12.00 |
| 1993 | 11.00 |
| 1994 | 10.00 |
| 1995 | 10.75 |
| 1996 | 10.75 |
| 1997 | 10.35 |
| 1998 | 10.60 |
| 1999 | 10.00 |
| 2000 | 10.90 |
| 2001 | 10.85 |
| 2002 | 10.00 |
| 2003 | 10.00 |
| 2004 | 10.00 |
| 2005 | 10.00 |
| 2006 | 10.00 |
| 2007 | 10.13 |
| 2008 | 10.00 |
| 2009 | 10.00 |
| 2010 | 10.00 |
| 2011 | 10.00 |
| 2012 | 10.00 |
Timberland cap rates
CADs must use a 2012 timberland cap rate of 8.44 percent. The 2003 Regular Session of the Legislature approved a provision that imposed a new method for determining the cap rate used to calculate timberland productivity values as of Jan. 1, 2004. The changes resulted in less volatility in the cap rate and more stability in timber productivity values. The goal was to slowly move to a cap rate based on a five-year average.
After January 2004, and when the interest rate specified by the Farm Credit Bank of Texas on Dec. 31 reached 7.5 percent or more, the cap rate used to value timberland is an average of previous years’ cap rates and the Dec. 31 interest rate plus 2.5 percent.
The following chart demonstrates how the cap rates used to value timberland have been determined from 2003, the year before the new method was adopted by the Legislature, through 2012.
| Year | Interest Rate |
Interest Rate +2.5 percent |
Cap Rate Used | Determination |
|---|---|---|---|---|
| 2003 | 3.9 percent | 6.4 percent | 6.4 percent | Current interest rate plus 2.5 percent |
| 2004 | 3.69 percent | 6.19 percent | 6.4 percent | the greater of previous year's cap rate or the current interest rate plus 2.5 percent |
| 2005 | 4.67 percent | 7.17 percent | 7.17 percent | the greater of previous year's cap rate or the current interest rate plus 2.5 percent |
| 2006 | 6.55 percent | 9.05 percent | 9.05 percent | the greater of previous year's cap rate or the current interest rate plus 2.5 percent |
| 2007 | 7.63 percent | 10.13 percent | 10.13 percent | the greater of previous year's cap rate or the current interest rate plus 2.5 percent |
| 2008 | 7.09 percent | 9.59 percent | 9.86 percent | the average of the previous year's cap rate (10.13 percent) and the current interest rate plus 2.5 percent (9.59 percent) |
| 2009 | 3.74 percent | 6.24 percent | 8.74 percent | The average of the previous two years' cap rates (10.13 and 9.86 percent) and the current interest rate plus 2.5 percent (6.24 percent) |
| 2010 | 3.16 percent | 5.66 percent | 8.60 percent | The average of the previous three years' cap rates (10.13, 9.86, and 8.74 percent) and the current interest rate plus 2.5 percent (5.66 percent) |
| 2011 | 3.78 percent | 6.28 percent | 8.72 percent | The average of the previous four years' cap rates (10.13, 9.86, 8.74, and 8.60 percent) and the current interest rate plus 2.5 percent (6.28 percent) |
| 2012 | 3.76 percent | 6.26 percent | 8.44 percent | The average of the previous four years' cap rates (9.86, 8.74, 8.60, and 8.72 percent) and the current interest rate plus 2.5 percent (6.26 percent) |
The method for determining the cap rate used for valuing timberlands in future years is explained in detail in Chapter 4 of the Manual for the Appraisal of Timberlands, published by the Comptroller. This manual, adopted in May 2004, is available online at http://www.window.state.tx.us/taxinfo/proptax/timber04/index.html. The cap rates in the manual are examples and should not be used in determining timberland values. The Comptroller's Property Tax Assistance Division will continue to report annually the correct capitalization rate to be used.