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Farmers' Views Sought on Valuation Approach

Interim Report (PDF)
Preliminary Government Response (PDF)

Friday 13 October 2006

Farmers' Views Sought on Impact of Valuation Approach

Land Information New Zealand (LINZ) will consult with pastoral leaseholders and interested groups on the impacts of changes to the way pastoral lease land is valued.

The Government today released a report on the valuation methods used to determine pastoral lease rents and tenure review transactions. The Government has also released its preliminary response to the report.

The report, prepared by a panel of senior valuers, sought to gauge whether the Crown was receiving a fair financial return on its high country land assets.

The report has brought to light important differences between the approach taken by valuers when valuing pastoral leases and the legal requirements of the 1948 Land Act, says LINZ's Acting Chief Executive, Warwick Quinn.

"Pastoral lease rents are set every 11 years. The changing property market in that time has really highlighted the impact that characteristics such as landscapes and views, and exclusive access to them, are having on the prices being paid for land.

"To date, however, valuations prepared for pastoral lease rents have not - or at least not fully - taken such characteristics into account."

Analysis of the valuers' report by government officials has established that these characteristics are required by the Land Act to be part of the rent-setting calculation, Mr Quinn said.

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The report argued that there was no need for lessees to pay rent for such characteristics and that the legislation should be changed to reflect valuation practice.

However, Mr Quinn said for a valuation to comply with the Land Act, values for features like views and landscapes must be included.

"In some cases, this may mean substantial increases to rents for pastoral leases. The Government recognises that this may have significant financial implications for some high country farmers and the Crown.

"We want to meet with pastoral leaseholders and interested groups to fully understand these implications. Our objective is to reach a fair, reasonable and durable outcome," said Mr Quinn.

Over the next nine weeks officials will consult with pastoral leaseholders and other interested groups to consider options for addressing affordability that recognise the value of sustainable and economically viable high country farming.

Next Steps

LINZ, Ministry of Agriculture and Forestry (MAF) and Department of Conservation (DOC) officials will meet with leaseholders and representative groups over the next nine weeks. Other key stakeholders and interested parties will have the opportunity to make submissions.

Submissions are sought by 15 December 2006. Submissions can be sent, in writing, to:

High Country Pastoral Lease Valuation Reviews
c/- Land Information New Zealand
Private Box 5501
Wellington 6145

Or by email to: valuation-review[at]linz.govt.nz

LINZ, DOC and MAF will report back to Cabinet in March 2007 on the results of the submission process and options for addressing any implications of the new valuation methodology, including rent relief mechanisms if required.

A copy of the Government's preliminary position, and the Interim Report can be found at www.linz.govt.nz from 3.00 pm today.



1. What is a pastoral lease?
The Crown owns 2 million hectares of high country land, located from Marlborough to Southland, which is leased or licensed. Pastoral leases (of which there are now 245 as at 30 September 2006[1]) were established under the Land Act 1948, although land in the South Island high country has been licensed or leased since the 1850s. Much of the high country land is environmentally sensitive (i.e. prone to soil erosion, pest incursion and natural fire spread). The Land Act was drafted with the intent of giving leaseholders an incentive to manage environmental values in an appropriate manner (i.e. to act as a steward of the land). The Land Act granted leaseholders secure rights to the land (perpetual right of renewal), exclusive occupation of the land, and the right to use the land for a limited purpose, namely pastoral farming. Leaseholders pay a rent which is set at 2.25% (2% if paid on time) of the land value exclusive of improvements ("LEI").

2. How often are pastoral lease rents reviewed and how are rents set?
Rents are reviewed every 11 years. Leaseholders pay an annual rent which is set at 2.25% (2% if paid on time) of the land value exclusive of improvements ("LEI"). LEI is the value of the underlying, unimproved land. The value of improvements includes visible improvements to a property such as houses, other buildings and structures like fences, tracks, bridges as well as less visible improvements that improve the fertility and productivity of the land such as scrub clearing, grass sowing and fertiliser application. Combining the LEI value and the value of improvements should provide the Capital Value of a property, i.e. the price a property would be expected to sell for if put on the open market.

3. Why was the valuers' Report commissioned?
Concerns had been raised by some groups that the Crown was receiving rental from leaseholders at a level that did not fairly reflect the value of the land or a leaseholders rights under a pastoral lease. There were also concerns that leaseholders are unfairly benefiting from both concessionary rents and capitalising the benefits of lower than proper rents when parts of the leases are transferred back to the Crown during tenure review. In response the Government initiated a review. A panel of valuers was engaged by Land Information New Zealand to review pastoral lease rental and tenure review valuation methodologies and outcomes associated with pastoral lands.

In the context of the Government's objectives for the South Island high country (notably a fair financial return to the Crown on its high country assets), the valuers were asked to report on:
* whether the current methodology for valuing lessor and lessee interests in tenure review is delivering accurate and fair outcomes and recommend changes to the methodology (if appropriate) to better meet those outcomes; and
* whether rents set by legislation accurately and fairly reflect open market levels and the options available if changes need to be made to ensure rent is set at a market level.

4. What did the valuers conclude?
On the issue of valuations for rental purposes the Report concludes that:
* The process in the Land Act 1948 for valuing pastoral leases does not lead to appropriate rents;
* There should be no rental charged for exclusive lessee access to amenity values;
* The current practice of the LINZ valuers results in an attempt to achieve 'affordable' rental figures;
* This practice does not strictly comply with the legislation;
* That in future rentals should be set on a 'per stock unit' basis and that the legislation be amended to allow for this.

On the associated matters relating to tenure review the report also concludes that:
* Transaction prices for tenure review should be made publicly available;
* A group, similar to the former Land Settlement Board, should be established to improve relationships between the Crown, lessees and the public.

5. What is the Government's position?
The issues raised in the Report were reviewed by officials. The Government's preliminary response concludes that:
* The Land Act 1948 provides a clear and workable framework for the setting of pastoral rents;
* The Crown owns the amenity values of a pastoral lease and those values form part of the valuation for rental purposes as they contribute to the total sum of land and improvements realised by the lessee on sale;
* Affordability of rent is not a factor to be considered by valuers when setting land value figures - it is a matter to be addressed after the rental figure is set;
* There should be improved transparency over transaction prices for tenure review; and
* Establishing a group to improve the relationship between the Crown, lessees and the public is not necessary at this stage.

The Government believes the Land Act is clear: valuers should take into account the increase in the market value of some pastoral lease land caused by greater value being attributed to amenity values such as landscapes. To date valuers have not or not fully included amenity values in valuations carried out for setting rents. This means that the rent paid by some Crown pastoral leaseholders is less than it ought to be under the Land Act. This, in turn, has an adverse impact on the Crown's interest when determining the "equality of exchange" between the Crown and the lessee in the tenure review process under the Crown Pastoral Land Act.

6. What are amenity values?
Amenity values include characteristics or features such as location, landscapes and views.

7. What are the implications of including amenity values when pastoral lease rents are set?
Pastoral lease rents are reviewed every 11 years. Rents usually increase to reflect appreciating land values over the 11 year period. By correctly applying the Land Act and including amenity values in the rental valuation calculation, rents on some properties with values that are highly valued by the property market may rise significantly. The size of any rent increase will vary from property to property, depending on amenity values that are present. For some leaseholders, this will have financial implications that the Government wants to fully understand. The nine-week consultation period is designed to find out from leaseholders what the implications of these increases are so that the Government can review options (including rent relief mechanisms) for addressing any adverse situations that may arise.

8. How many leaseholders are affected?
Rents for these leases are reviewed every 11 years, and review dates are staggered across several years. The new rental valuation methodology will be applied to all leases when the time comes to review rent. There are currently 245 pastoral leases a number that will decrease over time as tenure review proceeds.

9. What options will be available to lessees who cant afford the rents?
It's not the Governments intention to make rents unaffordable for lessees. There are several ways we can address the issue of affordability. One option for instance, may be to remit rent in return for additional sustainable management contributions - such as pest and weed control - or for improved public access. Other options may well emerge during the consultation process and we will explore these further with the leaseholders and their representative groups.

10. What happens next?
Officials from LINZ, DOC and MAF will meet with leaseholders and lessee representative groups to discuss the Governments preliminary response to the Report over the next nine weeks. Officials will report back to Cabinet in March 2007 on the results of the submission process and options for addressing any implications of the new valuation methodology, including rent relief mechanisms if required.

[1] Excluding those for which a substantive proposal has been accepted or implemented in tenure review


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