15.15.02.05

### .05 Explanation of Formula for Determining Agricultural Value.

A. Formula's Underlying Premise. The agricultural value of the land on which the landowner has applied to sell an easement shall be determined by the formula provided under Regulation .06. This formula, which measures the farm productivity of the applicant's land, provides a method for ascertaining the capitalized value of the sum necessary to rent the applicant's farm. (The formula's premise is that the capitalized value of cash rents paid for land is a reliable indicator of the land's agricultural value.) The formula numerically explains how certain factors such as a farm's location and its soil types affect rent.

B. Factors Affecting Rent.

(1) Soil Types. A survey of Maryland farmers who rented land revealed a strong relationship between rent and soil types, that is, the greater a land's natural productivity, the greater the rent paid for that land (and per the formula's premise, the greater the agricultural value of the land). As explained in Regulation .07, a land's natural productivity is measured in terms of a soil productivity index. This index is based on the natural characteristics of each soil class and how these characteristics relate to crop production.

(2) Location. A survey of Maryland farmers also revealed a relationship between rent and a farm's location, that is, the greater a farm's average distance from Baltimore and Washington, up to 100 miles, the greater the rent paid for that land (and per the formula's premise, the greater the agricultural value of the land). Beyond 100 miles, the relationship between rent and a farm's location was not significant.

(3) Quantifying How Soil Types and Location Affect Rent. From the results of this survey, a mathematical equation was developed which effectively estimates how a farm's soil types and location would affect its rent. Being able to effectively estimate how these factors would affect a farm's rent (and consequently, per the formula's premise, how they would affect a farm's agricultural value), this equation forms a major step in the Department's formula for determining agricultural value. The mathematical equation is as follows: Rent = -53 + (160 X productivity index) + (0.11 X average distance from Baltimore and Washington, up to 100 miles). The equation, however, is only effective for estimating rental values greater than \$25 per acre. For this reason, under the Department's formula for determining agricultural value, \$25 per acre constitutes the minimum per acre rental value for a parcel of land.

(4) Explanation of Mathematical Equation.

(a) Relationship Between Rent and Soil Types. The chart indicated in Regulation .08 is useful to understand the relationship between rent and soil types. A visual inspection reveals that rents tend to be greater for higher soil productivity indexes. Mathematical methods are used to generalize this relationship into a statistically "best fit" formula shown by the formula line on the graph. The -53 in the equation represents the point where the formula line crosses the rent axis on the graph. It has no practical meaning except to fit the formula line to the data. The 160 in the equation represents the formula line's slope. It means that for each increase of 0.10 in the soil productivity index of a parcel of land, rental values increase \$16.

(b) Relationship Between Rent and Location. The relationship between rent and location of this equation can be similarly explained. The 0.11 in the equation means that for every mile increase in average distance that the applicant's land is from Baltimore and Washington, up to 100 miles, rental rates increase by 11 cents.

(c) Range of Equation's Effectiveness. The \$25 minimum rent value line indicates that the equation is only effective for estimating rents within the range of the data. In those few cases when, under the equation, a land's rental value is estimated to be less than \$25 per acre, use \$25 per acre to complete the formula for determining the land's agricultural value.