West Virginia Code of State Rules › Agency 110 - Tax › Title 110 - LEGISLATIVE RULE STATE TAX DEPARTMENT › Series 110-01H - Value Of Timberland And Managed Timberland › Section 110-1H-12 - Capitalization Rate

Current through Register Vol. XLI, No. 28, July 12, 2024
The average statewide capitalization rate (based on a 5-year
				  weighted moving average of various components) for managed timberland shall be
				  determined annually by the Tax Commissioner through the use of generally
				  accepted methods of determining those rates. The rate shall be based on the
				  assumption of a discounted cash flow model based upon harvest intervals
				  reflected in Appendix 4 of this rule. The capitalization rate used to value
				  managed timberland shall be developed considering the following:
12.1. Discount Component. -- The summation
				technique shall be used in developing a discount component of the
				capitalization rate. The five subcomponents of the discount component are:
12.1.1. Safe Rate. -- The safe rate shall
				reflect a rate of return that an investor could expect on an investment of
				minimal risk. This rate shall be developed through weighted averages of
				interest rates offered on five-year United States Treasury Bills for the five
				years immediately preceding the appraisal date.
12.1.2. Nonliquidity . -- The nonliquidity
				rate shall be developed through an annual review to determine a reasonable
				estimate of time that timberland, when exposed for sale, remains on the market
				before being sold. The time thus determined shall be used to identify United
				States Treasury Bills with similar time differentials in excess of
				thirteen-week Treasury Bills. The interest differential between these
				securities shall be used to represent the nonliquidity rate. For example, if it
				is determined that a tract of timberland remains on the market for an average
				of nine months (39 weeks) before being sold, the nonliquidity rate shall be
				derived by subtracting the rate on 13-week Treasury Bills from the rate on one
				year Treasury Bills. This review shall consider the weighted average of these
				differences for a five year period immediately preceding the appraisal
				date.
12.1.3. Risk Rate. -- The
				relative degree of risk of an investment in timberland shall be developed
				through an annual review of thirty-year United States Treasury Bills less
				five-year United States Treasury Bills. The review shall consider the weighted
				averages of debt and equity components of these differences for a five-year
				period immediately preceding the appraisal date.
12.1.4. Management Rate. -- The management
				rate represents the cost of managing the investment, not the cost of managing
				the timberland. Historically, the management rate has been one-half of one
				percent (0.5%); therefore, this rate shall be considered the industry standard
				for current applications.
12.1.5.
				Inflation Rate (negative). -- Nominal interest rates, including the "safe rate"
				mentioned in subdivision 12.1.1 of this rule, are higher than real rates by an
				amount representing expectation of future inflation. However, net annual income
				from timberland is to be estimated assuming level future prices (no inflation).
				Therefore, the capitalization rate must be a real rate, net of expectation of
				inflation. The inflation rate shall be established through a weighted average
				analysis of the most recent five calendar year's urban consumer price index as
				determined by the United States Department of Labor, Bureau of Labor
				Statistics.
12.1.6. Discount
				Component. -- In determining the discount component of the capitalization rate,
				the Tax Commissioner shall take the sum of the safe rate, the nonliquidity
				rate, the risk rate, and the management rate, and shall deduct from this sum
				the inflation rate.