Introduction to the MP Agro
The Federal Law n. 13.986/20 (formerly, Provisional Measure No. 897/2019, known as “MP Agro,” was approved by the National Congress on March 4, 2020, and sanctioned by the president on April 7, 2020. MP Agro was conceived to modernize Brazilian regulation on rural financing, as well as the attraction of private sector funds, especially by creating new instruments and guarantees for the rural producer.
With regards to the real estate market, please find the main aspects brought by MP Agro detailed below:
1. Acquisition of Rural Land by Foreigners in Brazil
MP Agro brought changes to the text of Federal Law No. 5.709/71 and Federal Law No. 6.634/79. Federal Law No. 5.709/71 imposes restrictions to the acquisition of rural property by foreigners (including Brazilian companies controlled by foreign individuals or companies). Notwithstanding the fact that the matter regarding the acquisition of rural property by foreigners and by Brazilian companies controlled by foreign individuals or companies is currently under discussion at the Brazilian Supreme Court (STF)1 and at the National Congress2, both the final decision on the matter under such lawsuit as well as the deliberation of the subject before the National Congress are still pending.
In addition, Federal Law n. 6.634/79 imposes restrictions in the “border strip” area, which is the 150-kilometer-wide strip parallel to the border line of the national territory, corresponding to (i) any transactions with rural properties by a foreigner (or "equivalent") related to the ownership, possession or any real estate rights over the property and (ii) the participation, in any capacity, of a foreigner in a legal entity that owns real estate rights over rural property.
Therefore, even though MP Agro does not change the provisions of such laws regarding the direct acquisition of rural property (or rural property located at the “border strip”) by foreigners, it establishes two scenarios in which the restraints set forth in Law No. 5.709/71 would not be applicable from now on, which are:
- The constitution of in rem guarantee, including the assignment of the fiduciary property on behalf of domestic or foreign legal entities; and
- Receiving real estate property in payment ("payment in kind") in order to settle a transaction with domestic or foreign legal entities, or Brazilian companies in which participation, at any title, of individuals or legal entities that are headquartered or domiciled abroad holding the majority of its capital, through realization of in rem guarantee, payment in kind or any other form of transaction.
Thus, MP Agro grants greater legal certainty to the companies controlled by foreign capital which intend to finance national rural producers that, in order to secure its operations, receive rural property (or rural property located at the “border strip”) as guarantee, and, therefore, may generate more possibilities of investment in the agribusiness sector, the sector that has the strongest economic growth in the country in recent years.
2. Cooperative Guarantee Fund (Fundo Garantidor Solidário - FGS)
Among the principal innovation of the MP Agro is the creation of the Cooperative Guarantee Fund (“FGS”), a mechanism which allows the reunion of rural producers and creditors in order to create a jointly liable fund to secure operations of credit performed by rural producers, including the ones resulting from debt consolidation. Altogether, the producers form a financial fund able to guarantee new bank loans.
MP Agro establishes the minimum rates of paying-up resources at the FGS by its debtors, creditors and guarantors (if any): (i) primary share, for which the debtors are responsible, equivalent to four percent of the outstanding balance of the financial operations secured by FGS; (ii) secondary share, for which the creditor is responsible, or, in case of consolidation, the original creditors, equivalent to four percent of the outstanding balance of the financial operations secured by FGS; and (iii) tertiary share, for which the guarantors are responsible (if any), equivalent to two percent of the outstanding balance of the financial operations secured by FGS.
The paid-up capital of FGS cannot be accessed by any other creditor (regardless of the nature of debts or obligations due to such creditors) until the financial operations secured by FGS remain unpaid.
The reimbursement to the creditors or, in case of consolidation, the consolidating entity, shall occur by using the FGS' funds, after the due date and non-payment of the installments or operation, respecting the following order: (i) primary share, (ii) secondary share and (iii) tertiary share. FGS shall be extinguished after the payment of all the debts that it guarantees or until FGS' funds are over.
By promoting debt restructuring and giving additional guarantees to creditors, FGS aims to make agricultural credit cheaper and more accessible.
3. Segregate Estate
The regime of segregate estate established by MP Agro allows that the owner of rural property segregates the real estate property, fully or in part, linked to the constitution of guarantees in transactions of credit hired with financial institutions, becoming part of the segregate estate the land, its buildings and improvements. The institution of a segregate estate might occur in order to provide guarantee in Rural Credit Certificates (Cédula de Produto Rural - CPR), in the terms set forth at Federal Law No. 8.929/94, or in financial transactions contracted by the owner of the land Rural Real Estate Credit Certificates (Cédula Imobiliária Rural - CIR).
It is important to mention that the segregate estate shall comprise only the land, buildings and improvements, excluding the crops, movable assets and semi-permanent assets, thus allowing the rural producer to simultaneously grant the land and agricultural pledge over the crop.
Currently, rural producers may face challenges when seeking funding, among others, we enhance the obligation to grant as collateral the whole real estate property in order to guarantee debts. In many occasions, real estate value is higher than the debt it secures. With the possibility to segregate estate, as established by MP Agro, rural producers might offer fractions of real estate property as guarantee, each one related to a different debt, in order to adjust the value assigned to each fraction to the debt it secures.
Therefore, if the owner of the real estate property defaults, the corresponding fraction of the real estate affected to that debt shall not respond for any other obligations, except for tax liabilities, labor and social security obligations.
According to MP Agro, it is prohibited to establish segregate estate in the following cases: (i) when real estate property is encumbered with in rem guarantees, or in cases in which the corresponding Real Estate Record File contains any of the legal registration set forth in article 54 of Law No. 13.097/2015; (ii) for small rural properties, as defined in the specific law; (iii) for land with area up to the relevant rural-module or the minimum fraction established to land subdivision by specific law (whichever is less); and (iv) homestead rights.
The assets and rights that integrate rural segregate estate cannot be conveyed or confound with other assets, rights and obligations that compose the debtor general patrimony, or other segregate estates constituted by it, except for tax liabilities, labor and social security obligations.
Furthermore, rural property, as long as it is subject to segregate estate regime established by MP Agro, even if partially subject to it, could not be subject to purchase and sale or donation agreements, land subdivision, or any other form of transmission of the real estate property, in order to ensure security to the creditor.
Rural land subject to segregate regime shall be constituted by its owners’ request at the relevant Real Estate Registry Office.
4. Rural Real Estate Credit Certificate
In the context of the segregation of rural property in fractions and creation of the segregated estate, MP Agro introduces the Rural Real Estate Credit Certificate (“CIR”), an extrajudicial execution title that represents certain payable and indisputable debt, which shall be issued to the segregate estate and might be negotiated at the securities market.
Instituted as a registered bond certificate, transferable and freely negotiated, the CIR can be issued in its book entry-form, considering that afterwards it shall be registered before an entity authorized by Central Bank of Brazil (“BACEN”). It might be representative of promise of payment in cash, resulting in a credit operation of any type, as well as of the payment in kind, on behalf of the creditor, of rural property (segregated estate), or fractions of it, in case of non-payment.
Any rural property owner that constituted a segregated estate as per MP Agro may issue the CIR, which may be secured by third parties, including financial institutions and insurance companies.
The MP Agro brings an important innovation as it potentially softens the process of enforcing guarantees by applying the rules provided in articles 26 and 27 of Federal Law No. 9,514/97, which means that the creditor of the CIR, in case of default may exercise the right to execute the guarantee (and thus, to transfer the area of the segregate estate) case in which the Real Estate Registry Office must proceed with the registration and, if necessary, dismember and create individual record for the area.
5. Rural Credit Certificate
Another change brought by the MP Agro is the possibility of segregating estate through the issuance of a Rural Credit Certificate (Cédula de Produto Rural - CPR) (provided for in Federal Law No. 8,929/94), a credit title representing the promise of delivery of rural products or payment in cash in the future, with or without guarantees, expanding its applicability.
In addition, there was an expansion of the list of possible issuers of the Rural Credit Certificate (Cédula de Produto Rural - CPR). By the new wording of article 2 of Federal Law No. 8,929/1994, the CPR can now be issued by natural persons or legal entities who benefit or promote the first industrialization of rural products, according to the definition presented in article 1 of Federal Law No. 8,929/94.
For the purposes of Federal Law 8,929/94, rural products will be those obtained in agricultural and livestock activities, from planted forests and from fisheries and aquaculture, in their byproducts and residues of economic value, including when submitted to processing or the first industrialization. Thus, those related to the conservation of native forests and the respective biomes and to the management of native forests within the scope of the public forest concession program, or obtained in other forest activities that may be defined by the competent authorities, may also be the subject of the title “environmentally sustainable.”
6. Certificates of Agribusiness
MP Agro allows that certificates of agribusiness, such as Agribusiness Credit Receivable Certificates (Certificado de Recebíveis do Agronegócio - CRA) and Certificate of Agribusiness Credit Rights (Certificado de Direitos Creditórios do Agronegócio - CDCA), that might be issued in foreign currency and registered abroad, ensure exchange parity. It is expected that it encourages the foreign investment in agribusiness.
7. Equalization of Interest Rates
Private banks authorized to operate rural credit may count with the equalization of interest rates, currently restricted to official banks and cooperative banks. At the equalization, government bears part of the difference between interest rates charged by the lending bank and the interest rate effectively paid by rural producers, with the purpose of making rural credit cheaper.
In order to enhance the capacity of grain storage in the country, MP Agro creates a program in respect of the construction and expansion of warehouses (Programa para Construção e Ampliação de Armazéns - PCA), which allows companies that produce and negotiate cereals funding to the construction and expansion of warehouses. It also grants the possibility of economic subvention by the Union (by Federal Development Bank - BNDES, which provides medium and long-term financing to the Brazilian private sector), in funding the construction of warehouses, which certainly will have direct impact on the construction market and on the elaboration of real estate transactions (such as operations comprehending built to suit rentals) in order to meet the demand due to PCA.
9. Costs for Registry of Guarantees
Another stimulus to rural credit established by MP Agro is the creation of a cap to the amounts due to the constitution of in rem rights in respect to guarantees destined to secure rural credit.