Methods & Procedures

Determining Use-Value for Agricultural and Horticultural Land

The use value of agricultural land is defined as the net income one could expect to receive from crops (e.g., corn, alfalfa, pasture, and wheat) grown on the land, with the use value of horticultural land defined as the net income one could expect to receive from tree fruit (e.g., apple, peach, and pear). These special assessments only apply to what is produced on the land and not such things as livestock, buildings, and/or other improvements.

The purpose of the Methods and Procedures Manual is to explain the underlying assumptions behind the Virginia Land Use-Value Assessment Program and the processes used in calculating use-value estimates for agricultural and horticultural land in the cities and counties participating in the program. This Manual provides step-by-step explanations of the methods used in developing the final use-value estimates.

Income Approach Overview

The Income Approach to land use-value assessment estimates begins with the creation of a composite farm for each jurisdiction. A composite farm is representative of the agriculture within the jurisdiction based on most recent USDA Census. Next, net returns for each crop within the composite farm is determined through the creation of enterprise budgets. A capitalization rate based on property tax and interest rates is then applied to the net return of the composite farm. Once a per-acre net-return and capitalization rate for a jurisdiction has been estimated, calculating its value is straightforward. The basic formula is:

Use-value = Return/Capitalization rate

For example, in TY2020 Rockingham County’s without-risk capitalization rate was 0.0593 and its composite farm Estimated Net Return ($/acre) was $63.87. The county’s initial use-value estimate for without-risk cropland harvested was:

Use value (Unadjusted) = $63.87/0.0593 = $1,076.61 (TY2020)

Since land classes and soil types differ among jurisdictions, it is necessary to calculate a soil index factor. The soil index is a weighted average of the Natural Resources Conservation Services land Classes I thru IV in a jurisdiction.

Rockingham County’s soil index factor is calculated to be 0.99. This value means that a typical acre of land is between Class III (1.00) and Class IV (0.80). Rockingham’s unadjusted use-value estimate of $1,076.61 is divided by 0.99 resulting in a use-value estimate of $1,093.07, and rounded to the nearest $10. Therefore, Rockingham County’s Class III land use-value assessment estimate using the income approach for TY2020 was $1,090/acre.

Rental Rate Approach Overview

Once rental rates for a jurisdiction are received from the National Agricultural Statistics Survey, the rental rate value is divided by the jurisdiction’s capitalization rate made up by the property tax rate and interest rate. No land class adjustment for soil type is made in the rental rate approach.

Use-value = Rental Rate/Capitalization rate

For example, for TY2020, Rockingham County’s capitalization rate was 0.0593. Using the 2017 rental rate of $71 reported by NASS for the county (available data lags up to 3 years behind the given tax year) the following calculation is made:

Use value = $71/0.0593 = $1,197 (TY2020)

Accordingly, Rockingham County’s land use-value assessment estimate for TY2020 using the rental rate approach was $1,197/acre.