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Ag & Timberland Cap Rates

2004 Capitalization Rates Remain the Same as 2003 Rates

History of Ag Land Cap Rates
Year Percent
1982 13.50
1983 14.00
1984 13.50
1985 14.00
1986 14.00
1987 13.25
1988 12.75
1989 12.45
1990 12.75
1991 12.45
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

In 2004, county appraisal districts (CADs) must use a capitalization rate of 10 percent for appraising agricultural or open-space land and a capitalization rate of 6.4 percent for appraising timberland. These “cap” rates are the same as the 2003 rates.

Tax Code Sections 23.53 and 23.74 set out the requirements for these cap rates used to determine productivity values of qualified land.

Open-space land

For agricultural or open-space land, Tax Code Section 23.53 requires CADs to use a cap rate that is the greater of either 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, 2003, was 3.69 percent. With the 2.5 percent added, that rate became 6.19 percent. Since 10 percent is the greater rate, the 2004 cap rate is 10 percent.

The chart to the right shows that the cap rate has ranged from a low of 10 percent to a high of 14 percent since 1982.

Qualified agricultural land is taxed on its productivity value. To determine that value, CADs first must calculate the typical property owner's income generated by the land after certain expenses—commonly known as net-to-land. The CADs then divide the average net-to-land for a 5-year period by the annual cap rate to arrive at the land's productivity value.

The cap rate is one of many factors used to appraise qualified agricultural land. Other factors also affect the final productivity values, including local agricultural trends, income and expense information, property characteristics and property’s agricultural use.

Timberland

CADs must use a 2004 timberland cap rate of 6.4 percent, the same as last year. Determining this year’s timberland cap rate followed new law passed by the 78th Texas Legislature and effective January 1, 2004.

New law. In the 2003 regular session, the Legislature passed Senate Bill 1646 to amend Tax Code Section 23.74 that will phase-in a new method for determining the cap rate used to calculate timberland productivity values. The changes will result in less volatility in the cap rate and more stability in timber productivity values. The goal is to slowly move to a cap rate based on a 5-year average.

The first phase will be in effect until the interest rate specified by the Farm Credit Bank of Texas on December 31 is 7.5 percent or greater. During this period, the cap rate will be the greater of the interest rate of the previous year plus 2.5 percent or the cap rate used in the preceding tax year.

2004 cap rate. Adding 2.5 percent to the interest rate on December 31, 2003 of 3.69 percent results in a rate of 6.19 percent. Since the cap rate of 6.4 percent used in 2003 is greater, the 2004 cap rate for timberland is 6.4 percent.

Future years. But what will happen in future tax years with the timberland cap rate? To illustrate the first phase of the new legislation, some examples are:

Year Interest Rate Interest Rate
+ 2.5 percent		 Cap Rate Used
2003 3.9 percent 6.4 percent 6.4 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 5.2 percent 7.7 percent 7.7 percent
(the greater of previous year's cap rate or the current interest rate plus 2.5 percent)
2006 6.1 percent 8.6 percent 8.6 percent
(the greater of previous year's cap rate or the current interest rate plus 2.5 percent)

The second phase of the new law will begin when the interest rate at the Farm Credit Bank of Texas is 7.5 percent or greater. In the year that happens, the cap rate will be the interest rate plus 2.5 percent.

The third phase will be the four years following the second phase. The first year after the interest rate is 7.5 percent or greater, the cap rate will be the average of the interest rate for the previous year, plus 2.5 percent, and the cap rate used the previous year.

To illustrate, assume the interest rate on December 31, 2006, reached 7.5 percent. The 2007 cap rate would be 10.0 percent (7.5 plus 2.5 percent) as discussed for the second phase. On December 31, 2007, the interest rate is 7.9 percent. The 2008 cap rate would be calculated as follows:

Year Interest Rate Interest Rate
+ 2.5 percent		 Cap Rate Used
2007 7.5 percent 10.0 percent 10.0 percent
2008 7.9 percent 10.4 percent 10.2 percent
(the average of the previous year's cap rate and the current interest rate plus 2.5 percent, 10.0 and 10.4, respectively)

In 2009, the calculation of the cap rate would be the average of the previous two years’ cap rates and the current interest rate plus 2.5 percent. Continuing on with this example, on December 31, 2008, the interest rate is 7.0 percent. The 2009 cap rate would be:

Year Interest Rate Interest Rate
+ 2.5 percent		 Cap Rate Used
2009 7.0 percent 9.5 percent 9.9 percent
(the average of the previous two years' cap rates and the current interest rate plus 2.5 percent, or 10.0, 10.2 and 9.5, respectively)

For 2010, another year will be added to the average. Assume that the interest rate on December 31, 2009, is 7.8 percent. The 2010 cap rate would be:

Year Interest Rate Interest Rate
+ 2.5 percent		 Cap Rate Used
2010 7.8 percent 10.3 percent 10.1 percent
(the average of the previous three years' cap rates and the current interest rate plus 2.5 percent, or 10.0, 10.2, 9.9 and 10.3, respectively)

The final phase will be all subsequent years when the cap rate will be the average of the cap rates for the previous four years and the current interest rate plus 2.5 percent. To finish the example, assume the interest rate on December 31, 2010, is 8.5 percent and on December 31, 2011, is 8.0 percent. The calculations would be:

Year Interest Rate Interest Rate
+ 2.5 percent		 Cap Rate Used
2011 8.5 percent 11.0 percent 10.24 percent
(the average of the previous four years' cap rates and the current interest rate plus 2.5 percent, or 10.0, 10.2, 9.9, 10.1 and 11.0, respectively)
2012 8.0 percent 10.5 percent 10.19 percent
(the average of 10.2, 9.9, 10.1, 10.24 and 10.5)

Please remember these are examples. Do not use the cap rate examples to determine future timberland productivity values. The Comptroller’s Property Tax Division will continue to report annually the correct capitalization rate to be used.