Brazilian REITs

Brazilian REITs

FIIs — Brazil REITs

In 1993 Brazil launched its version of Investment Trusts (REIT), with what are known as Fundo de Investimento Imobiliario, or even FII.

This was from Federal Law 8668/93 and instruction 205/94. Now it’s by Rulings 472/08 from Comisao de Valores Mobiliarios/Brazilian Securities Fee (CVM). And regulated by the Rules for Account Operation, where they’re registered, then submitted for approval by the actual Comiss�o de Valores Mobili�rios/Brazilian Securities Commission (CMV).

FIIs could be listed on the stock market, the Bovespa (Sao Paulo Stock market), have at least 50 investors. Since 2006, they happen to be tax free for individuals, but not for companies — provided those persons own under 10% of the FII.

At least 95% of operating earnings, and at least 95% of capital gains, must be distributed to unit holders on the semi-annual basis, at the end of June and December of each and every year.

This income must be from the operation of property — rent and capital gains. Income from fixed income investments is susceptible to taxes and tax withholding of distributions. The use of influence is forbidden.

These Brazilian REITs can own and operate home investments. However, there are more private ones than publicly detailed ones. It is most often used as a special-purpose organization, and funded by private capital. Existing entities can not be transformed right into a FII.

A Fundo de Investimento Imobiliario is a REIT within Brazil

FIIs must be approved by the CVM, and therefore must subscriptions for units. They must be formed and managed by banking institutions authorized by the CVM.

There is no required minimum funds. An FII is not a legal entity, but a contractual arrangement between investors along with a fund manager. They are closed-end, and can have either a restricted or indefinite duration.

Most FIIs are small. They own only one, or a portion of one, property. So most Brazlian REITs own one business building or one shopping center or, in one case, one resort.

A construction company may not hold more than 25% curiosity about a FII. Unit holders may be legal entities or people in Brazil or outside Brazil. There is no discrimination in between Brazilian and foreign investors.

A FII is classified as a good investment condominium. They are forbidden by law to use influence, so all their positions are 100% equity.

The CVM web site lists 133 FIIs. However, I crosschecked against them with the Sao Paulo Stock market website listed companies. None of them were listed as becoming publicly traded.

Viewpoint: Choosing the Right Way to Invest in Brazilian Property

One of the first issues faced by foreign investors in the Brazilian housing market is choosing to invest through the so-called Fundo de Investimento Imobiliário (FII) or via a Fundo de Investimento em Participações (FIP). The instant question: What are the differences between the two?

The portfolio of the FII is meant to be composed of direct investment into property assets (holding either the ownership of a property or even title to real estate-backed credit). The portfolio of an FIP should be composed mainly by the stock of special purpose companies (SPCs), which can be engaged in the real estate business. In reality, FIPs were conceived for that private equity industry, but they can also be suited for the housing market.

Also, provided certain conditions are met, both the FII and the FIP offer foreign investors the advantage of exemption of withholding taxes on income derived from the FII and FIP and capital gains obtained through the foreign investors from the disposal of the FII’s and FIP’s quotas within the securities market.

In the end, both FIPs and FIIs may actually lead to the same results. In fact, managers set up FIIs and FIPs to focus on at investors and real estate projects with specific profiles. (Banking institutions manage FIIs, while accredited managers oversee FIPs. Unsophisticated investors, mainly Brazilian, see investment in real estate assets as more attractive than stock of SPCs. Pension funds favor FIPs over FIIs.

Managers need significantly greater infrastructure to manage a portfolio of properties in an FII than what is required to manage a portfolio of stocks within an FIP. Hence, FIIs cost more to maintain than FIPs.

FIPs can accommodate other stockholders as partners from the SPC and usually rely on their expertise to run the underlying property business. The FIP’s fund manager is responsible for participating within the management of the SPC, but it usually seeks other stockholders that may contribute to the business in some form. FII investors depend on the expertise of the fund manager to actually manage the actual estate assets, including collecting receivables, advertising real estate products as well as leasing the properties.

Finally, the SPCs of the FIPs tend to be more cost-effective than FIIs in divesting from the assets. Sales of SPC stocks don’t trigger any real estate transfer taxes, which can be up to 3 percent, whereas divestitures from FII assets do.

In overview: Choosing the more suitable vehicle for investing in Brazilian property depends not on tax advantages, as many think, but the characteristics of both real estate and the profile of the investors.

About the actual Authors: Guilherme Vieira da Silva is a Brazil-based corporate and securities partner at Tauil & Chequer Advogados in colaboration with Mayer Brown LLP. David Saye is a Charlotte-based real property partner at Mayer Brown LLP. Michael Hermsen is a Chicago-based business and securities partner at Mayer Brown LLP.

Disclaimer: This information is solely educational in nature and it is not intended by NAREIT to serve as the primary basis for just about any investment decision. NAREIT is not acting as an investment agent, investment fiduciary, broker, dealer or other market participant, and no offer or solicitation to buy or sell any security or investment is being made. This article does not constitute tax advice or perhaps a legal opinion. NAREIT makes no assurances regarding the article’s precision.

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