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Just a few
thoughts or notes from our SDAAO members
BISMARCK — Bottineau, N.D., merchants upset over the first
property appraisal review in 17 years tendered their businesses’
keys to the city in protest.
More than 50 businesses in the north central North Dakota
town took part in the so-called “key party” last month to
dispute what they believe are unfair commercial property
assessments, said Karen Larson, a protest leader and owner of an
office supply and gift shop in town.
“It didn’t work, but it was worth the effort,” Larson said
of the symbolic protest. “The City Council just shut their
ears.”
Mayor Douglas Marsden said commercial property in Bottineau
had not been appraised since 1992, because the city lacked an
appraiser.
“After nearly 20 years, the City Council felt it was time,”
Marsden said.
Cedar Rapids, Iowa-based Vanguard Appraisals Inc. was paid
$55,000 to perform the property valuations, he said.
About 200 properties were reviewed, and the city’s
commercial valuation grew from $24.8 million to $33.4 million,
city auditor Penny Nostdahl said.
Marcy Dickerson, the North Dakota Tax Department’s
supervisor of assessments, said several North Dakota communities
have not had an assessment in more than a decade.
“I don’t doubt one bit that Bottineau needed one,” Dickerson
said.
“Taxes don’t have to go up because of a valuation, but in
the real world, they usually do,” she said. “They are based on
the value of the property and not based on the income of the
property owner.”
‘Always a squabble’
The Bottineau assessments, some of which added more than 60
percent to the value of commercial buildings in the city,
spurred near standing-room-only crowds at recent City Council
meetings.
“Everybody’s interested when it comes to taxes, and there is
always a squabble,” said Marsden, who owns a tire and auto
business in the town of 2,300, about 20 miles from the Canadian
border.
Marsden said his building was assessed at a 38 percent
increase, which will mean an additional $600 or so a year in
property taxes.
“I don’t think it’s unfair,” the mayor said. “My valuation
is under what I’d sell it for, and I’m sure the rest of them are
like that, too.”
Alvin Hall, who owns a service station in town, was among
those who plopped down keys in the City Council chambers. He
said his valuation increased from $71,000 to about $117,000.
“That’s a 61 percent ouch,” said Hall, who intends to appeal
the increase to the county at its Board of Equalization meeting
in June.
“We’re going to keep appealing as far as we can go and see
what happens,” Hall said.
Hall figures taxes on his property will increase more than
$1,000 annually and could kill a pending sale of his business.
He said he’s asking $150,000 for the gas station and car wash,
which he’s run for 45 years.
“That’s $150,000 for all the equipment, my new pumps, the
franchise, car wash, the whole ball of wax,” Hall said.
Assessments are done on buildings and land, but not
inventory.
Hall said he and other commercial property owners don’t mind
paying additional taxes.
“Right now, they’re taxing everybody too much,” he said. “If
they just raised the valuations 10 percent or something,
everybody would have complained but everybody would have lived
with it.”
Uniform and fair
Bob Kocer, president and chief executive officer of Vanguard
Appraisals, said the valuations are uniform and fair. He did the
assessment in Bottineau in February.
“Our job was to establish fair market value, based on sales
data, cost information and income information in that
community,”he said. “It’s definitely not an exact science.”
Larson, one of the key party protest leaders, questioned the
thoroughness of the property assessment.
“We felt most of our buildings were assessed without being
assessed,” she said. “He walked in and walked out.”
Larson said her building was assessed at 32 percent more,
which will add about $2,000 to her annual tax bill. She said the
increased taxes come at a time of lost business, which she
blames on a new Wal-Mart that opened on the outskirts of town
two years ago.
Mayor Marsden and Lisa Peterson, the director of tax
equalization for Bottineau County, said the retail giant has not
hurt all businesses in town.
Marsden said Wal-Mart’s assessed valuation also ncreased
from $5.6 million to $6.8 million.
Dickerson, at the state Tax Department, has little sympathy
for Bottineau commercial property owners.
“They’ve been getting away with being undervalued,” she
said. “They should look at how much they’ve gotten away with all
these years.”
Business owner Karen Larson places keys to her store in a basket
on the City Council's table on Tuesday, April 14, 2009 in Bottineau,
N.D. as she and other business owners took part in the so-called
"key party" to dispute what they believe are unfair commercial
property assessments. (AP Photo/Bottineau Courant, Scott Wager)
The final meeting, prior to the 2009 legislative session, of the
Agricultural Land Assessment Implementation and Oversight Advisory Task Force
was November 14, 2008. This task force has been meeting and discussing the
implementation of the new method of assessing agricultural land in South Dakota.
The meeting ended with votes to recommend proposed legislation to the next
legislative session.
The meeting began with short presentations from Michael Kenyon, Department
of Revenue, and Burton Pflueger, Economics Department of SDSU. Kenyon’s
handouts to the committee have been available on
the SDAAO website. Nothing surprising was presented by either person. Much of
the specifics have been presented in prior meetings. The most interesting aspect
of this meeting was the comments and questions.
Many of the questions and comments from the task force members began with
some statement similar to, “My property is assessed…” And many questions and
comments revolved around details irrelevant at this point. These included
discussions about identifying property by actual use as either cropland or
non-cropland, as opposed to use identified through soil ratings. There even was
some discussion, and public comment, about assessing agricultural property at
full market value.
The most pertinent statement of the meeting was made during comments
responding to a presentation from Kenyon that detailed estimated changes in
agricultural assessments for each county in the state. Some counties will see
severe changes, as identified on the handout map also available on the SDAAO
website. Larry Gabriel, former Secretary of Agriculture, stated that it should
be expected to see changes in county assessments, even if the total statewide
agricultural assessment is held to no change. Even dramatic changes should be
expected as the assessment process is changed.
Most of the questions from the task force members resulted in repeated
assurance from Michael Kenyon that the local assessor would have the ability to
make adjustments to property assessments. Several committee members were very
concerned that some assessments, primarily their own, would change dramatically
under the new process.
Kenyon stated that the assessor would have an ability to make adjustments
similar to the present system. The Department of Revenue will be able to
calculate the total agricultural assessment for each county, under the new
process. Any adjustments to assessments might cause an argument between the
state and the county over the level of assessment. Adjustments to a few parcels
will not affect the total enough to be noticed. Some adjustments could be
discussed with the Department of Revenue and agreed upon by both the department
and the county. Appropriate adjustments would relate to the productive
capabilities of a property, not addressed in the soil rating, and would be made
to all properties in the county similarly affected.
At the end of the meeting, two drafts of proposed legislation were voted on
and passed. These will be presented to the next legislature with the support of
the task force members voting to recommend. The drafts
presented are available on the SDAAO website.
The primary legislation details the assessment process for agricultural
property. It specifies that cropland will be assessed using statewide crop
production and price information, and that non-cropland will be assessed using
cash rent information. It specifies the annual earning capacity of cropland to
be 36% of the annual gross return, and 100% of the annual gross return for
non-cropland. Both of these percentages are defined to represent the landowner’s
share of gross income. These income estimates will be capitalized at 6.6%.
Changes to the total taxable value of either cropland or non-cropland will be
limited to no more than 15%, up or down, through year 2017.
This legislation was amended from what was presented, and from what is
available on the SDAAO website, to include a comment about how the county
assessor can make adjustments to assessments as long as the total value of
cropland and the total value of non-cropland do not change. The vote was 11 to 1
to recommend this proposed legislation to the next legislature.
The second draft concerned the school levy. It simply is meant to prevent a
school district from benefiting from a windfall in tax money, or suffering from
a shortage, due to a dramatic change in the county agricultural assessment. This
draft was amended slightly and passed on a unanimous vote.
Shannon Rittberger
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
Spink County Director of Equalization
 Shannon Rittberger, CSDA, CAA
Director Butte County Equalization
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.”
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.”
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.”
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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