Determination of Fair Market Value

Local governments, through the county tax assessor, are charged with the responsibility of determining FMV. Georgia law and Department of Revenue regulations provide very broad and general guidelines for valuing land under this system. Tax assessors shall consider the following criteria in determining the FMV of real property:

1. Existing zoning of property;
2. Existing use of property, including any restrictions or limitations on the use of property resulting from state or federal law or rules or regulations adopted pursuant to the authority of state or federal law;
3. Existing covenants or restrictions in deed dedicating the property to a particular use; and, iv.Any other factors deemed pertinent in arriving at FMV. --(O.C.G.A. 48-5-2)

The Fair Market Value (FMV) method for real property is upward-biased toward highest- and best-use property sales and is the root-cause of recent Georgia legislation including: wetlands, value appeals process, conservation easements, agricultural preferential assessment, conservation use valuation, and joint study of revenue structure, among others.

With FMV, inadequate consideration is given to:

1. true comparable sales;
2. existing use of property; and,
3. alternative, supplemental valuation techniques including the income capitalization approach for income producing properties, among others.

Land sales during any year comprise only a very small percentage of all land. Most land that sells tends to be that which is the most desirable and the highest priced. In effect, the land market is relatively small and specialized.

With many land sales, the new use to be made of that land tends to move toward a more intensive, and more expensive, use. Many fewer land sales are made between owners making the same existing use of that land. Consider the issues of collecting sales data across county lines to increase the number of truly comparable sales used to determine FMV, as well as determining more accurately the effects of number of acres per sale (tract size) on sale value per acre.

As a result of the characteristics of the land sales market, a FMV study tends to return values that are upward-biased toward highest- and best-use values. Ultimately, many landowners pay higher property taxes based on an inflated (upwardly-biased) FMV. Owners of other types of property, where the market is more easily and more accurately determined, such as personal residences, cars, and boats, etc., pay a more fair and equitable tax.

Georgia law allows the consideration of existing use when determining FMV. This procedure using the income capitalization approach for valuing property is recognized by the Georgia Department of Revenue, McMichael's Appraising Manual, as well as property tax court decisions. The simple formula to use for this method, when the annual income stream is consistent for a long period of time, is:

Current Value = Income Stream ÷ Capitalization Rate

Therefore, to use this method you need to establish (1) an income stream, and (2) a capitalization rate (``cap rate'').

• The Income Stream may be determined by (1) rental rates as an estimate of the per acre value the market is assigning for the use of farm property, or (2) the production capacity of the soil (which is the basis of Current Use Valuation). For simplicity, current land rental rates may be used as the expected income stream. A survey of local rental rates would be useful. As a side note, the average cash rent for cropland and pasture in Georgia for 1991 was $28.00 and $20.00; 1992 was $30 and $20; and, 1993 was $31 and $21, respectively.
• The Cap Rate is some interest rate to approximate an expected return on the income stream. The Georgia Department of Revenue (DOR) uses a combination of the average Federal Farm Credit Bank bond rate (20% weight) and the average of the interest rates available on typical farm loans from the Federal Land Bank at Columbia, South Carolina (80% weight). This rate is used to calculate the land income values for Current Use valuation of agricultural and forestry property. For the purpose here, we use the DOR's most recently calculated cap rate, 9.62 percent.
• Using the above formula, the following values may be derived:

  Rent/acre/yr.	÷	Cap Rate	=	Estimated Value
  $15	÷	.0962	=	$156 per acre
  $20	÷	.0962	=	$208
  $25	÷	.0962	=	$260
  $30	÷	.0962	=	$312
  $35	÷	.0962	=	$364
  $40	÷	.0962	=	$416
  $50	÷	.0962	=	$520

According to Georgia law and precedent setting cases, these values are to be at least considered in the appraisal process.

In practice, FMV is typically determined by actual property sales occurring in the county within the last 12 to 18 months. The sales are separated into the respective classes and then compiled to establish a range of values. An additional step is often added to include a ``location influence factor.'' This factor takes into account access to roads, utilities, area development and other factors that may enhance the land's value. Finally, a table of values is set and used to appraise similar property based upon the acreage, as well as other chosen influence factors.

Ad valorem property taxes are calculated as follows:

Assessed Value	= FMV × 40%
Tax Owed	= Assessed Value × County Millage Rate
County Tax Digest	= Total of All Assessments
Millage Rate	= Proposed County Budget × County Tax Digest

You can see from this progression of formulas that if FMV increases as a result of mandated reassessment, a number of calculations happen automatically.

Follow these logical steps:

• FMV could increase for individual properties as recorded by reassessment;
• Total assessed value increases because individual FMV's increased;
• Remember, the Total County Digest is the sum of all individual property assessments;
• Total County Digest increases because the sum of individual property assessments has increased;
• What happens to the County Millage Rate when the Total County Digest increases (because of reassessment) and the Proposed County Budget stays the same? Under these conditions the County Millage Rate would decrease; and,
• Average individual property tax does not increase when the Total County Digest increases and the County Millage Rate decreases accordingly.

Property owners not in agreement with the county assigned value have the right under Georgia law to appeal any property value thought unfair or in error. See Fundamentals of Appealing Property Reassessments, University of Georgia Cooperative Extension Service Bulletin AG.ECON. 94-033 for details on property appeals. Also, contact your County Extension Office, Georgia Farm Bureau, Georgia Forestry Association, Georgia Forestry Commission, and/or your County Tax Assessor.