In review: real estate investment in Brazil

All questions

Foreign investment

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, the majority of whose capital is held by foreign investors or controlled by foreigners, will depend on the prior approval of the Brazilian Institute of Agrarian Settlement and Reform or the Brazilian National Congress, depending on the size of the rural property, among other restrictions.

These rules also apply to corporate transactions that result in the direct or indirect transfer of rural properties, such as mergers and acquisitions, changes in corporate control and if a Brazilian company becomes a foreign company. If there is a violation of these restrictions, the purchase of 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.⁵

Brazilian law also provides for restrictions on the acquisition or even possession of rural properties located in the country's border zone,⁶ which also depends on an approval by the National Defence Counsel.

To avoid triggering these restrictions, a foreign investor that intends to invest in rural real estate should seek approval from the competent bodies or adopt other possible legal 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 government discusses the possibility of softening these restrictions. In April 2020, the government enacted Law No. 13,986, which expressly allows foreigners to use fiduciary sales of rural properties as collateral to any kind of secured obligations. In addition, Law No. 13,986 allows foreign entities or persons to become owners of rural properties as a result of foreclosure of the aforementioned collateral. Since then, there has been no significant change to the aforementioned framework. There are basically no restrictions for foreign investment in urban properties.

Structuring the investment

There are several structures that may be adopted for investing in real estate in Brazil, which may vary depending on the focus and strategy of the investor. These may include direct acquisition, equity investments, real estate investment funds (FIIs) and Brazilian private equity funds (FIPs).

According to Article 1,254 of the 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 that involve 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 instruments by means of which parties undertake to, upon satisfaction of certain covenants, execute the definitive deed of purchase and sale.

The 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, allow 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, the 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 real estate transfer tax (ITBI). 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.

Another common structure to invest in the Brazilian real estate market is to acquire equity of specific purpose companies (SPEs). 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 and the election of managers, among others. Notwithstanding, it is quite common for real estate developers seeking for investment to have their 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 28 real estate companies listed in the stock exchange,⁷ and several such companies have been raising funds through public offering of securities in the capital market.

An advantage of equity investments if compared to direct real estate investment is that 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).

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).

FIIs are investment funds specifically designated to invest in real estate projects, in a mechanism similar to REITs in the United States. FIIs are closed-end funds without corporate identity, and redemption of their quotas is not allowed. Hence, after the investment in an 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.

FIIs can be for a determinate or indeterminate term and, as a legal rule, there is no minimum investment (even though, in practice, 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.

FIPs are funds intended to invest in securities representing equity, such as shares or quotas, debentures, subscription bonds, or other securities that can be converted in or exchanged for shares. 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 their equity in SPEs, which, in their turn, are the direct owners of certain real properties or real estate developments. This is mainly because Brazilian law provides income tax exemptions and incentives for foreign investors who comply with certain requirements.