Money can grow on trees, with the right prospectus

While agricultural investments take off there are some traps to avoid.

Beverly Houterman and Paul Resnik detail what areas need to be considered.

Many investment advisers would like to recommend agricultural projects to their clients as these are often linked to important social and economic issues.

The benefits for clients include potential for high return, investments that capture personal interest and, of course, significant tax deductions.

Yet these projects as a group are under intense criticism from the media, research houses, major dealer groups and the tax office.

There seem to be three types of projects, good ones with clear disclosure, good ones with poor disclosure, and bad ones.

How can an adviser or investor sort their way through the many agricultural projects available and judge which ones to invest in?

First, projects that are unable to achieve sufficient investor support to reach efficient, cost effective production will under-perform or fail. The poor image of these projects leads to lack of support which marginalises the project, and the investor, their adviser and promoter lose.

Second, promoters often lack the skills to put together complying disclosure and legal documents. Prospectus documents are required to provide all the information that investors and their advisers need to have to form an investment decision. Where there is a significant level of non-disclosure, investors are well advised to stay away from the project.

The fact that a project has a product ruling from the Australian Tax Office (ATO) says nothing about disclosure of information regarding the project. The ATO only comments on the manner in which the business has been described and provides that if the business is conducted in that manner, tax deductions will be allowable.

The fact that the prospectus has been lodged with the Australia Securities and Investment Commission (ASIC) should provide the potential investor with no confidence either.

In fact, the prospectus must quote"ASIC takes no responsibility for the content of this Prospectus."They are put up for public scrutiny, but it is hard to imagine anyone except the promoter or a competitor actually looking at the document.

Some of the prospectuses have been so deficient that even an astute reader could be misled and in some cases it is hard to say for certain how the project would work.

As such promoters of agricultural projects need to refocus their attitude back to the investor. For the life of the project, it is the investors' project, not the promoter/farmers' project.

Seen this way would an investor buy land without knowing, and checking, on the price? A prospectus must disclose land prices and have independent valuations.

At the same time certainty of ownership must be made clear. Legal documents must securely back investors' rights.

Any investment decision will be based on performance projections. The prospectus must provide sufficient financial information for a reasonable performance projection to be made. All assumptions must be provided and the factors that will significantly impact on performance must be identified.

In the end, an adviser or an investor needs to make choices between investments and be able to compare indicative performance outcomes.

While many promoters use internal rate of return (IOR) as their performance indicator, IOR is a volatile measure, it is hard to explain to investors and does not necessarily reflect potential performance.

Net present value (NPV) performance projections are far more useful. NPVs are highly dependent on the discount factor but are useful for comparisons. Using, the current rate of inflation for the discount factor makes sense to the investor.

Thus the investor can compare the NPV of borrowing to invest in Australian equities against that of borrowing to invest in an agricultural project. They can judge for themselves if taking the additional risks is justified by the potential higher returns.

Comparison analysis is the basis of all investment decisions. If projects can not be compared to other investments, then investors and advisers should eschew these investments.

To succeed promoters need to meet certain criteria which should also be examined by advisers and investors.

Promoters need sufficient start-up capital and should be able to pay for independent valuations and accountant's reports. They must have appropriate legal advice, from professionals who understand the projects and the regulatory environment.

Initial offerings must have sufficient money to sustain up to 18 months marketing effort, ie two prospectuses, before they get sufficient support for a project to carry it through.

They need to do preliminary work with planners and dealers, so that their project is understood, reflects the feed-back gained from these people, and has a better chance of early and sustained support.

When developing the projects, they need to keep them simple. Complicated projects raise concerns that something is being hidden.

Investors and Advisers should look for a copy of any tax rulings, ownership and valuation papers for the land and a simple ownership structure

At the same time adequate financial information to replicate projections, a solid sales and marketing strategy and high levels of industry expertise are essential.

Finally there should also be clear legal documents drafted by qualified lawyer, indications of financial strength in the manager and documented experience and success within the industry.

Australia has a long history of successful agricultural innovation. It can not allow poor business management on the part of agricultural project promoters to curtail this innovation and diminish its competitiveness. It also can not afford to dismiss an investment sector that is a source of national economic, social and ecological benefits.

Beverly Houterman and Paul Resnik

Resnik Consulting