Why Research Farmland Ownership And Values? Part 8
Farmland assessment: Amenity values, expected rising cash flows, tax shelter values, mineral rights, and entitlement values.
December 31, 2017
Mason Gaffney, Ph.D.

III. Farmland assessment

Where does farmland stand in the bias scale? Somewhere in the middle. We have seen that assessors have trouble valuing “exotic” forms of property, and mobile and intangible and sophisticated and novel and invisible and underground forms. Farmland is the least exotic and most traditional form. Everyone, even the greenest elected assessor knows that farmland is land. Hammurabi taxed farmland in ancient Babylon and the cultural subconscious is inured to it. The mere vastness of land seems to justify a value, even when nothing else does, whereas the notion that a mere acre in downtown Chicago, New York or San Francisco could be worth $40 millions (@$1,000 per square foot) has a reputation for intimidating assessors into lowering the peak values down towards the mean.

But on the other side there is the equally traditional pathos (or bathos, as Hofstadter prefers) for protecting the sturdy yeoman and breeder of infantrymen. More operationally effective, I suspect, is political organized strength, an increasing share of it coming from that vast gray area that separates the city from the country where farmers are speculators and speculators may be farmers and both are philosophers of the capitalized-income approach to land assessment.

So we cannot say with confidence that farmland overall is under- or over-assessed relative to some mean (which we do not really possess). But we can say that ripening land on the fringe between uses ("the margin of supersession," we were once taught) is under-assessed relative to land in more stable areas, whether rural or urban. Assessments here are something of a laugh, to the extent that we are permitted to laugh about serious matters. Here are some problems with the capitalized income approach to assessing farmland, which seems dominant in this area even where not mandated by law.

A. Amenity values.

Capitalized income is based on cash income. But proximity to cities, and/or the good roads that lead to cities, has always been a major element of farmland value, without any reference to anticipated urbanization. Farm people shop in cities, see doctors there, work there part time, bank there, and generally benefit in many ways other than marketing food and fibre.

When Montgomery County MD went to TDRs they assumed that developers would buy them at a good price from the "sending" areas to apply in the "receiving" areas, but so far the prices have not been good at all. This suggests that the severed development rights were not as large an element in the values of the sending areas as assumed; that, rather, the imputed amenity and locational value for living under Hunt Club conditions and within reach of the Kennedy Center and K Street are a large part of the value.

B. Expected rising cash flows.

Values capitalized from current income, using current mortgage rates, will be unrealistically low under inflationary conditions, and therefore have been for a long time into the past. When you buy common stock it is no mystery that your income comes in two forms, dividends and appreciation. If you rearrange terms in Equation (1) above so that the denominator on the right side is i alone, rather than (i-g), you will find the numerator has become (a+gV). But gV is the annual appreciation, which says that value is found by capitalizing the sum of ordinary current income plus appreciation, using the mortgage rate.

But assessors cannot do anything so "speculative". And so in those areas where they have to use the capitalized income approach they have been under-assessing farmland as farmland, using floating urban value as an excuse. They have acted and talked as though speculative expectations were evidence of urban influence, even though some were of rural origin. In addition, of course, many are indeed of urban origin.

Today an assessor might well reply "Aha, you see now, the market was wrong and so I was right." I cannot agree. The assessor is supposed to follow the market, not outguess it, and if a certain madness prevails he is supposed to go along. In so doing he will not worsen the overpricing but cure it quicker than anything or anyone else could. It was the lack of such a quick remedy that let the land bubble of the 70s soar so dangerously high above reality.

C. Tax shelter values.

The value of farmland as a tax shelter is not news, but perhaps never so dramatized as in a paper by Finis Welch and Robert Evenson finding that the farm income reported on the 1040s of farmers in certain states was about 2% of the respective state's farm income as estimated by the USDA. California was one of those states; Florida was another.

Such advantages can hardly fail to stimulate the demand for farmland, and thus to be capitalized into farm land values. The capitalized income approach, however, generally sifts them out.

D. Mineral rights.

As noted earlier mineral rights, before being severed to a lessee, add value to farmland over vast areas, perhaps 15% of the country. Proneness to possible bonanzas raises market values, but adds nothing to the current income that is capitalized. In respect to regressivity it bears noting that in some areas farmland was so cheap that oil companies never bothered taking leases but simply bought titles, surface and all. In some other cases, like the Kern County Land Company, now part of Tenneco, a large rancher became an oil company. Texaco of White Plains, N.Y., now holds 77,000 acres in Kern County. It would be a pity were all that to be assessed purely on its net income, even potential income from farming alone.

E. Entitlement values.

Much dry land in Southern California is "entitled" (in some sense) to future water by virtue of membership in a district that has paid some dues down on the California Water Plan to finance its works. Such entitlements are claimed to be "binding contractual obligations". Just how binding may depend on future voters, but there is at least a fighting chance there of future waters.

Of such figments are speculative land values made. But there is no current income to capitalize. This is representative of a whole class of "floating values" to which various landholders feel “entitled", and which they may actually acquire some day. Future events cast their shadows before them in the speculative price of land.

This article is an excerpt from an invited paper presented at the Assessment Workshop cosponsored by USDA-ERS-NRED and the International Association of Assessing Officers, Chicago, IL, June 25-26, 1985. The paper was published in Almy, Richard R., and T.A. Majchrowitz (eds.), Property Tax Assessment (Chicago: U.S. Department of Agriculture, International Association of Assessing Officers, and The Farm Foundation, 1985), pp. 91-109. The whole paper will be published daily in increments over this week and part of next week. This is excerpt 8 of 9.

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Mason Gaffney, Ph.D.

MASON GAFFNEY first read about the economist Henry George when a high school junior. After he served in the Pacific during WW II, this interest led him back to get a Ph.D. in Economics at Berkeley, where he tried to meet his teachers’ skepticism and apathy with a dissertation, Land Speculation as an Obstacle to Ideal Allocation of Land. Since then he has published many books and articles on land use, economics, taxation, and public policy. He has been a Professor of Economics at several Universities; a journalist with TIME, Inc.; a researcher with Resources for the Future, Inc.; the head of the British Columbia Institute for Economic Policy Analysis, which he founded; an economic consultant to several businesses and government agencies; and a frequent speaker on economic topics, domestic and foreign, and in political campaigns. He has been Professor of Economics at U.C. Riverside from 1976 through the end of his life. Mason passed in the summer of 2020 and will be lovingly remembered and greatly missed by many. For more information, visit his website at MasonGaffney.org