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Valuation Guidance for Agricultural Properties

This document provides guidance on valuing agricultural properties for market value. It discusses that agricultural properties can represent various combinations of land, buildings, equipment and crop plantings. Valuers must consider both internal factors like soil type, water availability, and carrying capacity, and external factors like support facilities. The highest and best use of the property should be determined to establish whether continuing the current agricultural use is appropriate. Where market data is unavailable, the income capitalization approach can be used to establish the unit base market value for different agricultural land classes based on income, expenses, rental rates and capitalization rates derived from various sources.

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103 views4 pages

Valuation Guidance for Agricultural Properties

This document provides guidance on valuing agricultural properties for market value. It discusses that agricultural properties can represent various combinations of land, buildings, equipment and crop plantings. Valuers must consider both internal factors like soil type, water availability, and carrying capacity, and external factors like support facilities. The highest and best use of the property should be determined to establish whether continuing the current agricultural use is appropriate. Where market data is unavailable, the income capitalization approach can be used to establish the unit base market value for different agricultural land classes based on income, expenses, rental rates and capitalization rates derived from various sources.

Uploaded by

Jestoni Asis
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd

Guidance

Diverse forms of commodity production and methods of operation are


characteristic of agricultural properties.

These properties may also represent various combinations of land,


buildings, equipment, and crop plantings.

Market Value must be recognized as the fundamental basis of valuation


(PVS 1).

Guidance

The Valuer shall arrive at the Market Value for the agricultural property,
ensuring that the valuation is market-derived.

In the valuation of agricultural properties, the physical and


environmental aspects of the property assume special importance.

These include features such as:

 climate,
 soil types and their productive capability,

 the availability or absence of water for irrigation, and


 the feeding/carrying capacity for livestock.

External factors to be considered include:

 the availability and adequacy of support facilities


required for storage, processing, and transportation.

The Valuer needs to consider both internal and external factors in


making a determination of which class of agricultural use the property
is best suited for.

Guidance

In keeping with the definition of Market Value, a highest and best use
analysis of the property should always be conducted in order to

 warrant that an agricultural use is to be continued, specially when


it appears that another land use, e.g., subdivision development
occasioned by encroaching urban/suburban expansion, might be
more appropriate, and

2) determine whether the specific agricultural use is to be continued.

Guidance
Establishing the Schedule of Unit Base Market Values for Agricultural
Land

 The Schedule of Unit Base Market Value for the different classes of
agricultural lands shall, as much as possible, be established by the
Market Data or Sales Analysis Approach.

 However, for lack of market data, the income capitalization


approach maybe resorted to.

Income Capitalization Approach

Several processes are possible, namely:

 Gross Production minus production expenses per hectare;

 Rental Income per Hectare;

 Income per Hectare on sharing basis.

 Income should be the basis of capitalization value.


 Capitalized Value considered as the market value of the land must
be equal to the net income per hectare divided by the rate of
capitalization.

Required Data

 Information on crop production in the area

 Expected rate of interest on money invested for the preceding


years.

Sources of information:

 Bureau of Agricultural Extension and the Bureau of Plant Industry


for crop production and cost of production;

 Bureau of Agricultural Statistics, National Food Authority,


Department of Trade and Industry farmers for crop prices

 Land Bank, DBP, PNB, rural banks for interest rates

Common questions

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The income capitalization approach involves several processes, including calculating gross production minus production expenses per hectare, determining rental income per hectare, and computing income per hectare on a sharing basis. These processes calculate net income, which is then used to find capitalized value by dividing by the capitalization rate .

A highest and best use analysis is crucial as it ensures that the valuation is aligned with the optimal economic use of the property. Such an analysis helps determine whether the current agricultural use should be continued, especially when other uses, like subdivisions due to urban expansion, might offer higher market values. This analysis impacts decisions on whether to maintain or change the current land use to maximize value and utility, considering economic and market conditions .

A valuer should engage in a highest and best use analysis, evaluating the economic benefits of continued agricultural use versus potential gains from converting to alternative uses such as urban development. They must consider market trends, regulatory implications, and potential profitability from both perspectives to provide a balanced and strategic valuation recommendation .

Critical sources for deriving reliable income estimates in agricultural land valuation include the Bureau of Agricultural Extension and the Bureau of Plant Industry for crop production and cost data. Additionally, crop prices information can be sourced from the Bureau of Agricultural Statistics, National Food Authority, and Department of Trade and Industry, while interest rates can be obtained from financial institutions like Land Bank, DBP, PNB, and rural banks .

Climate variability impacts the market value of agricultural properties by altering productive capacity and affecting the type of crops that can be viably produced. Changes in climate conditions can increase risks, such as droughts or floods, reducing land suitability for agriculture, thus decreasing its market value. Conversely, optimal climate conditions may enhance productivity and value .

Market-derived value serves as the cornerstone for assessing agricultural properties, ensuring valuation reflects current market conditions and potential profitability. However, this value can be challenged by external factors such as urban encroachment and infrastructure developments, which may prompt a reassessment of 'highest and best use', potentially leading to a shift in property utilization towards non-agricultural purposes .

A valuer must take into account both internal and external factors when determining the market value of agricultural properties. Internal factors include the physical and environmental aspects such as climate, soil types and their productive capability, availability of water for irrigation, and the feeding/carrying capacity for livestock. External factors encompass the availability and adequacy of support facilities required for storage, processing, and transportation .

Understanding the physical and environmental aspects is essential as these factors directly affect the agricultural viability and productivity of the land, influencing its market value. These aspects, such as climate, soil quality, irrigation availability, and livestock carrying capacity, dictate the feasibility and profitability of agricultural operations, thereby impacting the property's economic assessment .

The schedule of unit base market values might resort to methods other than the Market Data or Sales Analysis Approach, such as the income capitalization approach, particularly in situations where market data is not available. This alternative method uses net income metrics for valuation instead of comparable sales data .

The income capitalization approach helps establish the market value by calculating the capitalized value as the net income per hectare divided by the capitalization rate, thereby equating it to the market value of the land. This methodology relies on income and expenses related to crop production to derive value in situations where market data is insufficient .

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