                           QBffice     of tfp   Plttornep    Qknerat
                                        Wate     of Qexas
DAN MORALES
 ATTORNEY
      CENER.4L
                                            June 23, 1995

      Honorable Tom Craddick                         Opiion No. DM-355
      Chair
      Committee on Ways and Means                   Re: Whether the cash lease method of
      Texas House of Representatives                w&ration of open-space land comports with
      P.O. Box 2910                                 section l-d-l of article VJH of the Texas
      Austin, Texas 78768-2910                      Constitution (RQ-708)

      Dear Representative Craddick

             You ask whether the cash leaq method of valuation of open-space land comports
      with section l-d-l of article VJJJ of the Texas Constitution.1 Subsection (a) of section
      l-d-l provides as follows:
                     To promote the preservation of open-space land,   the le@uture
                shaII prow& by general law fm taxatton of open-space hrnd
                akvoted to fcnm or nmch purposes on the basts of its productive
                capad@ and may provide by general law for taxation of open-space
                land devoted to timber production on the basis of its productive
                capacity. The legislature by general law may provide eligibility
                limitations under this section and may impose srmctions in
                fmtherance of the taxation policy of this section.

      Tex. Const. art. VJII, 5 l-d-l (emphasis added).

              The legislature has provided for taxation of open-space land in sections 23.51
      through 23.57 of the Tax Code. Section 23.52 of the Tax Code, which sets forth
      valuation methods, provides in pertinent part:
                     (a) The appraised value of qua&d          open-space land is
                determined on the basis of the category of the land, using accepted
                income capitalization methods applied to average net to land. The
Honorable Tom Craddick - Page 2              (DM-355)




          appraised value so determined may not exceed the market value as
          determined by other appraisal methods.

Section 23.51 defines the terms “income capitalization” and “net to land.” “Income
capitalization” means “the process of dividing net to land by the capitalization rate to
determine the appraised value.” Tax Code 3 23.51(S); see uLFoid. $23.53 (setting forth
the capitalization rate). “Net to land” means “the average annual net income derived from
the use of open-space land . .” Id. $23:51(4). Section 23.51 requires a chief appraiser
to calculate net to land “‘by considering the income that would be due to the oww of the
land under the cssh lease, share lease, or whatever lease srrangement is typical in that area
for that category of land.” Id.’

       In addition to establishing the methods for determining the appraised value of
open-space land, section 23.52 of the Tax Code also requires the comptroller (formerly
the State Property Tax Board) to develop appraisal manuals to assist appraisal offices
around the state:
                (c) The comptroller by rule shall develop and distribute to each
           appraisal office appraisal manuals setting forth this method of
           appraising qutied open-space land, and each appraisal 05ce shall
           use the appraisal manuals in appraising qualified open-space land. . . .
           The rules, before taking effect, must be approved by a majority vote
           of a committee comprised of the following officials or their
           designees: the governor, the comptroller, the attorney general, the




        %eUion   ld-1   was raIified in 1978. Behwen   1978 and 1987, subs&ion    (4) of wAon   23.51
pnAdedadifferentmethcdforcalculatjng’nettoland”:

           The chief appraisn shall calculatt net to land using an owner-o~mtor budget,
           sohuactingall crdimy and prudentexpensesiwmd in pursuit of agricultural
           USC,including alII ordinary and prudent wptnscs incurmd in oxmcciion with
           lnmting and rccmtional lcasca and including owner-labor and fixed and variable
           c&s, fmm the five yea agriculmral income using estimates . . . On/y f
           in.wtJkient data is available to calculate net to land an the basis of an cnww-
           operator budget, net to land may be determined by wnsidcring the inwm that
           wouldkduetotheownrrofthclandundercashlease,sharelease,mw~
           leasearranganentistypicalinthatartaforthatEategoryofland.... emphasis
           -.I
See Acl of May 21, 1987, 7Otb Leg., RS.. ch. 780. 1987 Tex. GUI. Laws 2763. House Bi 1867. the
legisMon which amended s&section (4) to its present form, omitted the owicr-opcrator budget melhod.




                                             p.   1893
Honorable Tom Craddick - Page 3              (DM-355)     ’




           agriculture wmmissioner, and the Commissioner of the General Land
           Office.3 Footnote added.]

The Mamu/ for the Appraisal of Agricuhral Lund (the ‘Mznua!“), adopted by the
former State Property Tax Board pursuant to this provision, describes three valuation
methods for calculating net to land, i.e.. the cash lease method, the share lease method,
and alternative methods to be used when neither share nor cash leases are available for
comparison. See State Property Tax Board, Manual for the Appraisal of Agricuhural
Lfmd 23-28 (Apr. 1990).

        The Mum& provides that under the cash and share lease methods, net to land is
the rent that would be due to the property owner under a cash lease or share lease, less
expemes typically paid by the property owner. In a cash lease the rent is a tixed amount,
whereas in a share lease the rent is a share of the gross receipts for the year, less a share of
certain expenses. Id. at 23. The cash or share lease used for a specific class of land
should represent the payment to a prudent property owner. In some areas, such as those
in which the most wmmon lease agreements are between family members, the most
common or typical lease agreement may not be prudent for either the property owner or
the tenant. Id. at 23,25.

        If neither cash nor share leases are available for comparison within the immediate
area, the chief appraiser must use alternative methods to determine the amount a
reasonable lessee in the area would pay to lease the land on either a cash or share basis.
An appraiser may go outside of the appraisal district to tind comparable leases. Id. at 27.
An appraiser must also decide whether to supplement information about such leases by
using the owner-operator budget method to determine what a reasonable lessee would pay
to lease the land. Id. at 27-28. The owner-operator budget method is used to develop an
estimated net operating income based on the gross income a prudently managed operation
would generate. The estimated net operating income is used to estimate the cash amount
or share for which a prudent operator would kmse the property. The estimated lease
amount is the net to land. Id. at 53.

        A letter you have submitted with your request states that the Munuul “uses the
term productivity value to be the value arrived at by using a capital rate formula which is
termed Cash Lease Method. The typical cash lease is divided by a capitalization rate to
yield productivity value.” The letter asks, “Does the capital value arrived at by the cash

         ~subseaionwasamadcdin1991tosubstihltt~errnccsmthccomptrollcrforrrfacncesto
lhestateRopeny    TaxBoard .%?eActofAu~25,1991,72dLcg.,             zdC.S., ch. 6.5 24.1991 Tex. Ses.
Law Serv. 26,31.




                                              p.   1894
Honorable Tom Craddick - Page 4             (DM-355)




lease method of valuation comply with the intent of the Constitutional requirement [m
section Id-l, article VIII of the Texas Constitution] based on productive capacity?” We
fail to see how the Manmrl’s discussion of the methods for determining the appraised
value of open-space land could run afoul of the constitution. The Mmnral provides
guidance regarding the methods expressly provided for by the legislature when it enacted
(or amended)4 sections 23.51 and 23.52 ofthe Tax Code.5

        We believe that the methods set forth in these Tax Code provisions wmport with
the Texas Constitution, article VIII, section l-d-l. Section Id-l, in providing that “the
legislamre shag provide by genera) law for taxatiottof open-space land devoted to farm or
ranch purposes on the basis of its productive capacity,” expressly gives the legislature
latitude to select valuation methods which will reflect the “productive capacity” of open-
space land. The legislature has done so in enacting subsection (4) of section 23.51, and
the methods it has selected appear reasonably tailored to reflect “productive capacity.”

        Fiiy,   we wmment on another letter submitted with your request that states that

           land may. . . qualify under section l-d-l but is then subject to the
           cash lease method of valuation that in many cases yields a capital
           value which far exceeds the capacity of the land to produce.
           Appraisal districts have adopted the attitude that the cash lease
           formula is a state mandate and the only method acceptable to
           determine value.

The letter goes on to suggest that the State Property Division of the wmptroller’s 05ce
should “issue rules that would allow the use of production income under [section] 1-d-l
by appraisal districts when a family owned and operated facility is willing to provide such
wntidential information.” We note that the MonuuZ describes the cash lease method, the
share lease method, and alternative methods for use when neither share nor cash leases are
available for comparison as three methods for calculating net to land. These are the only
methods for calculating net to land that are permitted by section 23.51(4) of the Tax
Code, Neither section 23.51(4) nor the Munual provides for an appraisal of open-space


        4See supra aotc 2.

         5Althoughthe Monaal, adoptal pursuantto tlu oamptmllu’s authority under section 23.52(d) of
the Tax Code, is entitled to dcfemncc, it may not be inconsistent with saXions 23.51 tbmugh 23.57.
Compare Tammt Appraisal L&t. v. Moore, 845 S.W.Zd 820, 823 flex. 1993) (Mammal entitled to
defetetk~ so long as coadnrtion is nasonablc and does not contmdict plain language of statute) wiUt
Rims v. Williamson Count Appraisal Di~r., 735 S.W.2d 633, 637-38 (Tcx. App.-Austin, 1987, writ
dwicd) (State Ropuly Tax Board rule held inconsistent with &on    23.51).




                                             p.   1895
Honorable Tom Craddick - Page 5            W-355)




land based on the actual production income of the particular tract. Any changes
authorizing appraisers to use new methods to calculate net to land must be made by the
legislature, not the comptroller. Similarly, the capitalization rate, which is established in
section 23.53 of the Tax Code, may only be changed by the legislature.

                                   SUMMARY

               The valuation methods for calculating “net to land” in
          determining the appraised value of open-space land set forth in
          sections 23.51 through 23.57 of the Tax Code comport with section
           1d- 1, article VJR of the Texas Constitution. The valuation methods
          for calculating “net to land” described in the comptroller’s Mmrurxl
          for theAppraisal of Agriculhrral L.ud, includii the cash lease
          method, reflect the valuation methods set forth by the legislature in
          section 23.51(4) of the Tax Code.




                                                      DAN MORALES
                                                      Attorney General of Texas

JORGE VEGA
Fht Assistant Attorney General

SARAH J. SHJRLEY
Chair, Opiion Committee

Prepared by Mary R Grouter
Assistant Attorney General




                                         p.   1896
