The Productivity Approach to Value

INTRODUCTION

All appraisers and assessors have been taught the three methods of finding value. The first is the sales approach, a comparison of the subject property to actual sales in a given area. The second is the cost approach, where you start by rebuilding the subject property with a replacement cost new rate and then depreciate the property by age and condition. The third approach is the income approach, which is a method of finding value by capitalizing the net income.

All three of these approaches are used whenever an appraiser is to find the market value of a subject property. In the minds of some appraisers, all three approaches should be compatible with one another. In short, all three should come up with the same value for a subject property. These methods are excellent for finding the value of residential and commercial properties, which have a history of sales in any area for the sales approach. These properties can be built from scratch, giving a replacement cost new for the cost approach, and if the subject property is older than new, it can be depreciated to find the present value using the cost approach. These properties may also have histories as rental properties, such as apartment houses. This income can then be capitalized to find value in accordance with the income approach.

The problem comes when we try to use these three approaches to find the market value of farmland. While farmland lends itself very well to the income and sales approaches, it doesn’t work at all for the cost approach. Why? Because farmland is a non-depreciating asset, and you do not build new farmland. Therefore, there is no rate for cost new and no way to depreciate the subject property.

It has been long recognized by appraisers and assessors that a fourth method of finding value is available for finding market value of farmland. It is the subject of this book and is called the productivity approach for finding value. This method has been recognized by many states for a long time and has been in use for taxation purposes. That is, a value for farmland based on productivity is a fair and equitable way of taxing farmland.

Farmland appraisers also know that they need to consider this method in their appraisals as well. As a result, over a period of time, the productivity approach has replaced the cost approach for appraising farmland. Appraisers know they still have three methods to consider, but those three are now the sales, income and productivity approaches.

Why is the productivity approach is so widely used? It deals with soil types. It has long been known that certain soil types are more desirable than others for raising crops. Those soils that are not good enough or productive enough to raise crops are then used for pasture. Just knowing that much about a soil type, whether it is suitable for crops or pasture, would certainly give you an idea of the value of the soil in a subject property. The productivity approach actually does much more. It also considers the modifiers to be applied to each soil type. These modifiers are items that would detract from the maximum value of the soil type, such as alkali and water drainage. The reader will find a whole chapter devoted to only modifiers, how they should be used, and by what amounts. We will also develop a Productivity Index for each soil type that shows its upper limit of value.

The productivity approach is also important in farmland appraisals when doing the sales and income approaches. In both of these approaches, the appraiser will find properties to compare both selling price and rental prices. It is a matter of common sense that the comparable should have equality in soil types, so you are comparing with farmland of similar abilities in growing crops or grass. This is why appraisers and assessors need to keep track of their comparable sales and comparable income properties of farmland by dominating soil type. In other words, they should determine what soil type is dominating or has the most acres in the comparable property. They would then look at the dominating soil type of the subject property and compare that to similar dominating soil types for sales and income information.

The final result is the productivity approach, paramount to finding value for farmland properties. By knowing the soil types, we can compare with similar properties that have been sold or rented to have an indication of the value of the subject property. Then by using the productivity approach, we can do a comparison by using the ability to grow crops or grass with modification in order to have a separate method for evaluating the subject property.