With Fiagro, we will have a new vehicle that may generate great interest from investors, who are already familiar with an analogous instrument for the real estate market, the FIIs, as well as appreciate the liquidity that this type of investment has

It's early March 2011 and the phone rings:

"Luis, how are you? We are here with a very cool operation to do and that brings a return for investors above comparable investments, we have a very good structure and team to show to the market. But the operation involves rural properties and these properties, as you know, are not easily known by the public like those buildings in Faria Lima. Besides, they have the regulatory and land issues of rural properties..."

In other words, it was a viable operation, but one with major challenges for that moment in the structured debt and fund industry.

To my satisfaction, in early March 2021, the plenary of the Federal Senate approved the basic text of Bill 5.191-A, which establishes the Agroindustrial Productive Chain Investment Funds (Fiagro) by amending the Real Estate Investment Funds Law (FIIs) - Law 8.668/93.

Thus, we will have a new vehicle that can generate great interest among investors, who are already familiar with a similar instrument for the real estate market, the FIIs, as well as appreciate the liquidity that this type of investment has.

As its name suggests, Fiagro's investment portfolio must necessarily be composed of real estate assets, equity investments, securities or bonds that are part of the agribusiness production chain (CDCA, CPR Financeira, CRA, etc.).

If the project approved by the Federal Senate does not undergo major changes until presidential sanction, the regulation of the new agricultural fund should be, in general, very similar to that governing Real Estate Investment Funds.

Besides being created within the scope of the FIIs Law, Fiagro has similar characteristics to the real estate fund, including the taxation of the income of the quota holders by the income tax of 20%, zeroed when the requirements of the tax legislation are observed.

But some important provocations and reflections should be made by structurers, research houses and investors:

(i) Should we wait for Fiagro's regulation to create a fund with investment policy in rural real estate or can we simply use FIIs?

(ii) The bill provides that, in the case of leased or rented real estate assets, the rural property producer must leave the property for breach of contract within a maximum period of 1 year from a court order - and his departure must coincide with the harvest of the crop. What about cases in which the harvest is not ready for harvest? What structures should be used in these cases?

(iii) The traditional rural practice of using rural partnerships in the relationship between the owner of the property and the producer is not contemplated in the project. Shouldn't the Fiagros be able to grant their properties in rural partnerships as well (besides leasing or just alienation)?

(iv) Fiagro, differently from FII, will not have the obligation of a semi-annual income distribution. Would it not be appropriate to review the regulation of FIIs so that they also have this possibility? We now have, without a doubt, a more developed market than the one that existed at the end of 2009, and without any comparison with the one in the 1990s (the decade in which the FII Law was enacted). Thus, it would be positive for the market and for the growth of alternative financing instruments if this adjustment were made.

(v) What regulatory treatment will CVM propose for Open-end Funds? Will there be any kind of restriction in the sense of having only or preponderantly liquid assets in the portfolio? Will there be mandatory suitability rules or waiting periods for redemption?

(vi) For funds with more restricted rules regarding the target investor public, which will be the case of Fiagro according to the draft bill, will there be any specific rule for intermediaries, considering that closed-end funds may be traded on the stock exchange?

(vii) Should not the rule of deferral of taxation on capital gains on payment in kind of real estate, as provided for Fiagro, be extended to FIIs?

As one can see, the approval of the amendment to the FIIs Law will be only the first step towards the creation of Fiagro.

After that, CVM will still have to issue specific rules, when it can follow three paths: (i) create a rule from scratch; (ii) use a text that is the result of minor adjustments in the FII rules; or (iii) create a regulation that takes into consideration the general rule for funds currently in public hearing by CVM.

As we look forward to Fiagro, I remember the continuation of that phone conversation in 2011 and the difficulties arising from the lack of market maturity.

Luis do presente can happily report that, in recent years, the market has developed a lot and we currently have several options, each with its peculiarities, its investors' focus, expected returns, its regulatory complexities, tax effects and many acronyms, FIPS(Private Equity Investment Funds), FIDCs(Investment Funds in Credit Rights), CRIs(Real Estate Receivables Certificates), CRAs(Agribusiness Receivables Certificates), LIGs etc.

If all goes well, one more acronym will soon come, Fiagro.