Brian Stone is Director of Valuation Services for Forest Resource Consultants. His article outlines an opportunity to improve timberland returns by managing your property tax burden.
As compared to other states, Georgia has the highest ad valorem (property) taxes in the southern U.S. Thus, one of the largest expenditures for many timberland owners in Georgia is their annual property tax payment. The often-exorbitant property taxes have a negative impact on timberland’s investment value (net present value) and financial returns over the long term, especially with lower timber revenues given the current economic climate. However, many landowners do have options to reduce their property tax obligations and improve long-term returns from growing timber.
From January until April of each year, landowners are allowed to file a property tax return (referred to as a declaration of value) with their local taxing authorities. This makes the first few months of the year an appropriate time for landowners to review their property’s assessed values. Areas that are commonly examined include acreage and/or land classification corrections, adjoining parcel mergers, and the possibility of enrollment in tax-saving conservation covenants. Unless your local county assessors have made significant errors in evaluating your property, enrollment in tax-saving programs such as the 10-year Conservation Use Value Assessment (CUVA) or the 15-year Forest Land Protection Act (FLPA) is likely your best opportunity to significantly reduce your annual property tax expenses. Since these covenants require a landowner to keep the property in agricultural use for 10 or 15 years, individual investment horizons and disposition strategies may impact enrollment decisions. Nevertheless, the importance of properly evaluating this tax-saving opportunity has been magnified by the current timberland investment environment where rates of return are contracting due to increased buyer competition (for large, investment-graded timberland properties), lower stumpage prices, and numerous other factors.
What’s the financial benefit of enrolling my timberland in a tax-saving covenant?
Based on valuation analyses this firm has performed on multiple timberland ownerships of varying size and location throughout Georgia, we have observed how enrollment in FLPA (and the resulting reduction in taxes) positively affects Internal Rate of Return (IRR) and Net Present Value (NPV). For the majority of the ownerships reviewed using a 20-year planning horizon, enrollment has increased IRR 25 to 60 basis points with an average increase of 45 basis points. The corresponding increase in NPV associated with enrollment ranged from $70 to $125 per acre with an average increase of $95 per acre. It must be noted that a few exceptions were observed where the county tax appraiser had appropriately set the property’s “market value” at levels commensurate with the Georgia Department of Revenue’s CUVA and FLPA timberland value schedule. In these instances, the upside associated with enrollment was virtually eliminated. Considering the notable negative impact of high annual property taxes, the opportunity to improve financial returns and value through enrollment in a FLPA or CUVA covenant should be very enticing to most landowners and managers. In fact, there is little to no downside in enrollment for most rural timberland owners who plan to continue to manage their property for timber production.
What are the steps in the enrollment process?
First, a landowner should determine which tax-saving covenant, either CUVA or FLPA, best fits their ownership scenario and investment objectives. Both programs carry penalties if the covenant is breached, so consideration must be given before entering into an agreement. CUVA requires a minimum parcel size of 10 acres with a maximum statewide enrollment of 2,000 acres per owner. FLPA requires a minimum parcel size of 200 acres with no acreage enrollment cap. Once you have determined which covenant best fits your situation, an evaluation of each parcel in your ownership should be conducted with a realistic view toward possible future changes in use. It is important to remember that enrollment is not an all or none proposition. In the end, there may be a group of tax parcels that you decide not to enroll given their future potential for transition to more valuable use (such as residential development, etc.). Finally, enroll your property in as many separate covenant agreements as possible. Enrolling each tax parcel as a separate covenant agreement (as long as it meets minimum acreage requirements) will help mitigate risk associated with breaching penalties, if that situation were ever to occur. Also, group several smaller adjoining tax parcels together in a single covenant agreement (if necessary) to meet the minimum acreage requirement. After completing the enrollment process, you should begin to enjoy a reduction in annual expenses from tax savings that will ultimately lead to increased long-term returns.
Please contact FRC if you have any questions or need assistance in evaluating property tax assessment values, tax-saving conservation covenant program options, or if you are in need of other appraisal services in the management of your timberland assets.