Mechanisms for investment in Brazilian Real Estate

Luciano Garcia Rossi

September 2009

2

1. Direct Investment in Brazilian Properties

2. Equity Investments

3. Real Estate Funds (FIIs)

4. Private Equity Funds (FIPs)

Summary

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1. Direct Investment in Brazilian Properties

4

Urban Properties

Restrictions for Acquisition

Fee farm system - Seafront properties, few municipalities

Zoning restrictions

Taxation

IPTU calculated based on the assessed value (city tax)

Foreign Investor (Corporate or Individual)

Income from Real Estate: 15% withholding tax (WHT)

Capital gains: 15% (WHT); 25% for tax haven investors

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Rural Properties

Restrictions for Acquisition

Direct Acquisition – Law 5,709/71

Does not apply to Brazilian companies after 1988

Free up to 3 modules

INCRA authorization - from 3 to 50 modules

Foreigners cannot own more than 25% of the area of a municipality (up to 40% under one nationality)

Strict interpretation in the Amazon region

Border areas – 150km from international borders – Law 6,634/79

Need of authorization from Brazilian Defence Council (CDN)

Companies – majority of capital held by Brazilians

Violation – null and void + penalty of 20% the transaction

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Rural Properties

Other Limitations for Acquisition

Mining Rights

Environmental constraints – legal reserve

Indian reservations

Former slave communities (quilombolas)

Georeferencing

Any properties from 500ha (all properties after Nov. 2011)

GPS measurement + neighbours acceptance + INCRA certification

Taxation

ITR calculated based on declared value (federal tax)

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Restricted Areas

Environmental Reserves

Indigenous Reserves

Border Zone

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2. Equity Investments

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Type of Company:

Brazilian corporation - S.A.

Limited liability company – Ltda.

Setting up:

Board of Trade, CNPJ, Election of Managers

Time for incorporating a company: 30/60 days

Taxation (foreign investors)

Dividends – tax exempt

Interest on Shareholders’ Equity - 15% WHT; 25% (tax haven)

Capital Gains - 15% WHT; 25% (tax haven)

IOF tax – 0.38% inbound and outbound

Equity Investments – SPE (Law 4131)

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Stock Exchange:More than 30 real estate companies listed in Bovespa (28 in Novo

Mercado)Largest players: CYRELA (CYRE3)

MRV (MRVE3)

GAFISA (GFSA3)

BR MALLS (BRML3)IMOB index (12 companies) - total value of US$17.3 Billion in July

2009

Taxation (foreign investors) - transactions in the market

Dividends – tax exempt

Interest on Shareholders’ Equity - 15% WHT; 25% (tax haven)

Capital Gains - tax exempt; 15% WHT for tax havens

IOF tax – not applicable

Equity Investments – Stock Exchange (R 2689)

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3. Real Estate Investment Funds (FIIs)

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FII Offerings

FIIs created in 1993: Law 8668

Regulated by CVM Ruling 472 / 2008

Tax benefits for Brazilian individuals only

Number of FII Offerings (primary)

15

7

22

7

31

4

30

281 280

35 73

979

518 498

2003 2004 2005 2006 2007 2008 aug/ 2009

FII Issue Volume (MM of R$)

Source: CVM

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Legal Basis: Law 8,668/93, as amended CVM Ruling 472/2008

Concept: Investment fund designed to invest in real estate projects – Mechanism similar to US REITs

Main Characteristics: No corporate identity Closed-end fund: redemption of quotas not permitted Determinate or indeterminate term No minimum investment amount

FII – Basic Features

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Permitted Investments

Real estate properties and rights

Equity of real estate companies

SPEs with real estate business

Other funds (FIPs, FIIs, FIDCs)

Real estate receivables certificates (CRIs) and other instruments

Possibility of funds for QIBs – waiver of requirements (e.g., prospectus)

New flexibility on approval of acts (change in bylaws, new quotas)

Appraisal reports – approved by quotaholders - not necessarily market value

Law 12,024 - shall stimulate acquisition of CRIs and other instruments

FII Investments

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FII earnings derived from real estate business are not subject to income tax.

Earnings derived from fixed or variable yield investments - WHT according to the same rules applying to financial investments by legal entities. May be offset against any WHT by the FII on distributing profits to quotaholders

FII shall pay out to quotaholders at least 95% of profits reported, as determined on a cash basis, every 6 months (June 30 and December 31)

Any FII that has a quotaholder (and related parties) as developer, builder or partner having over 25% of the quotas – tax assessed as a legal entity

Foreign Investor (individual or legal entity) Quota earnings: 15% WHT; 20% for tax haven Capital Gains: 15% income tax; 20% for tax haven

FII Tax Assessment

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4. Private Equity Funds (FIP)

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Change in FIP Offerings

1271423 2120

4775

2226420050

5229

2003 2004 2005 2006 2007 2008 aug/ 2009

FIP Issue Volume (MM of R$)

Number of FIP Offerings (primary)

39 6

72

13

86

25

2003

2004

2005

2006

2007

2008

aug/

2009

FIPs created in July 2003 by way of CVM Ruling 391

In June 2006, FIP foreign investors were granted a tax benefit under Law 11,312

Source: CVM

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FIP – Basic Features

Basic Rule: CVM Ruling 391/03

Concept: Investment fund in (1) securities representing equity, (2) with participation in the management of the invested company

Main Characteristics: No corporate identity Closed-end fund: quota redemption is not permitted Determinate term Qualified Investors + Minimum Investment of R$100,000

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FIP Investments

Investments in securities representing equity

Investments Permitted:

(a) shares(b) debentures(c) subscription bonds(d) other securities that can be converted in or exchanged for shares

All securities above may be issued by either publicly-held or closely-held companies.

Investment in fixed-yield funds for routine FIP expenses

Effective influence on the invested company

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Taxes Assessed on FIP Quotaholders

Foreign Investors – Individual or Legal Entity

Law 11,312/06: Tax benefit (0% WHT on FIP earnings paid to quotaholders) provided the quotaholder meets the following requirements:

only individuals or legal entities resident abroad

investment made via Resolution 2689

quotaholder or related party may not hold more than 40% of FIP quotas or earnings

FIP may not have more than 5% debt bonds in its portfolio (net assets)

FIP quotaholder may not be located in a tax haven

If the requirements above are not met, WHT will be due on earnings paid out by the FIP at the rate of 15%

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SPC 1 SPC 2 Other investments

Offshore

Brazil Up to 40% of

FIP

Up to 40% of

FIP

Up to 40% of

FIP

FIP Structure – Feeder Funds

Investors

Investment

Vehicle

Investors Investors

Investment

Vehicle

Investment

Vehicle

FIP

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FII FIP

Manager Portfolio Manager Financial institutions

TermDeterminate or indeterminate

Determinate

Minimum Investment

No minimum Minimum of R$100,000 + QIBs only

Object

Real estate, equity of real estate business, debt instruments, other funds

Equity or equity-related instruments of S.A.s + effective influence. Any type of business

Taxation15% WHT on quota earnings and on capital gains (20% for tax havens)

Zero percent WHT on earnings if all conditions are met (otherwise 15%)

Main focusBrazilian individuals (tax benefits)

Foreign investors

FII vs FIP

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Luciano Garcia Rossi

Tel: (55 11) 3247-8673

Fax: (55 11) 3247-8600

E-mail: lrossi@pn.com.br

Pinheiro Neto Advogados

Rua Hungria, 1100

01455-000 São Paulo – SP

BRAZIL

www.pinheironeto.com.br

9.689.275

Contact Information