Can Texas appraise open-space farm and ranch land by the cash lease method?

Plain-English summary

Texas lets farm and ranch land be taxed on what it can produce rather than on its full market value, a break written into article VIII, section 1-d-1 of the Texas Constitution. Representative Tom Craddick, who chaired the House Ways and Means Committee, asked the Attorney General whether the way appraisers actually carry that out, the "cash lease" method, fits the constitutional command that open-space land be taxed "on the basis of its productive capacity." The question came from landowners who complained that the cash lease method sometimes produced a value far above what their land could really yield, and that appraisal districts treated the formula as the only allowed method.

The office said the method is constitutional. The constitution tells the legislature to provide for productive-capacity taxation by general law, and the office read that as giving the legislature room to pick the valuation methods. The legislature filled in the details in Tax Code sections 23.51 through 23.57. Section 23.52 sets the appraised value of qualified open-space land using accepted income capitalization applied to the average "net to land," capped at market value. Section 23.51 defines "net to land" as the average annual net income from the land and directs the appraiser to calculate it by looking at the income that would be due to the owner under the cash lease, share lease, or whatever lease is typical in the area for that category of land. The comptroller's Manual for the Appraisal of Agricultural Land spells out three ways to find net to land: the cash lease method, the share lease method, and alternative methods when no comparable leases exist. Because the manual just implements the methods the legislature chose, the office could not see how it ran afoul of the constitution, and it found the statutory methods reasonably tailored to reflect productive capacity.

The office was equally clear about the limits the landowners were running into. One letter asked the comptroller's office to issue rules letting appraisers use a tract's actual production income, at least for family-owned operations willing to share confidential records. The office said no such option existed: section 23.51(4) permits only the cash lease, share lease, and alternative methods, and neither the statute nor the manual provides for appraising land by the actual production income of the particular tract. If anyone wanted to add a new valuation method, or change the capitalization rate set in section 23.53, that change had to come from the legislature, not from the comptroller or the appraisal districts.

Currency note

This opinion was issued in 1995. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

The open-space appraisal statutes (Tax Code sections 23.51 through 23.57) and the comptroller's appraisal manual have been amended and revised since 1995, and the comptroller's property-tax functions and rule-approval process have been reorganized over the years. The opinion itself notes that the calculation method changed in 1987 and that oversight shifted from the State Property Tax Board to the comptroller in 1991. Read this page for how the office read the law in 1995, and check the current Tax Code and the comptroller's current manual before relying on any specific method, definition, or rate.

What the opinion meant at the time

For Representative Craddick and the legislature: The opinion confirmed that the existing statutory scheme was constitutional, and it placed the lever for change squarely with the legislature. If lawmakers wanted appraisers to use a tract's actual production income or a different capitalization rate, they had to amend the Tax Code; the comptroller could not do it by rule.

For appraisal districts and appraisers: The opinion validated the cash lease method and the comptroller's manual, while confirming that the manual's three methods (cash lease, share lease, and alternatives) were the only permitted ways to calculate net to land, and that the manual must stay consistent with the statute.

For farm and ranch landowners: The opinion explained why their appraisals were tied to typical area lease rates rather than their own production figures, and that the relief some sought (valuation by actual production income) was not available under the law as written; it would take a change by the legislature.

Common questions

Was Texas's cash lease method of valuing ag land constitutional?
Yes. Under this 1995 opinion, the cash lease method and the other Tax Code valuation methods comported with article VIII, section 1-d-1, because the constitution lets the legislature choose how to measure productive capacity.

What is "net to land," and how is it calculated?
"Net to land" is the average annual net income from the open-space land. Appraisers calculate it by looking at the income that would be due to the owner under the cash lease, share lease, or whatever lease is typical in the area for that category of land.

Could appraisers use my land's actual production income instead?
No. The opinion said neither section 23.51(4) nor the comptroller's manual allowed appraising a tract by its own actual production income. Only the cash lease, share lease, and alternative methods were permitted.

Why did some owners say the cash lease value was too high?
Landowners complained the cash lease formula sometimes yielded a value far above what the land could actually produce, and that appraisal districts treated it as a state mandate. The opinion did not change the method; it said any change had to come from the legislature.

Who can change the valuation method or the capitalization rate?
Only the legislature. The opinion said the comptroller could not authorize new methods by rule, and the capitalization rate set in section 23.53 could be changed only by the legislature.

Background and statutory framework

Article VIII, section 1-d-1, ratified in 1978, directs the legislature to provide by general law for taxing open-space land devoted to farm or ranch purposes "on the basis of its productive capacity," and allows similar treatment for timber land, along with eligibility limits and sanctions. The legislature implemented this in Tax Code sections 23.51 through 23.57. Section 23.52(a) determines the appraised value of qualified open-space land using accepted income capitalization methods applied to average net to land, not to exceed market value. Section 23.51 defines "income capitalization" as dividing net to land by the capitalization rate (set in section 23.53) and defines "net to land" as the average annual net income derived from the land, to be calculated by considering the income that would be due to the owner under the cash lease, share lease, or whatever lease is typical in the area for that category of land. Section 23.52 also requires the comptroller (which took over from the State Property Tax Board in 1991) to develop appraisal manuals, with rules approved by a committee of the governor, comptroller, attorney general, agriculture commissioner, and Commissioner of the General Land Office.

The comptroller's Manual for the Appraisal of Agricultural Land describes three methods for calculating net to land: the cash lease method (rent is a fixed amount, less the owner's typical expenses), the share lease method (rent is a share of gross receipts less a share of expenses), and alternative methods, including the owner-operator budget method, used when no comparable cash or share leases are available. The office noted that between 1978 and 1987 the statute had used an owner-operator budget as the primary method, with leases as a fallback, but House Bill 1867 in 1987 rewrote section 23.51(4) into its present lease-based form.

On the merits, the office held the statutory methods comport with the constitution, reasoning that section 1-d-1 gives the legislature latitude to select methods reflecting productive capacity and that the chosen methods appear reasonably tailored to that end. Because the manual implements those statutory methods, it could not be unconstitutional on that account, though (as the office noted in a footnote) the manual is entitled to deference only so long as it stays consistent with the statute, comparing Tarrant Appraisal District v. Moore, 845 S.W.2d 820 (Tex. 1993) with Riess v. Williamson County Appraisal District, 735 S.W.2d 633 (Tex. App.—Austin 1987, writ denied). Finally, the office stressed that the statute does not permit appraising land by its actual production income, and that adding new methods or changing the capitalization rate is for the legislature alone.

Citations

Constitutional and statutory provisions discussed:

• Texas Constitution art. VIII, § 1-d-1 (productive-capacity taxation of open-space farm, ranch, and timber land)
• Tax Code § 23.51 (definitions of "income capitalization" and "net to land"; methods for calculating net to land)
• Tax Code § 23.52 (appraised value of qualified open-space land; comptroller's appraisal manuals)
• Tax Code § 23.53 (capitalization rate)

Cases discussed (in the opinion's footnote on deference to the manual):

• Tarrant Appraisal District v. Moore, 845 S.W.2d 820 (Tex. 1993) (manual entitled to deference where its construction is reasonable and does not contradict the statute)
• Riess v. Williamson County Appraisal District, 735 S.W.2d 633 (Tex. App.—Austin 1987, writ denied) (a State Property Tax Board rule held inconsistent with section 23.51)

Source

• Landing page: https://www.texasattorneygeneral.gov/opinions/dan-morales/dm-0355
• Original PDF: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/1995/dm0355.pdf

Original opinion text

Best-effort transcription from a scanned PDF. Minor errors may remain (including footnote numbering) — the linked PDF is authoritative.

Office of the Attorney General
State of Texas

DAN MORALES
ATTORNEY GENERAL

June 23, 1995

Honorable Tom Craddick
Chair
Committee on Ways and Means
Texas House of Representatives
P.O. Box 2910
Austin, Texas 78768-2910

Opinion No. DM-355

Re: Whether the cash lease method of valuation of open-space land comports with section 1-d-1 of article VIII of the Texas Constitution (RQ-708)

Dear Representative Craddick:

You ask whether the cash lease method of valuation of open-space land comports with section 1-d-1 of article VIII of the Texas Constitution. Subsection (a) of section 1-d-1 provides as follows:

To promote the preservation of open-space land, the legislature shall provide by general law for taxation of open-space land devoted to farm or ranch purposes on the basis of its productive capacity 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 sanctions in furtherance of the taxation policy of this section.

Tex. Const. art. VIII, § 1-d-1 (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 qualified 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 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 § 23.51(5); see also id. § 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 owner of the land under the cash lease, share lease, or whatever lease arrangement is typical in that area for that category of land." Id.[2]

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 qualified open-space land, and each appraisal office 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 agriculture commissioner, and the Commissioner of the General Land Office.[3]

The Manual for the Appraisal of Agricultural Land (the "Manual"), 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 Agricultural Land 23-28 (Apr. 1990).

The Manual 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 expenses typically paid by the property owner. In a cash lease the rent is a fixed 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 common 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 find 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 lease 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 Manual "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 lease method of valuation comply with the intent of the Constitutional requirement [in section 1-d-1, article VIII of the Texas Constitution] based on productive capacity?" We fail to see how the Manual's discussion of the methods for determining the appraised value of open-space land could run afoul of the constitution. The Manual provides guidance regarding the methods expressly provided for by the legislature when it enacted (or amended)[4] sections 23.51 and 23.52 of the Tax Code.[5]

We believe that the methods set forth in these Tax Code provisions comport with the Texas Constitution, article VIII, section 1-d-1. Section 1-d-1, in providing that "the legislature shall provide by general law for taxation of 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."

Finally, we comment on another letter submitted with your request that states that

land may . . . qualify under section 1-d-1 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 comptroller's office should "issue rules that would allow the use of production income under [section] 1-d-1 by appraisal districts when a family owned and operated facility is willing to provide such confidential information." We note that the Manual 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 Manual provides for an appraisal of open-space 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 1-d-1, article VIII of the Texas Constitution. The valuation methods for calculating "net to land" described in the comptroller's Manual for the Appraisal of Agricultural Land, including 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
First Assistant Attorney General

SARAH J. SHIRLEY
Chair, Opinion Committee

Prepared by Mary R. Crouter
Assistant Attorney General

[2] Section 1-d-1 was ratified in 1978. Between 1978 and 1987, subsection (4) of section 23.51 provided a different method for calculating "net to land":

The chief appraiser shall calculate net to land using an owner-operator budget, subtracting all ordinary and prudent expenses incurred in pursuit of agricultural use, including all ordinary and prudent expenses incurred in connection with hunting and recreational leases and including owner-labor and fixed and variable costs, from the five year agricultural income using estimates . . . . Only if insufficient data is available to calculate net to land on the basis of an owner-operator budget, net to land may be determined by considering the income that would be due to the owner of the land under cash lease, share lease, or whatever lease arrangement is typical in that area for that category of land. . . . [emphasis added].
See Act of May 21, 1987, 70th Leg., R.S., ch. 780, 1987 Tex. Gen. Laws 2763. House Bill 1867, the legislation which amended subsection (4) to its present form, omitted the owner-operator budget method.

[3] This subsection was amended in 1991 to substitute references to the comptroller for references to the State Property Tax Board. See Act of Aug. 25, 1991, 72d Leg., 2d C.S., ch. 6, § 24, 1991 Tex. Sess. Law Serv. 26, 31.

[4] See supra note 2.

[5] Although the Manual, adopted pursuant to the comptroller's authority under section 23.52(d) of the Tax Code, is entitled to deference, it may not be inconsistent with sections 23.51 through 23.57. Compare Tarrant Appraisal Dist. v. Moore, 845 S.W.2d 820, 823 (Tex. 1993) (Manual entitled to deference so long as construction is reasonable and does not contradict plain language of statute) with Riess v. Williamson County Appraisal Dist., 735 S.W.2d 633, 637-38 (Tex. App.—Austin 1987, writ denied) (State Property Tax Board rule held inconsistent with section 23.51).