case study: dairy farm - real estate division · pdf filecase study: dairy farm 1. zone aa for...

Case Study: Dairy Farm

Assignment

1. Estimate the bare land value using the Direct Comparison Approach.

2. Estimate the contributory value of buildings and other improvements to be used in the Cost Approachto Value.

Note: Economic obsolescence is estimated through the use of the Building Residual Technique and isexpressed as a percent of the Reproduction Cost New.

3. Estimate the market value of the subject property applying the Direct Comparison Approach usingappropriate units of comparison.

4. Estimate the market value of the subject property applying the income approach to value. The overallcapitalization rate should be used as derived by the Mortgage Equity formulas.

Related Data

Effective Date of Appraisal is January 1, 2002.1

The property is to be appraised as if free and clear of any encumbrances except for normal mortgage financingavailable to farmers.

Legal Description: The lots and parts of lots known on the official cadastral map for the parish of Saint Henri,county of Levis, registered under Plan numbers P.555, P.556, P.573, L.574 and L.575 in the province ofQuebec.

Highest and Best Use: The highest and best use of the land, together with existing buildings, is dairy farmingas of the date of appraisal.

Zoning: The subject property is located in:

GREEN ZONE (Province of Quebec Agricultural Zoning); AB (Municipal Zoning).

Dairy farming conforms to the above two government zoning requirements.

On December 21, 1978, the Provincial Government of Quebec passed Act No. 90. This law is directed towardthe preservation of agricultural land for agricultural usage. These agricultural lands are identified as "GreenZone" land.

The Municipality of Saint Henri has classified the agricultural land into two zones:

1 Market data and other facts presented in this case study may not represent current market levels or practices. As a demonstration ofappraisal techniques, the lack of current data should be overlooked.

1


1. Zone AA for properties located around the periphery of the village. The following production ispermitted on these properties in the AA Zone:

• cereal grains;• fruit;• vegetables;• trees and nursery plant products;• stables;• honey bees;• greenhouses;• wood lot or maple syrup production.

2. Zone AB for properties located further from the village. In addition to uses permitted in Zone AA, thefollowing are permitted in Zone AB:

• cattle;• sheep;• horses;• rabbits and fur-bearing animals; • swine;• poultry.

General Information for the Area and the Municipality

The Municipality of Saint Henri is situated 16 km southeast of Levis and 240 km east of Montreal in theprovince of Quebec. Saint Henri forms part of the county of Levis which has a total area of 70,500 hectaresof which 14,000 are cultivated. The total population of the county is 95,000 people, of which 3,900 are locatedin the village of Saint Henri. The population, which consists of nearly 100% francophones, enjoys the normalcommunity benefits including church, schools, senior citizen centres, as well as medical clinics. The roadsystem is adequate with Saint Henri located near the main auto route serving the major populated area of theprovince.

Climate:

Precipitation: Rain: 86 cm/yr. Snow: 300 cm/yr.

Frost-free days: 157

Heat units: 2,371 (corn)

Average temperature: January -11"C July +20"C

Summary of the Real Estate Situation for the Area

An analysis of properties sold in the county of Levis over the past three years indicates the majority sold forfarm expansion purposes. This phenomena is the result of new technologies allowing the management of largerfarms.

2


Sales of dairy farms as going concerns (i.e., including cattle, machinery and quota) are rare, considering 30%to 35% equity is necessary to break even.

Land values in the county of Levis have been gradually increasing for the past five years. This is explained bythe fact that most sales are to dairy farmers having a stable income as a result of a supply quota system.

The Dairy Quota System (in the Province of Quebec)

The sale of milk in Quebec is managed by means of production quotas. Fluid milk quota is under the controlof the Federation des Producteurs de Lait du Quebec (Federation of Milk Producers of Quebec). Industrial milkquota is controlled by the Canadian Dairy Commission. Both quotas are traded on the market by means of amonthly auction.

Each province has a milk production quota system. The appraiser must be familiar with the system for the areain which he/she is appraising.

Neighbourhood Analysis

The subject property is situated on Range Boisclair 6 km south of the village of Saint Henri. The majority ofthe inhabitants are farmers, mainly dairy. This neighbourhood is considered typical in comparison with the restof the municipality of Saint Henri with regard to appearance, condition and age of improvements. Roads to thevillage of Saint Henri are paved.

Site Analysis

The farm consists of two parcels situated on the same range located 1.5 km from each other. Both arerectangular in shape, containing a total of 76 hectares. Of the 76 hectares, 47 are cultivated, of which 12hectares are tile drained. The remaining 29 hectares are wooded. The topography of both parcels is flat andthe soil is a clay type of soil in good condition. This soil is well suited to forage and cereal production. Watersupply is by artesian well located some distance from the dairy barn. Line fences are page wire in goodcondition and answer the needs of the farming operation. The building site benefits from all public servicesavailable. The wood lot consists mainly of soft wood trees and is considered to be of medium quality. Siteimprovements are valued at $1,500.

Municipal Assessment

For 2001, the assessment value of the subject property is $129,800.00. The taxation rate for the municipalityof Saint Henri is 77 cents per $100.00 assessment value. The tax is calculated as follows:

$129,800 × .77/100 = $999.46.

Assessment values have increased at the rate of 5% for each year for the past three years. This trend is expectedto continue next year.

3


Description of Improvements

1. House

The house is 1 1/2-storey construction containing 85 square metres of living space. It is at least 60years old and had a complete renovation (interior and exterior) 12 years ago. The ground floor consistsof a hall, living room, kitchen, one bedroom, and full bath. There are four bedrooms on the secondfloor. The basement is not improved and serves as storage space. The structure is well maintained andis in good condition. The living room requires repainting. This house is considered to be aboveaverage for the area.

2. Dairy Barn

Built in 1968 and measures 550 square metres, having a capacity of 42 dairy cows. This style of barn.is popular in this area. It is well maintained and considered above average for the area.

This building has no hay storage. Forage is kept in a separate building. The cattle are tied up in tworows back to back. Each stall has pressurized water bowls, milk pipeline and a mineral/supplementdispenser. A summary of the buildings and reproduction cost new (RCN) follows:

Building BuildingCondition

Area m2 RCN m2 RCN

House Above 85 $800 $68,000

Dairy Barn Above 550 $175 $96,250

Hay Shed Above 300 $80 $24,000

Machine Shed Above 250 $80 $20,000

Silo (note) Above 18 $1,600 $28,800

Waste Platform Above 675 $40 $27,000

Total RCN $264,050

Trends and Value Indicators

Explanatory Notes

Motive

Motive usually consists of a special consideration or arrangement made at the time of sale. It, therefore, shouldbe the first adjustment with the objective of reflecting a "motive free" sale.

Machinery, Livestock and Quota

The values placed on these items reflect the market value of these items as of the date of sale.

4


Woodland and Building Site

The value of woodland and building site land is valued at $150/ha. This value has remained unchanged for thepast five years and appears it will remain steady for a while yet.

Natural Pasture

A market analysis indicates it to be worth $250/ha.

Tile Drainage

Tile drained cultivated land commands a premium of $250/ha drained.

Reproduction Cost New (RCN) of Buildings

The RCN of buildings means estimating as close as possible the cost to reproduce the building as is, completewith over improvements and super adequacies. A cost manual is used to maintain consistency.

Soil Adjustment

A record of sales of different soil types revealed the following:

• Clay commands top value. • Clay loam is slightly inferior to clay by $25/ha. • Sandy loam is more inferior to clay by $50/ha. • Sandy soil is inferior to clay by $75/ha.

Soil Condition

This is difficult to measure from the market. Adjustments are made on the estimated cost to change the soilcondition.

• Good soil condition is the norm. • It would cost approximately $75/ha to raise good condition soil to excellent. • It would cost $50/ha to raise average condition soil to good.

Topography

An analysis of sales indicated buyers are prepared to pay $75 more for level land compared to undulating.

Location

For every kilometre distant from a principal trading town or centre, values drop by 1%.

Note: The value of the wooded land as well as that for the building site is estimated at $150/ha. Naturalpasture is valued at $250/ha.

5


Time Adjustment — (Bare Land)

In order to estimate monthly time adjustment, nine sales of bare land similar to the land of the subject propertywere examined. These sales took place during the past 18 months. A regressional analysis of these sales shouldbe done commenting on the validity of the model.

ComparableNumber

Months Since FirstSale Took Place

Price/Hectare

PredictedValue

1 0 950 945.9326

2 2 930 931.3584

3 5 910 909.4971

4 8 880 887.6358

5 8 890 887.6358

6 10 870 873.0616

7 12 860 858.4874

8 15 840 836.6261

9 18 815 814.7648

The regression analysis of these data offers two main features:

1. It measures the degree to which time explains a change in value. In this case, R = .992792, meaningover 99% of a change in value is explained by time.

2. The regression predicted values smooth the raw data into a straight line, thus eliminating unexplainedprice variations. For example, in Month 8 is the representative value $880 or $890. According to thepredicted values, $887.64 is the most representative value.

Solution: Predicted Value, Month 0 ÷ Predicted Value, Month 18.

$945,9326 ÷ 814.7648 = 1.160989.

Values increased by +16.0989% over 18 months, or .8944% per month, rounded to .9%(straight line).

Bare Land Comparable Sales

Comparable Sale #1

Date: December 2001, (less than one month ago).Legal Description: P.177 of the official cadastral map of the parish of Saint Henri in the registry

division of Levis.Size: 35 hectares cultivated.Soil Type: Sandy loam Beaurivage (inferior to subject by $50/ha).Topography: Undulating (inferior to subject by $75/ha).Soil Condition: Excellent (superior to subject by $75/ha).Sale Price: $26,000.

6


Location: 7 km from St. Henri.Comments: A recent sale to a farmer expanding his farming operation.

Comparable Sale #2

Date: September 2000, (15 months ago).Legal Description: P.731, P.732, of the official cadastral map of the parish of Saint Henri in the

registry division of Levis.Size: 28 ha cultivated, 12 ha woodland and 10 ha of natural pasture.Soil Type: Clay.Topography: Undulating (inferior to subject by $75/ha).Soil Condition: Good.Tile Drainage: 15 ha. (Cost to install drainage is $400/ha, however it now contributes

$250/ha to the value of the drained land.)Sale Price: $31,000Location: 9 km from St. HenriComments: Purchaser paid $6,000 above market value because he urgently needed an area

to spread animal waste from his hog operation.

Comparable Sale #3

Date: March 2001, (10 months ago).Legal Description: P.5 of the official cadastral map of the parish of Saint Bernard in the registry

division of Dorchester.Size: 55 hectares cultivated and 18 hectares wooded.Soil Type: Clay/loam (inferior to subject by $25/ha).Topography: Flat.Soil Condition: Average (inferior to subject by $50/ha).Tile Drainage: 35 ha (contributing $250/ha drained).Sale Price: $47,000.Location: 12 km from St. BernardComments: N/A

Comparable Sale #4

Date: August 2000, (16 months ago).Legal Description: P.402, P.403, P.404 of the official cadastral map of the parish of Saint Isidore

in the registry division of Dorchester.Size: 35 ha cultivated and 5 ha wooded.Soil Type: Sandy (inferior to subject by $75/ha).Typography: Flat.Soil Condition: Good.Tile Drainage: 35 ha (contributing $250/ha).Sale Price: $29,000Location: 10 km from St. Isidore.Comments: N/A

7


Improved Property Sales

Comparable Sale #5

Date: December 2001. No time adjustment necessary.Legal Description: P.515, L.516 of the official cadastral map of the parish of Saint Henri in the

registry division of Levis.Size: 60 ha cultivated (valued at $850/ha).Soil Type: Sandy loam (inferior to subject by $50/ha).Topography: Undulating (inferior to subject by $75/ha).Soil Condition: Good.Tile Drainage: 25 ha (valued at $250 over $850/ha for cultivated land).Location:Buildings:

House: 75 square metre living area (1 1/2-storey building) built approximately 60years ago and renovated 12 years ago. Considered to be average for the area.

Service Buildings: Dairy barn built in 1972. Good quality construction having no functionalutility problems. Capacity of 52 dairy cows, plus their natural replacements. The milk house, hay shed, machinery shed and two forage silos are all ingood condition and in balance with the 52 dairy cow capacity of the farm. The service buildings are considered to be average condition but are estimatedto be $2,500 inferior to the subject property.

Building Value: RCN = $305,000.

Sale Price: $460,000 allocated as follows:

$18,500 House 75,250 Farm buildings57,250 Land61,000 Machinery — remaining economic life 9 years58,000 Cattle

190,000 Quota$460,000 Total

Financing: $180,000 Cash.280,000 Mortgage, 25-year amortization at 8% semi-annual payments.†

RNFI: $39,300‡

† N.B. The Province of Quebec offers a loan guarantee program which effectively results in 8% financingavailable to all farmers in Quebec.

‡ RNFI = Realized Net Farm Income as calculated according to Statistics Canada procedures.

Comparable Sale #6

Date: Recent. No time adjustment necessary.Legal Description: P.651, P.692 of the official cadastral map of the parish of Saint Henri in the

registry division of Levis.Size: 35 ha cultivated, valued at $900/ha, plus 12 ha of wooded land.

8


Soil Type: ClayTopography: Flat.Soil Condition: Good (similar to subject).Tile Drainage: N/ALocation:Buildings:

House: 65 square metres of living area (1 1/2-storey building) built 50 years ago andcompletely renovated a few years ago. Quality considered to be aboveaverage.

Service Buildings: Stable barn (hay stored second storey) is 30 years old but completelyrenovated a few years ago. Capacity of 32 dairy cows, plus normalreplacements. Other service buildings all in good condition and in balancewith the 32-cow capacity of the farm. The quality of the service buildings isconsidered to be above average for the area.


Sale Price: $293,000, allocated as follows:$17,500 House50,200 Farm buildings33,300 Land42,000 Machinery (remaining economic life = 9 years).38,000 Cattle

112,000 Quota$293,000 Total

Financing: $120,000 Cash173,000 Mortgage — 25-year term at 8% semi-annual payments.

$293,000

RNFI: $25,100

Comparable Sale #7

Date: Recent. No time adjustment necessary.Legal Description: L.242, L.309 of the official cadastral map of the parish of Saint Joseph in the

registry division of Levis.Size: 45 ha cultivated, valued at $875/ha, plus 18 ha of wooded land.Soil Type: Clay/loam (inferior to subject by $25/ha).Topography: Flat.Soil Condition: Average ($50/ha inferior to subject).Tile Drainage: 35 ha.Location:

Buildings:

House: 95 square metres of living area (l 1/2-storey building) built 15 years ago. Quality is considered above average for the area.

9


Service Buildings: Stables/barn (hay stored in second storey) built 20 years ago having a capacityof 42 dairy cows, plus normal replacements. The other service buildings arein balance with the 42-cow capacity of the farm. Quality of the servicebuildings is considered above average for the area.

Building Value: RCN = $300,000

Sale Price: $425,000, allocated as follows:$26,000 House73,175 Farm buildings 50,825 Land55,000 Machinery — (remaining economic life 9 yrs.)50,000 Cattle

170,000 Quota$425,000 Total

Financing: $170,000 Cash255,000 Mortgage — 25-year term at 8% semi-annual payments.

$425,000

RNFI: $36,000

Comparable Sale #8

Date: Recent. No time adjustment necessary.Legal Description: P.314, L.315, L.316 of the official cadastral map of the parish of Saint

Michel in the registry division of Bellchasse.Size: 30 ha cultivated, valued at $900/ha.Soil Type: ClayTopography: FlatSoil Condition: Average ($50/ha inferior to subject)Tile Drainage: 15 ha.Location:Buildings:

House: 75 square metres of living area (1 1/2-storey building) built 15 years ago andin good condition. Quality is considered average for this area.

Service Buildings: Stable/barn (hay stored in second storey) built 10 years ago, having a capacityof 64 dairy cows, plus normal replacements. The other service buildings areadequate for the requirements of this farm and are in good condition. Qualityis average for the area. The building capacity is approximately double theland capacity.


Sale Price: $365,000 allocated as follows:

$18,800 House73,450 Farm buildings 30,750 Land

10


50,000 Machinery (remaining economic life = 9 yrs.)42,000 Cattle

150,000 Quota $365,000 Total

Financing: $145,000 Cash220,000 Mortgage — 25-year term @ 8% semi-annual payments.

$365,000

RNFI: $31,500

Income Approach to Value

The calculation of the gross income, cost of operation and the annual realized net farm income (RNFI) mustreflect typical operating conditions.

For the subject property, normal operation has been estimated by the analysis of the owner's past records as wellas comparison to data published in the "Reference Economique en Agriculture du Quebec” (AgriculturalEconomic Reference Manual of Quebec).

The farm has a fluid milk quota of 320 litres of milk/day, plus an industrial milk quota of 4.579 kilograms ofbutterfat (BF) per year.

PROJECTED INCOME 2002

1. Sale or Cattle

Type Inventory Sold Revenue

Cows 45 15 $7,700Bred Heifers 14 0Open Heifers 14 0Calves 14 23 2,875 10,575

2. Animal Products (Milk)Hecto

Product Litres Price/hL Income

* Fluid Milk, Class I 975 50.55 $49,286** Fluid Milk, Class II 49 43.69 2,141*** Industrial Milk, Class I 1,202 39.28 47,215**** Industrial Milk, Class II 63 33.25 2,095 100,7363. Crops

Cereal 9 hectares @ 2.7 tonnes = 24.3 * $150.00 = 3,646

4. Patronage Refund

Co-op rebate on milk deliveries 2,800

Total Gross Income: $117,757

11


Notes Regarding Income

* 320 litres/day × 365 days × 83.5% utilization = 975.2 hL say 975** 320 litres/day × 365 days × 4.2% utilization = 49.0 hL*** (4,579 kg B.F. × 95% Class 1) ÷ 3.6% B.F. = 1,202.0 hL**** (4,579 kg B.F. × 5% Class II) ÷ 3.6% B.F. = 63.0 hL

Industrial milk price per hectolitre (hL) is based on 3.6% butterfat (BF) content.

Each province has its own method to calculate eligible quota. Appraisers must be fully aware of policies forthe area in which they are appraising farms.

Expenses

Variable Expense

Salaries and wages $8,300Crop insurance 300Machinery repair and fuel expenses 7,000Purchase cattle 1,000Vet fees, AI and dairy production monitoring 3,200Feed and concentrate 17,500Seed, fertilizers and sprays 5,600Baler twine 200Custom work 900Transportation and marketing 10,500Sundry and milk house items 1,200

Fixed Expenses

Taxes 1,000Insurance (building, chattels, equipment) 1,800Building and fence repairs 1,500Automobile expenses (farm share) 1,500Telephone and electricity (farm share) 2,400Administration and accounting fees 1,000Interest on operating loan 400Work and management to owner 18,600Credit for use of house ($400/mo. × 12 mo.) 4,800

Reserves for Non-Real Estate Items

There does not seem to be common agreement amongst the various professions as to how reserves for non-realestate items (such as machinery, cattle, etc.), should be calculated.

In an attempt to standardize the procedures for appraisal purposes, the reserves were calculated as follows:

12


(a) Non-depreciating Items:

Value of items × standard loan rates = Total interest

(b) Depreciating Items:

Value of items amortized over the remaining collective life expectancy of the items at standard loanrates.

This process tends to reflect an appropriate set aside regardless of the age of the item(s).

Example: Full line of equipment.

Age Total Value RemainingEconomic Life

AmortizationRate

Set Aside

New $60,000 12 years 8% $7,961

5 yrs. 40,000 7 years 8% 7,682

9 yrs. 20,000 3 years 8% 7,760

Even though the collective age of the equipment varied considerably, the "set aside" calculated in each case wassimilar.

“SET ASIDE” CALCULATIONS FOR SUBJECT PROPERTY

Item Value Interest Rate Set Aside

Cattle* $49,500 8% $3,960

Quota 203,000 8% 16,240

Machinery 60,000 Amortized 8%for 9 years = 9,605

TOTAL SET ASIDE: $29,805* Accounting procedures suggest individual animals are considered as depreciating assets, however,

most farmers value the herd as a non-depreciating asset which maintains its value by means ofcontinuous replacement of culls.

COST APPROACH TO VALUE

Time adj/month = 0.009% Location Adjustment/km = 0.01%

Item Subj. Sale #1 Sale #2 Sale #3 Sale #4 Notes

a Date of Sale Dec/01 Sept/00 Mar/01 Aug/00

b Total Sale Price $26,000 $31,000 $47,000 $29,000

c Motive ($6,000) Note #2

d SP after Motive Adj $26,000 $25,000 $47,000 $29,000 a + c

e Time in Months 0 15 10 16 Note #1

f Time Adj % 0.00% 13.50% 9.00% 14.40% Time × e

g Time Adjusted SP of RE $26,000 $28,375 $51,230 $33,176 d × f

h Kilometres from Mkt 6 7 9 12 10

i Kilometres Difference vs Subj 1 3 6 4 h - subj

j Location Adj % 1.00% 3.00% 6.00% 4.00% Loc × 1

13


k Location Adj Sale Price $26,260 $29,226 $54,304 $34,503 j × g

l Total Hectares 76 35 50 73 40

m Cultivated Hectares 47 35 28 55 35

n Wood & Site Hectares 29 0 12 18 5

o Adj @ $150/Ha $0 ($1,800) ($2,700) ($750) (150 × n)

p Nat Past Hectares 0 0 10 0 0

q Adj @ $250/Ha $0 ($2,500) $0 $0 (250 × p)

r Tile Drainage Hectares 12 0 15 35 35

s Adj @ $250/Ha $0 ($3,750) ($8,750) ($8,750) (250 × r)

t Sale Price of Cultivated Land $26,260 $21,176 $42,854 $25,003 k + o + q + s

u Sale Price per Cultivated Ha $750.29 $756.29 $779.16 $714.37 t/m

v Soil Type Clay Sndy lm Clay Clay lm Sandy

w Adj/Ha $50 $0 $25 $75

x Soil Condition Good Excellent Good Avg Good

y Adj/Ha ($75) $0 $50 $0

z Topography Flat Und Und Flat Flat

aa Adj/Ha $75 $75 $0 $0

ab Adj Val/Ha Cult $850.29 $831.29 $879.16 $864.37 u + w + y + aa

ac

ad VAL / HA CULT ROUNDED $850 $831 $879 $864

Reconciliation:The indicated value per cultivated hectare ranges from $831 to $879. Sale #1 is the most recent and is the best indication ofvalue.

Indicated Val/cult ha $850

Contributory Value of Buildings

Comparable Sale Sale #5 Sale #6 Sale #7 Sale #8

Contributory Value of Bldgs 0.31 0.34 0.33 0.28

Building Condition Avg Abv Avg Abv Avg Avg

Reconciliation:Buildings in above average condition contribute 34.00%

Buildings in average condition contribute 30.00%

Note: The Reproduction Cost New (RCN) of buildings is based on a recognized costing manual.

Summary of Value Using the Cost Approach:

Bare Land Value: Hectares Val/ha Total

Cultivated 47 $850 $39,950

Wooded 29 $150 $4,350

Tile Drained 12 $250 $3,000

Value of bare land $47,300

Site improvements $1,500

14


Contributory Value of Buildings

BldgCondition

AreaSq M

RCN/Sq M

RCN Contribas %

Contrib($)

House Above 85 $800 $68,000 34.00% $23,120

Dairy Barn Above 550 $175 $96,250 34.00% $32,725

Hay Shed Above 300 $80 $24,000 34.00% $8,160

Machine Shed Above 250 $80 $20,000 34.00% $6,800

Silo (note) Above 18 $1,600 $28,800 34.00% $9,792

Waste Platform Above 675 $40 $27,000 34.00% $9,180 $89,777

Totals $264,050 $89,777

Indicated value by Cost Approach $138,577

ROUNDED $138,600

Note 1: The Silo is in vertical metres and the RCN is based on this.Note 2: Adding negative numbers is the same as subtracting.Note 3: Appraisal theory suggests that time must always be the first adjustment. It has become evident however, that

concessions made at the time of sale should be adjusted as of the date of sale. In this case, the motive at thetime of sale was $6,000, therefore should be deducted before time adjustments.

15


DIRECT COMPARISON APPROACHTime adj/month = 0.009% Location Adjustment/km = 0.01%

Item Subj. Sale #5 Sale #6 Sale #7 Sale #8 Notes

a Date of Sale Dec/01 Dec/01 Dec/01 Dec/01

b Total Sale Price $460,000 $293,000 $425,000 $365,000

c Less Non RE Items

d Machinery ($61,000) ($42,000) ($55,000) ($52,000)

e Livestock ($58,000) ($38,000) ($50,000) ($40,000)

f Quota ($190,000) ($112,000) ($170,000) ($150,000)

g Other $0 $0 $0 $0

h Total Non RE Items ($309,000) ($192,000) ($275,000) ($242,000) d + e + f + g

i Residual to RE at Sale Price $151,000 $101,000 $150,000 $123,000 a - d -e -f - g

j Time in Months 0 0 0 0 time × j

k Time Adj @ Int/Mo 0 0 0 0 i × k

l Time Adj Val of RE $151,000 $101,000 $150,000 $123,000

m Kilometres From Mkt 6 2 6 6 6

n Location Adj @ #/Km -4.00% 0.00% 0.00% 0.00% (m - subj) × loc

o Location Adj $’s ($6,040) $0 $0 $0 n × l

p Total Hectares 76 60 47 63 30

q Hectares Cult 47 60 35 45 30

r Val/Ha Cult Date of Sale $850 $900 $875 $900

s Time Adj Val /Ha Cul $850 $900 $875 $900 (l + k) × r

t Adj for Cult Land ($11,050) $10,800 $1,750 $15,300 s - (subj - q)

u Hectares Wooded/Site 29 0 12 18 0 (l + k) × v

v Val/Ha Cult Date of Sale $150 $150 $150 $150

w Time Adj Val /Ha $150 $150 $150 $150 (l + k) × z

x Adj for Wooded Site $4,350 $2,550 $1,650 $4,350 w × (subj - q)

y Hectares Wooded Site 0 0 0 0 0

z Val/Ha Nat Past Sale Date $250 $250 $250 $250

aa Time Adj Val/Ha $250 $250 $250 $250 (l + k) × z

ab Adj for Nat Past $0 $0 $0 $0 aa × (subj - y)

ac Hectares Tile Drain 12 25 0 35 15

ad Val/Ha Tile Dr Sale Price $250 $250 $250 $250

ae Time Adj Val/Ha $250 $250 $250 $250 (l + k) × ad

af Adj for Tile Dr ($3,250) $3,000 ($5,750) ($750) ac × (subj - ac)

ag Soil Type Clay Sndy Lm Clay Clay Lm Clay

ah Val/Ha Soil Type $50 $0 $25 $0

ai Time Adj Val/Ha $50 $0 $25 $0 (l + k) × ah

aj Adj Soil Type $2,350 $0 $1,175 $0 ai × subj cult

ak Soil Condition Good Good Good Avg Avg note #1

al Val/Ha Soil Condition $0 $0 $50 $50

am Time Adj Val/Ha $0 $0 $50 $50 (l + k) × al

an Adj Soil Condition $0 $0 $2,350 $2,350 an × subj cult

ao Topography Flat Und Flat Flat Flat

ap Val/Ha Topography $75 $0 $0 $0

aq Time Adj Val/Ha $75 $0 $0 $0 (l +k) × ap

ar Adj Topography $3,525 $0 $0 $0 aq × subj cult

as Bldg Val @ Time of Sale $89,777 $93,750 $67,700 $99,175 $92,250

at Bldg Val adj for time $93,750 $67,700 $99,175 $92,250 (l + k) × as

au Adj for Bldgs ($3,973) $22,077 ($9,398) ($2,473) Note #4

av

16


aw INDICATED VAL OF SUBJ $136,912 $139,427 $141,777 $141,777 Note #2

ax

ay Absolute Adjustments $34,538 $38,427 $22,073 $25,223 Note #3

Reconciliation:Comparables #6, #7, and #8 strongly support a value of $140.000

Note 1: Adjustments for soil type, condition and topography are based on subject cultivated hectares because the comparablehave already been adjusted for size.

Note 2: l + o + t + x + aa + af + aj + an + ar + auNote 3: o + t + x + aa + af + aj + an + ar + au (absolute values).Note 4: Contributory Value of Buildings.

Item Subj Sale #5 Sale $6 Sale #7 Sale #8

R.E. Value $151,000 $101,000 $150,000 $123,000

Cult Land @ Date of Sale $51,000 $31,500 $39,375 $27,000

Wooded/Site @ Date of Sale $0 $1,800 $2,700 $0

Value of Drained Land $6,250 $0 $8,750 $3,750

Value of Natural Pasture $0 $0 $0 $0

Total Adjustment $57,250 $33,300 $50,825 $30,750

Residual to Buildings 93,750 67,700 99,175 92,250

Reproduction Cost New 305,000 200,000 300,000 330,000

Contrib Val of Bldgs as % 0.3073770 0.3385 0.3305833 0.2795454

Condition of Buildings Avg Above Above Avg

House value 18,500 17,500 26,000 18,800

Size (sq. m.) 75 65 95 75

$/sq. m. 246.67 269.23 273.68 250.67

Farm Buildings 72,250 50,200 73,175 90,370

Cow Capacity 52 32 45 64

Value/cow 1,389.42 1,568.75 1,626.11 1,412

17


INCOME APPROACH

Income

ANIMAL SALES

AvgInventory

Sales Income Totals

Cows 45 15 $7,700

Bred heifers 14

Open heifers 14

Heifer calves 7 23 $2,875 $10,575

ANIMAL PRODUCTS

HLPRICE/hl

Milk Class I 975 $50.55 $49,286

Milk Class II 49 $43.69 $2,141

Milk Industrial I 1,202 $39.28 $47,215

Milk Industrial II 63 $33.25 $2,095 $100,736

CROPS

Unit Hectares Yield Total $/unit Income

Cereals tonnes 9 2.7 24.3 $150 $3,645 $3,645

OTHERS

Dairy Co-op rebate $2,800

GROSS INCOME $117,756

18


Expenses

VARIABLE EXPENSES

Salaries and wages $8,300

Crop insurances $300

Machinery and fuel expenses $7,000

Livestock purchases $1,000

Veterinary, breeding fees, and dairy control $3,200

Feed purchases $17,500

Seed, fertilizer, pesticides $5,600

Baler twine $200

Custom work $900

Transport and shipping $10,500

Sundry and milk house expenses $1,200

Total Variable Expenses $55,700

FIXED EXPENSES

Taxes $1,000

Insurances (building, livestock and equipment) $1,800

Upkeep (buildings and fences) $1,500

Automobile expenses (farm portion) $1,500

Telephone and electricity (farm portion) $2,400

Administration and accounting $1,000

Interest on operating loans $400

Total Fixed Expenses $9,600

TOTAL OPERATING EXPENSES $65,300

RATIO EXPENSE/GROSS INCOME 55%

NET OPERATING INCOME $52,456

Owner’s income for labour and management $18,600

Less: rent val of house ($400 × 12M) $4,800 $13,800

Depreciating Assets REN Value Int Rate

Set aside for machinery 9 $60,000 8.00% $9,605

Set aside = value of depreciating assets amortized over remaining collective economic life. Interest onnon depreciating items:Item - Cattle Quota

19


$49,500 $203,000 8.00% $20,200

NET INCOME TO BE CAPITALIZED $8,852

CAPITALIZATION OF NET INCOME

See derivation of capitalization rate.

Using ME derived cap rate: 8,851.587 ÷ 6.40% = $138,306

Using property residual overall rate: 8,851.587 ÷ 6.40% = $138,306

Rate Selected: 6.40% = $138,306

Note:The rates in this case are identical; however, this is not necessarily true in all cases. A decision would haveto be made as to which method best reflects the market.

Reconciliation:Since both rates are identical, the indicated value by the income approach is $138,306 rounded to $138,300.

20


Derivation of Capitalization Rate

1. Mortgage Equity Approach:

Estimation of ParametersCalculation of equity portion of investments

SaleNo.

Sale Price LivestockQuota

Machinery R.E. Value Equity Equity as %

5 $460,000 $248,000 $61,000 $151,000 $180,000 39%

6 $293,000 $150,000 $42,000 $101,000 $120,000 41%

7 $425,000 $220,000 $55,000 $150,000 $170,000 40%

8 $365,000 $190,000 $52,000 $123,000 $145,000 40%

Mean 39.95%

Median 40.00%

Value Selected 40.00%

Calculation of yield to equity

SaleNo.

Net Incto ent

Set Asideto equip

IntLstk+quot

Net Inc toRE

DebtService

Net toEquity

Value ofRE

5 $39,300 $9,765 $19,840 $9,695 $8,557 $1,138 $151,000

6 $25,100 $6,723 $12,000 $6,377 $5,552 $825 $101,000

7 $36,000 $8,804 $17,600 $9,596 $8,379 $1,217 $150,000

8 $31,500 $8,324 $15,200 $7,976 $6,902 $1,074 $123,000

SaleNo.

Equity inRE

Return toEquity

5 $59,087 1.93%

6 $41,365 1.99%

7 $60,000 2.03%

8 $48,863 2.20%

Mean 2.04%

Median 2.01%

Rate Selected 2.00%

21


Cash Flow calculation of capitalization rate

R = (M × f) + (E × y) REM: Normal financing is based on 25 years @ 8% SA payments asavailable in Que.

= (.60 × f) + (.4 × .02)

6.39%Rounded 6.40%

2. Overall Rate Method:

Property Residual Approach

SaleNo.

Value ofRE

Net Inc toRE

OverallCap Rate

5 $151,000 $9,695 6.42%

6 $101,000 $6,377 6.31%

7 $150,000 $9,596 6.40%

8 $123,000 $7,976 6.48%

Mean 6.40%

Median 6.41%

Rate Selected 6.40%

Correlation and Final Estimate of Value

The indicated values as estimated by the three approaches to value are:

The Income Approach $138,300Cost Approach $138,600Direct Comparison Approach $140,000

All three approaches support a value estimate of: $140,000

The most confidence is given to the Direct Comparison approach because it best reflects the investmentanalysis of the likely purchaser. Even though this is an investment property, it should be noted that thereturn to equity at 2% is small. Any error in calculation would result in a magnified error in the valueestimate. The Income Approach therefore is best suited as support to the estimate of value. Sale #8 havingbuildings that exceed the land production capacity is not a good comparable.

The Cost Approach is reliable where the buildings are relatively new. In this case the contributory value ofthe buildings amounted to 34% meaning 66% loss in value to depreciation from all sources. Because of thelarge depreciation the Cost Approach should also be used as a support to the value estimate.

In conclusion the best indication of value is the Direct Comparison approach indicating a value of $140,000.

22

case study: dairy farm - real estate division · pdf filecase study: dairy farm 1. zone aa for...

Documents