Title of Regulation: 2VAC5-20. Standards for Classification of Real Estate as Devoted to Agricultural Use and to Horticultural Use under the Virginia Land Use Assessment Law (amending 2VAC5-20-10 through 2VAC5-20-40).

Statutory Authority: § 58.1-3230 of the Code of Virginia.

Public Hearing Information: No public hearings are scheduled.

Public Comment Deadline: March 20, 2020.

Agency Contact: Kevin Schmidt, Director, Office of Policy, Planning and Research, Department of Agriculture and Consumer Services, P.O. Box 1163, Richmond, VA 23218, telephone (804) 786-1346, FAX (804) 371-7679, TTY (800) 828-1120, or email kevin.schmidt@vdacs.virginia.gov.

Basis: Section 3.2-102 A of the Code of Virginia states that the Commissioner of the Department of Agriculture and Consumer Services (VDACS) shall be vested with the powers and duties set out in §§ 2.2-601 and 3.2-102 of the Code of Virginia and such other powers and duties as may be prescribed by law.

Section 58.1-3230 of the Code of Virginia requires that the commissioner prescribe uniform standards in accordance with the Virginia Administrative Process Act (§ 2.2-4000 et seq. of the Code of Virginia) for "real estate devoted to agricultural use" and "real estate devoted to horticultural use," and Chapter 504 of the 2018 Acts of Assembly expands the scope of the standards in § 58.1-3230 requiring the commissioner revise 2VAC5-20.

Purpose: The proposed change will bring the regulation into compliance with the changes made to Article 4 (§ 58.1-3229 et seq.) of Chapter 32 of the Code of Virginia by Chapter 504 of the 2018 Acts of Assembly. Additionally, VDACS staff has identified parts of the regulation that needs clarifying so that the commissioner is better able to provide opinions upon request by commissioners of the revenue or local assessing officers. This regulatory action does not impact public health or safety; however, general public welfare is protected when regulations are in compliance with statutory requirements. Additionally, commissioners of the revenue, local assessing officers, and individual landowners will all benefit from standards that are clear and consistent.

Substance: The proposed amendments to the regulation include standards for determining whether real estate meets the expanded definition of real estate devoted to agricultural use or real estate devoted to horticultural use. Specifically, the amendments include standards for determining whether real estate is (i) devoted to the bona fide production for sale of plants and animals, or products made from such plants and animals on the real estate, that are useful to man; (ii) devoted to the bona fide production for sale of fruits of all kinds, including grapes, nuts, and berries; vegetables; nursery and floral products; and plants or products directly produced from fruits, vegetables, nursery and floral products, or plants on such real estate; or (iii) devoted to and meeting the requirements and qualifications for payments or other compensation pursuant to soil and water conservation programs under an agreement with an agency of the state or federal government under uniform standards prescribed by the commissioner in accordance with the Administrative Process Act. The proposed amendments also remove the existing requirement that real estate be used for a particular purpose for a minimum length of time before qualifying as real estate devoted to agricultural use or horticultural use.

Issues: As a result of recent requests from commissioners of the revenue and local assessing officers for the commissioner to issue opinions pursuant to 2VAC5-20-40, agency staff and legal counsel have identified language in the existing regulation that needs clarifying. The proposed amendments to this regulation provide that clarity. Landowners and other members of the public will also benefit from clarification as to what is required for a parcel of land to be considered real estate devoted to agricultural use or to horticultural use. The removal of the five-year previous use requirement may also encourage additional agricultural land that is not currently being farmed to be made available for agricultural use. There are no disadvantages to the public or the Commonwealth.

Small Business Impact Review Report of Findings: This proposed regulatory action serves as the report of the findings of the regulatory review pursuant to § 2.2-4007.1 of the Code of Virginia.

Department of Planning and Budget's Economic Impact Analysis:

Summary of the Proposed Amendments to Regulation. The Commissioner of Agriculture and Consumer Services (Commissioner) proposes amendments to this regulation for consistency with changes to the Virginia Land Use Assessment Law (Law), § 58.1-3229 et seq., that occurred through Chapter 504 of the 2018 Acts of Assembly (Chapter 504).

Background. The regulation includes a preamble that states that the purpose of the regulation is to: 1) Encourage the proper use of real estate in order to assure a readily available source of agricultural, horticultural, and forest products, and of open space within reach of concentrations of population; 2) Conserve natural resources in forms that will prevent erosion; 3) Protect adequate and safe water supplies; 4) Preserve scenic natural beauties and open spaces; 5) Promote proper land-use planning and the orderly development of real estate for the accommodation of an expanding population; and 6) Promote a balanced economy and ease pressures that force the conversion of real estate to more intensive uses.

The Law authorizes localities that have adopted a land-use plan to adopt an ordinance to provide for the use value assessment and taxation of real estate classified in § 58.1-3230. Use value assessment is in contrast to fair market value assessment. Fair market value is essentially the amount one could expect to sell a parcel for if no further restrictions were placed on its use other than those placed on the parcel through the local political process. Use value is the amount that one would expect to sell the land for if it were restricted to a pre-defined use. For instance, agricultural use value is the amount one would expect to receive if the land were to be maintained solely in agricultural use. As the options for land use are restricted, one would typically find that use value is less than fair market value.²

In practice, localities often choose to have use value ordinances to discourage the conversion of land from a preferred purpose such as agriculture, to a less preferred purpose, such as an additional housing development. Since keeping real estate in agriculture may result in lower property value assessments with the use value, it may lower the real estate tax bill for the owner.

Section 58.1-3230 establishes four special classifications of real estate for the purposes of the Law, including "real estate devoted to agricultural use" and "real estate devoted to horticultural use." The definitions of both real estate devoted to agricultural use and real estate devoted to horticultural use in the Law require the Commissioner to prescribe uniform standards in accordance with the Virginia Administrative Process Act (§ 2.2-4000 et seq. of the Code of Virginia). As directed by this requirement, the Commissioner promulgated thisregulation, which first became effective in 1988.

The regulation includes specified activities associated with agriculture or horticulture that must occur on the property for it to qualify as "real estate devoted to agricultural use" or "real estate devoted to horticultural use." In order for the property to qualify, the owner must certify that the real estate is being used in a planned program of practices that: 1) With respect to real estate devoted to a use that disturbs the soil or that affects water quality, is intended to (in the case of soil) reduce or prevent soil erosion and (in the case of water) improve water quality by best management practices, such as terracing, cover cropping, strip cropping, no-till planting, sodding waterways, diversions, water impoundments, and other best management practices, to the extent that best management practices exist for that use of the real estate; 2) With respect to real estate devoted to crops grown in the soil, is intended to maintain soil nutrients by the application of soil nutrients (organic and inorganic) needed to produce average yields of such crops or as recommended by soil tests; and 3) Is intended to control brush, woody growth, and noxious weeds on row crops, hay, and pasture by the use of herbicides, biological controls, cultivation, mowing, or other normal cultural practices.

Estimated Benefits and Costs. The Commissioner proposes several amendments to the regulation that mirror changes to the Law from Chapter 504. The changes generally expand the situations where real estate qualifies as "real estate devoted to agricultural use" or "real estate devoted to horticultural use." To the extent that local commissioners of revenue and landowners are already aware of the changes to the Law, these proposed changes to the regulation should not have a large impact. The changes would be beneficial in that they would reduce the likelihood of confusion as toward the law in effect for readers of the regulation.

The current regulation includes a requirement that for real estate to qualify for designation as "real estate devoted to agricultural use" or "real estate devoted to horticultural use," it must have been devoted, for at least five consecutive years previously, to specified activities associated with agriculture or horticulture. The current regulation also specifies minimum field crop production and minimum sales over the previous three years. Chapter 504 inserted the following statement into the Law:

If the uniform standards prescribed by the Commissioner of Agriculture and Consumer Services pursuant to § 58.1-3230 require real estate to have been used for a particular purpose for a minimum length of time before qualifying as real estate devoted to agricultural use or horticultural use, then (i) use of other similar property by a lessee of the owner shall be included in calculating such time and (ii) the Commissioner of Agriculture and Consumer Services shall include in the uniform standards a shorter minimum length of time for real estate with no prior qualifying use, provided that the owner submits a written document of the owner's intent regarding use of the real estate containing elements set out in the uniform standards. Localities are not required to maintain such written document.

The Commissioner proposes to eliminate the requirement that the land have been devoted, for at least five consecutive years previously, to specified activities associated with agriculture or horticulture and instead have the applicant certify that the real estate currently is devoted to the specified activities. Mirroring the Law, those activities are: 1) Be devoted to the bona fide production for sale of plants or animals that are useful to man; 2) Be devoted to the bona fide production for sale of products that are useful to man and that are made on the real estate from plants or animals produced on the real estate; 3) Be devoted to the bona fide production for sale of fruit of all kinds, including grapes, nuts, and berries; 4) Be devoted to the bona fide production for sale of vegetables; 5) Be devoted to the bona fide production for sale of nursery or floral products; 6) Be devoted to the bona fide production for sale of plants or products directly produced on such real estate from fruits, vegetables, nursery or floral products, or plants produced on such real estate; or 7) Be devoted to and meet the requirements and qualifications for payments or other compensation pursuant to a soil and water conservation program under an agreement with an agency of the state or federal government.

This proposed change would very likely increase the number of properties that qualify as "real estate devoted to agricultural use" or "real estate devoted to horticultural use," since meeting at least one of those activities in the present is substantially easier to achieve than to do so for five consecutive years. The Commissioner also proposes to remove the three-year requirements for minimum field crop production and minimum sales. These proposed amendments also make it easier for properties to qualify, and would likely increase the number of properties that are designated as "real estate devoted to agricultural use" or "real estate devoted to horticultural use." To the extent that the specified activities are preferable to alternative uses of the land such as building new houses or office buildings, and to the extent that the property owner maintains the best management practices required for qualification, the proposed amendments would be beneficial.

Since more properties would qualify, more real estate would be assessed at the typically lower use value rather than the fair market value. Owners of the qualified properties would often pay lower real estate taxes. Thus, localities that have ordinances for use value assessments for agricultural and/or horticultural real estate may receive lower revenue.

Businesses and Other Entities Affected. All owners of real estate in the Commonwealth that is not exempt from taxation are potentially affected. Owners of real estate located in a participating locality who would consider devoting the land to agriculture or horticulture use are particularly affected.

Localities³ Affected.⁴ Since all local governments may choose to have use value assessments for agricultural or horticultural real estate, all are potentially affected by the proposed amendments. As of 2017, the following local governments did have use value assessments for agricultural and/or horticultural real estate:⁵

Cities: Buena Vista, Chesapeake, Danville, Franklin, Fredericksburg, Hampton, Harrisonburg, Lynchburg, Petersburg, Radford, Roanoke, Staunton, Suffolk, Virginia Beach, Waynesboro, and Winchester.

Counties: Accomack, Albemarle, Alleghany, Amelia, Amherst, Appomattox, Augusta, Bath, Bedford, Bland, Botetourt, Campbell, Caroline, Carroll, Chesterfield, Clarke, Culpeper, Cumberland, Dinwiddie, Essex, Fairfax, Fauquier, Floyd, Fluvanna, Franklin, Frederick, Giles, Gloucester, Goochland, Greene, Greensville, Hanover, Henrico, Henry, Isle of Wight, James City, King George, King William, Lancaster, Loudoun, Louisa, Madison, Middlesex, Montgomery, Nelson, New Kent, Northampton, Northumberland, Nottoway, Orange, Page, Pittsylvania, Powhatan, Prince Edward, Prince George, Prince William, Pulaski, Rappahannock, Richmond, Roanoke, Rockbridge, Rockingham, Russel, Shenandoah, Smyth, Southampton, Spotsylvania, Stafford, Tazewell, Warren, Washington, Westmoreland, Wise, Wythe, and York.

Towns: Altavista, Amherst, Blacksburg, Bridgewater, Chilhowie, Christiansburg, Dayton, Front Royal, Hillsville, Lebanon, Leesburg, Louisa, Lovettsville, Montross, New Market, Pulaski, Remington, Windsor, and Wytheville.

Eliminating the five-year consecutive use requirement and the three-year requirements for minimum field crop production and minimum sales would likely increase the number of properties that qualify for use value assessments. Since use value assessments are typically lower than fair market value assessments, there would likely be reduced revenue for participating localities.

Projected Impact on Employment. The proposals to eliminate the five-year consecutive use requirement and the three-year requirements would likely increase the use of land for agricultural or horticultural purposes versus for other purposes. Consequently, employment in agricultural and horticultural activities may increase, and employment associated with alternative uses of the land may decrease. It is not clear whether there would be a net increase or decrease in total employment.

Effects on the Use and Value of Private Property. The proposals to eliminate the five-year consecutive use requirement and the three-year requirements would likely increase the use of land for agricultural or horticultural purposes. Since the real estate taxes would likely be lower for the affected properties, the cost of developing the land for agricultural or horticultural purposes would likely be lower.

Adverse Effect on Small Businesses:⁶ The proposed amendments do not directly adversely affect small businesses.

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²Source for "use value" and "fair market value" definitions: Lamie, Dave and Gordon Groover, "A Citizens' Guide to The Use Value Taxation Program in Virginia," 2009, Virginia Cooperative Extension Publication 448-037.

³"Locality" can refer to either local governments or the locations in the Commonwealth where the activities relevant to the regulatory change are most likely to occur.

⁴§ 2.2-4007.04 defines "particularly affected" as bearing disproportionate material impact.

⁵Source: Kulp, Stephen C. "Virginia Local Tax Rates, 2017: Information for All Cities and Counties and Selected Incorporated Towns," Weldon Cooper Center for Public Service.

⁶Pursuant to § 2.2-4007.04 of the Code of Virginia, small business is defined as "a business entity, including its affiliates, that (i) is independently owned and operated and (ii) employs fewer than 500 full-time employees or has gross annual sales of less than $6 million."

Agency's Response to Economic Impact Analysis: The agency concurs with the analysis of the Department of Planning and Budget.

Summary:

In response to Chapter 504 of the 2018 Acts of Assembly, the proposed amendments (i) clarify requirements by listing the specified activities associated with agriculture or horticulture that must occur on a property for it to qualify as "real estate devoted to agricultural use" or "real estate devoted to horticultural use"; (ii) require that the owner must certify to such; and (iii) eliminate the requirement that the land must have been devoted for at least five consecutive years previously to specified activities associated with agriculture or horticulture.

2VAC5-20-10. Preamble Purpose.

The Commissioner of Agriculture and Consumer Services adopts these Standards for Classification of Real Estate As Devoted to Agricultural Use and to Horticultural Use Under the Virginia Land Use Assessment Law to:

1. Encourage the proper use of real estate in order to assure a readily available source of agricultural, horticultural, and forest products, and of open space within reach of concentrations of population.

2. Conserve natural resources in forms that will prevent erosion.

3. Protect adequate and safe water supplies.

4. Preserve scenic natural beauties and open spaces.

5. Promote proper land-use planning and the orderly development of real estate for the accommodation of an expanding population.

6. Promote a balanced economy and ease pressures which that force the conversion of real estate to more intensive uses.

The real estate must meet all of the following standards in this chapter to qualify for agricultural or for horticultural use.

2VAC5-20-20. Previous and current use, and exceptions Current use.

A. Previous use. The real estate sought to be qualified must have been devoted, for at least five consecutive years previous, to the production for sale of plants or animals, or to the production for sale of plant or animal products useful to man, or devoted to another qualifying use including, but not limited to:

1. Aquaculture

2. Forage crops

3. Commercial sod and seed

4. Grains and feed crops

5. Tobacco, cotton, and peanuts

6. Dairy animals and dairy products

7. Poultry and poultry products

8. Livestock, including beef cattle, sheep, swine, horses, ponies, mules, or goats, including the breeding and grazing of any or all such animals

9. Bees and apiary products

10. Commercial game animals or birds

11. Trees or timber products of such quantity and so spaced as to constitute a forest area meeting standards prescribed by the State Forester, if less than 20 acres, and produced incidental to other farm operations

12. Fruits and nuts

13. Vegetables

14. Nursery products and floral products.

If a tract of real estate is converted from nonproduction to agricultural or horticultural production, the tract may qualify without a five-year history of agricultural or horticultural use only if the change expands or replaces production enterprises existing on other tracts of real estate owned by the applicant.

B. Current use. The real estate sought to be qualified must currently be devoted to the production for sale of plants or animals, or to the production for sale of plant or animal products useful to man, or devoted to another qualifying use including, but not limited to, the items in subsection A of this section; except that no A. The applicant shall certify that the real estate sought to be qualified currently meets one or more of the following requirements:

1. Be devoted to the bona fide production for sale of plants or animals that are useful to man;

2. Be devoted to the bona fide production for sale of products that are useful to man and that are made on the real estate from plants or animals produced on the real estate;

3. Be devoted to the bona fide production for sale of fruit of all kinds, including grapes, nuts, and berries;

4. Be devoted to the bona fide production for sale of vegetables;

5. Be devoted to the bona fide production for sale of nursery or floral products;

6. Be devoted to the bona fide production for sale of plants or products directly produced on such real estate from fruits, vegetables, nursery or floral products, or plants produced on such real estate; or

7. Be devoted to and meet the requirements and qualifications for payments or other compensation pursuant to a soil and water conservation program under an agreement with an agency of the state or federal government.

B. No real estate devoted to the production of trees or timber products may qualify unless:

1. The real estate is less than 20 acres.;

2. The real estate meets the technical standards prescribed by the State Forester,; and

3. The real estate is producing tree or timber products incidental to other farm operations.

C. Exceptions.

1. Conversions by farm operator -- nonqualifying real estate. If a tract of real estate is converted from other uses or nonproduction to agricultural or horticultural production, the tract may qualify without the five-year history of agricultural or horticultural use when the change expands or replaces production enterprises existing on other tracts of real estate owned by the applicant, regardless of location.

2. Conversions by farm operator -- qualifying real estate. If a tract of real estate is converted from a qualifying use (forestry or open space) to agricultural or horticultural production, the tract may qualify without the five year history of agricultural or horticultural use.

3. Government action. If a tract of real estate which has previously qualified for agricultural use taxation is not devoted to agricultural or horticultural production because of governmental actions, the tract or portions shall be considered productive for that period of time.

4. Crops that require more than two years. The tract of real estate may qualify without the five-year history of agricultural or horticultural use if the tract of real estate is devoted to the production of any agricultural or horticultural crop that requires more than two years from initial planting until commercially feasible harvesting, and the locality in which the tract of real estate is located has waived with respect to such real estate the five-year-history-of-agricultural-or-horticultural-use requirement.

2VAC5-20-30. Conservation of land resources; management and production.

A. Conservation of land resources. The applicant shall certify that the real estate is being used in a planned program of practices that:

1. With respect to real estate devoted to a use that disturbs the soil or that affects water quality, is intended to (in the case of soil) reduce or prevent soil erosion and (in the case of water) improve water quality by best management practices such as terracing, cover cropping, strip cropping, no-till planting, sodding waterways, diversions, water impoundments, and other best management practices, to the extent that best management practices exist for that use of the real estate.

2. With respect to real estate devoted to crops grown in the soil, is intended to maintain soil nutrients by the application of soil nutrients (organic and inorganic) needed to produce average yields of such crops or as recommended by soil tests.

3. Is intended to control brush, woody growth, and noxious weeds on row crops, hay, and pasture by the use of herbicides, biological controls, cultivation, mowing, or other normal cultural practices.

B. Management and production. The applicant shall certify that the real estate is being used in a planned program of management and production for sale of plants or animals (or plant or animal products useful to man), which include, but are not limited to, field crops, livestock, livestock products, poultry, poultry products, dairy, dairy products, aquaculture products, and horticultural products; or that the real estate is being used for any other thing that is a qualifying use pursuant to 2VAC5-20-20 that corresponds with the demonstration of at least one of the requirements in 2VAC5-20-20 A 1 through A 6.

C. Field crop production shall be primarily for commercial uses and the average crop yield per acre on each crop grown on the real estate during the immediate three years previous, shall be equal to at least one-half of the county (city) average for the past three years; except that the local government may prescribe lesser requirements when unusual circumstances prevail and such requirements are not realistic.

Livestock, dairy, poultry, or aquaculture production shall be primarily for commercial sale of livestock, dairy, poultry, and aquaculture products. Livestock, dairy, and poultry shall have a minimum of 12 animal unit-months of commercial livestock or poultry per five acres of open land in the previous year. One animal unit to be one cow, one horse, five sheep, five swine, 100 chickens, 66 turkeys, or 100 other fowl. (An animal unit-month means one mature cow or the equivalent on five acres of land for one month; therefore, 12 animal unit-months means the maintenance of one mature cow or the equivalent on each five acres for 12 months, or any combination of mature cows or the equivalent and months that would equal 12 animal unit-months, such as three mature cows or the equivalent for four months, four mature cows or the equivalent for three months, two mature cows or the equivalent for six months, etc.).

Horticultural production includes nursery, greenhouse, cut flowers, plant materials, orchards, vineyards, and small fruit products.

Timber production, in addition to crop, livestock, dairy, poultry, aquaculture, and horticultural production on the real estate must meet the standards prescribed by the Department of Forestry for forest areas and will be assessed at use value for forestry purposes.

2VAC5-20-40. Certification procedures.

A. Documentation. The commissioner of the revenue or the local assessing officer may require the applicant to document what the applicant must certify pursuant to 2VAC5-20-20 and 2VAC5-20-30. The commissioner of the revenue or local assessing officer may find one of the following documents useful in making his determination:

1. The assigned USDA/Farm Service Agency farm number and evidence of participating in a federal farm program;

2. Federal tax forms (1040F) Farm Expenses and Income, (4835) Farm Rental Income and Expenses, or (1040E) Cash Rent for Agricultural Land;

3. A Conservation Farm Management Plan conservation farm management plan prepared by a professional; or

4. Gross sales averaging more than $1,000 annually over the previous three years Documentation demonstrating that the real estate sought to be qualified currently is devoted to the bona fide production for sale of one of the requirements in 2VAC5-20-20 A 1 through A 6; or

5. Documentation demonstrating that the real estate sought to be qualified currently is devoted to and meeting the requirements and qualifications for payments or other compensation pursuant to a soil and water conservation program under an agreement with a federal government or state government agency.

B. Interpretation of standards. In cases of uncertainty on the part of the commissioner of the revenue or the local assessing officer, the law authorizes him to request an opinion from the Commissioner of Agriculture and Consumer Services as to whether a particular property meets the criteria for agricultural or horticultural classification. The procedure for obtaining such an opinion is as follows:

1. The commissioner of the revenue or the local assessing officer shall address a letter to the Commissioner, Virginia Department of Agriculture and Consumer Services, P.O. Box 1163, Richmond, Virginia 23218, describing the use and situation, and requesting an opinion of whether the real estate qualifies as agricultural or horticultural real estate for the purpose of use-value taxation. The letter should include the following:

a. Owner's name and address.

b. Operator's name and address.

c. Total number of acres, acres in crops, acres in pastures, acres in a federal or state soil and water conservation programs (Farm Service Agency, Natural Resources Conservation Service, Virginia Department of Conservation and Recreation programs), program, and acres in forest.

d. If more than one tract of real estate, the number of acres in each tract and whether the tracts are contiguous.

e. A copy of the application for land use assessment taxation.

f. In any case involving a question about the applicability of the exception to the five-year-history-of-agricultural-or-horticultural-use requirement contained in 2VAC5-20-20 C 4 (relating to real estate devoted to the production of an agricultural or horticultural crop that requires more than two years from initial planting until commercially feasible harvesting), a statement as to whether the locality has waived with respect to such real estate, the five-year-history-of-agricultural-or-horticultural-use requirement.

2. The commissioner may request additional information, if needed, directly from the applicant; or he may hold a hearing at which the applicant and others may present additional information.

3. The commissioner will issue an opinion as soon as possible after all necessary information has been received.