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Cap Rate for Special Valuations

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 appraisal districts 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.

Tax Code Sections 23.53 and 23.74 prescribe the methods for determining the cap rate used to calculate agricultural and timberland values. To determine productivity values, appraisal districts 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. Appraisal districts 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 2014, appraisal districts must use a cap rate of 10 percent for appraising agricultural or open-space land and a cap rate of 8 percent for appraising timberland.

Agriculture land cap rates

For agricultural or open-space land, Tax Code Section 23.53 requires appraisal districts 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, 2013, was 3.7 percent. With the 2.5 percent added, that rate became 6.2 percent. Since 10 percent is the greater rate, the 2014 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 10.75 percent.

Year Percent
1995 10.75
1996 10.75
1997 10.35
1998 10.6
1999 10
2000 10.9
2001 10.85
2002 10
2003 10
2004 10
2005 10
2006 10
2007 10.13
2008 10
2009 10
2010 10
2011 10
2012 10
2013 10
2014 10

Timberland cap rates

Appraisal districts must use a 2014 timberland cap rate of 8 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 2014.

Year Interest Interest Rate
+2.5 percent
Cap Rate Used Determination
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 8.6 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 8.6 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 year’s cap rates (9.86, 8.74, 8.6 and 8.72 percent) and the current interest rate plus 2.5 percent (6.26 percent)
2013 3.1 percent 5.6 percent 8.02 percent The average of the previous four year’s cap rates (8.74, 8.6, 8.72 and 8.44 percent) and the current interest rate plus 2.5 percent (5.6 percent)
2014 3.7 percent 6.2 percent 8 percent The average of the previous four year’s cap rates (8.6, 8.72, 8.44 and 8.02 percent) and the current interest rate plus 2.5 percent (6.2 percent)

The method for determining the cap rate used for valuing timberlands is explained in detail in Chapter 4 of the Manual for the Appraisal of Timberlands, published by the Comptroller's office. This manual was adopted in May 2004. 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 rate to be used.

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