(A) The annual
"Current Agricultural Use Value Of Land Table Or Tables" to be prescribed by
the tax commissioner shall be calculated and prepared by the capitalization of
the typical net income before real property and income taxes from agricultural
products assuming typical management, cropping and land use patterns and yields
for a given type of soil, as provided in this rule.
(B) The use of the income approach to develop
annual "Current Agricultural Use Value of Land Table Or Tables" that are
accurate, reliable and practical requires that careful attention be given to
the many principles and techniques involved. It is essential that the typical
or potential net income be based on the land capability under normal or typical
management practices, yields, cropping or land use patterns, prices, costs and
conditions in the area rather than the management ability or decisions of an
individual owner or operator. To avoid erratic fluctuations of value due to
spot economic, market or climatic conditions, five year moving averages of
price costs, cropping patterns and other factors shall be used where practical.
In addition, the effect of changes in agricultural technology and economic
relationships must constantly be revaluated. The agricultural advisory
committee shall function to keep the commissioner informed of such
technological and economic changes.
(C) The most critical determination is the
capitalization rate. This rate shall be determined by comparison of net income,
calculated as described in this rule, to known prices or market value
appraisals of farms that have been sold or appraised under the conditions
prescribed by the definition of "Current Agricultural Use Value of Land" in
rule
5703-25-30 of the
Administrative Code. The synthesis of the capitalization rate by other than
market data shall be by a method that gives weight to the factors present in
the market for such property.
(D)
Information shall be obtained from such agencies as cooperative extension
service, college of agriculture, the Ohio state university; Ohio agricultural
research and development center; national resources conservation services,
U.S.D.A.; forest service, U.S.D.A.; national agricultural statistical service,
U.S.D.A.; department of agriculture of Ohio; department of natural resources of
Ohio, federal land bank and other reliable sources.
(E) In the absence of crop yield information
for any soil mapping unit present in Ohio, the tax commissioner shall, in
consultation with the department of natural resources of Ohio, determine the
appropriate crop yield and soil productivity information for that mapping unit.
(F) Land capability classes:
Consideration shall be given to the land capability class of a soil as
determined by the soil conservation service based on the soils suitability to
grow various crops and potential hazards considering slope, drainage, erosion
and other factors. The typical land capability class for a soil management
group shall be determined and this class shall serve as a base for calculation
of values when the soils in a group fall in other than typical land capability
class. Usually the typical class for which the base value for a soil management
group is calculated will be the class with the least hazard for the group.
The major land capability classes are as follows:
(1) Land adapted for crops:
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Class I No special hazards, very good land from every
standpoint.
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Class II Some hazards which require good conservation
practices.
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Class III Several intensive hazards which require intensive
conservation practices.
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Class IV Very severe hazards, needs very careful handling and
management.
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(2) Land for permanent
vegetation only:
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Class V Very frequent flooding or permanently wet.
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Class VI Moderate hazards to be overcome for pasture use.
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Class VII Severe limitations for grazing or forestry, very
steep.
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Class VIII Not suited for cultivation, pasture or forests.
Wildlife and recreation is the best use.
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(G) Cropping
pattern by land capability classes: The cropping pattern or proportion of
different crops grown will vary with both the soil region and the land
capability class. A higher percentage of row crops will be grown on the better
soils with land capability class ratings such as I or II. Land in land
capability class V through VIII shall be considered as devoted entirely to
either pasture or woodland. Annually the commissioner shall calculate the five
year moving average of each crop harvested in each of the extension areas of
Ohio. A determination shall be made of the percentage of each rotation acre
devoted to each crop for land capability classes I through IV. Such
determination shall be made separately for:
(1) Soil regions A, B, I, II, III, IV, V, and
VIII.
(2) Soil regions VI and VII.
(3) Organic or muck soils.
(H) Crop prices: Five
year moving weighted average crop prices for the major field crops are to be
calculated by totaling the production and value of each crop, as reported by
the statistical reporting service or other reliable source, for the five years
preceding the year in which the table is issued and calculating the average
price per unit after consideration of price differentials in various parts of
the state.
(I) Management: A
percentage to be determined annually shall be deducted from the five year
moving weighted average crop prices to provide for typical management costs
incurred by the land owner.
(J)
Non land production costs: Information on typical non-land production costs
shall be obtained from the best available sources. Where the available
information is for a base year other than the current year such prices shall be
adjusted to a five year moving average basis by the use of the U.S.D.A. index
of prices paid for production items, interest, taxes, and farm wage rules
reported each June in U.S.D.A. agricultural prices, or other reliable sources.
In developing these costs consideration shall be given to extra expense
incurred by the use of more seed, fertilizer, etc., on the more productive
soils.
(K) Estimation of net
income for a rotation acre of a given soil management group: The steps to be
used in estimating net income shall be as follows:
(1) The midpoint of the range of minimum
yields for each major field crop is determined for each soil management group.
(2) The gross income per acre for
a given crop is determined by multiplying the midpoint of yield by the five
year weighted average price per unit reduced by the percentage for management
expense as determined under paragraph (I) of this rule.
(3) The five year average non-land crop
expense for the appropriate yield level is deducted from gross income to
determine net income per care.
(4)
The typical land capability class is estimated for each soil management group
based on information from the soil conservation service and the cropping
pattern assigned from paragraph (G) of this rule. This multiplied by the net
return per acre gives the contribution from the crop to the rotation acre.
(5) The total of the net return
from each crop in the rotation is the total net return to be capitalized into
land value.
(L)
Adjustment for land capability class other than typical for soil management
group: Since the soils in a given soil management group occur in different land
capability classes a method must be provided for adjusting from the typical to
the non-typical situation. The following is an example of the adjustment
factors to be used to adjust from the land capability class for which the net
return or value per acre was actually calculated to another class by
multiplying such return or value.
Base Land Capability Class
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Adjust To I II III IV
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I 1.001.261.793.10
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II .79 1.001.422.46
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III .55 .70 1.001.73
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IV .32 .41 .58 1.00
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V .29 .36 .52 .89
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VI .17 .22 .31 .53
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VII .06 .07 .10 .18
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VIII .03 .04 .05 .09
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Use of these factors will allow the estimation of net income
per acre through the range of land capability classes for soils in a soil
management group.
(M)
Capitalization rate:
(1) For the purpose of
estimating the capitalization rate to be used in determining the base value of
agricultural land the use of the mortgage-equity method is prescribed. In
making the rate determination the five year running average of each of the
following items will be used:
(a) Typical
term of years, per cent of mortgage and return on farm mortgages as reported by
federal land bank and other sources.
(b) Return on investors equity - This shall
be extracted from market data.
(c)
Depreciation or appreciation expected in property (agricultural land) over the
next five years. The moving average of the preceding five years of percentage
increases or decreases in U.S.D.A. farm real estate index for Ohio for March of
each year over the previous year shall be considered as the estimate of this
term. In the consideration of the weight to be given to this item the effect of
speculation should be removed so that the appreciation that accrues in land
values over a five-year period from improvement in agricultural technology and
practices only is reflected.
(2) After these terms have been determined
the over all capitalization rate shall be calculated by reference to compound
interest tables.
To the capitalization rate adjusted for land only shall be
added the effective real property tax rate. This is to be determined by
multiplying the five year average state tax rate as shown in department of
taxation records by thirty-five per cent and expressed as a percentage. This
rate shall be further reduced to reflect the average effect of the reductions
required by section 319.301 of the Revised Code. The
total of the two rates is the agricultural land capitalization rate. This
should represent the rate of return a prudent investor would expect on an
average or typical Ohio farm considering only agricultural factors.
(3) Since capitalization rates
will vary with the land capability class due to the difference of risk and
operating costs market studies shall be designed to determine such differential
in rates.
(4) The per acre value
of each soil category will be determined by dividing the net return per acre by
the appropriate rate. Values in classes I through IV shall be the values for
cropland. If land in these classes is used for other purposes such as forestry
or pasture the cost of converting from present use to crop use shall be
deducted. Values in classes V through VII shall be the value for pasture and
woodland.