Terra Nova: Proving that Irregular Land Titling Can Be a Strong Business Case
Terra Nova and its shareholders are an example that impact investing has the potential to play an important role in the solution of our social and environmental issues in a large scale.
Terra Nova (TN) is the only Brazilian company focused on providing support services for the formalization of illegally invaded urban areas, acting as an intermediator between landowners and occupants. Founded in 2001, Terra Nova empowers the low-income community to play the main role in a conflict that traditionally depended on government bureaucratic solutions.
The Company’s model is based on the assumption that the wealth and resources to get the problem solved lies in the communities themselves – if properly organized. The framework relies on a peaceful multi-stakeholder negotiation and an innovative legal structure that brings together community associations, the private sector and government agencies. Once an agreement is reached, it enables occupants to indemnify landowners and acquire title to the land they have been living in. TN’s approach to dispute resolution not only produces solid positive social impact, but has also proven more efficient and cost-effective than the existing government-run processes.
The Context:
Brazil presents a large deficit of low-income housings, driven by a highly unstructured and intense urbanization process and followed by a lack of government investment, increasing the social inequality throughout the country. As a result, families began to occupy public and privately-owned land, often in areas of high risk. Currently, Brazil has more than 2 million people living in areas lacking formal land titles and essential public services. TN is focused on private areas undergoing eviction processes.
With irregularities in the land title, Brazilian government has difficulties (and low incentives) to cope with its social obligations, and occupants and landowners are also discouraged to invest in maintenance and home improvements, given the uncertainty of the future outcome. In addition, the government has failed to address the issue of urban informality, accumulating piles of lawsuits related to land reapropriation. Government initiatives to settle land ownership disputes generally rely on costly and protracted land expropriation processes to distribute property titles to residents of informally settled communities for free. Lack of continuity of government policies, conflicting political interests and the amount of resources required to regularize or reintegrate the possession of these properties have made it all but impracticable for the State to successfully address such complex issues.
Win-Win Operating Model:
TN’s operating model consists of (i) identification of potentially regularizing areas, (ii) preparation of a feasibility study to identify the economic and legal likelihood of the project, (iii) informal and judicial agreements in which high attention is paid to community engagement and preparedness (iv) project implementation and (v) project maintenance. For the services rendered along the entire process, TN receives a percentage of the land purchase price, aligning incentives among the different parties.
Once a potential area is identified, a traditional project will pursue the following course of actions:
Feasibility Study: Initial roadmap that shall be constructed to understand if a target area can be successfully regularized, verifying land ownership and fiscal obligations, and identifying potential community leaderships. The feasibility study represents less than 1% of the total costs.
Diagnostic: At this stage, it is fundamental that a strong community leadership is identified, since normally one single landowner has more than 10 families living in its property. Terra Nova deeply analyzes the legal feasibility of the project and the community demographics (investigating payment capacity and commitment to the project). The Company also drafts the purchase conditions for the negotiation stage. The diagnostic phase represents approximately 25% of the total costs.
Negotiation: Presentation of and agreement on purchase conditions and payment terms. At this stage, the Company works with the government to negotiate commitment to infrastructure development in the area, once the regulation is concluded. Rights and duties document are signed by all parties. The negotiation phase represents approximately 25% of the total costs.
Ratification: The Judicial Agreement is ratified in the courts, providing legal protection necessary to begin securing the indemnification contracts from the residents. Titling is held from buyers up until final payment is made. The ratification stage represents approximately 15% of total costs.
Implementation: Since each transaction involve more than 10 families, a dedicated community agent is assigned to the project for the entire period and has the goal of capturing 70% of contracts in the first 7 months of operation. The implementation phase represents approximately 40% of the total costs.
A Triple-Bottom-Line Successful Model
TN is an example of effectiveness, because it can integrate social development, sustainable urbanization and value creation through an operating model that empowers the community, raising them to act as agents of transformation, in a world that government uses to play the main role. TN operates in a win-win model, in which the landowners receive benefits from the increase in its land valuation (priory considered a dead zone), government starts receiving property taxes (and no longer has to conduct costly land tenure processes), and the occupants no longer live on a threat of eviction. Land regularization, not only improves the life-quality of the occupants, but also acts as an important economic integration tool, providing the community access to credit (with the land as collateral) and formal jobs.
Terra Nova’s operating model accelerates the conflict resolution in years. Agreements are now reached in 18-24 months, in comparison with 10-15 years of the traditional paths.
Terra Nova already changed the reality of 3,500 low income households, with a long-term business plan focused on land tenure regularization of more than 20,000 families. Although, TN’s operating model is highly depend on the success of each transaction and in the engagement of the community, the Company presents a strong competitive advantage due its learning curve in the last decade, in a highly complex industry with multilateral agreements combined with the extensiveness of resources required, forming a potential entry barrier. Because of its operating model focused on creating partnership and strong relationships among the involved parties, government, landowners and communities are constantly presenting new opportunities to the Company’s pipeline.
Moreover, even with differences between country’s regulations, Terra Nova’s operating model could be expanded to other regions, mainly in Latin America. The United Nations estimates that 1 billion people live in slums in the world, a figure projected to reach 1.4 billion by 2020. Terra Nova and its shareholders are an example that impact investing has the potential to play an important role in the solution of our social and environmental issues in a large scale, since it also presents positive and sustainable economic impact.
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Great post, Camila! It seems like Terra Nova has found a very creative and structured solution to a problem that, as you pointed out, affects a huge percentage of the world’s population. I am amazed that, given the bureaucratic problems emerging market countries often face, Terra Nova has created an effective process to speed up the land transfer “cycle time” to 24 months. What a complete paradigm shift for this industry! It seems that this is really possible because of their focus on alignment of all parties and to find a reasonable settlement that benefits everyone. I am curious to see how the government is incentivized to provide more investment in the public infrastructure as a result of this and what that investment will ultimately look like.
My questions are:
1. How does TN ensure that landlords will be willing to sell to current residents? What if they think they can get a better offer from elsewhere?
2. As TN scales, is there a bottleneck to how many transactions the government is able to facilitate at once? Will they reach a growth plateau? How can they continue to improve processes to make this more systematized and expedited? How will costs be impacted?
3. Is Terra Nova’s cut of these transactions too large? They are clearly creating a lot of value in time and resources saved for the landlord and tenants, as well as increasing the value of the neighborhood and improving social good. How do they balance capturing value for themselves with ensuring that they keep sale prices low enough for tenants to afford and that the landlord is happy with his share?
Overall, TN seems like a great impact investment opportunity and I hope it continues to pioneer and perfect this model, so that ultimately it can be adapted in other countries!