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Cap Rate for Special Valuations
Qualified agricultural or open-space and timber land are taxed on productivity rather than market value. The aim is for landowners to realize property tax savings to encourage them to continue to produce vital agricultural products, such as livestock, cotton, timber, milk and corn.
The capitalization rate (cap rate) is one of many factors used by appraisal districts to value agricultural and timber lands. Other factors also affect the final productivity values, including local agricultural trends, income and expense information, property characteristics and the property's agricultural use.
Tax Code Sections 23.53 and 23.74 prescribe the methods for determining the cap rate used to calculate agricultural and timber land values. To determine productivity values, appraisal districts calculate the typical property owner's income generated by the land and subtract certain expenses such as property taxes and the cost of fencing and irrigation wells. The result is commonly known as net-to-land. Appraisal districts divide the average net-to-land for a five-year period by the annual cap rate to arrive at the land's productivity value.
In 2017, appraisal districts must use a cap rate of 10 percent for appraising agricultural or open-space land and a cap rate of 7.39 percent for appraising timber land.
Agriculture Land Cap Rates
For agricultural or open-space land, Tax Code Section 23.53 requires appraisal districts to use a cap rate that is the greater of 10 percent or the interest rate specified on the previous Dec. 31 by the Farm Credit Bank of Texas plus 2.5 percent. The bank's interest rate on Dec. 31, 2016, was 3.21 percent. With the 2.5 percent added, that rate became 5.71 percent. Since 10 percent is the greater rate, the 2017 cap rate is 10 percent. The cap rate for the past 10 years has been 10 percent, the last time it was not 10 percent was 2007, when it was 10.13 percent.
| Year | Percent |
|---|---|
| 2007 | 10.13 |
| 2008 | 10 |
| 2009 | 10 |
| 2010 | 10 |
| 2011 | 10 |
| 2012 | 10 |
| 2013 | 10 |
| 2014 | 10 |
| 2015 | 10 |
| 2016 | 10 |
| 2017 | 10 |
Timber land Cap Rates
Appraisal districts must use a 2017 timber land cap rate of 7.39 percent. The 2003 Regular Session of the Legislature approved a provision that imposed a new method for determining the cap rate used to calculate timber land productivity values as of Jan. 1, 2004. The changes resulted in less volatility in the cap rate and more stability in timber productivity values. The goal was to slowly move to a cap rate based on a five-year average.
After January 2004, and when the interest rate specified by the Farm Credit Bank of Texas on Dec. 31 plus 2.5 percent is greater than or equal to 10 percent, the cap rate for that year is the interest rate plus 2.5 percent. The following year the cap rate is the average of the Dec. 31 interest rate plus 2.5 percent and the previous years' cap rate for the previous four years as provided by Tax Code 23.74.
The year 2007 was the first time since the change in the law that the interest rate plus 2.5 percent was greater than 10 percent. As you can see in the following table, the cap rate for the first year was the interest rate plus 2.5 percent, or 10.13 percent. In the following years, the cap rate was determined by averaging the Dec. 31 interest rate plus 2.5 percent and the previous years' cap rates excluding the years before 2007.
The following chart demonstrates how the cap rates used to value timber land have been determined from 2005 through 2017.
| Year | Interest | Interest Rate +2.5 percent |
Cap Rate Used | Determination |
|---|---|---|---|---|
| 2005 | 4.67 percent | 7.17 percent | 7.17 percent | The greater of previous year's cap rate or the current interest rate plus 2.5 percent |
| 2006 | 6.55 percent | 9.05 percent | 9.05 percent | The greater of previous year's cap rate or the current interest rate plus 2.5 percent |
| 2007 | 7.63 percent | 10.13 percent | 10.13 percent | The greater of previous year's cap rate or the current interest rate plus 2.5 percent |
| 2008 | 7.09 percent | 9.59 percent | 9.86 percent | The average of the previous year's cap rate (10.13 percent) and the current interest rate plus 2.5 percent (9.59 percent) |
| 2009 | 3.74 percent | 6.24 percent | 8.74 percent | The average of the previous two years' cap rates (10.13 and 9.86 percent) and the current interest rate plus 2.5 percent (6.24 percent) |
| 2010 | 3.16 percent | 5.66 percent | 8.6 percent | The average of the previous three years' cap rates (10.13, 9.86 and 8.74 percent) and the current interest rate plus 2.5 percent (5.66 percent) |
| 2011 | 3.78 percent | 6.28 percent | 8.72 percent | The average of the previous four years' cap rates (10.13, 9.86, 8.74 and 8.6 percent) and the current interest rate plus 2.5 percent (6.28 percent) |
| 2012 | 3.76 percent | 6.26 percent | 8.44 percent | The average of the previous four years' cap rates (9.86, 8.74, 8.6 and 8.72 percent) and the current interest rate plus 2.5 percent (6.26 percent) |
| 2013 | 3.1 percent | 5.6 percent | 8.02 percent | The average of the previous four years' cap rates (8.74, 8.6, 8.72 and 8.44 percent) and the current interest rate plus 2.5 percent (5.6 percent) |
| 2014 | 3.7 percent | 6.2 percent | 8 percent | The average of the previous four years' cap rates (8.6, 8.72, 8.44 and 8.02 percent) and the current interest rate plus 2.5 percent (6.2 percent) |
| 2015 | 2.90 percent | 5.40 percent | 7.72 percent | The average of the previous four years' cap rates (8.72, 8.44, 8.02 and 8.00 percent) and the current interest rate plus 2.5 percent (5.40 percent) |
| 2016 | 2.96 percent | 5.46 percent | 7.53 percent | The average of the previous four years' cap rates (8.44, 8.02, 8.00 and 7.72 percent) and the current interest rate plus 2.25 percent (5.46 percent) |
| 2017 | 3.21 percent | 5.71 percent | 7.39 percent | The average of the previous four years' cap rates (8.02, 8.00, 7.72, and 7.53 percent) and the current interest rate plus 2.5 percent (5.71 percent). |
The method for determining the cap rate used for valuing timber lands is explained in detail in Chapter 4 of the Manual for the Appraisal of Timberlands (PDF), published by the Comptroller's office. This manual was adopted in May 2004. The cap rates in the manual are examples and should not be used in determining timber land values. The Comptroller's Property Tax Assistance Division will continue to report annually the correct rate to be used.