Buying a Farm - 'Caveat Emptor'
Buying a Farm - “Caveat Emptor”
Buying a farm is a major investment that has now become much more complicated with the Waikato Regional Council's proposed and current rule changes under Plan Change 1.
Plan Change 1 requires farmers to obtain a nitrogen reference point (NRP) based on either the 2014/15 or the 2015/16 season.
Under a standard agreement for sale and purchase a vendor has no obligation to provide the information necessary to calculate the NRP. If a farmer does not have this information, they are assigned 75per cent of the sector average.
Overseer© is the main method of calculating the NRP that is prescribed in PC1 and this system has a known error rate. For example the minimum error (CV, coefficient of variation) in the predicted rate of nitrogen leaching from Overseer is about 30% but it can be much higher (>100%) if the incorrect input data is used, inadvertently or otherwise.
Investors should obtain detailed legal advice regarding any farm, sale and purchase agreement prior to signing, which should include matters such as conditions of sale specific to the property (e.g. LIM report, supply of information, vendor assistance) and vendor warranties (to ensure the accuracy of the information supplied).
Why would anyone in their right mind invest millions of dollars in an agricultural operation where they may find that they have been given incorrect information and in fact they are unable to undertake normal operation of this investment as planned, due to restrictions from PC1?
What this effectively means is that the purchaser may be severely restricted in what they can do to make a return on their investment.
There are severe restrictions in place around land use intensification under PC1, particularly in relation to horticultural operations (with no new horticultural operations allowed to commence since PC1 was advertised).
PC1 has now made horticultural operations a non-complying activity and any new operations will require a Resource Consent to be issued for the non-complying activity prior to being able to commence.
It will be critical for prospective investors to obtain sound advice from a suitably qualified farm adviser, about the application of the rules to the property, and any likely constraints on current and future activities. This must include obtaining sound accounting advice and budgets.
It has become evident that since PC1 has been advertised the capital value of agricultural land has reduced by a considerable amount and there has been a huge reduction in actual farm sales completed.
The answer is: “Caveat Emptor” (Let the buyer beware); do your homework, obtain sound advice and plan ahead.