Frequently Asked Questions

  • 1 July 2019 – 30 June 2023; the lease commences - partner payments forecast[1] at $406,860 p.a. or 8.1% on investment, with distributions of $79,825 per month.
  • 1 July 2024 – the vineyard is now fully developed and the rental paid will go to a market-based price, but will be no less than the initial rental, as set in the point above.  Rent reviews now occur every three years for the remaining 20 years of the 24-year lease.
 

[1] The actual rental payable from 1 July 2019 will be 7% capitalised rate of the cost of the land plus the cost of the development plus a margin of 7% p.a. for two years.  If for example, the development costs say 5% more than forecast, the base for the 7% plus adjustments will increase with a corresponding increase in the rental payable through this initial period.

Because of the partnership structure, the partnership losses (and profits) are passed through to partners who declare these as part of their own tax return.

Bartletts Creek Vineyard involves the development of a bare land block into a Marlborough Sauvignon Blanc vineyard.  This results in some deductible expenditure and high levels of depreciation that are available to the Partnership for tax purposes. Because of these depreciation allowances, the Partnership will make sizeable tax losses during the development period and low levels of taxable profit in subsequent years – this is despite strong positive cashflows paid to investors.

Based on budgeted development costs and preliminary accounting advice, it is likely that Partnership tax losses during the development period will be sufficient to offset Partnership taxable profit earned in the first 10 years of the lease to Sacred Hill. 

For an investor with other taxable income and investing through a company entity with a tax rate of 28%, the tax losses can be used to offset tax on this other income as shown in table 1.

  • The budgeted development cost, including 10% of contingencies is for an accumulated land and development expenses cost of $9 million or $101,000/cHa.
  • This increases to $9.85 million including capitalised interest and all fees or 110,712 per canopy hectare.
  • The forecast market value of the vineyard is between $11.8 million ($133,000 per cHa) and $14.2 million ($160,000 per cHa).
  • This results in a net gain of between $2.0 & $4.3 million for a gain of 20 – 45%.
  • Under the lease agreement partnership agreement with Sacred Hill, they have a one-time option to buy the property in July 2023 with the price being set at the greater of market price or a 28.8% margin over the developed cost of the vineyard.

Marlborough vineyard values vary according to their location with information from Colliers International in their 2016 review showing that prime Rapaura and Lower Wairau vineyards selling for $175 - $250k per cha, mid-tier Wairau and Southern Valleys properties at $150 - $200k/ha and Awatere and upper Wairau vineyards at $100k - $150k/cha.

Data from the ANZ June Agri-focus show land price trends since 1999.

We note that Bartletts Creek is forecast to be established (including capitalised interest) at a price of $111k per cHa.

The vineyard does lie adjacent to the Wairau River, and blocks U, V and part of T & S making up approximately 45 cha could be flooded.  The major risk mitigation is via a stop bank in place, which is planned to be extended, and MyFarm have been informed this bank has been built to withstand a one in 100-year flood.  This officially means that in theory there is less than a 10% chance of topping the stop bank within the next 10 years.

The effect of a flood will be dependent on the flood characteristics.  If the water simply backs up behind the stop bank, then the damage is likely to be limited to the effect on that year’s crop (say, due to silting affecting the plants).  It is understood that it would take raging floodwaters to impact on the vines and structures themselves; in this case a portion of these may need to be replaced with a two-year impact on rental returns and increased capital costs.

Insurance is not realistically available for this type of event.

  • The property is purchased on 17 March 2017 and development will commence immediately. 
  • The lease starts 1 July 2019 and is set at the cost of the developed orchard plus 7% p.a. for two years multiplied by a lease rate of 7%.  On the forecast developed cost of $17.76 million the capital cost for rent purposes is $20.2 million and the rental itself would be $1.41 million p.a.  This is the initial rental and is the minimum lease for the term of the investment.
  • In 1 July 2023 the rental will go to a market rental with rent reviews every three years thereafter.   

We believe it prudent that the Partnership fix interest for a period of five years.  Our latest quotation for five year fixed interest for a similar project was for a rate of 5.5%.  It is possible that this rate may change prior to the loan being booked.

In many of our investments, the investors elect a board of directors from amongst their number.  In this case, Bartletts Creek is a passive investment with the main functions of the General Partner and the Board of the GP to supervise the development and ensure that the lessee meets their obligations.  On that basis the investment has been established with MyFarm effectively controlling the GP on behalf of the investors with the following key provisions:

  • No less than three directors.
  • We commence with two directors from MyFarm; Grant Rowan and Brian Cloughley and an independent director, Paul Dunleavy. 
  • After three years, one of the director appointees will be elected by the Limited Partners.
  • At any one time there may be two independent directors but there must be one director who is the appointee of MyFarm.

The Board will also consider from time to time the opportunities to sell the asset if they believe this is a favourable outcome, but this would be a recommendation to the Limited Partners and would require 75% support of those partners.  Any other such major decision would require the approval of the Limited Partners.

The lessor obligations are minimal other than to fund the development of the vineyard, to permit the lessee to hold and enjoy the land without interruption or disturbance by the lessor, and to maintain and renew the Resource consent for taking water (at the lessee’s expense).  The lessee will pay the lease and all outgoings, and in short is obligated to use and care for the land and all improvements upon it according to best viticultural practices appropriate in the circumstances and in the Marlborough district.

A copy of the lease agreement is available on request.

We are currently benchmarking the agreement development budget with an independent party.  It is our view, however, that the budget is set conservatively, and note that it includes an 83,000m³ water storage dam, 33 frost fans and a 10% contingency allowance. 

Sacred Hill has been contracted under a Project Management Agreement to conduct the development with oversight provided by MyFarm.  The Project Management cost is $750 p.a. per canopy hectare and compares favourably with other Project Management options.  The other developments conducted by Sacred Hill Marlborough and viewed by MyFarm have been completed to a high standard.

We note that there is a common interest in ensuring that the development is completed as efficiently as possible as the developed cost affects the rental paid by Sacred Hill during the first four years.

This is a straight option to buy at the greater of market or the value of the developed vineyard (land price + development costs) plus 7% p.a. for two years and plus 3% p.a. for four years.  This equates to a gain on the initial investment of a minimum of 28.1% over approximately 6.5 years.  There are no transaction or other costs associated with the option to purchase.

It is believed that the water consent is sufficient for the vineyard.  Sacred Hill have assessed the soil, rain fall and irrigation requirements for Bartletts Creek and determined an approximately 83,000m³ storage pond will provide adequate water for the entire vineyard for up to 56 days.  It is also noted the lower terrace adjacent to the river will have a higher water table and it is likely the vines root system will be in this water table zone.  This has the effect of reducing the irrigation required to this area and allows water to be circulated to more pressing areas to protect and enhance the productivity of the property.

Paul Dunleavy has considerable vineyard and industry experience having a long family involvement in the sector, ownership of vineyards as well as a winery and a directorship on NZ Wine Growers.  Paul also brings considerable financial acumen to the board having held senior financial positions for the likes of Fisher and Paykel.  Paul was approached as it was felt he offered a broad set of skills to enhance the overall knowledge of the board and specific industry experience to help guide the board during the development of this vineyard.

The fees are covered by Bartletts Creek LP.  A fee of $10,000 p.a plus disbursements is set for the independent chairman.  Disbursement expenses are anticipated to be the likes of travel that may be required in his duty as chairman.  Given the passive nature of the business and a management contract MyFarm will hold to oversee the business, disbursements are not expected to be high.

No other director fees are set for this business with the exception of disbursements for the remaining directors for any expenses incurred in their duty as directors for Bartletts Creek LP.

Frosts are directly a risk of the lessee but if the vineyard was poorly sited and protected then it could affect the lessee’s ability to pay their rent and the ultimate value of the vineyard.

As part of due diligence, frost protection was considered in detail.  The following is a formal report from Stu Powell of Climate Consulting and some informal comments from Brian Woods of Sacred Hill Marlborough.

From Climate Consulting

The following brief overview summarises data from 3 Climate Towers at a property on North bank Road encompassing Bartletts Creek:

Initial data suggests frost will pose a risk to the proposed vineyard development. Coolest temperatures were found at the tower located furthest up the valley and temperatures appeared to warm toward North bank Road. A detailed frost profile has yet to be completed, but data suggests minimum temperatures are higher than those recorded at Climate Consulting’s reference Wairau Valley AWS located at Wairau Valley Township by 1.0 – 1.5°C.

Inversion strengths are strongest furthest up the valley (>2°) and weaken toward North Bank Road. This reflects increased air movement draining the Wairau Valley, as opposed to quite different drainage winds from the Bartletts Creek tributary. Wind machines could be expected to provide an effective means of frost protection from the majority of frost events, however, wind machine spacing should be tightened to no greater than 5ha / machine over northern-most (assuming) cooler areas of the property.

Wind drift speeds were light – moderate, although marked changes in drift direction were observed reflecting cool air drainage from a number of smaller contributing gullies and valleys. Wind direction frequency analysis performed as part of the full frost report will ultimately dictate numbers and positions of wind machines.

From Brian Woods of Sacred Hill

“It was a reasonable frost here this morning (9th of September) so I took the chance to take some temperatures at Bartlett’s.  This morning the Wairau drift had stalled due to the strong southerly, this generally causes a harder frost in areas normally frost free such as Rarangi and Rapaura.  The Southern Valleys were cold with – 2dg at Hells Gate and Singing Bridge for 6 hours (these are two other Sacred Hill vineyards in Marlborough). Hammond Est in Renwick was also -1.9dg for 2 hours.

The top terrace at Bartletts was positive 0.9dg dipping to 0.3dg with a drift down the valley of approximately 5 kph. The side gullies were 1.3dg, which is warmer than I expected.”

During development planning, the fan placement plan provided by NZ Frost Fans shows 3 fans covering the cooler part of the block at present.  Adjustments can be made regarding placements once tree removal has been factored into the plan.

The hills located around Bartletts Creek are neither steep nor particularly close by – we don’t expect slipping from quakes or due to heavy rain events to be either likely or significant.  Can never say never but not a high risk!

In their words, “The combination of aspect, water availability and storage matched with soil types make this site a very attractive viticultural proposition.  However, the data gathered by Climate Consulting confirming that this site can be adequately protected from frost events by frost fans offers the final assurance that this site can be developed and operated as a reliable, productive viticultural unit.

Sacred Hill is satisfied that this site meets and surpasses what has been accepted as land suitable for viticultural development.”