Structuring the investment
When investing in real estate in Brazil, there are several structures that may be adopted depending on the focus of the investor, which may include: (1) direct acquisition; (2) equity investments; (3) real estate investment funds (FIIs); and (4) Brazilian private equity funds (FIP).i Direct investment
According to Article 1,254 of the Brazilian Civil Code, transfer of real estate ownership, as well as creation or conveyance of other in rem rights over real properties depends on the registration of the title with the real estate registry with jurisdiction over the place where the relevant property is located. Additionally, as per Article 108 of the Civil Code, any real estate transactions whose value is at least three times the current minimum wage shall be performed by means of a public deed, to be drawn-up by a notary public.
Notwithstanding that, it is very common in transactions involving direct acquisition of real estate for the parties to execute a commitment of purchase and sale agreement. The commitment of purchase and sale is a conditional agreement that can be entered into by private instrument, by means of which parties undertake to, upon satisfaction of certain covenants, execute the definitive deed of purchase and sale.
Such agreement can be registered with the competent real estate registry to grant priority against third parties and, should either party refuse to comply with its obligations thereunder, allows compulsory conveyance through a specific performance proceeding.
The commitment is a very helpful tool in situations where the parties wish to be bound to each other but, either because of the need to regularise formal matters to allow conveyance of the property, or just because of business conditions, such parties do not want to actually transfer ownership at that moment.
It is worth mentioning that direct acquisition of real property is subject to payment of the real estate transfer tax (ITBI), which is described further in Section V.iii, below. Additionally, notary and registration fees will be due to the notary public and real estate registry when drawing up and registering the definitive deed. Taxes on capital gain if the property is sold may apply.ii Equity investments
Another common structure to invest in Brazilian real estate market is to acquire equity of specific purpose companies (SPE). The SPE is a company that may be incorporated in the form of a limited liability partnership or of a Brazilian corporation, with the specific purpose of investing in certain real estate development.
Incorporation of an SPE involves certain steps, such as registration with the board of trade, enrolment with the federal revenue, election of managers, among others. Notwithstanding, it is quite common for real estate developers seeking for investment to have the SPEs already incorporated.
Alternatively, investors may also want to acquire stocks of real estate companies listed in the Brazilian stock exchange. Currently, there are around 20 real estate companies listed in the stock exchange.
An advantage of equity investments if compared to direct real estate investment is that the ITBI, as well as notary and registration fees, do not apply. However, when investing in real estate through equity investment, one should assess not only potential liabilities relating to the property itself, but also with respect to the SPE (e.g., tax, labour and other kinds of liabilities).iii Real estate investment funds
Another good alternative to invest in real estate in Brazil is to acquire quotas of an FII. The FII was created by Law No. 8,668/1993, and the offering of FII quotas is ruled by Normative Ruling No. 472 of the Brazilian securities exchange commission (CVM).
The FIIs are investment funds specifically designated to invest in real estate projects, in a mechanism similar to the real estate investment trusts (REITs) in the United States. The FIIs are closed-end funds without corporate identity, and redemption of their quotas is not allowed. Hence, after the investment in a FII is consolidated, by means of subscription and payment of certain quotas, such quotas can only be negotiated in a secondary market, with low liquidity.
The FIIs can be for determinate or indeterminate term and, as a legal rule, there is no minimum investment (even though, in practice, the public offerings of FII quotas usually provide for minimum investment amounts).
As the intention of the creation of the FII was to foster real estate market development, there are certain tax benefits for the earnings of FII investments. For such reason, applicable laws have set forth some restrictions on permitted investments, namely: (1) real property and rights; (2) equity of real estate companies; (3) SPEs with real estate purposes; (4) other real estate funds; and (5) real estate backed securities and other real estate-related securities.iv Brazilian private equity funds
FIPs are funds intended to invest in securities representing equity, such as (1) shares or quotas; (2) debentures; (3) subscription bonds; or (4) other securities that can be converted in or exchanged for shared. The FIPs are ruled by CVM normative ruling No. 578.
Even though the FIP is not properly intended for real estate investment, it is quite common to have foreign investors incorporating FIPs to hold its equity in SPEs which, in their turn, are the direct owners of certain real properties or real estate developments.
This is because Brazilian law provides income tax exemptions and incentives for foreign investors who comply with certain requirements.
As a general rule, foreigners may freely invest in real estate in Brazil. However, for acquisition of rural properties or properties located in the country's border area, some restrictions may apply.
Current rules and restrictions regarding foreign investments in Brazil provide that the acquisition or lease of rural properties by foreign entities and individuals and also by Brazilian companies whose majority of the capital is held by foreign investors or controlled by foreigners, will depend on the prior approval by the Brazilian Institute of Agrarian Settlement and Reform (INCRA) or the Brazilian National Congress, depending on the size of the rural property, among other restrictions.
Such rules also apply to corporate transactions that result in the direct or indirect transfer of rural properties, such as mergers and acquisitions, changes in the corporate control, or if a Brazilian company becomes a foreign company. In case of violation of such restrictions, the purchase of the rural properties (or of a company that owns rural properties) without having complied with the required public approvals would be considered null and void for all legal purposes.
Brazilian law also provides for restrictions on the acquisition or even possession of rural properties located in the country's border zone, which depends also on the approval by the National Defence Counsel.
To avoid triggering such restrictions, a foreigner that intends to invest in rural real estate should seek approval from the competent bodies or adopt alternative structures, which may include granting of in rem rights or entering into a joint venture with a Brazilian partner.
It is worth highlighting that from time to time the Brazilian government discusses the possibility of softening such restrictions. Until this moment, however, no concrete measures in this sense have been implemented. There are basically no restrictions for foreign investment in urban properties.