Case Study: Dairy Farm

Transcription

1 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 Approach to Value. Note: Economic obsolescence is estimated through the use of the Building Residual Technique and is expressed as a percent of the Reproduction Cost New. 3. Estimate the market value of the subject property applying the Direct Comparison Approach using appropriate units of comparison. 4. Estimate the market value of the subject property applying the income approach to value. The overall capitalization rate should be used as derived by the Mortgage Equity formulas. Related Data Effective Date of Appraisal is January 1, The property is to be appraised as if free and clear of any encumbrances except for normal mortgage financing available 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 of Quebec. Highest and Best Use: The highest and best use of the land, together with existing buildings, is dairy farming as 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 toward the preservation of agricultural land for agricultural usage. These agricultural lands are identified as "Green Zone" 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 of appraisal techniques, the lack of current data should be overlooked. 1

2 1. Zone AA for properties located around the periphery of the village. The following production is permitted 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, the following 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 the province of Quebec. Saint Henri forms part of the county of Levis which has a total area of 70,500 hectares of which 14,000 are cultivated. The total population of the county is 95,000 people, of which 3,900 are located in the village of Saint Henri. The population, which consists of nearly 100% francophones, enjoys the normal community benefits including church, schools, senior citizen centres, as well as medical clinics. The road system is adequate with Saint Henri located near the main auto route serving the major populated area of the province. Climate: Precipitation: Rain: 86 cm/yr. Snow: 300 cm/yr. Frost-free days: 157 Heat units: Average temperature: 2,371 (corn) 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 for farm expansion purposes. This phenomena is the result of new technologies allowing the management of larger farms. 2

3 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 by the 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 control of the Federation des Producteurs de Lait du Quebec (Federation of Milk Producers of Quebec). Industrial milk quota is controlled by the Canadian Dairy Commission. Both quotas are traded on the market by means of a monthly auction. Each province has a milk production quota system. The appraiser must be familiar with the system for the area in 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 of the inhabitants are farmers, mainly dairy. This neighbourhood is considered typical in comparison with the rest of the municipality of Saint Henri with regard to appearance, condition and age of improvements. Roads to the village 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 are rectangular in shape, containing a total of 76 hectares. Of the 76 hectares, 47 are cultivated, of which 12 hectares are tile drained. The remaining 29 hectares are wooded. The topography of both parcels is flat and the soil is a clay type of soil in good condition. This soil is well suited to forage and cereal production. Water supply is by artesian well located some distance from the dairy barn. Line fences are page wire in good condition and answer the needs of the farming operation. The building site benefits from all public services available. The wood lot consists mainly of soft wood trees and is considered to be of medium quality. Site improvements are valued at $1,500. Municipal Assessment For 2001, the assessment value of the subject property is $129, The taxation rate for the municipality of Saint Henri is 77 cents per $ assessment value. The tax is calculated as follows: $129,800.77/100 = $ Assessment values have increased at the rate of 5% for each year for the past three years. This trend is expected to continue next year. 3

4 Description of Improvements 1. House The house is 1 1/2-storey construction containing 85 square metres of living space. It is at least 60 years old and had a complete renovation (interior and exterior) 12 years ago. The ground floor consists of a hall, living room, kitchen, one bedroom, and full bath. There are four bedrooms on the second floor. The basement is not improved and serves as storage space. The structure is well maintained and is in good condition. The living room requires repainting. This house is considered to be above average 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 two rows back to back. Each stall has pressurized water bowls, milk pipeline and a mineral/supplement dispenser. A summary of the buildings and reproduction cost new (RCN) follows: Building Building Condition Area m 2 RCN m 2 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, should be 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

5 Woodland and Building Site The value of woodland and building site land is valued at $150/ha. This value has remained unchanged for the past 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, complete with 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: Soil Condition 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. This is difficult to measure from the market. Adjustments are made on the estimated cost to change the soil condition. Topography 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. 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. Natural pasture is valued at $250/ha. 5

6 Time Adjustment (Bare Land) In order to estimate monthly time adjustment, nine sales of bare land similar to the land of the subject property were examined. These sales took place during the past 18 months. A regressional analysis of these sales should be done commenting on the validity of the model. Comparable Number Months Since First Sale Took Place Price/ Hectare Predicted Value 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 = , meaning over 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 unexplained price variations. For example, in Month 8 is the representative value $880 or $890. According to the predicted values, $ is the most representative value. Solution: Predicted Value, Month 0 Predicted Value, Month 18. $945, = Values increased by % 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

7 Location: Comments: 7 km from St. Henri. 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: $31,000 Location: 9 km from St. Henri Comments: 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. Bernard Comments: 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: $29,000 Location: 10 km from St. Isidore. Comments: N/A 7

8 Improved Property Sales Comparable Sale #5 Date: December 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 60 years ago and renovated 12 years ago. Considered to be average for the area. Service Buildings: Dairy barn built in Good quality construction having no functional utility problems. Capacity of 52 dairy cows, plus their natural replacements. The milk house, hay shed, machinery shed and two forage silos are all in good condition and in balance with the 52 dairy cow capacity of the farm. The service buildings are considered to be average condition but are estimated to 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 buildings 57,250 Land 61,000 Machinery remaining economic life 9 years 58,000 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% financing available to all farmers in Quebec. RNFI = Realized Net Farm Income as calculated according to Statistics Canada procedures. Comparable Sale #6 Date: Legal Description: Size: Recent. No time adjustment necessary. P.651, P.692 of the official cadastral map of the parish of Saint Henri in the registry division of Levis. 35 ha cultivated, valued at $900/ha, plus 12 ha of wooded land. 8

9 Soil Type: Topography: Soil Condition: Tile Drainage: Location: Buildings: House: Service Buildings: Clay Flat. Good (similar to subject). N/A 65 square metres of living area (1 1/2-storey building) built 50 years ago and completely renovated a few years ago. Quality considered to be above average. Stable barn (hay stored second storey) is 30 years old but completely renovated a few years ago. Capacity of 32 dairy cows, plus normal replacements. Other service buildings all in good condition and in balance with the 32-cow capacity of the farm. The quality of the service buildings is considered to be above average for the area. Building Value: RCN = $200,000. Sale Price: $293,000, allocated as follows: $17,500 House 50,200 Farm buildings 33,300 Land 42,000 Machinery (remaining economic life = 9 years). 38,000 Cattle 112,000 Quota $293,000 Total Financing: $120,000 Cash 173,000 Mortgage 25-year term at 8% semi-annual payments. $293,000 RNFI: $25,100 Comparable Sale #7 Date: Legal Description: Size: Soil Type: Topography: Soil Condition: Tile Drainage: Location: Recent. No time adjustment necessary. L.242, L.309 of the official cadastral map of the parish of Saint Joseph in the registry division of Levis. 45 ha cultivated, valued at $875/ha, plus 18 ha of wooded land. Clay/loam (inferior to subject by $25/ha). Flat. Average ($50/ha inferior to subject). 35 ha. 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

10 Service Buildings: Stables/barn (hay stored in second storey) built 20 years ago having a capacity of 42 dairy cows, plus normal replacements. The other service buildings are in balance with the 42-cow capacity of the farm. Quality of the service buildings is considered above average for the area. Building Value: RCN = $300,000 Sale Price: $425,000, allocated as follows: $26,000 House 73,175 Farm buildings 50,825 Land 55,000 Machinery (remaining economic life 9 yrs.) 50,000 Cattle 170,000 Quota $425,000 Total Financing: $170,000 Cash 255,000 Mortgage 25-year term at 8% semi-annual payments. $425,000 RNFI: $36,000 Comparable Sale #8 Date: Legal Description: Size: Soil Type: Topography: Soil Condition: Tile Drainage: Location: Buildings: House: Service Buildings: Recent. No time adjustment necessary. P.314, L.315, L.316 of the official cadastral map of the parish of Saint Michel in the registry division of Bellchasse. 30 ha cultivated, valued at $900/ha. Clay Flat Average ($50/ha inferior to subject) 15 ha. 75 square metres of living area (1 1/2-storey building) built 15 years ago and in good condition. Quality is considered average for this area. Stable/barn (hay stored in second storey) built 10 years ago, having a capacity of 64 dairy cows, plus normal replacements. The other service buildings are adequate for the requirements of this farm and are in good condition. Quality is average for the area. The building capacity is approximately double the land capacity. Building Value: RCN = $330,000. Sale Price: $365,000 allocated as follows: $18,800 House 73,450 Farm buildings 30,750 Land 10

11 50,000 Machinery (remaining economic life = 9 yrs.) 42,000 Cattle 150,000 Quota $365,000 Total Financing: $145,000 Cash 220,000 Mortgage 25-year 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) must reflect typical operating conditions. For the subject property, normal operation has been estimated by the analysis of the owner's past records as well as comparison to data published in the "Reference Economique en Agriculture du Quebec (Agricultural Economic Reference Manual of Quebec). The farm has a fluid milk quota of 320 litres of milk/day, plus an industrial milk quota of kilograms of butterfat (BF) per year. 1. Sale or Cattle PROJECTED INCOME 2002 Type Inventory Sold Revenue Cows $7,700 Bred Heifers 14 0 Open Heifers 14 0 Calves ,875 10, Animal Products (Milk) Hecto Product Litres Price/hL Income * Fluid Milk, Class I $49,286 ** Fluid Milk, Class II ,141 *** Industrial Milk, Class I 1, ,215 **** Industrial Milk, Class II , , Crops Cereal tonnes = 24.3 * $ = 3, Patronage Refund Co-op rebate on milk deliveries 2,800 Total Gross Income: $117,757 11

12 Notes Regarding Income * 320 litres/day 365 days 83.5% utilization = 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 for the area in which they are appraising farms. Expenses Variable Expense Fixed Expenses Salaries and wages $8,300 Crop insurance 300 Machinery repair and fuel expenses 7,000 Purchase cattle 1,000 Vet fees, AI and dairy production monitoring 3,200 Feed and concentrate 17,500 Seed, fertilizers and sprays 5,600 Baler twine 200 Custom work 900 Transportation and marketing 10,500 Sundry and milk house items 1,200 Taxes 1,000 Insurance (building, chattels, equipment) 1,800 Building and fence repairs 1,500 Automobile expenses (farm share) 1,500 Telephone and electricity (farm share) 2,400 Administration and accounting fees 1,000 Interest on operating loan 400 Work and management to owner 18,600 Credit 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-real estate 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

13 (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 loan rates. 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 Remaining Economic Life Amortization Rate Set Aside New $60, 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 was similar. 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 of continuous 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 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 i Kilometres Difference vs Subj h - subj j Location Adj % 1.00% 3.00% 6.00% 4.00% Loc 1 13

14 k Location Adj Sale Price $26,260 $29,226 $54,304 $34,503 j g l Total Hectares m Cultivated Hectares n Wood & Site Hectares o $150/Ha $0 ($1,800) ($2,700) ($750) (150 n) p Nat Past Hectares q $250/Ha $0 ($2,500) $0 $0 (250 p) r Tile Drainage Hectares s $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 $ $ $ $ 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 $ $ $ $ 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 of value. Indicated Val/cult ha $850 Contributory Value of Buildings Comparable Sale Sale #5 Sale #6 Sale #7 Sale #8 Contributory Value of Bldgs 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

15 Contributory Value of Buildings Bldg Condition Area Sq M RCN/ Sq M RCN Contrib as % Contrib ($) House Above 85 $800 $68, % $23,120 Dairy Barn Above 550 $175 $96, % $32,725 Hay Shed Above 300 $80 $24, % $8,160 Machine Shed Above 250 $80 $20, % $6,800 Silo (note) Above 18 $1,600 $28, % $9,792 Waste Platform Above 675 $40 $27, % $9,180 $89,777 Note 1: Note 2: Note 3: Totals $264,050 $89,777 Indicated value by Cost Approach $138,577 ROUNDED $138,600 The Silo is in vertical metres and the RCN is based on this. Adding negative numbers is the same as subtracting. 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 the time of sale was $6,000, therefore should be deducted before time adjustments. 15

16 DIRECT COMPARISON APPROACH Time 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 time j k Time Int/Mo i k l Time Adj Val of RE $151,000 $101,000 $150,000 $123,000 m Kilometres From Mkt n Location #/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 q Hectares Cult 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 (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 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 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 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

17 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 $ Note 1: Adjustments for soil type, condition and topography are based on subject cultivated hectares because the comparable have already been adjusted for size. Note 2: l + o + t + x + aa + af + aj + an + ar + au Note 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 Date of Sale $51,000 $31,500 $39,375 $27,000 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 Contrib Val of Bldgs as % Condition of Buildings Avg Above Above Avg House value 18,500 17,500 26,000 18,800 Size (sq. m.) $/sq. m Farm Buildings 72,250 50,200 73,175 90,370 Cow Capacity Value/cow 1, , , ,412 17

18 INCOME APPROACH Income ANIMAL SALES Avg Inventory Sales Income Totals Cows $7,700 Bred heifers 14 Open heifers 14 Heifer calves 7 23 $2,875 $10,575 ANIMAL PRODUCTS HL PRICE/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 $150 $3,645 $3,645 OTHERS Dairy Co-op rebate $2,800 GROSS INCOME $117,756 18

19 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, % $9,605 Set aside = value of depreciating assets amortized over remaining collective economic life. Interest on non depreciating items: Item - Cattle Quota 19

20 $49,500 $203, % $20,200 NET INCOME TO BE CAPITALIZED $8,852 CAPITALIZATION OF NET INCOME See derivation of capitalization rate. Using ME derived cap rate: 8, % = $138,306 Using property residual overall rate: 8, % = $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 have to 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,

21 Derivation of Capitalization Rate 1. Mortgage Equity Approach: Estimation of Parameters Calculation of equity portion of investments Sale No. Sale Price Livestock Quota 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 Sale No. Net Inc to ent Set Aside to equip Int Lstk+quot Net Inc to RE Debt Service Net to Equity Value of RE 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 Sale No. Equity in RE Return to Equity 5 $59, % 6 $41, % 7 $60, % 8 $48, % Mean 2.04% Median 2.01% Rate Selected 2.00% 21

22 Cash Flow calculation of capitalization rate R = (M f) + (E y) REM: Normal financing is based on 25 8% SA payments as available in Que. = (.60 f) + (.4.02) 6.39% Rounded 6.40% 2. Overall Rate Method: Sale No. Value of RE Net Inc to RE Property Residual Approach Overall Cap Rate 5 $151,000 $9, % 6 $101,000 $6, % 7 $150,000 $9, % 8 $123,000 $7, % 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 $138,300 Cost Approach $138,600 Direct 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 investment analysis of the likely purchaser. Even though this is an investment property, it should be noted that the return to equity at 2% is small. Any error in calculation would result in a magnified error in the value estimate. The Income Approach therefore is best suited as support to the estimate of value. Sale #8 having buildings 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 of the buildings amounted to 34% meaning 66% loss in value to depreciation from all sources. Because of the large 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,