Advice needed before subdividing
Last week, Vicky McKenzie wrote on the benefits of subdivision. She noted that, given the tough economic times that the farming industry is currently experiencing, subdividing and selling a portion of a farm may be a good way of raising capital.
While this option may appear attractive, there are a number of pitfalls that need to be considered. A subdivision will not be right for everyone. It can also only be considered a short term solution to any underlying problems that farmers face.
There are of course other options to subdivision. Interest rates are currently at the lowest they have been at for decades. For some, simply refinancing debt which is at a higher interest rate may be a better option. However, if debt is locked in for a fixed term, then the bank may charge an early repayment fee or other break costs if that debt is refinanced before the end of the fixed term. Another alternative to subdivision is to delay expenditure. However, this can also only be considered a short-term solution.
If these alternatives to subdividing are not viable, then careful thought will need to be given to the land that is to be sold. Is the land that is to be sold a strategic part of the farm? Will it affect the ongoing operation of the farm? If so, then perhaps the land should not be sold.
The other consideration before undertaking a subdivision is cost. We recommend that, prior to subdividing, you assemble a team of professionals which should include your solicitor, accountant, surveyor and your bank. The team should work on a “no surprises” basis so that each party is aware of what is occurring through the course of the subdivision. We find that this leads to greater efficiencies and allows for most problems to resolved at an early stage. This of course all has a bearing on the overall cost of the subdivision.
There will however be some costs which need to be incurred. Surveying, legal and Council costs are examples. There will also be the costs involved with carrying out physical works, the extent of which will depend on the scope of the subdivision. New services such as stormwater, sewerage, electricity, gas, telecommunications, water and rights of way may be required.
All of these costs will need to be considered prior to the commencement of the subdivision.
Additional short-term funding may also be required to complete the subdivision. In that regard, you will need to liaise with your Bank at an early stage to determine whether that funding will be available, and if so, on what terms.
A subdivision may be a good way of raising capital. However, it will not be the right option for everyone. We recommend that you take professional advice at an early stage before committing yourself to a subdivision.
The content of this document is necessarily general and readers should seek specific advice on particular matters and not rely solely on this document.
If you would like more information on any of the topics in this document, please contact your usual Auld Brewer Mazengarb & McEwen adviser.