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Just a few thoughts or notes from our SDAAO members
The construction on the new ethanol plant in Spink County was started in 2006. The plant has the capacity to process up to 18 million bushels of corn a year and produce 50 million gallons of ethanol. The plant has a by product of distillers grain sold locally and on the west coast. The first corn was delivered in February 2007 and production started in April. Spink County hired Mike Amo to do the appraisal. It was a blessing to have someone with his experience here to help us. I learned a great deal just listening to the questions Mike asked the construction manager. The plant was assessed as approximately 66% complete for 2007. The ethanol plant applied for and was granted a TIFF. This was the first one for Spink County. It was far less painful than I thought it would be. I have discovered the Tiff is more work for the auditor than it is for me. Kim Markley, Director
I recently read the minutes of a South Dakota Association of Assessing Officers district meeting. This district is being proactive and had invited area state legislators to their meeting. For this involvement in their government, they deserve congratulations. The discussion focused on the assessment process and changes that might take place. Part of that discussion mentioned capitalization rates for agricultural land, specifically a stated 4% rate common to ag sales. Reading these minutes prompted me to wonder about cap rates for different types of ag sales in Butte County and how they compare to this 4% figure as well as the “discount” rate found in last year’s proposed legislation. I analyzed seven ag sales of varying land types from the last 18 months to discover their cap rates. I know that this is not an exhaustive analysis of the market, but was not intending anything more than a simple indication. My analysis involved a division of sale price by an estimate of typical net operating income. Three sales of ranch properties located in the northern area of Butte County have cap rates that vary from 2.2% to 3%. The northern area of the county is very rural, hard grass, ranch country. Two sales of unimproved grazing properties located in the more aesthetically desirable location of southwestern Butte County have cap rates of 0.2% and 0.7%. This corner of the county has scattered pine trees, views of the Black Hills, and a good location between Belle Fourche and Spearfish. An irrigated farm property with heavier soils located east of Newell has a cap rate of 3.8%. Another irrigated farm with much better soils and a superior location near Belle Fourche has a cap rate of 1.9%. A capitalization rate is defined as “Any rate used to convert an estimate of future income to an estimate of market value; the ratio of net operating income to market value.”[1] The capitalization rate that I solved for is defined as an overall rate, “A capitalization rate that blends all requirements of discount, recapture, and effective tax rates for both land and improvements; used to convert annual net operating income into an indicated overall property value.”[2] The overall cap rate is similar to a gross rent multiplier used most commonly in the valuation of residential properties. A gross rent multiplier is defined as, “The ratio between sale price and potential gross income or effective gross income.”[3] The gross rent multiplier has its basis in gross monthly rent, as opposed to annual net operating income, but both express the ratio between income and sale price. My simple analysis of these few sales has indicated that cap rates will vary with location. I have expressed my belief that there is very little or no direct relationship between agricultural income and agricultural property value. Other market influences, usually aesthetic characteristics, are primary motivators in the agricultural real estate market. These characteristics are usually tied to location. There might be a direct relationship between potential rental income and property value in the residential market. A home located in an inferior neighborhood will have a low property value and a low potential rent. Another home located in a superior location, maybe along a lake, will have a higher property value, as well as a corresponding higher potential rent. The same motivations that cause a buyer to pay more for a home in a more desirable location may cause a tenant to pay more in rent for the same home. The gross rent multipliers of these properties might be consistent from one location to the other, maybe. This sort of consistency does not appear in cap rates for ag land. Aesthetic characteristics such as locations near rivers or creeks, trees, or hunting opportunities are major influences on the market value of agricultural properties. They do not have the same, if any, impact on agricultural rental rates. Assuming equal carrying capacities, a cow will graze a flat, treeless, and remote property exactly the same as she will another with beautiful hills, pine trees and a bubbling brook. In the same manner, assuming equal soils and moisture, corn will grow exactly the same on a property devoid of pheasants and white-tailed deer as it will on another with abundant hunting opportunities. Because of this, the typical tenant will not pay more in rent to graze or farm a prettier place than he would a more aesthetically undesirable one. It is incorrect to say that the lowest cap rates are attributable to development properties rather than true ag properties. The sales that I have analyzed are all utilized for either grazing or farming. Their purchasers might not be the stereotypical cowboy or farmer, but that can be said of a variety of all types of ag properties, regardless of price paid. Almost all of the ag properties sold and purchased in Butte County are used for an ag purpose, regardless of the buyer’s residence or income source. Appraisers and assessors need to stop thinking that the value of ag properties is primarily influenced by income. An overall cap rate simply expresses the ratio between income and sale price or value. It does not identify a direct financial effect on property value from income. The state legislature will be considering a change in the property assessment of ag land in South Dakota. One of their considerations is a selection of a cap rate, or “adjustment factor.” There are and will be arguments about exactly what this rate should be. Don’t think that a proper market value assessment of ag land is dependent upon this factor. A single cap rate cannot be chosen that will result in all ag property across the state being assessed at market value. This is impossible. Market characteristics not represented by income are influencing agricultural property values. The most valuable ag property has cap rates that are much less than 6.16%, or even 4%. For the future, expect ag property to be assessed less than market value, regardless of the cap rate in statute, if the legislature chooses such a method of assessment. |
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