Williamson Act contracts and land value

Millions of acres of California farmland and rangeland are enrolled under the California Land Conservation Act of 1965, better known as the Williamson Act. The deal is simple: the landowner agrees to keep the land in agriculture or open space, and in return the county taxes it based on its agricultural income instead of its full market value.

For appraisers, buyers, and lenders, the question is how much a contract affects what the land is worth. The honest answer is that it depends almost entirely on where the land is and what else it could be used for.

1. How the contract works

• Term. Contracts have an initial term of at least ten years and renew automatically each year, so there are always about ten years left unless someone acts.
• Runs with the land. The contract binds future owners. A buyer takes the land subject to it.
• Taxes. The county assessor values contracted land by capitalizing its agricultural income, and taxes the lowest of that restricted value, the Prop 13 base-year value, or current market value.
• Uses. The land must stay in agricultural, open space, or compatible uses as defined by the county's rules. Subdividing and non-agricultural development are generally barred.

2. Getting out: nonrenewal and cancellation

There are two ways out, and they have very different effects on value.

Nonrenewal

The landowner (or the county) files a notice of nonrenewal. The contract stops renewing and ends after the remaining nine years or so. During that time, the property tax gradually steps up toward full value. It's slow but certain, and costs nothing beyond the higher taxes.

Cancellation

Immediate cancellation is possible but deliberately difficult. The county board of supervisors or city council must make specific findings, generally that cancellation is consistent with the purposes of the act or is in the public interest, and the landowner must pay a cancellation fee equal to 12.5 percent of the land's unrestricted market value as determined by the county assessor. On valuable land near a city, that fee can be very large.

Far from town, a contract barely touches value. At the urban edge, it can be the biggest factor in the appraisal.

3. When the contract matters to value

Land whose best use is farming anyway

For most contracted land, such as rangeland in the Coast Ranges or orchards deep in the Central Valley, the highest and best use is agriculture with or without the contract. The restriction takes away development rights that aren't worth much, and the tax savings are a real benefit to the owner. In these markets, contracted and uncontracted land often sell at similar prices, and many comparable sales will themselves be under contract.

Land with development potential

Near a growing city, or where rural homesites are in demand, the picture changes. The contract delays any non-agricultural use by up to about nine years after a nonrenewal notice, or requires a costly and uncertain cancellation. A buyer who wants to develop will discount the land for that delay and risk, much like the entitlement discount described in Entitled vs. unentitled land.

The appraiser considers whether a nonrenewal notice has already been filed, how many years remain, how likely a cancellation would be, and what the fee would cost. Sales of other contracted land near the urban edge, with their contract status noted, are the best evidence.

4. Farmland Security Zones

Some counties also offer Farmland Security Zone contracts, sometimes called the "Super Williamson Act." They have a 20-year term that renews annually, and offer a deeper property tax reduction. They're also harder to exit, and land in a Farmland Security Zone is protected from annexation into cities and from certain school district land acquisitions. For land with development potential, a Farmland Security Zone contract is a heavier restriction than a standard contract.

5. How we handle it in an appraisal

• We obtain the contract, any amendments, and the county's current uniform rules
• We confirm whether a notice of nonrenewal has been recorded, and when
• We note the contract status of each comparable sale
• We test highest and best use both with the restriction and, where it matters, as if it expired
• We keep assessed value and market value separate. The assessor's restricted value is a tax figure, not an indication of what the land would sell for.

This article is general information about appraisal practice, not legal, tax, or investment advice. Rules change, and every property is different. Talk to your attorney or tax advisor about your situation.