07/18/2014 | by

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

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

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

In the end, both FIPs and FIIs appear to lead to the same results. In fact, managers set up FIIs and FIPs to target at investors and real estate projects with specific profiles. (Financial institutions manage FIIs, while accredited managers oversee FIPs. Unsophisticated investors, mostly Brazilian, see investment in real estate assets as more appealing than stock of SPCs. Pension funds favor FIPs over FIIs.

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

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

Finally, the SPCs of the FIPs are more cost-effective than FIIs in divesting from the assets. Sales of SPC stocks do not trigger any real estate transfer taxes, which can be as high as 3 percent, whereas divestitures from FII assets do.

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

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

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