Virginia Use Value Trends

Farm Business Management Update, December 2003/January 2004

By Beth Ann Pelletier

A synopsis of section 58.1-3229 of the Code of Virginia declares that "the preservation of real estate for agricultural, horticultural, forest and open space use is the public interest and ... the classification, special assessment and taxation of such property in a manner that promotes its preservation help foster long term public benefits." Virginia law allows assessment of eligible land in any of these categories to be based upon the land's value in use (use value) as opposed to the land's fair market value. Section 58.1 - 3239 of the Code of Virginia establishes the State Land Evaluation Advisory Council (SLEAC) and directs it to estimate the use value of eligible land for each jurisdiction participating in the land use program.

The latest use values for agricultural, horticultural, and orchard sectors indicate a fifth straight year of declining values. Tax year 2004 use values recently released by the State Land Evaluation Advisory Council and the Virginia Department of Taxation indicate the use value of an average acre of Virginia cropland was $215 per acre for tax year 2004. The average use value was $60 less than the use value reported in October 2002, a 22 percent decrease. Of those jurisdictions with changes, over 52 percent had changes of less than $50 per acre. Orchard use values also saw continued declines for tax year 2004. For example, an average apple orchard acre with Type 3 soil classification and no risk in Virginia had a use value of $75 for tax year 2004. These values show a decline of $20 per acre, or 20 percent compared to tax year 2003 values released in October 2002.

Another year of use value declines raises two obvious questions. First, why are the values declining? Second, will the values continue to decline? The use values continue to decline in large extent due to the cumulative results of several years of drought in the Commonwealth. The largest declines in use values over the past several years can be closely correlated with the listing of those primary and secondary jurisdictions eligible for drought relief assistance. Agricultural, horticultural, and orchard use values in Virginia are determined using a capitalization of net income approach dividing average net returns by the capitalization rate. The net returns are based on an "olympic" average using the most recent seven years and dropping the highest and lowest net returns and then averaging the remaining five years for an average net return. Usually this averaging process helps to mitigate fluctuations in the annual use value estimates caused by unusually good or poor years. However, in recent years Virginia has seen several consecutive years of low net returns influenced by the drought, the collapse of grain prices, the changes in government payments, and an increase in machinery costs. These consecutive years of poor returns have continued to put downward pressure on the use value of land in Virginia. Declining interest rates are captured in the capitalization rate and put upward pressure on use values; however, this upward pressure has been minor compared to the effect of the declining average net returns. Orchard values have suffered for many of the same reasons as agricultural and horticultural values. However, international competition has quickened their declines.

The second question is, "Will land values continue to decline?" Although values may remain stagnant for tax year 2005, the most recent crop season indicates the likely answer is "no." Crop yields for several years prior to 2003 were, in general, much lower than long-term averages. Results from the 2003 crop season indicate that many crops had better than average or average yields this growing season. Crops such as tobacco and cotton, were hurt by the large amounts of rainfall in the summer of 2003, but other major crops such as corn, soybeans, and hay all had better than average yields. Low interest rates and government income support provide positive influences on land values as well. However, several years of increasing net returns will be necessary before the positive effects can outweigh the negative impacts Virginia agriculture has seen in recent years.

Recent years have seen increasing development pressure on many localities using use value taxation. Heavy losses by agricultural producers coupled with low interest rates have caused some producers to cease operations and sell off their properties. At the same time opportunities for expansion have occurred and some producers have increased their operation size. These events could become less likely in the future with several years of average or better than average yields which would result in greater stabilization of Virginia use values.

More information on past and current Virginia use values can be found at: http://usevalue.agecon.vt.edu.

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