ARA Agricultural Economics & Land Use Analysis 3 ā Questions and Answers
Question 1: When calculating a capitalization rate for irrigated cropland, an appraiser should primarily use rates derived from:
- National average Treasury bond yields
- Local market sales of comparable irrigated properties (Correct answer)
- State average farmland tax assessments
- USDA published benchmark interest rates
Correct answer: Local market sales of comparable irrigated properties
Capitalization rates for farmland should be extracted from the local market using paired sales of similar irrigated properties to reflect current investor expectations.
Question 2: A rural appraiser must account for 'conservation easements' on agricultural land. What is the primary effect on market value?
- Conservation easements always increase value via tax benefits
- They typically restrict development rights and reduce market value (Correct answer)
- They have no effect because agricultural use is unchanged
- They convert the land to government ownership
Correct answer: They typically restrict development rights and reduce market value
Conservation easements permanently restrict development and certain other uses, which typically reduces market value relative to unencumbered comparable sales.
Question 3: The 'land residual technique' in agricultural income capitalization assigns value by:
- Subtracting land taxes from gross rental income
- Capitalizing income remaining after returns to non-land inputs are deducted (Correct answer)
- Dividing total farm income by number of acres
- Applying a fixed land-to-building value ratio
Correct answer: Capitalizing income remaining after returns to non-land inputs are deducted
The land residual technique isolates land's contribution by deducting returns attributable to capital, labor, and management from total farm income, then capitalizing the remainder.
Question 4: Which market condition indicator would most suggest a buyer's market for rural farmland?
- Multiple competing offers on listed properties
- Rising cash rental rates and declining cap rates
- Extended marketing periods and price reductions (Correct answer)
- Strong commodity futures prices
Correct answer: Extended marketing periods and price reductions
Extended days on market and seller price reductions indicate excess supply relative to demand, characteristic of a buyer's market.
Question 5: An ARA appraiser must adjust for a 'time of sale' difference when market conditions changed significantly. Which data source is most reliable for quantifying this adjustment?
- National USDA Land Values Survey annual report
- Paired sales of similar properties sold at different times in the same market (Correct answer)
- Federal Reserve agricultural credit condition reports
- County assessor's annual revaluation percentage
Correct answer: Paired sales of similar properties sold at different times in the same market
Paired salesāidentical or near-identical properties sold at different points in timeādirectly quantify market condition changes for time adjustments.
Question 6: Which soil classification system is most widely referenced in US farmland appraisals to describe agricultural land capability?
- USDA Soil Capability Classes (IāVIII) (Correct answer)
- EPA Brownfield Rating System
- SCS Hydrologic Soil Groups (AāD)
- ASCE Land Productivity Tiers
Correct answer: USDA Soil Capability Classes (IāVIII)
USDA Land Capability Classes (IāVIII) categorize soil suitability for agricultural production, with Class I being the most productive and Class VIII least suitable.
Question 7: A farm's 'net farm income' differs from 'cash flow' primarily because net income:
- Excludes operator labor and management charges
- Includes non-cash items such as depreciation and inventory changes (Correct answer)
- Is reported on a cash basis under GAAP
- Subtracts only variable costs from gross revenue
Correct answer: Includes non-cash items such as depreciation and inventory changes
Net farm income is an accrual-based measure that includes non-cash adjustments like depreciation and inventory changes, whereas cash flow tracks actual cash receipts and disbursements.
ARA Agricultural Economics & Land Use Analysis 3
When calculating a capitalization rate for irrigated cropland, an appraiser should primarily use rates derived from: