Public Act 490 Guide - CT.gov

PA 490 Land Classes
Type Description Soils and Limitations
Tillable A Excellent. Light, well-drained,
Shade tobacco, sandy loams,
nursery,
typically flat
some cropland. or level, no stones
Tillable B Very Good. Light, well-drained,
Binder tobacco, sandy loams,
vegetables, typically level to
potatoes,
slightly rolling, may
some cropland. have some stones
Tillable C Very Good to Good. Moderate heavier
Quite level. soils, level to rolling,
Corn silage, hay, may have stones.
vegetables,
potatoes, cropland.
Tillable D Good to Fair. Heavier soils,
Moderate to may be sloped and
considerable hilly, stones and
slope.
seasonal wetness
Hay and
may be limiting
rotation
factors.
pasture.
Christmas trees.
Orchard Fruit orchard. May include grapes
and berries.
Pasture Permanent May be heavier soils
pasture,
too wet or stony
unmanaged to till for crops, may
pasture, not tilled, be wooded area.
grazing.
Christmas trees.
The capitalization rates were developed beginning with the
recommended PA 490 formula, which is from the Federal
Land Bank, now the long-term mortgage lending arm of
the Farm Credit Service. The five-year rolling average is
6.49%. This rate is divided by 95% to reflect the value of
the stock purchase required by the member owners of
the Farm Credit Service, then added to the statewide
effective tax rate of 2.3%. This results in a capitalization
rate of 8.44%.
A second set of rates was developed by a mortgage
equity band of investment. Mortgage equity band of
investment includes the Farm Credit rolling average of
6.5%, a 75% loan-to-value ratio, and a 15% return on equity
with a ten-year holding period, plus the 2.3% effective tax
rate. This results in a rate of 11.5%. This is the method
used in Massachusetts.
The buildup method of rate determination includes
the mortgage rate and a risk rate. A buildup rate can be
used taking the mortgage rate and adding it to a risk rate.
Five year AAA Bonds range from 2.9% to 3.6%. European
International Bank is at the bottom of that range at 2.92%
and Johnson and Johnson at the top at 3.58%. This creates
a range of 9.12% to 10.08%. The capitalization rate
becomes 11.42 % to 12.38% when the effective tax rate
of 2.3% is added.
The alternative risk factor for the buildup rate on the
buildup methods of investment is to use the Ten-year
Treasury Bill, which is currently at 3.73%. When added to
the mortgage rate of 6.5% and the effective tax rate of
2.3%, the capitalization rate becomes 12.53%.
All of the rates considered provide a basis for a range
of capitalization rate for rents from 8.44% to 12.5%. The
lower rates represent lower risk, which is not necessarily
associated with land. The higher rate represents more risk,
which is more associated with land as it is a less-liquid
commodity, and larger parcels take longer to sell and
have fewer buyers because of their size and overall price.
PA
490
SECTION 4: RECOMMENDED PA 490 LAND VALUES
Swamp, Wetlands, Non-farmable areas
Ledge, ledge that also make up
Scrub outcroppings. the farm unit.
Woodland, Forest land Non-farmable areas
Forest associated with that also make up
the farm unit. the farm unit.
their tenant farmers, such as overseeing dwellings, maintenance
of fence rows, snow plowing, or a portion of the
crop. Whenever possible, non-cash considerations were
converted to a cash equivalency; so these were not counted
as zero rents.
The purpose of the collection of the rents is to capitalize
them into a value. The capitalized value is the income
divided by a specified rate to equal the value per acre of
each land class for its use for agriculture-based assessment.
Connecticut Farm Bureau Association • http://www.cfba.org/pa490guide.htm • Public Act 490: A Practical Guide and Overview
5