Current through Register Vol. XLI, No. 38, September 20, 2024
The average statewide capitalization rate (based on a 5-year
weighted moving average of various components) for managed timberland shall be
determined annually by the Tax Commissioner through the use of generally
accepted methods of determining those rates. The rate shall be based on the
assumption of a discounted cash flow model based upon harvest intervals
reflected in Appendix 4 of this rule. The capitalization rate used to value
managed timberland shall be developed considering the following:
12.1. Discount Component. -- The summation
technique shall be used in developing a discount component of the
capitalization rate. The five subcomponents of the discount component are:
12.1.1. Safe Rate. -- The safe rate shall
reflect a rate of return that an investor could expect on an investment of
minimal risk. This rate shall be developed through weighted averages of
interest rates offered on five-year United States Treasury Bills for the five
years immediately preceding the appraisal date.
12.1.2. Nonliquidity . -- The nonliquidity
rate shall be developed through an annual review to determine a reasonable
estimate of time that timberland, when exposed for sale, remains on the market
before being sold. The time thus determined shall be used to identify United
States Treasury Bills with similar time differentials in excess of
thirteen-week Treasury Bills. The interest differential between these
securities shall be used to represent the nonliquidity rate. For example, if it
is determined that a tract of timberland remains on the market for an average
of nine months (39 weeks) before being sold, the nonliquidity rate shall be
derived by subtracting the rate on 13-week Treasury Bills from the rate on one
year Treasury Bills. This review shall consider the weighted average of these
differences for a five year period immediately preceding the appraisal
date.
12.1.3. Risk Rate. -- The
relative degree of risk of an investment in timberland shall be developed
through an annual review of thirty-year United States Treasury Bills less
five-year United States Treasury Bills. The review shall consider the weighted
averages of debt and equity components of these differences for a five-year
period immediately preceding the appraisal date.
12.1.4. Management Rate. -- The management
rate represents the cost of managing the investment, not the cost of managing
the timberland. Historically, the management rate has been one-half of one
percent (0.5%); therefore, this rate shall be considered the industry standard
for current applications.
12.1.5.
Inflation Rate (negative). -- Nominal interest rates, including the "safe rate"
mentioned in subdivision 12.1.1 of this rule, are higher than real rates by an
amount representing expectation of future inflation. However, net annual income
from timberland is to be estimated assuming level future prices (no inflation).
Therefore, the capitalization rate must be a real rate, net of expectation of
inflation. The inflation rate shall be established through a weighted average
analysis of the most recent five calendar year's urban consumer price index as
determined by the United States Department of Labor, Bureau of Labor
Statistics.
12.1.6. Discount
Component. -- In determining the discount component of the capitalization rate,
the Tax Commissioner shall take the sum of the safe rate, the nonliquidity
rate, the risk rate, and the management rate, and shall deduct from this sum
the inflation rate.
12.2. Property Tax Component. -- The property
tax component shall be derived by multiplying the assessment rate by the
statewide five year weighted average of tax rates on Class II and on a blended
rate for Class III and Class IV properties. The discounted property tax rates
shall be deducted from the discounted difference between total harvest income
and end of rotation management costs.
