Income & Rental Rate Approaches Explained

Income Approach 

Once a per-acre net-return and capitalization rate for a jurisdiction has been estimated, calculating its value is straightforward. The basic formula is: 

Use value (Income) = Return/Capitalization rate 

For example, in TY2010 Rockingham County's without-risk capitalization rate was 0.0791 and its use value Estimated Net Return ($/Acre) was $47.01. The county's initial use value for without-risk cropland harvested was: 

Use value (Income) (Unadjusted) = $47.01/0.0791 = $594.30 (TY2010) 

Since the mix of land classes differs among jurisdictions (i.e., Class I thru Class VIII), it is necessary to calculate a soil index factor. The index is a weighted average of the land Classes I thru IV in a jurisdiction (cropland acreage Classes I thru IV provides the weights). Rockingham County's soil index factor is calculated to be 1.10. This value means that a typical acre of land is between Class II (1.35) and Class III (1.00). Therefore, Rockingham's unadjusted use value of $594.30 is divided by 1.10 resulting in a Type III Use value Estimate of $539.24 which is reported as a value rounded to the nearest $10 which for TY2010 was $540. 

Rental Rate Approach 

Once rental rates for a jurisdiction from NASS, the value is divided by the jurisdiction's capitalization rate - no land class adjustment is made in this approach. 

Use value (RentalRate) = Rental Rate/Capitalization rate 

For TY2010, Rockingham County's capitalization rate was 0.0791. Using the 2008 rental rate of $59 reported by NASS for the county (budgets lag a given tax year by 2yrs) the following calculation is made: 

Use value (RentalRate) = $59/0.0791 = $750 (TY2010)