July 25, 2016

When Farmland Becomes Commercial Property How Should the Land Be Valued in the “In-Between” Time? The Kentucky Department of Revenue Weighs In.

Written By

By: Erica Horn and Maddie Schueler

After a series of articles published by The Lexington Herald-Leader criticizing valuation of land as being for “agricultural use”, Fayette County Property Valuation Administrator David O’Neill sent a letter to the Kentucky Department of Revenue seeking advice on the meaning and application of the statutory requirements for valuing agricultural property.  Public concern over this issue has been spurred by the Fayette County PVA’s decision to value parcels of property slated for commercial development according to the property’s “agricultural” value, which is significantly less than the “fair cash value” standard applicable to other property in the Commonwealth.

Under KRS § 132.010(9), “agricultural land” is defined to include “[a]ny tract of land, including all income-producing improvements, of at least ten (10) contiguous acres in area used for the production of livestock, livestock products, poultry products and/or the growing of tobacco and/or other crops including timber.”  “Horticultural land” is defined by KRS § 132.010(10) as “[a]ny tract of land, including all income-producing improvements, of at least five (5) contiguous acres in area commercially used for the cultivation of a garden, orchard, or the raising of fruits or nuts, vegetables, flowers, or ornamental plants.”  KRS § 132.450(2)(a) provides that in determining the total area of land devoted to agricultural or horticultural use, dwelling houses and other areas devoted to family recreation shall be excluded.  Further, when the owner of agricultural or horticultural land is granted a zoning change, KRS § 132.450(2)(b) provides that the land qualifies for agricultural or horticultural assessment until the land changes to the use granted by the zoning classification.

In a response dated June 6, 2016, the Department addressed the questions posed by O’Neill’s letter.  The Department stressed that, contrary to certain advice given by Department officials in the past, acreage associated with a dwelling house cannot be included in the ten-acre or five-acre minimum required for the property to qualify for agricultural or horticultural valuation, respectively.  The Department also stated that property must be actively engaged in agricultural or horticultural use in order to qualify for the lower assessed value.  Although there is no statutory requirement that the property must actually produce income, the property still must be used for agricultural or horticultural activities.

The Department also stated that, even where a zoning change has been granted, the land in question continues to qualify for assessment as agricultural or horticultural land as long as agricultural and horticultural activities are being actively undertaken on the property.  However, if the land lies dormant and unused, simply awaiting future commercial development, a PVA would be justified in removing the agricultural or horticultural designation of the property and assessing the property at fair cash value when use of the property consistent with the zoning change begins.