Unlocking the value of 99-year leases

Private financing of farmers is proving to be difficult due to the legal structure of the 99-year leases issued to new farmers.

This continued stalemate between the Bankers Association of Zimbabwe (BAZ) and the Government calls for a frank discussion on the merits of the current legal structure and ways it can be improved to unlock private sector financing for farmers.

Through the Land Reform Programme, the Government reallocated land to new farmers through a 99-year lease on the land.

Using a lease structure created a problem for the new farmers as they could not use their land as collateral to finance loans for farming activities.

Alive to this fact, the Government started playing an active role in financing the new farmers through different input schemes.

Unfortunately, this support has proved expensive for the Government which has limited and tight financing.

The Government had to resort to the issuing of Treasury bills which expanded money supply and stoked the inflation fires.

With all the Government support, the new Zimbabwean farmers have not built any capacity to self-finance and are still reliant on Government input schemes.

Banks need to meet regulatory requirements with regards to loans they issue to customers.

One key requirement is the need for collateral to give the bank cover for loans in the event of a default in payments by clients.

Due to a historical imbalance of opportunities, few Zimbabweans have accumulated property that can be used as collateral for loans.

Former white farmers held title to their land and used their farming land as collateral for loans. Current 99-year lease holders only have allowance to use their land for a set period and cannot transfer that land to anyone because the land is the property of the Government.

It is understandable that the Government is hesitant to transfer full title to new farmers immediately as this could trigger sales of land that could reintroduce concentration of ownership among a few well-resourced individuals.

In this light, it becomes critical to assess other ownership structures that can serve the Government’s agenda and unlock funding for new farmers.

A look next door shows that South Africa has developed two distinct legal structures for limited interests that separate ownership from enjoyment/use.

These consist of Usufruct – this legal structure allows one person to enjoy the use of a specified property for a set period or for life, after which, the property will transfer back to the stated owner, known as the bare dominium holder.

The South African Revenue Service (SARS) has set out a valuation method for these limited interests where:

Market value of property – 12 percent (assumed annual income) valuation factor based on usufructuary’s age next birthday or term of limited interest which is equal to Usufruct value.

For example, a US$100,000 property subject to a lifelong usufruct in favour of a 40-year-old man is equal to 100,000X12%X8,01067 = US$96,128 = value of usufruct

Fideicommissum – this legal structure allows one person to enjoy the use of a specified property for a set period or for life, after which, the property can be transferred to other specified people in a specified order. SARS values fideicommissum’s in the same manner as a usufruct.

The beauty of a usufruct/fideicommissum legal structure is that valuation methodologies have already been established. Holding a limited interest has a value attached to it because that use/enjoyment is valuable.

There is no need to reinvent the wheel, the BAZ and other statutory bodies can get technical assistance from South Africa with regards to valuing and implementing these limited interest structures locally

In practice, farmer A with land under a usufruct/fideicommissum arrangement can give up their right to a specified property as security for a loan.

In the event of a default, their limited interest will be transferred to the financier of the loan to make good the farmer’s obligations.

The financier needs to be empowered to sell this limited interest to another interested farmer B, generating cash which will be used to service farmer A’s loan.

Ultimately, farmer A will be able to unlock financing at the cost of assuming all business risks and the potential to lose their limited interest in the event of failure to service a loan.

Farmer B’s takeover of land on commercial terms also ensures continued productivity of land as farmer A can also seek funding by using land as collateral.

Conservatively speaking, Zimbabwe has 521 000 hectares (ha) of land in the control of newly resettled farmers.

A snap-survey of farmland with full title available for sale in Zimbabwe show properties from between US$700 — US$5,000/Ha.

Securitising this land to provide collateral for farmers can unlock at least US$261 million in collateral at an assumed limited interest value of US$500/Ha.

Financiers can easily extend over US$100 million in loans to resettled farmers as they will have over two times cover for the credit risk.

For context, Zimbabwe’s total Money Supply stood at RTGS$24,28 Billion or US$285,6 million (at the current USDZWL interbank rate of 85) as of the 4th of June 2021.

The resettled land numbers above are conservative considering the fact that a significant portion of resettled land is either lying idle or is under crops not listed above.

Unlocking US$100 million financing for farmers will improve Zimbabwe’s food security situation.

Many direct and indirect jobs will be created, while banks and other investors will enjoy interest income earned from financing Zimbabwean farmers.

This will have positive effects on Zimbabwe’s GDP growth rate with the potential for further upstream and downstream benefits through investments and jobs.

The Government needs to craft policies to support the valuation of limited interests.

Such policies will unlock private sector funding that can influence growth and development for the benefit of all.

They also need to consider ways to compensate financiers for defaults like allowing the transferability of land under certain conditions.

Wholesale land valuations would also need to be conducted to make it easier for financiers and farmers to establish the value of their land.

A new renaissance is beckoning and now is the time to unlock dead capital in Zimbabwe.-herald.cl.zw