Features of an FII

Definition

An FII is a pool of funds intended to be invested in assets related to the real estate market. They are created as a closed-end collective investment entity whose shares may not be redeemed before the expiration of the fund’s period of duration, which is normally unlimited.

Such funds were created under Law No. 8668/93 and are regulated by CVM Instruction No. 472/08, of October 31, 2008, as amended (“ICVM 472”), which makes provisions on the main rules for the creation, disclosure of information, and operation of the funds. The main figures of an FII are the administrator, real estate consultant (when applicable), custodian, registration agent, and auditor.

In general, the administrator—a specific financial institution—is responsible for a group of services related directly or indirectly to the operation and maintenance of the fund that may be provided by the administrator itself or by third parties engaged by it. Such services include managing the portfolio, an activity often carried out by the administrator itself. However, the real estate assets are managed solely by the administrator, which will hold fiduciary ownership of the assets of the fund but may nonetheless hire third parties to administer the real properties.

Investments and redemptions

It is possible to invest in real estate investment funds as follows: (i) share offering or (ii) purchase of shares via secondary market of B3. Since the funds are created as a closed-end collective investment entity, shares may be redeemed only upon expiration of the FII’s period of duration. Shares may be sold on the over-the-counter market or via secondary market on the stock exchange.

Investment policy

The money raised from the placement of shares may be used for acquiring rural or urban properties, finished or under construction, for commercial or residential purposes, as well as for acquiring real estate bonds and securities, such as shares in other FIIs, Real Estate Credit Bills (LCIs), Certificates of Real Estate Receivables (CRIs), shares in real estate companies, etc.

Every FII has its own bylaws which, among other things, establish the investment policy of the fund. The policy may be specific—and establish, for instance, that the FII may invest only in commercial suites for lease—or generic—allowing the fund to acquire finished properties or properties under construction for general use, which may be leased or sold.

Following the real property acquisition, the fund will earn income from its lease, sale, or rental. If the fund invests in bonds and securities, income will be generated from the returns on such assets or, further, from the difference between their purchase and selling price (capital gain). The earnings received by the FII are periodically distributed to its shareholders. The fund must distribute at least 95% of the earnings ascertained on a cash basis by the last day of each semester.

Types of real estate investment funds

According to Anbima Deliberation No. 62 and Anbima Rules and Procedures for FII Classification No. 10, of May 23, 2019, FIIs may be classified by their (i) mandate, (ii) type of management, and (iii) segment of operation

  1. Mandate
    1. FII of development for income
    2. FII of development for sale
    3. FII of income
    4. FII of bonds and securities
    5. Hybrid FII
  1. Type of management
    1. Passive management
    2. Active management
  1. Segment of operation
    1. Branches
    2. Educational premises
    3. Hybrid properties
    4. Hospitals
    5. Hotels
    6. Office floors
    7. Logistics
    8. Residential
    9. Malls
    10. Bonds and securities
    11. Other
Remuneration of the administrator

The administrator’s remuneration for the services provided will be expressly established in the fund’s bylaws and will normally consist of a percentage of the net asset value or market value of the FII, calculated daily and paid monthly. The bylaws may also establish a performance fee, informing the criteria for its calculation

Distribution of earnings and taxation

Distribution of earnings and taxation

One of the main features of FIIs is that they are required to distribute to its shareholders at least 95% of the earnings, ascertained on a cash basis according to an annual or semiannual balance sheet ended on June 30 and December 31 of each year. Accordingly, most funds distribute monthly earnings as prepayment of semiannual results.

As set forth in Law No. 11033/04, individual shareholders are exempt from income tax withholding on the earnings in the following cumulative events:

  1. The fund has 50 shareholders or more.
  2. Fund shares are admitted for trading solely on a stock exchange or organized over-the-counter market.

Even if the above requirements are met, individual shareholders will not be entitled to the above-mentioned exemption in the following events: (i) the individual shareholder individually holds 10% or more of all shares in the fund or, further, (ii) individual shareholders whose shares entitle them to receive more than 10% of the total income received by the fund in the period.

Finally, capital gains and earnings from the sale or redemption of fund shares by any beneficiary, including exempt legal entities, are subject to income tax at the rate of 20%.

Disclosure of periodic information

ICVM 472 requires the administrator to disclose the following periodic information:

  1. Monthly bulletin
    1. Frequency: Monthly, within 15 days after the end of the month
    2. Contents: Summary of the breakdown of assets and liabilities of the fund, its net asset value, and number of shareholders
  2. Quarterly bulletin
    1. Frequency: Quarterly, within 45 days after the end of each quarter
    2. Contents: Provides information by type of asset of the fund, breaking down the information into, for example: importance of each property to the revenues of the FII, vacancy rate of each property, delinquency rate by property, breakdown of lease agreements by index and expiration, and breakdown of the quarterly accounting and financial result.
  3. Annual bulletin
    1. Frequency: Annually, within 90 days after the close of the fund’s fiscal year
    2. Contents: Provides, among others, information on the providers of services to the fund, a description of the transactions carried out in the period, the book value of the real estate assets of the fund and their appreciation/depreciation in the period, a list of legal proceedings, and distributions to shareholders according to the percentage of shares in the fund.

In addition to the above reports, several administrators also publish a monthly management report, in which they address the main themes related to the assets of the fund, acquisitions or disinvestments, market data related to the FII, etc.

Features of an FII
Features of an FII
Paperwork Requires registration with the CVM
CVM rule Governed by CVM Insctuction No. 472
Form and duration Closed-end collective investment entity, with an unlimited period of duration1
Main service providers Administrator, manager, custodian, and registration agent
Liquidity Trading of shares via secondary market of B3
Classification Classification based on: (i) mandate; (ii) type of management, and (iii) segment of operation.
Distribution of earnings Distribution of at least 95% of the earnings, ascertained on a cash basis according to an annual or semiannual balance sheet ended on June 30 and December 31 of each year.
Frequency of dividend payments Monthly distribution of earnings as prepayment of semiannual results.
Taxation to shareholders (i) distribution of earnings: income tax exemption, as long as certain criteria are met.

(ii) sale/redemption of shares: 20% of the capital gain.

Periodic bulletins (i) monthly bulletin; (ii) quarterly bulletin; (iii) annual bulletin; (iv) management report (non mandatory)
Properties Investments in real properties whose counterparty is a shareholder with more than 25.0% of the shares in the fund are prohibited
Auditing Audited financial statements are published annually.
Settlement Physical and financial
Period for liquidation T+2 from the date of trade
Market 1 share