IN BRAZIL YOU CAN COUNT ON US 24/7.   Corporate   Tax   Dispute Resolution   Labor   Real Estate   Finance   Infras...
BrazilA turning pointCristiane Mamprin de Castro Guerra and FernandoSemerdjian of Lobo & de Rizzo Advogados providea compr...
“  The lack         The security of these transactions is much improved                                              In th...
Brazil   The commercial properties invested in by these         been forcing an alliance between the archaic civil      pe...
“      General’s Office (Advocacia Geral da União, or AGU) by                            Incra). The real estate registry ...
Brazil   In Brazil, typical leases for residential or com-      certainty. A recent decision by the São Paulo State       ...
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IFLR - Publicação Lobo & de Rizzo Advogados


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IFLR - Publicação Lobo & de Rizzo Advogados

  1. 1. IN BRAZIL YOU CAN COUNT ON US 24/7. Corporate Tax Dispute Resolution Labor Real Estate Finance Infrastructure and Projects Regulation and CompetitionLobo & de Rizzo AdvogadosSão Paulo Rio de JaneiroAv. Brigadeiro Faria Lima, 3.900 Rua Lauro Müller, 116 - 43º andar3º andar - Itaim Bibi Sala 4301 Torre Rio Sul - Botafogo04538 132 - São Paulo - SP - Brazil 22290 906 - Rio de Janeiro - RJ - Brazilt 55 [11] 3702 7000 t 55 [21] 3299 7100f 55 [11] 3702 7001 f 55 [21] 3299
  2. 2. BrazilA turning pointCristiane Mamprin de Castro Guerra and FernandoSemerdjian of Lobo & de Rizzo Advogados providea comprehensive overview of the Brazilian real estatemarketB razil is experiencing a positive economic moment. The decline of the so-called Brazil risk has made Brazil an increasingly secure market, with excellent opportunities and competitive returns in a wide range of sectors. This is particularly true of the real estate market, whichwas helped in part by the US sub-prime crisis which hastened the tendency for displacement of in-vestment to other national markets. Due to an economic culture based on years of high inflation and economic instability, Brazil hadnot encouraged financial leveraging in the real estate market, and the low purchasing power of themajority of the population dampened demand in this segment. Furthermore, the country’s vast terri-torial extent did not require the creative solutions that lack of space imposes in certain markets. Thus,until recently, Brazil’s property market was relatively underdeveloped, marked by low complexity oftransactions and limited diversity of products. However, with the stabilisation of the currency, Brazil’seconomic scenario changed to one of solid growth. As mentioned, the Brazilian property market was not negatively affected by the sub-prime crisis;in fact the exact opposite occurred. Recent legal changes providing greater security for creditors, thecreation of more sophisticated investment mechanisms and the need for infrastructure and housingprojects have made the time ripe for progress. Foreign investors first sought out real estate opportuni-ties in large metropolitan regions, then expanded to neighbouring cities (especially in the southeast)before turning to look for opportunities elsewhere in the country.A market ripe for development “Although much foreign investment has been concentrated in the southeast of Brazil, the notorioushousing deficit in other regions and the relative shortage of land and associated high prices per square Until recently,metre in this region have contributed to shift people and investments to other regions, particularly tomedium-sized cities. Brazil’s property According to a study by the Institute of Applied Economic Research (Instituto de Pesquisa Econômi-ca Aplicada, or IPEA), a government-sponsored think tank, medium cities – those with populations market was relatively underdeveloped ”of between 100,000 and 500,000 – increased their share of national wealth from 26.07% to 27.35%between 2002 and 2005 while the GDP share of large metropolitan regions and cities declined from43.34% to 41.70%. This factor has affected the real estate market in various segments. Surveys show that the launch ofnew residential projects has been surging in regions of the state of São Paulo outside the capital city’sgreater metropolitan region, driven by the migration of firms, increased income in medium cities andlack of good land for undertakings in the capital. Another reflection of these trends is the spreadingconstruction of shopping centres throughout Brazil in less populous regions, in cities with more than150,000 inhabitants, significantly increasing the opportunities for investment in these ventures. The larger volume of credit available from financial institutions at more palatable interest rates hasspurred mortgage lending to people in more varied social segments, enabling a whole new contingentof families to own IFLR | REAL ESTATE 005
  3. 3. “ The lack The security of these transactions is much improved In the coming years the Brazilian economy will be fur- for all those involved. The enhanced contractual guar- ther boosted by important events such as the 2014 Word antee mechanisms, such as fiduciary assignment (trust deed) established by Law 9,514/1997, now facilitate of uniformity Cup and 2016 Olympics. repossession without requiring a judicial foreclosure pro- throughout the Brazilians’ new relationship with real estate cess. This has been particularly important given Brazil’s investment slow courts. In this respect, less protection of borrowers country poses The way Brazilians invest their money has also been has helped them as a class, since the greater protection changing in recent years, because their relationship with of creditors has made banks more willing to lend, and a relevant credit has also been changing. The increasing income, hindrance to at lower spreads. Finally, the realty market has been more accessible credit, and particularly the strengthening greatly favoured by creation of the regime of separate of the middle class, have increased the capital available assets and liabilities for real estate development projects. By ring-fencing these undertakings, this regime prevents the expansion for financial investments, with greater appetite for less conservative instruments. problems involving one project from affecting a devel- oper’s other projects. (Passage of this law was largely in response to the bankruptcy of a large national property developer.) of the market ” The market already shows signs of this new reality: in 2010, the Brazilian Securities Commission (Comissão de Valores Mobiliários, or CVM) granted approval to 39 of- ferings of shares in real estate investment funds (a vehicle Another factor driving the improved housing sector previously little used in the Brazilian capital market) with and generating good investment prospects was the cre- a record amount of R$9.7 billion offered. Of these, 20 ation of the Minha Casa Minha Vida (My House, My offerings were concluded during the year, for a total of Life) programme, by which approximately R$4.6 billion R$3.3 billion, while the others are still in the marketing ($2.82 billion) has been earmarked for loans to build process. low-income housing. This has helped spread develop- Of the 20 offerings concluded, a total of R$2.8 billion ment of the real estate market. was effectively placed, to various types of investors. The Overall, real estate developers, many of them capi- majority of purchasers in number were individuals, proof talised by foreign investors, have been responding to the of acceptance of the diversification and sophistication of expansion of the middle class, the arrival of credit for the these instruments. Of the volume placed, R$2.2 billion lower middle class and new legal mechanisms, with a was put up by individuals. substantial number of new project launches. About half the volume of these offerings placed in This improved scenario is reflected in the statistics 2010 went to real estate funds focused on projects for from Caixa Econômica Federal (CEF), a federally-owned new office buildings, for lease of floor space to first-line savings and loan institution linked to the Finance Minis- companies (Triple A). This type of fund attracted money try, for the first quarter of 2011, during which it signed from around 8,000 individuals, with average investments 226,381 loan agreements, involving R$14.7 billion in of approximately R$130,000. In terms of volume, the housing financing. Comparison with the same period in funds that most attracted individual investors were those 2010, when R$14.6 billion was lent, shows maintenance with an investment policy of acquiring real estate finan- of a good pace of mortgage lending. cial assets. First-quarter data also shows that CEF made an av- The average investment of the 700 people who invest- erage of 3,651 new real estate loans a day, nearly 50% ed in this type of fund was higher, at about R$500,000. to families with incomes up to 10-times the minimum With respect to the number of investors, the funds monthly wage (R$545), worth R$ 7.7 billion. This focused on purchasing properties leased under built-to- represents growth of 14.8% in comparison with the first suit arrangements and commercial properties in general three months of 2010. attracted roughly 2,000 individuals each. About the author Contact information Cristiane Mamprin de Castro Guerra specialises in corporate law, M&A, joint venture structuring and commercial agreements, as well as real estate law. She Cristiane Mamprin de is one of the founding partners of Lobo & de Rizzo Advogados and head of Castro Guerra its real estate practice. Mamprin assists clients on both real estate acquisitions Lobo & de Rizzo Advogados and in the process of funding, as well as sale and leaseback transactions, built- to-suit agreements, leasehold advisory, real estate receivables securitisation Av. Brigadeiro Faria Lima, and other real estate transactions. She has also advised US, European and 3.900, 3º andar - Itaim Bibi domestic corporations in Brazil and other South American jurisdictions. 04538 132 - São Paulo - SP - Brazil She holds an MBA in Economic and Corporate Law form Getúlio Vargas Foun- t +55 [11] 3702 7000 dation and a postgraduate degree in US Law from New York University. She is f +55 [11] 3702 7001 a member of the Commission on Interns and Bar Examinations for the Brazilian Bar Association and a frequent speaker at real estate seminars throughout the country.006 IFLR | REAL ESTATE
  4. 4. Brazil The commercial properties invested in by these been forcing an alliance between the archaic civil pending on the particularities of each place.funds range from office buildings to large stores and law and the dynamism of contractual relations to When purchasing property for real estate de-units in shopping centres. The average investment dispense with the requirement for public instru- velopments, after the acquisition it is necessary toin funds specialising in built-to-suit properties ments in some cases. obtain prior approval from the municipal govern-was R$90,000 while the average for those focused In these cases, legislation often attributes force ment and environmental agencies and to obtainon investing in other commercial properties was of a public deed to private instruments. This is connection to public utilities. Although all lowerR$60,000. Additionally, but in smaller numbers, the case with, for example: (i) purchase and sale governments are subject to federal legislation, theindividuals also put money in funds specialising commitments (conditional sale), assignments, and states and municipalities have autonomy to legis-in housing projects, industrial buildings or ware- commitment to assign in transactions involving late and regulate these matters within the boundshouses for distribution of goods. Finally, several subdivision of property; (ii) contracts and other of the federal rules. This is true of zoning regula-funds of funds were established, serving as vehicles instruments issued by state and municipal gov- tions, construction standards and the proceduresto invest in other real estate investment funds. ernments to formalise the transfer, concession or for approval of projects, for instance. The numbers show the diversification of the recognition of domain over rural public lands; (iii) The lack of uniformity throughout the countryproducts available and the participation of indi- trust deeds (fiduciary assignment) to secure real es- poses a relevant hindrance to the expansion of thevidual investors in this market (which until fairly tate financing; and (iv) contracts entered into with market, both for Brazilian investors from other re-recently was virtually nil), as well as still huge un- entities of the National Habitation System (gener- gions of the country and foreign ones. In this par-explored potential. ally for earmarked lending to low-income people). ticular, partnerships with local parties have shown In many of these cases, besides eliminating a their importance due to their intimacy with localAcquisition of ownership step, the lack of the need for a public instrument regulations and procedures.As a general rule, in order to be perfected acts in- provides significant savings due to the high officialvolving real estate, including transfer of title and fees, reducing the final amount spent by the pur- Restrictions on foreign individuals andthe grant of in rem guarantees, must be formalised chaser and facilitating regularisation of ownership. companiesby a public deed and be registered at the real estate Another example of lowering costs occurs in the The acquisition of rural land by foreigners in Brazilregistry office for the jurisdiction where the prop- My House, My Life programme, under which the is regulated by Law 5,709 (enacted in 1971). Thiserty is located. state and municipal governments can receive ben- law establishes a series of limits and restrictions on The formalism and rigour of Brazilian legisla- efits from the federal government, such as revenue real estate purchase of real estate by foreign indi-tion on real estate gives good legal security to trans- transfers to offset the revenue forgone by state viduals, foreign companies authorised to operate inactions. On the other hand, though, this formal- and local governments’ granting of exemptions on Brazil and Brazilian companies with foreign major-ism, in a country with a large contingent of citizens causa mortis and inter vivos transmission tax, as ity ownership.with limited purchasing power, generates distor- well reduced state value-added tax on construction In 1988, with the promulgation of the currenttions between the registrations and public records materials and municipal service tax on construc- Brazilian Constitution, an important discussionof ownership and the reality on the ground. As a tion services. arose about the possibility of giving differentialresult, many property transmissions are carried out Recent laws have also been enacted to facili- treatment to Brazilian companies (those incorpo-without all the proper registrations. tate regularisation of property records, permitting rated in Brazil, according to Brazilian law, with Many times this regularisation is not possible certain rectifications in the public records that headquarters and management in the country).administratively, and it is necessary to go to court, previously needed court approval to be done in the These discussions slowly lost momentum. Thewhich generally increases costs and takes many administrative sphere. position that developed and prevailed until 2010years. Nevertheless, since Brazil is a large country was that such distinction simply has no constitu- However, the social and economic needs of a with great cultural diversity, the interpretation and tional support, so that the restrictions and limitscountry that wants to grow have been prompting form of applying the legal provisions on property on the acquisition of rural property by Braziliana softening of this formalism in specific cases. The registration tend to be quite heterogeneous. The companies with majority foreign ownership shouldneed for regularisation of landholding, particularly procedures with public registrars and notaries, not shanty towns, as well as the housing deficit, has and also in the courts, can vary significantly de- That position was confirmed by the Solicitor About the author Contact information Fernando Semerdjian is an associate lawyer of Lobo & de Rizzo’s real estate team. Before joining the firm, he worked as a consultant of real estate registry Fernando Semerdjian offices and notary public throughout the country by providing opinions and Lobo & de Rizzo Advogados analysis regarding titles submitted for registration. Semerdjian assists national and foreign clients in real estate matters, including real estate acquisitions, Av. Brigadeiro Faria Lima, sale and leaseback transactions, built-to-suit and real estate development 3.900, 3º andar - Itaim Bibi projects. He holds a postgraduate degree in Registry and Notary Law focused 04538 132 - São Paulo - SP - on Real Estate Law from Escola Paulista de Direito. He specialises in Real Es- Brazil tate Law at Escola Paulista da Magistratura. t +55 [11] 3702 7000 f +55 [11] 3702 7001 IFLR | REAL ESTATE 007
  5. 5. “ General’s Office (Advocacia Geral da União, or AGU) by Incra). The real estate registry office may only register the Legal Opinions 22/1994 and 181/1998. The latter was The transfer upon proof of approval by Incra. duly approved by the President and became binding on all entities of the federal public administration. growing use Nevertheless, even those that decide from a practical or strategic question to follow the requirements of Law However, on August 23 2010, a new AGU opinion (Opinion 01/2008) was approved by then President Lula. of built-to-suit 5,709/71, the law’s application has been generating some insoluble questions, at least in the short and medium It not only holds that it is constitutional to apply differ- arrangements term. After years of not applying the law, the real estate ent limits and restrictions on companies with majority registries do not have the proper records, for example, foreign capital, it also extends this to Brazilian companies is an important to determine compliance with the limits necessary to be controlled by foreign capital (such as when foreign indi- able to report that information to Incra for use in the viduals and/or legal entities do not hold the majority of indicator of approval process. The need to regulate matters that never the capital but exercise effective control). were under the remit of these public offices has revealed A great role in terms of oversight and control of grant- the more a void in the registry system. Besides this, the real estate ing (or refusing) registration of real estate transactions covered by Law 5,709/71 is played by the real estate sophisticated registries do not have the staff or expertise to verify the corporate control of acquiring companies. Likewise, the registry offices. As these offices are not part of the fed- eral public administration, the Internal Affairs Office mechanisms commercial registries do not have sufficient information about the assets owned by the companies registered with of the National Council of Justice (to which real estate available in the them. registries are linked) issued a recommendation that they In June 2010, the Brazilian Institute of Real Estate start applying Law 5,709/71, according to the position of commercial Registrars held a congress to discuss the reflections of AGU Opinion 01/2008, on transactions completed after these matters and to recommend the procedures that August 23 2010. property should be adopted by commercial registries, real estate ” Besides this, with the aim of making Opinion 01/2008 registries and notary public offices in response to the more effective, in March 2011 the AGU issued Notices market restrictions. It seems that, with rare exceptions, notaries 110 and 121, by which it requested the National Depart- and registrars are simply not prepared to face the ques- ment of Commercial Registries (which regulates state tion responsibly. The previously mentioned diversity commercial registry boards, where companies’ incorpora- in the application of laws and regulations by real estate tion documents are registered) and the Finance Ministry registries causes further havoc. to study ways to restrict indirect acquisition of rural land With the country receiving foreign investments in by foreigners – acquisition carried out by corporate trans- virtually all segments, the attempt to apply a law enacted actions. The AGU also asked the CVM to take measures, in 1971 does not appear to be the best way to address among them the issuance of a rule to establish standard the question. The market as a whole, while continuing clauses and conditions that must be included in instru- to function through solutions attempting to safeguard ments or investment agreements intended for trading positions, anxiously awaits the outcome of this debate of securities in exchanges or over-the-counter markets so as to resolve the impasses this has brought to a vitally (organised or not), and to refuse permission for trading important market. of securities that do not satisfy the requirements of the referred law. Built-to-suit leases and the judiciary Although those orientations and opinions do not stop In terms of the advance and maturity of the Brazilian real Brazilian companies with majority foreign ownership or estate market, the growing use of built-to-suit arrange- control from going to court to challenge the reception of ments is an important indicator of the more sophisticated the 1971 law by the 1988 Constitution, from a practical mechanisms available in the commercial property mar- standpoint this would take years to reach final conclu- ket. These arrangements cover buildings constructed spe- sion, and title would be clouded in the interim. cifically for a single tenant, and for this reason the lease Despite the theoretical possibility of arguing the agreement has particular characteristics, generally cover- unconstitutionality of Law 5,709/71, the safest way for ing a long term and calling for pre-established monthly foreign companies to purchase or lease rural property, rent and other charges, subject to well-defined inflation or to acquire the direct or indirect control of a company adjustment clauses. The aim is to provide a steady and holding such property, is to satisfy the limits and restric- reliable cash flow to remunerate the owner for use of the tions of that law and related legislation. In general lines, property and to amortise the construction outlays. besides the limits regarding the amount of land owned In short, because these leases are tailored to the specific by foreigners (up to 25% of a municipality), the extent needs of a single tenant, the contractual relationship must of properties owned by a person or company of the same assure return of the investment, based on the certainty nationality (up to 40% of the 25% limit per municipal- that the monthly revenue stream will not suddenly fall ity) and the need to use the land for an agricultural or and that in the event of early termination, the liquidated industrial project falling under the company’s stated damages will be sufficient to make up for the lost rent. business purpose, the transaction must be submitted to This type of contract rests on a series of legal and fi- the National Institute of Settlement and Agrarian Reform nancial developments and serves as the basis for various (Instituto Nacional de Colonização e Reforma Agrária, or funding transactions in the property market.008 IFLR | REAL ESTATE
  6. 6. Brazil In Brazil, typical leases for residential or com- certainty. A recent decision by the São Paulo State lessor and legal insecurity for all interested parties.mercial purposes are regulated by the Tenancy Law, Court of Appeal, in a suit filed by a lessee seeking Though the final outcome is still uncertain, thewhich if applied strictly to built-to-suit leases could to lower the rent based on the argument it was ex- decision was a step in the right direction and dem-undermine all the contractual features discussed cessive in relation to the market value, went some onstrated the sensitivity of the judges to the needsabove. For this reason, the majority doctrine, in line way to reducing this unease. of the rapidly developing market.with market practice, has taken the position that This question is extremely relevant because under Brazilian real estate legislation and practice arethese are atypical contracts that cannot be tightly a built-to-suit lease the rent is set so as to reimburse extensive, in flux and interpreted in varied waysbound to the rules applicable to regular lease agree- the lessor for the investments made to build instal- by the courts. The local customs and practices alsoments because the purpose of a built-to-suit lease is lations tailored specifically for the tenant’s activities. often influence the applicability of the general rulesessentially different from a common one. This generally costs more than would otherwise be in each case. Despite these particular features, Bra- In the absence of specific legislation and of the case, so the rent is usually higher than under a zil’s economic situation is promising for real estatejudicial decisions supporting the legal doctrine typical lease. However, the appellate panel held that investments of the most varied types, from purchas-on the atypical nature of built-to-suit agreements, the revision of this type of agreement would cause ing individual properties to investing in real estatethe market has been experiencing a degree of un- contractual imbalance and generate losses for the IFLR | REAL ESTATE 009