State farmland under concession: what the right is worth, one remaining year at a time

1. 1. Why does a "per hectare" price say nothing about land under concession?

Under the ads, prices are quoted per hectare. That is the unit for freehold land. For a concession, it is misleading.

Law No. 10-03 of 15 August 2010 grants a right to farm the land and the surface assets attached to it, for a maximum term of forty years, renewable, in return for an annual fee (Article 4). When this right changes hands, Executive Decree No. 10-326 of 23 December 2010 specifies that the transfer only covers the remaining term (Article 22). Two neighbouring plots that look identical therefore do not have the same value if one was granted in 2011 and the other in 2020.

What the buyer pays for has three components:

The third line is not paid for like the other two. The text provides for renewal on request, but a prudent buyer does not price in years he has not yet obtained. It is better treated as a negotiating point than as a value.

2. 2. What does the 1/40 tax rule say, and why is it not a price?

The Registration Code contains the only official scale that names this right explicitly. Its Article 353-7 values it, for each remaining year, at one fortieth of the market value of the land granted, with no fraction of a year and regardless of the holder's age.

The rule is generous. The same article values a fixed-term usufruct at two tenths of the property's value per ten-year period, with no fraction. For the same term, the concession therefore weighs more heavily in the tax base than a usufruct:

This benchmark has two limits. It assumes the land's market value is known, and that value is published nowhere for state-owned land. And it is linear: the twenty-fifth year counts as much as the first. No buyer reasons that way. A dinar received in twenty-five years is worth much less than a dinar received at the next harvest.

It remains useful for a practical reason. When the deed does not state a value, the land registration tax is calculated on this estimate. We come back to this in section 6.

3. 3. How do you put a figure on what the land yields each year?

The economic value of a right to farm is the sum of what the farm will leave each year, brought back to today. The starting point is therefore an annual net income:

1. the output from crops or livestock in a normal season;
2. minus operating costs (seed, fertiliser, energy, labour, water);
3. minus the annual concession fee, payable in arrears to the state property office (specifications annexed to Decree 10-326, Art. 9);
4. minus maintenance and replacement of equipment, boreholes and plantations;
5. minus tax, if due.

An official base exists for the first two lines, and almost nobody uses it. Every year, before 1 February, a wilaya commission chaired by the director of taxes sets, for the past year, the average yield per hectare, average prices and costs per hectare, by crop, by zone and by municipality or group of municipalities (Tax Procedures Code, Art. 7 bis, 7 ter and 10). The agricultural services directorate, the ONTA and the chamber of agriculture sit on it. The rates are approved by the regional director of taxes within thirty days (Art. 10 bis).

These scales are used to calculate agricultural IRG. They also give a neutral order of magnitude that neither the seller nor the buyer wrote. Ask the tax office for your municipality's scale. They are averages, and a well-run farm can do better. Use them as a floor, then justify the gap with the seller's seasonal accounts.

On tax, Article 36 of the CIDTA permanently exempts income from cereals, pulses, dates and raw milk, as well as income from farms of 6 hectares or less in the South and the High Plateaus, and 2 hectares or less elsewhere. Newly developed land and mountain areas benefit from a ten-year exemption. Two plots with the same gross income therefore do not have the same net income.

4. 4. Example: what is a right on 10 irrigated hectares with 20 years remaining worth?

The figures below are calculation assumptions, not market prices. They are there to show the method.

• Area: 10 irrigated hectares, authorised borehole, 20 years remaining on the deed.
• Annual net income, after the fee, maintenance and tax: DZD 1,500,000.
• Discount rate: 12%. This is the return a buyer requires to tie up his money in a farm exposed to weather and prices. It is an example assumption, to be adapted to your cost of financing. The table below shows the effect of a 10% or 15% rate.
• Expected compensation for surface assets at expiry: DZD 4,000,000.

Twenty annual amounts of DZD 1,500,000 discounted at 12% are worth DZD 11,204,000 today (factor 7.469). The end-of-term compensation, received in twenty years, is worth only DZD 415,000. The economic value of the right comes to about DZD 11,600,000.

If the land itself were valued at DZD 3,000,000 per hectare, i.e. DZD 30,000,000, the 1/40 tax rule would give 20/40 of that amount: DZD 15,000,000. Here the tax benchmark exceeds the economic value by nearly 30%.

The following table shows how the value moves with the remaining term and the rate, for the same net income of DZD 1,500,000 a year (end-of-term compensation excluded):

One lesson stands out at once. Going from ten to twenty years remaining adds about DZD 2,700,000 at 12%. Going from twenty to thirty adds only DZD 880,000. The 1/40 rule, by contrast, adds the same amount for each ten-year band. So it is on almost new concessions that the tax benchmark strays furthest from the economic value.

The discounting method is detailed in our article on NPV, IRR and payback period.

5. 5. What pushes the value of a concession right up or down?

The calculation is only as good as its inputs. Six points move them more than anything else.

The fees line deserves a clarification. The buyer takes over the farm as it stands. If the seller has let arrears build up, the risk of termination does not disappear on signing. It is deducted from the price, or settled before the deed.

The last line is a reminder that a price is not set in isolation. A holder who wants to transfer must tell the ONTA the price and the buyer's identity, after which the co-farmers and the Office may pre-empt. The full procedure is described in our article on transferring a concession right.

6. 6. What price should be declared, and how can the purchase be financed?

The declared price is used three times. At the ONTA, it sets the price at which a co-farmer or the Office can pre-empt. In the deed, it is the base for the 1% land registration tax, which covers transfers of real property rights and is calculated on the value declared in the document to be registered (Registration Code, Art. 353-2). For the seller, it finally determines any capital gain.

In the example, a price of DZD 11,600,000 gives a tax of DZD 116,000. If the tax office applied the 1/40 rule and land valued at DZD 30,000,000, the base would be DZD 15,000,000 and the tax DZD 150,000. Our reading is that the 1/40 rule applies when the deed does not state a value, as in a free transfer or a withdrawal between heirs. The text does not expressly settle the case where the agreed price is below the 1/40 figure. Have the notary confirm the base before signing.

Understating the price to cut the tax is a poor calculation. The co-farmer can buy at the understated price. And Article 113 of the same code makes void any agreement that conceals part of the price in a property sale, with a fine equal to twice the duties evaded.

To finance the purchase or the investments that follow, the acquired right can be mortgaged to a bank (Law 10-03, Art. 12). Registering a mortgage securing a loan granted to a farmer for his activity is exempt from the land registration tax (Registration Code, Art. 353-6). If you lack collateral, our article on loans without a mortgage sets out the other options.

FAQ — Frequently asked questions

BENSAID Farouk

Financial & Economic Research Consultant — ProfitPilot NextGen Consulting

Certified sole trader and expert in financial studies, risk analysis and market research for SMEs, startups and investors in Algeria. View full profile