Main risk factors

Fatores de risco

Fatores de risco

Risk of investments in malls

The purpose of the Fund is to invest in malls and, therefore, its results will depend on the ability of storeowners to generate sales and of the sales actually generated by the stores in the malls. The increase in the Fund’s revenues and the increase in operating profits resulting from the investment in malls rely on the steady growth in the demand for the products offered by the storeowners. Any decrease in the consumer’s spending in periods of general economic slowdown can lead to losses to the Fund. Adverse economic conditions in the location of each mall can also adversely affect the occupancy and lease levels and, consequently, its operating results, impacting the results of the Fund.

 

The mall industry in Brazil is highly competitive, which may lead to a reduction in the leasing prices in malls. Several entrepreneurs in the mall industry compete with the Fund for prospective buyers and renters. The mall may have other investors, and their approval may be needed in cases of significant decisions. It is possible that other investors in the mall have economic interests that differ from the interests of the Fund, which may lead them to vote against on projects that meet the Fund’s purposes, preventing the implementation of the strategies, which may lead to a material adverse effect in the Fund’s assets. Also, leasing agreements in the mall industry have unusual characteristics and may generate risks to the Fund’s business in relation to these investments and adversely impact its operating results.

 

Nevertheless, the management of malls may be carried out by specialized companies, without the direct interference of the Fund, which may represent a limiting factor for the Fund to implement the management policies it deems appropriate, and these limitations grant to these specialized companies a degree of autonomy that may be considered excessive or inadequate by the Fund in the future, not being possible to ensure that the management policies adopted by such companies will not adversely affect the conditions of the malls or the earnings to be distributed by the Fund to the Shareholders.

Systemic and real estate risk

The price of Properties, Real Estate Assets and Financial Assets related to the real estate industry is affected by domestic and foreign economic conditions and by several external factors, such as the interference of government authorities and market regulators, moratorium and changes in the monetary policy, which may result in losses to the Fund. The decrease of the population’s purchasing power may have a negative impact on the price of the Properties, rents and amounts received by the Fund from leases, affecting the assets of the Fund, which may negatively affect its income and the trading price of the Shares and lead to losses to the Shareholders. No indemnity, fine or penalty of any nature will payable by the Fund, Administrator, Management or Custodian if the Shareholders suffer any damage or loss resulting from any of these conditions and factors.

Risks concerning the Fund’s profitability and assets

The investment in Shares can be compared, for certain purposes, to an investment in variable income securities, since the profitability of the Shares depends on the real estate valuation and on the result of the management of the assets and rights that make up the structure of the equity of the Fund, as well as the remuneration derived from the sale and rent of Properties. The devaluation or expropriation of Properties acquired by the Fund and the decrease in the revenue from rents, among other factors connected to the Fund’s assets, may negatively affect the Fund’s equity, profitability and trading price of the Shares. In addition, the Fund is exposed to the risks inherent to the lease or rental of the properties, so there is no guarantee that all units of the Properties will always be rented or leased. Additionally, Properties and Real Estate Assets that may be subject to investment by the Fund may be classified as medium- and long-term investments, which have low liquidity in the market. Therefore, if these Properties and/or Real Estate Assets in the Fund’s portfolio need to be sold, there may be no buyers or the trading price may result in a loss of equity to the Fund and also adversely affect the Fund’s equity, profitability and trading price of Shares.

Risk of vacancy, termination of lease agreements and revision of the rent’s price

The Fund’s main purpose is the commercial exploitation of Properties, and the profitability of the Fund may vary if there is a vacancy in any of its leasable spaces, for the duration of the vacancy. In addition, any attempt by tenants to legally challenge the validity of clauses and terms of lease agreements, among others, in relation to the following: (i) indemnity to be paid in case of termination of the agreement by the tenants before the maturity of the contractual term; and (ii) revision of the rent’s price, may adversely affect the Fund’s equity, profitability and trading price of Shares. In both cases, any court ruling that does not recognize the legality of the parties’ will in establishing the terms and conditions of the lease under specific commercial conditions, applying the Tenancy Law, may adversely affect the equity of the Fund, the profitability and the trading price of Shares.

The Relevance of the Investment Advisor

The Fund’s results and financial condition are directly linked to revenue from property leasing and the sale of properties, which will depend on portfolio management activities. Success depends heavily on the performance of the investment advisor, which has extensive powers relating to the properties as described in the Fund Regulation and in the Investment Advisory Agreement. There is no guarantee that the investment advisor, together with its key personnel, including Mr. Leandro Bousquet, will remain as an advisor to the Fund for the duration of the Fund’s existence. Resignation of the investment advisor and the Fund’s inability to hire another advisor with the same experience and qualifications may significantly impact the Fund’s results and its profitability to the quotaholders.

 

See below all risk factors for the fund:

TodosFatores

Complete Risk Factors

An investment in the quotas involves a high degree of risk. You should carefully consider all the information set forth in the offering memorandum, particularly the risks described below, before making a decision to invest in the quotas. The Fund’s business, financial condition, results of operations, cash flows and prospects could be materially and adversely affected by any of these risks, among others. The risks described below are those that we currently believe may adversely affect us. Additional risks and uncertainties not currently known to the Fund, or those that the Fund currently deems to be immaterial, may also materially and adversely affect the Fund’s business, financial condition, results of operations, cash flow and prospects, and the market price of the Fund’s quotas. The market price of the Fund’s quotas could decline due to any of these risks or other factors, and you may lose all or part of your investment.

 

For the purposes of this section,”adverse effect” means that a risk, uncertainty or problem could have an adverse effect on the Fund’s business, financial condition, results of operations, cash flow and prospects, and the market price of the Fund’s quotas, except as otherwise indicated.

 

 

Risks Relating to Brazil

 

The Brazilian government has significant influence over the Brazilian economy. This influence, as well as Brazilian political and economic conditions, could adversely affect the Fund.

The Brazilian government frequently intervenes in the Brazilian economy and occasionally makes significant changes in policy and regulation. The Brazilian government’s actions, policies, and regulations have involved, among other measures, increases in interest rates, changes in tax policies, wage and price controls, currency devaluations, capital controls, freezing and blocking bank accounts, exchange controls, and limits on imports.

 

The Fund cannot control or predict the Brazilian government’s future policy decisions. New policies or changes to current policies may have a material adverse effect on the Fund’s business, results of operations, and financial condition. As a result, the Fund and the price of the quotas may be adversely affected by political, social, and economic developments in or affecting Brazil, and by changes in policy or regulations at the federal, state, or municipal level involving or affecting factors such as:

  • exchange rates;
  • inflation;
  • interest rates;
  • monetary policies;
  • the credit rating of Brazil;
  • liquidity of domestic capital and lending markets;
  • fiscal policies and changes in tax laws;
  • economic, social and political instability;
  • reductions in salaries and income levels;
  • increases in the unemployment rate;
  • changes to labor laws;
  • exchange controls or restrictions on remittances abroad;
  • expansions or contractions in the Brazilian or global economy; and
  • other economic, political, diplomatic and social developments in or affecting Brazil.

 

Any uncertainty over whether the Brazilian government will implement changes affecting these and other factors may create instability. This may also adversely affect the Fund and the price of its quotas.

 

 

Political instability and corruption scandals in Brazil may materially and adversely affect the Fund and its results of operations.

Political crises may have an adverse effect on the real estate sector and its results.  The Brazilian political environment has historically influenced, and continues to influence, the performance of the country’s economy. Political crises have affected and may continue to affect the confidence of investors and the general population and have resulted in a slowdown in the economy and an increase in securities volatility issued by Brazilian companies.

 

A number of high profile corruption scandals have generated uncertainty in the Brazilian markets. These scandals have had a major impact on both Brazil’s political arena and economy. Amidst this background of political and economic uncertainty, President Dilma Rousseff was suspended from office on May 12, 2016, when the Brazilian Senate voted to hold a trial on impeachment charges against her. President Rousseff was replaced by Vice President Michel Temer, who served as acting President until Ms. Rousseff was permanently removed from office by the Senate on August 31, 2016. President Temer’s term of office is set to end in December 2018. There was an ongoing proceeding before the Brazilian Higher Electoral Court (Tribunal Superior Eleitoral) alleging that the electoral alliance between Ms. Rousseff and Mr. Temer in the 2014 general election had violated campaign finance laws. On June 9, 2017, the Brazilian Higher Electoral Court absolved Mr. Temer of wrongdoing, however, he is still being subjected to heightened scrutiny due to the ongoing Lava Jato investigations. Subsequently in June 2017, additional corruption charges were levied against Mr. Temer.  In August 2017, the Brazilian Chamber of Deputies narrowly voted against having these charges heard by the Brazilian Supreme Court, which is the only tribunal in Brazil tasked with adjudicating allegations against a sitting president. Despite these findings, Mr. Temer is still subject to investigations being conducted by the Brazilian Federal Police and the Office of the Brazilian Federal Prosecutor and may be indicted in connection with certain allegations of corruption and ultimately subject to impeachment proceedings. The inability of President Michel Temer’s government to reverse the country’s political and economic crisis and to approve social reforms may have effects on the Brazilian economy and may have an adverse effect on the operational results and financial condition of the properties.

 

In addition, various investigations into allegations of money laundering and corruption are currently being conducted by the Office of the Brazilian Federal Prosecutor, including “Operation Car Wash” (“Operação Lava Jato”) and “Operation Zelotes” (“Operação Zelotes”), which may adversely affect the growth of the Brazilian economy and the real estate business. Brazilian markets have been increasingly volatile due to uncertainties arising from such investigations.

 

Operation Car Wash is an investigation into senior officers of large state-owned companies for corruption for accepting bribes by means of kickbacks on contracts granted by the government or government related entities to several infrastructure, oil and gas, construction and other private-sector companies.  Profits of these kickbacks allegedly financed the political campaigns of political parties of the current federal government coalition that were unaccounted for or not publicly disclosed, as well as served to personal enrich the recipients in the bribery scheme. As a result, a number of senior politicians, including congressmen and officers of the major state-owned and private companies in Brazil, resigned or have been arrested and certain senior elected officials and other public officials, including current President Michel Temer are being investigated for allegations of unethical and illegal conduct identified during the Lava Jato investigation. The Brazilian federal police is also investigating allegations of improper payments made by Brazilian companies to officials of the Board of Tax Appeals (Conselho Administrativo de Recursos Fiscais), or CARF, a tax appeals tribunal (the so-called “Operação Zelotes”). It is alleged that the purpose of such improper payments was to induce those officials to reduce or waive certain tax-related penalties imposed by the Brazilian federal revenue authority, which were under appeal in the CARF.

 

While the outcome of these investigations on corruption schemes is uncertain, they have already had an adverse impact on the image and reputation of the companies implicated and on the Brazilian economy. It is unclear whether these investigations will lead to further political and economic instability or whether new corruption scandals will emerge in the future. In addition, we cannot predict either the outcome of these investigations or their effect on the Brazilian economy. The development of these cases may adversely affect the Brazilian economy and as a result, the Fund’s assets and the profitability and the trading value of the Quotas.

 

Incidents and changes in the perception of risk in other countries, particularly in developed markets, may affect the market value of securities globally, including the market value of the Fund’s quotas.

The market value of securities issued by Brazilian companies is influenced, to differing degrees, by economic and market conditions in other countries, including developed and developing markets. Although the economic conditions in these countries are significantly different from the economic conditions in Brazil, investors’ reactions to events in certain countries may adversely affect the market value of securities of Brazilian issuers. Crises in other emerging countries or differing economic policies may reduce investors’ interest in Brazilian securities, including securities issued by us, which may adversely affect the market value of our quotas.

 

Moreover, the Brazilian market is affected by international market and economic conditions, especially economic conditions in the United States. The prices of shares on the B3, for example, are highly affected by fluctuations in interest rates in the United States and by the behavior of the primary North American stock exchanges.  Any increase in interest rates in other countries, especially in the United States, may reduce global liquidity and investor interest in investing in the Brazilian stock market.

 

In addition, the financial crisis in the United States and Europe affected the global economy, with direct and indirect influences on the stock market and the Brazilian economy, such as, among others, fluctuations in prices for securities of public companies, lack of credit availability, reduced spending, a general slowdown in the global economy, currency instability and inflationary pressure. Any of these factors may, directly or indirectly, have a material adverse effect on the Fund.

 

We cannot ensure that the Brazilian stock market will continue to be open to Brazilian issuers and that financing costs in the market will be favorable to Brazilian issuers. Economic crises in emerging markets can reduce investor interest in Brazilian securities, including our securities. This may affect the liquidity and market price of the Fund’s quotas, as well as the Fund’s future access to the Brazilian capital markets and financing on acceptable terms, which could have a material adverse effect on the market price of our quotas.

 

Inflation and certain measures taken by the Brazilian government to combat it may adversely affect the Brazilian economy and securities market.

Brazil has a history of high inflation and consequently has in the past adopted monetary policies that led to high real interest rates, thereby limiting the availability of credit and reducing economic growth. Between December 2004 and December 2016, the base interest rate, or the SELIC rate, ranged from 17.57% to 13.75%. According to the IPCA, inflation rates were 6.41% in 2014, 10.67% in 2015, and 6.29% in 2016. The Brazilian government’s measures to combat inflation, coupled with speculation about possible future governmental measures, may contribute to economic uncertainty in Brazil and result in increased volatility in the Brazilian capital markets. Inflation and the Brazilian government’s measures to combat it, primarily through the Central Bank, have had and in the future could have considerable effects on the Brazilian economy and our business. Accordingly, strict monetary policies resulting in high interest rates may adversely affect Brazilian growth and credit availability. Furthermore, government policies and declining interest rates may trigger increases in inflation, resulting in growth volatility and requiring measures for sudden and significant increases in interest rates.

 

In case of high inflation, it may not be possible to adjust the purchase and sale prices of electricity to offset the effects of inflation on the Fund’s cost structure and financial results. Inflationary pressures may also affect the Fund’s ability to anticipate government policies to combat inflation that could adversely affect the Fund’s business.

 

Exchange rate instability may adversely affect the Brazilian economy, the Fund and the trading price of its quotas.

The Brazilian currency has fluctuated against the U.S. dollar and other foreign currencies over the last four decades. Throughout this period, the Brazilian government implemented several economic plans and used various exchange rate policies, including sudden devaluations, periodic daily or monthly devaluations, floating exchange market systems, exchange controls, and parallel market exchange rates, among others. Currency devaluations in more recent years have resulted in significant fluctuations in the exchange rates of the real against the U.S. dollar and other currencies. According to Bloomberg, between 2000 and 2002, the real depreciated considerably in comparison to the U.S. dollar, reaching a rate of R$3.53 per U.S.$1.00 at the end of 2002. Between 2003 and mid-2008, the real increased significantly against the U.S. dollar, driven by the stabilization of the macroeconomic environment in Brazil and a strong increase in foreign investments in Brazil, with the exchange rate reaching R$1.56 per U.S.$1.00 in August 2008. In the context of the crisis that hit the global financial markets in mid-2008, the real depreciated by 31.9% against the U.S. dollar during 2008, reaching the rate of R$2.337 per U.S.$1.00 at the end of that year. Between 2009 and 2016, the real showed significant fluctuations against the U.S. dollar, reaching R$3.26 per U.S.$1.00 on December 31, 2016 and R$3.308 per U.S.$1.00 on June 30, 2017.

 

Depreciation of the real against major foreign currencies, including the U.S. dollar, could create inflationary pressures in Brazil and cause the Central Bank to increase interest rates in an effort to steady the economy. In turn, these measures could negatively affect the growth of the Brazilian economy as a whole and may harm the Fund’s financial condition and results of operations, curtail access to foreign financial markets and prompt government intervention, including efforts to avoid recession. Depreciation of the real can also, as in the context of an economic slowdown, lead to decreased consumer spending, deflationary pressures and reduced growth in the Brazilian economy as a whole.

 

In contrast, appreciation of the real relative to major foreign currencies could lead to a deterioration of Brazilian foreign exchange current accounts, as well as affect export-driven growth. Depending on the circumstances, either depreciation or appreciation of the real could materially and adversely affect the growth of the Brazilian economy and the Fund’s investments and also impact the U.S. dollar value of earnings distributions and the U.S. dollar equivalent of the market price of the Fund’s quotas.

 

Risks Related to the Fund and its Industry

 

The Fund’s operating income depends on the performance of its shopping malls, which are vulnerable to periods of economic slowdown and reduced consumer spending.

The Fund’s operating income depends on the constant growth of demand for products offered by the stores in the shopping malls in our portfolio. The Fund’s business may be affected by general economic and commercial conditions in Brazil and globally. A reduction in demand, whether stemming from changes in consumer preferences, decreasing purchasing power, or a weakening of economic conditions in Brazil or globally, may lead to a reduction in the relevant shopping malls’ revenue and, consequently, of our revenues. Any such development would negatively affect the Fund’s financial results.

 

The highly competitive nature of the Brazilian shopping mall industry may affect the Fund’s investment returns.

The shopping malls industry in Brazil is highly competitive and fragmented.  Commercial shopping mall operators compete to attract stores based on rent, operating costs, location, condition and characteristics of the shopping mall, among other factors.  This competition may cause rents to decrease and, consequently, have a negative impact on the Fund’s investment returns.

 

In addition, the Fund faces competition from other investors in the shopping mall industry with respect to potential buyers and tenants. This competition may result in the Fund having a minority position in the shopping malls in which it invests. It is possible that the Fund’s co-investors have interests which conflict with the Fund’s interests, which may in turn have an adverse impact on the Fund’s results.

 

The Fund’s operating income depends on the performance of its real estate and financial assets.

The Fund invests in real estate and financial assets. The investment advisor has discretion in selecting the assets in which the Fund invests. As a result, the investment advisor may choose to invest in inadequate assets, or the assets in which the investment advisor chooses to invest may underperform, which could have a negative impact on the Fund’s revenues and financial results.

 

The shopping centers in which the Fund invests may be managed by independent administrators.

The shopping centers in which the Fund invests may be managed by independent professional administrators. This may limit its ability to direct the policies of the shopping center’s administration. There is no guarantee that the administrative policies adopted by these independent administrators will not adversely affect the shopping centers, which may in turn have an adverse effect on the Fund.

 

Adverse economic conditions in the regions where Fund properties are located may adversely affect occupancy rates and the Fund’s capability to rent available spaces.

The Fund’s operating results depend on occupancy rates and renting of available spaces. Adverse regional or national economic conditions may reduce the occupancy rates and restrict the ability to efficiently lease available spaces and to negotiate acceptable rental rates and other rental conditions. This could reduce rental income and affect the operating results of the Fund’s properties.

 

If securitization companies from which the Fund acquires real estate receivables certificates become bankrupt, or if a definitive registration by the CVM is not granted in relation to such real estate receivables certificates, the Fund may not be able to recover its investment in such certificates, which could have an adverse effect.

The Fund may acquire real estate receivables certificates (Certificados de Recebíveis Imobiliários), or CRIs, which may be traded pursuant to an interim registration granted by the CVM. If no definitive registration is granted by the CVM, the issuer of such CRIs must redeem them early.

 

The Fund cannot guarantee that the issuers of such CRIs will have funds readily available to carry out such redemptions.

 

Article 76 of Provisional Measure No. 2,158-35, dated August 24, 2001, provides that “norms establishing the allocation or separation, in any way, of assets of individuals or legal entities do not produce effects in relation to the liabilities of a fiscal, social security or labor nature, in particular with regard to the guarantees and privileges assigned to them. “ It also provides that “accordingly, the totality of assets and income of a person subject to such liabilities, including his estate or his bankrupt estate, and also those that have been subject to separation or affectation, are to be accountable in relation to such liabilities.”

 

If the foregoing interpretation prevails, creditors of the securitization vehicle with claims pertaining to debts of a fiscal, social security or labor nature may compete with CRI  holders to receive the real estate credits underlying the CRIs in case of bankruptcy.

 

Therefore, if the securitization vehicle does not honor its tax, social security or labor obligations, the real estate credits underlying the CRI and other assets may be used for the settlement of such liabilities. Any such developments may adversely affect the ability of CRI issuers to honor their obligations and, consequently, have an adverse effect on the real estate assets forming part of the assets of the Fund.

 

The Fund’s operating performance is subject to fluctuations of real estate prices.

The value of the assets in the Fund’s portfolio may increase or decrease according to price fluctuations, listed market prices and any appraisals conducted in accordance with applicable laws and/or the Fund’s bylaws. Decreasing property values, especially in the cities in which our shopping centers are located, may adversely affect the Fund’s profits from any sale of the properties and rental income, as well as the trading price of the quotas.

 

Compliance with the laws and regulations applicable to the Fund’s properties, including permit, license and zoning requirements, may result in significant costs and adversely affect the Fund’s results.

The Brazilian real estate sector is subject to federal, state, and municipal laws and regulations, including zoning regulations, which may change. These laws and regulations may cause the Fund to incur significant compliance costs, which may affect its financial condition and the price of its quotas.

 

Compliance with environmental laws and regulations applicable to Fund properties may result in significant costs or delays and adversely affect the Fund’s growth strategy.

The properties in the Fund’s portfolio and those that the Fund may acquire in the future are subject to risks inherent to (i) environmental legislation and regulations, including environmental licenses and operation licenses applicable to the shopping malls and related activities, such as effluent treatment stations, telecommunication antennas and energy management, use of water resources through artesian wells, permits for the handling of controlled chemicals, trimming and other removal of vegetation and disposal of solid waste, (ii) environmental liabilities related to soil and groundwater, which could lead to administrative, civil and criminal penalties as well as reputational risks for the Fund, (iii) environmental problems that occurred prior to the Fund’s acquisition of the shopping malls that could result in the loss of value of such properties and/or administrative, civil and criminal penalties, and (iv) indirect consequences of regulation or market tendencies, including urban planning and zoning and the size of lots and maximum construction areas. The occurrence of any of these events may adversely affect the Fund, its results and the value of the quotas.

 

Currently, two of the Fund’s shopping centers, Shopping Paralela in Salvador and Shopping West in Rio de Janeiro, are in the process of remedying minor instances of non-compliance with environmental regulations in connection with the operation of effluent treatment stations. In addition, one of the Fund’s shopping malls, Shopping Center Rio located in Rio de Janeiro, is in the process of obtaining the environmental license required in order to carry out full operations.

 

In case of non-compliance or breach of environmental laws, regulations and permits, the Fund or its tenants may be subject to administrative sanctions, such as fines, prohibition of carrying out activities, cancellation of licenses and revocation of permits, in addition to potential civil or criminal sanctions, which could have a negative effect on the Fund, its results and the profitability and value of the quotas. In particular, carrying out activities deemed as potentially pollutant, such as operation of shopping malls, effluent treatment stations, telecommunication antennas and energy generation, without due authorization is subject to penalties ranging between R$500 thousand and R$10 million, restitution obligations and suspension of activities.

 

Governmental organizations or other authorities may also institute more rigorous regulations or seek more restrictive interpretations of existing laws and regulations. This may cause companies to spend additional resources to comply with environmental regulations, including obtaining environmental licenses for installations and equipment that did not previously require such licenses. Governmental organizations and other authorities may also significantly delay the issuance or renewal of licenses and authorizations necessary to the businesses of the owners or tenants, which may adversely impact these businesses. Additionally, renovations or alterations to real estate properties, the costs of which will be paid by the Fund, may become necessary. Environmental protection laws may be changed following the acquisition of a property by the Fund and before the development of the real estate project linked to that property. This may cause delays as well as modifications in the business objective for which the property was initially developed, adversely affecting estimated results and, consequently, the profitability of the Fund and distributions made to quotaholders.

 

The Fund may be adversely affected by changes in laws governing its lease agreements.

The Fund’s revenues derive principally from the receipt of rent paid to it pursuant to lease agreements. Accordingly, if Law No. 8,245, of October 18, 1991, as amended, of the Brazilian Tenancy Law is amended in a manner that is favorable to tenants (including, for example and without limitation, with respect to alternatives for the renewal of tenancy agreements, the definition of rental values, or changes to the periodicity of readjustments), the value of the Fund’s assets and the profitability and trading value of its quotas may be adversely affected.

 

The Fund may not be able to fully execute its business strategy, which could adversely affect its financial condition and the profitability of its quotas.

The Fund considers the acquisition of new properties to be essential to the consolidation and expansion of its real estate portfolio, although the Fund is unable to guarantee that its projects and portfolio expansion strategies can be successfully carried out in the future. The Fund may be unable to find attractive real estate that fits within its investment profile, or may have a limited number of properties in which it can invest, which may cause a lack of diversity in the Fund’s portfolio. The Fund may also be unable to make new real estate acquisitions with the same frequency or scope, or the same favorable prices or conditions, anticipated in its business strategy. If the Fund fails to make new investments, or if it makes investments with a less than anticipated value, its results and the profitability of its quotas may be adversely affected.

 

The Fund must update the value of its investments periodically, which may cause fluctuations in the price of its quotas.

The financial assets in which the Fund invests must be marked to market, that is, their value must be updated on a daily basis to reflect their market value. As a consequence, the price of the Fund’s quotas may suffer frequent and significant variations.

 

In addition, the Fund must update the value of its real estate assets each year. As a result, there may be disparities between valuations. This may create a disparity between the real value of the Fund’s assets and their market value at any given time. As a consequence, the price of the Fund’s quotas may not reflect the market value of its real estate assets.

 

The Fund may be unable to successfully dispose of and acquire new investments as defined in its strategy, which may adversely affect its business and the profitability of the quotaholders.

The Fund may be unable to successfully dispose of and acquire new investments as defined in its strategy. It may be difficult for the Fund to sell for adequate value those properties it deems to be underperforming or acquire new properties that generate adequate returns, which could adversely affect its business and the profitability of the quotaholders.

 

The Fund’s investment advisor also advises other funds that invests in shopping malls.

Vinci Gestora, the Fund’s investment advisor, is the investment advisor of other real estate funds that invest in shopping malls and similar properties such as strip malls and outlet centers.  Therefore, when analyzing investment opportunities, Vinci Gestora may decide to allocate certain investments to funds other than the Fund, which could result in those funds performing better than the Fund. Therefore, we cannot guarantee that the Fund will have exclusivity or preference in the investment advisor’s investment decisions.

 

The Fund could be adversely affected if it is unable to renew its lease agreements with current tenants.

The Fund’s operating revenue projections are based on the terms of lease agreements. If current tenants decide to terminate or not renew their leases, or accept renewing only at lower than expected rates, it is possible that projections will not be fully met, thus adversely affecting the Fund’s results. Also, in case a lease agreement is terminated or not renewed, the Fund may face difficulties in renting a vacant property under the same or more favorable terms than with the previous tenant or within a desirable time frame. In such cases, the Fund’s business and results may be adversely affected.

 

The Fund is exposed to the risk of prepayment or early amortization of its financial assets and real estate assets.

The agreements governing the Fund’s financial assets and real estate assets may contain provisions permitting prepayment or early amortization. If the Fund invests most of its capital into financial assets and real estate assets, the exercise of such prepayment or early amortization rights may result in the Fund’s portfolio failing to meet its asset concentration criteria. This may result in the Fund’s investment advisor encountering difficulties in identifying real estate assets or buildings that comply with its investment policy and, accordingly, inhibit the ability of the Fund’s investment advisor to reinvest funds into assets with the target profitability the Fund seeks. Any such development may adversely affect the Fund’s assets, profitability and the market price of its quotas (without any fines or penalties becoming due by the Fund, the investment advisor of the Fund or the custodian as a result thereof).

 

The Fund may suffer losses in case of a natural disaster or events of force majeure affecting its real estate investments.

In case of a natural disaster, such as storms, floods or earthquakes, the real estate assets in the Fund’s portfolio may suffer damages, which may adversely affect its equity and the price of its quotas. The Fund cannot guarantee that the insurance covering its properties will be sufficient to cover such losses, which may adversely affect the Fund’s results and the price of its quotas.

 

In fact, there are certain kinds of losses that are not covered by the Fund’s insurance policies, such as acts of terrorism, wars or civil unrest. In the event that any of those acts occur, the Fund may suffer significant losses which adversely affect its operations. Moreover, we cannot assure that the insurance proceeds will be sufficient to cover any eventual losses.

 

Moreover, the Fund may be under an obligation to indemnify the victims of the disaster, which may have a negative impact on its financial condition and, as a result, the distributions made to its quotaholders.

 

The Fund’s properties may be partially or fully expropriated due to eminent domain, which would restrict the use of such properties, adversely affecting the Fund, its assets, financial condition and profitability.

The Fund’s properties may be partially or fully expropriated due to eminent domain, which could result in losses for the Fund. It is not possible to guarantee that any compensation received from government authorities in connection with expropriations will be adequate, fair, consistent with market value or sufficient to avoid losses regarding the Fund’s assets or investments in the Fund. Lease agreements entered in relation to properties subject to expropriation are terminated by the act of expropriation. Government authorities may also impose other restrictions on the use and disposition of real estate properties, including, among others, a prohibition on any modifications to their external appearance for historical preservation purposes. Any such expropriations or additional restrictions may have an adverse effect on the Fund, its assets, financial condition and results.

 

The Fund may be subject to unfavorable administrative and/or judicial proceedings. Adverse judgments or additional expenses related to victim indemnifications could affect the Fund’s financial results.

In its capacity as owner of real estate properties and in connection with its business, the Fund may be subject to administrative and/or judicial proceedings, including civil action No. 0365911-14.2013.8.05.0001, which seeks to invalidate the environmental licenses issued by the Salvador Municipality in connection with construction works at Shopping Paralela. As of July 26, 2017, the amount in controversy was R$19.3 million. Due to delays in the Brazilian judicial system, the resolution of those proceedings may not occur at a reasonable time. There is no guarantee that the Fund will obtain favorable results or that any administrative or judicial proceedings brought against the Fund will be dismissed, or that the Fund has sufficient reserves to defend its interests in any administrative and/or judicial proceeding. If the final judgment of any administrative or judicial proceedings is adverse to the Fund, or if its reserves are insufficient to bear the cost of adequate representation for the defense of its interests, the quotaholders may be called upon to make a capital contribution to cover such expenses. As a result, the Fund’s equity, financial results and the value of its quotas may be adversely affected. Moreover, there is no guarantee that we will obtain favorable results in the judicial proceedings related to our real estate or real estate rights, which may have a negative impact on our results and the profitability of our quotas.

 

We may be a party to judicial proceedings related to our real estate and financial assets.

 

Delays or interruption in the construction projects in which the Fund invests may result in increased costs and adversely affect the Fund’s results.

The Fund may advance funds in connection with the construction of real estate projects in which it invests, pursuant to the project’s schedule. Delays in the construction of these projects due to weather condition or other reasons, may negatively impact the Fund’s profitability by delaying the ability to generate rental income from these properties, which could have an adverse effect on the profitability of the Fund’s quotas.

 

Moreover, in certain cases, the construction companies in charge of the projects may face financial, administrative or operational difficulties which may cause interruptions or delays. If any of these events occurs, the Fund may be adversely affected.

 

Increases of construction costs of the projects in which the Fund invests may adversely affect the Fund’s results.

The Fund may invest in projects under construction. In connection with these projects, the Fund may be required to assume any eventual increases in the cost of construction. In such cases, the Fund, and consequently the quotaholders, may have to bear the increase of construction costs, which may have a negatively affect the Fund’s results.

 

The Fund, and the shopping malls in which it invests, may face penalties if construction of the shopping malls is undertaken without the proper permits.

Shopping mall construction projects must be approved by the competent municipal authorities. If there is any construction outside the project approved by municipal authorities, penalties may be imposed on the shopping mall and its owners, including the Fund, such as fines, rejection of construction permits, rejection of operation licenses, rejection of property insurance and the demolition of the unauthorized construction. The imposition of any of these penalties could adversely affect the activities and results of operations of the shopping malls in the Fund’s portfolio, and, consequently, the Fund.

 

The shopping malls in the Fund’s portfolio may not be able to renew the licenses required for their operation, including the fire inspection permit.

We cannot provide any assurances that the shopping malls in which the Fund invests will be able to obtain and renew in a timely manner all of the licenses required to operate a shopping center, including the operating license granted by the corresponding municipality and the fire inspection permit. In particular, Shopping Paralela and Shopping Crystal are currently in the process of renewing their fire permits. If the shopping malls in which the Fund invests are unable to obtain or renew these licenses, they may face risks such as (i) the refusal of the insurance companies to insure the shopping malls or to pay an indemnification in case of an eventual incident, (ii) the liability of the owners of the shopping mall in case of any eventual damages to third parties and (iii) the refusal of the authorities to issue operating licenses.

 

In addition, failure to obtain such licenses may result in penalties such as warnings, fines or the closure of the affected shopping mall. The imposition of such penalties would adversely affect the Fund and the profitability of its quotas.

 

The Fund may face proceedings in connection with the investment in real estate through legal entities such as condominiums.

The Fund may invest in shopping centers through legal entities such as condominiums. If these condominiums are subject to legal proceedings, including proceedings related to activities that occurred prior to the Fund’s investment, the Fund may be held responsible for the payment of any potential adverse judgment.

 

Investments in the real estate market may be illiquid and may expose the Fund to liabilities and contingencies incurred previously to the acquisition of real estate properties.

Investments in the real estate market may be illiquid, and this can make the purchase and sale of properties more difficult, adversely impacting the prices of such properties in the event of a purchase or sale under pressure.

 

Acquisitions may expose an acquirer to liabilities and contingencies incurred previously to the acquisition of a real estate property. Disputes over land ownership on which acquired buildings are located as well as disputes over the ownership of buildings themselves may also exist, and there is no title insurance in Brazil. The due diligence performed by the Fund on acquired properties, as well as any contractual guarantees or indemnifications that the Fund may receive from a seller, may not be sufficient to prevent, protect against, or compensate for contingencies that arise only after a property is acquired. Considering the limitations of the scope of a due diligence investigation, the debts of previous property owners may continue to encumber the property and disputes over the regularity of a property that had not been previously identified or resolved may also exist. These situations could (a) result in liability for the Fund in its capacity as property owner; (b) cause eventual restrictions or impediments on the utilization of a property by the Fund; or (c) spur discussions regarding the legitimacy of the acquisition of the property by the Fund, including creditors’ rights. The occurrence of any of these events could affect the results of the Fund and consequently distributions to quotaholders and the value of the quotas.

 

In addition, even if there are no contingencies, it is possible that the Fund will not be capable of successfully completing an acquisition on the initially established terms, restricting it from effectively operating acquired properties.

 

The Fund may be subject to the payment of extraordinary expenses, reducing the profitability and market value of the quotas.

The Fund, as the owner of real estate, will be subject to payment of potential extraordinary expenses. These include a pro rata share of remodeling, painting, decoration, conservation and security equipment installation work, employment indemnification and any other expenses that are not part of the routine maintenance of the properties and of the condominiums in which they are located. The payment of extraordinary expenses may result in reduced profitability and market value of the quotas.

 

The Fund’s rental income may not be fully realized, since at the end of each year its lease agreements may be renegotiated, leading to changes in the amounts originally agreed upon, which could adversely affect the Fund’s financial results.

The Fund’s rental income may not be fully realized, since at the end of each year its lease agreements may be renegotiated, leading to changes in the rent amounts originally agreed upon. If, after three years of a contract being in effect or a previous agreement, the Fund and leaseholder cannot reach an agreement regarding the value of the lease, a judicial review of the lease may be undertaken with the goal of adjusting a rental rate to current market prices. Therefore, the value of leases may vary in accordance with current market conditions at the time of a judicial review, which may adversely affect the Fund.

 

The guarantees relating to CRIs which the Fund acquires may not be sufficient to cover the financial obligations arising in connection with such CRIs.

The Fund financed the acquisition of the properties in its portfolio through CRIs. As part of these transactions the Fund granted security interests over the shopping malls in its portfolio. The Fund’s investment in CRIs may expose it to risks, such as the risk of default, which are inherent to the holding of real estate assets, in addition to the resulting enforcement of guarantees granted in connection with the applicable transactions. These risks may adversely affect the Fund’s profitability.

 

Any enforcement of the CRI guarantees may result in a need for the Fund, as a holder of CRIs, to incur costs (e.g., in connection with the hiring of advisers, among others). In addition, the guarantees granted in connection with the CRIs may not be sufficient to cover the financial obligations arising in connection with such CRIs.

 

Any such developments may have an adverse effect on the market value of the quotas and the Fund’s profitability.

 

The growth of the Fund may require additional funds, which may not be available, or, if available, may not be obtained under satisfactory conditions.

The growth of the Fund may require significant additional resources, particularly for the acquisition or development of new real estate properties. If internally generated cash flow is not sufficient for the growth and development of future business, the Fund may need to raise additional funds through the issuance of new quotas. The Fund cannot ensure the availability of additional funds, or, if available, that additional funds may be obtained under satisfactory conditions.

 

Certain factors that affect the availability of these funds are listed below:

  • investor interest in the Fund and the general reputation of the Fund and of its service providers;
  • capability to comply with the CVM requirements for new public issuances;
  • attractiveness of other securities and of other means of investment;
  • research reports regarding the Fund and its business sector; and
  • financial statements of the Fund and of its tenants.

 

An inability to secure additional resources under satisfactory conditions may restrict the future growth and development of the Fund, which could adversely affect its business and profitability to quotaholders.

 

The Fund is dependent on the investment advisor and its key personnel for success, and may not find a suitable replacement if the Investment Advisory Agreement is terminated.

The Fund’s results and financial condition are directly linked to revenue from property leasing and the sale of properties, which will depend on portfolio management activities. Success depends heavily on the performance of the investment advisor, which has extensive powers relating to the properties as described in the Fund Regulation and in the Investment Advisory Agreement. There is no guarantee that the investment advisor, together with its key personnel, including Mr. Leandro Bousquet, will remain as an advisor to the Fund for the duration of the Fund’s existence. Resignation of the investment advisor and the Fund’s inability to hire another advisor with the same experience and qualifications may significantly impact the Fund’s results and its profitability to the quotaholders.

 

The feasibility study is based on forward-looking statements that may prove to be inaccurate.

The feasibility study prepared by Vinci Gestora and included in the offering memorandum includes forward-looking statements regarding future events and financial trends. These forward-looking statements are subject to important exceptions, which are noted in the study itself. We cannot ensure that these forward-looking statements are accurate or that the expectations will come to pass. The forward-looking statements in the feasibility study are also based on internal data from the Fund and market reports produced by independent companies. The feasibility study has not been subject to audit, examination, review, compilation or any other procedure by the Fund’s independent auditors.

 

Additionally, the feasibility study does not contain a conclusion, opinion or recommendation related to the Fund’s business plan, and you should not interpret it as a guarantee or recommendation of future returns. Moreover, because of the subjectivity and uncertainty inherent in estimates and forward-looking statements, and because they are based on various suppositions and material uncertainties that are beyond the Fund’s control, there is no guarantee that the estimates or conclusions in the feasibility study will be achieved. Actual costs, cash flows, profit margins and business risk exposure could be significantly less favorable than the estimates in the feasibility study. See “Forward-Looking Statements—Feasibility Study.”

 

The Fund may enter into derivatives transactions which affect the Fund’s volatility and returns.

From time to time, the Fund enters into derivative transactions (up to the value of its shareholders’ equity) for hedging purposes. The value of the derivatives instruments into which the Fund enters is subject to significant changes, even if the value of the underlying assets remains unaltered. In addition, the use of such instruments may (i) increase the volatility of the Fund, (ii) reduce the overall return of the Fund, (iii) not result in the expected results, or (iv) lead to gains or losses. The Fund’s entering into derivatives transactions should not be construed as a guarantee by the Fund, the investment advisor, the custodian, any insurance mechanism or the Fundo Garantidor de Crédito – FGC that distributions will be made with respect to the quotas. The Fund’s entering into derivatives transactions may result in losses to the Fund and its quotaholders.

 

Real estate and financial assets held in the Fund’s portfolio are subject to credit risks.

The Fund’s results depend on its ability to collect rent from its tenants. The value of the financial assets that may now or in the future be part of the Fund’s portfolio depends on the creditworthiness of each respective issuer and their ability to honor their commitment to make principal and interest payments on their debts. As a consequence, the inability of our tenants to pay their rent, and their insolvency, or the insolvency of the entities in which the Fund invests, may adversely affect the value of the Fund’s assets, the Fund’s financial condition and the profitability of its quotas.

 

Risks Relating to the Offering and the Quotas

 

An investment in the quotas of a real estate investment fund involves liquidity risks that may subject an investor to losses.

FII’s are an emerging investment vehicle in the Brazilian market and must be incorporated as a closed condominium, which does not allow for the redemption of its quotas. Quotaholders may face difficulties in selling their quotas in the secondary market. In addition, at times it may be difficult to dispose of the Fund’s assets due to low or nonexistent demand or negotiability. In such cases, the fund manager may face difficulties in negotiating or disposing of such assets at a convenient price or time, and as a consequence, the Fund may face liquidity problems. In addition, the decrease in the value of the Fund’s assets may have a negative impact on the Fund’s equity, distributions and the value of its quotas. In addition, under certain circumstances, the general meeting of quotaholders may decide to liquidate the Fund and redeem the quotas by assigning to the quotaholders the assets of the Fund. In such cases, the quotaholders may not be able to dispose of the assets received in connection with the liquidation of the Fund.

 

An investment in the quotas of a real estate investment fund involves risks that may subject an investor to losses.

An investment in the quotas of a real estate investment fund involves risks that may subject an investor to losses as well as illiquidity of the quotas, volatility in the capital markets and risks associated with the portfolio real estate investments. Quotas purchased in the Fund do not come with any guarantee from the fund manager, the investment advisor, the agents or the FGC, nor any type of insurance whatsoever.

 

If the Fund ceases to have the minimum number of quotaholders required by Brazilian law, investors in the Fund who are individuals may no longer benefit from tax exemptions.

Pursuant to law No. 8,668/93, funds that invest in real estate owned or built by a quotaholder that owns, directly or indirectly, 25% or more of its quotas are subject to tax. In case the Fund were to be subject to this tax, its profitability would be adversely affected.

 

Law No. 11,033/04 exempts from withholding income tax and income tax due upon the income distributed by real estate investment funds for individual investors resident in Brazil owning quotas representing less than 10% of the total outstanding quotas or rights over quotas or arising from quotas that do not entitle such persons to 10% or more of the Fund’s earnings. Such exemption only applies if the quotas are admitted to trading exclusively on stock exchanges or an OTC market, and provided that such fund has at least 50 quotaholders.

 

There is a risk that one single investor could purchase a substantial portion of the quotas being offered, or even all of the quotas being offered, such that one single quotaholder would hold a clearly concentrated position. This could ultimately prevent the Fund from complying with the 50 quotaholder requirement, thus subjecting the other quotaholders to taxation at a rate of 20%.

 

In addition, in case of a change of the applicable tax laws resulting in the elimination or modification of such exemption, the income distributed by the Fund could be subject to tax, including withholding tax upon the income distributed to its quotaholders.

 

The Brazilian Revenue Service (Receita Federal) issued consultation No. 181 on June 25, 2014 interpreting that the profits obtained by real estate funds from the sale or disposal of quotas issued by other real estate funds are subject to tax at a rate of 20%. This consultation is being challenged by the fund manager. However, if this interpretation is upheld, the Fund’s results and the profitability of its quotas could be adversely affected.

 

If the Fund no longer qualifies for tax exemptions under its status as a FII, the Fund will be treated as a legal entity for tax purposes and taxed accordingly, which could adversely affect the Fund’s results.

To qualify for the tax exemption set forth in Brazilian Law 9,779 of January 19, 1999, as amended, FIIs must not invest funds in real estate developments whose builder, developer or partner is a quotaholder holding, individually or in conjunction with related persons, more than 25% of the quotas issued by the fund.

 

If these conditions are violated, the Fund will be treated as a legal entity for tax purposes, and profits and revenues earned by the Fund will be subject to income tax and social contribution, PIS and Social Security Financing Contribution (Contribuição para o Financiamento da Seguridade Social), or COFINS, all of which could adversely affect the results of the Fund.

 

Moreover, profit and gains recorded by the Fund in fixed-income financial investments are subject to income withholding tax based on the same rules as are applicable to legal entities, except for investments made by the Fund in mortgage notes (letras hipotecárias), or LHs, real estate credit bills (letras de crédito imobiliário), or LCIs, and CRIs, under applicable law.

 

We expect to be treated as a “passive foreign investment company” for U.S. federal income tax purposes.

Because of the passive nature of our assets and income we expect to be treated as a passive foreign investment company, or PFIC, for U.S. federal income tax purposes,. Assuming that we are a PFIC, quotaholders who are U.S. Holders (as defined herein) will be subject to special adverse U.S. federal income tax consequences. See “Taxation—U.S. Federal Income Tax Considerations.” We do not intend to perform any analysis to determine whether we are a PFIC or to assist investors in, or to provide investors with information to assist them in, making determinations with respect to our status under the PFIC rules. We also do not intend to provide U.S. Holders with the information that would be required to make “qualified electing fund” elections with respect to their quotas.

 

Liquidity issues related to the quotas may substantially limit the ability of investors to sell the quotas at their preferred time and price.

The secondary market for dealing in real estate investment fund quotas in Brazil has limited liquidity. The Fund cannot guarantee that there will be a market for selling real estate investment fund quotas in the future. Investors may experience difficulties in entering into transactions on the secondary market, may obtain only low prices for the quotas they intend to sell or may have difficulties in registering their quotas with a CVM for the purposes of conducting a secondary offering. In addition, the value of the quotas on the secondary market may be adversely affected in the period between the Fund determining the beneficiaries of its income distribution and the additional distribution of income or the amortization of principal, and the date of actual payment.

 

The Fund depends on the income it receives from its investments to make distributions to quotaholders.

The Fund is an FII real estate investment fund. Accordingly, the Fund depends on the income it receives from the assets in its portfolio. The Fund’s ability to service its debt and other obligations depends on the value of its assets and the income it receives from its investments. In the event that the value of the Fund’s portfolio decreases or it does not receive income from its investments, the Fund may not be able to make distributions to its quotaholders, which may in turn adversely affect the value of the Fund’s quotas.

 

The Fund’s quotaholders may be required to contribute additional capital to the Fund in order to enable the Fund to protect its rights as a creditor.

The Fund is responsible for enforcement costs in relation to assets belonging to its portfolio as well as for costs incurred with actions aimed at protecting the Fund’s rights, interests and prerogatives, up to the total limit of the Fund’s shareholders’ equity (subject to the decisions taken by quotaholders in a general meeting). The Fund may only adopt and/or maintain the judicial or extrajudicial procedures for enforcement on such assets in excess of the value of its shareholders’ equity if quotaholders contribute the additional amounts required for that purpose. Accordingly, if judicial or extrajudicial measures are necessary for the purposes of the enforcement of our rights over such assets, we may request that our quotaholders contribute funds in order to enable us to take or maintain the necessary measures to safeguard their interests.

 

No judicial or extrajudicial measure shall be initiated or maintained by the fund manager prior to the full receipt of the aforementioned contribution and the acceptance by the quotaholders of the commitment to cover the applicable legal costs if a decision adverse to the Fund is reached.

 

The fund manager, investment advisor and custodian of the Fund as well as any of their respective affiliates are not liable (jointly or severally) for the adoption or maintenance of such enforcement measures or for any damages or losses of any kind suffered by the Fund or its quotaholders due to the non-filing (or continuation) of judicial or extrajudicial measures necessary to safeguard their rights, guarantees and prerogatives, if quotaholders fail to provide the necessary resources to do so. Accordingly, the Fund may not have sufficient resources to amortize or redeem its quotas, which may lead to quotaholders losing part or all of their investment.

 

The Fund may, during the course of its existence, have negative equity.

The Fund may, during the course of its existence, have negative equity. This would result in the need for the Fund’s quotaholders to approve a capital increase. The Fund cannot guarantee that all of its quotaholders would agree to contribute additional capital to the Fund. Furthermore, the Fund cannot predict the amount of capital that its quotaholders may be called upon to provide and cannot guarantee that, following such a capital increase, the Fund would generate returns for its quotaholders.

 

It may be difficult for a quorum to be achieved at meetings of the Fund’s quotaholders, which may result in certain matters not being decided upon.

Certain matters reserved for the Fund’s general meeting require an affirmative vote by a qualified majority of quotaholders to be approved. Given that real estate investment funds tend to have a large number of quotaholders, certain matters may not be approved if the necessary quorum requirements (when applicable) are not met. As a result, no deliberation would be held at the relevant meeting. The impossibility of deliberating on certain matters may lead, among other consequences, to the early liquidation of the Fund.

 

The majority of the Fund’s quotas may be acquired by a single quotaholder, who may then take decisions pertaining to the affairs of the Fund focusing exclusively on their own self-interest, to the detriment of the Fund and/or minority quotaholders.

A single person may acquire a substantial portion or even all of the quotas issued by us. This would result in such person holding a strongly concentrated position, which could weaken the position of any minority quotaholders. In such a scenario, it would be possible for such majority quotaholder to take decisions pertaining to the affairs of the Fund focusing exclusively on their own self-interest, in detriment of the Fund and/or minority quotaholders.

 

Quotaholders wishing to divest their quotas will have to sell their quotas on the secondary market.

The Fund is a closed condominium and, accordingly, it is not permitted to redeem its quotas. As a result, if quotaholders wish to divest from the Fund, they will only be able to do so (absent a liquidation of the Fund) by selling their quotas on the secondary market. Quotaholders wishing to sell their quotas may encounter limited liquidity or obtain low prices on the secondary market and therefore may not be able to sell their quotas at their preferred time.

 

Changes in tax laws relating to CRIs, LCIs and LHs may adversely affect the Fund.

As provided for in our Regulation and in the offering memorandum, the Fund may, in order to pay the ordinary expenses, the extraordinary expenses and the charges set forth in its Regulation, maintain part of its assets, which are temporarily not invested in real estate or real estate assets, in financial assets, including (without limitation) CRIs, real estate credit letters (letras de crédito imobiliário), or LCIs, and mortgage letters (letras hipotecárias), or LHs. Pursuant to Law No. 12,024, income derived from CRIs, LCIs and LHs earned by real estate investment funds which meet certain requirements is exempt from income tax. Changes in tax legislation resulting in the elimination the aforementioned exemption, as well as setting or increasing tax rates on CRIs, LCIs and LHs, or the creation of new taxes applicable to CRIs, LCIs and LHs, may have an adverse effect on the Fund and the profitability and the trading price of our quotas.

 

Voting restrictions applicable to the Fund’s general meetings may be prejudicial to certain quotaholders.

The following persons may not vote at general meetings of the Fund’s quotaholders: (a) the fund manager and/or the investment advisor of the Fund; (b) the partners, officers and employees of the fund manager and/or the investment advisor of the Fund; (c) companies related to the fund manager and/or the investment advisor of the Fund, their partners, directors and employees; and (d) the service providers of the Fund, their partners, directors and employees, except where such persons are the sole quotaholders of the Fund or when the majority of the other quotaholders present agree. Such voting restrictions may be prejudicial to the persons referred to in items (a) through (d) of the previous sentence should such persons decide to acquire quotas in the Fund.

 

If there is insufficient demand, the offering will be canceled.

If there is insufficient demand, the offering will be canceled and investment orders made by investors may be canceled. In such a scenario, if investors have already paid the issue price to the applicable placement agent, any amounts already paid by investors will be refunded net of taxes and charges on the income incurred in the period, if any, with only the net income earned by the investments in quotas of investment funds or fixed income securities (whether public or private) earned in the period being due. Any such development may adversely affect the potential gains attributable to investors as well as to related persons and persons who have made their reservation orders or investment orders subject to conditions as provided for under Article 31 of CVM Instruction No. 400.

 

If investors do not pay for the new quotas in accordance with their respective investment orders, the offering will be canceled.

If, on the settlement date, investors do not pay for the new quotas in accordance with their respective investment orders, we may not achieve the minimum offering amount. This may result in the offering not being completed. In such a scenario, investors would be exposed to the risks indicated under “—If there is insufficient demand, the offering will be canceled.”

 

Investment in the Fund’s quotas by institutional investors that are connected persons may result in reduced liquidity of its quotas.

Institutional investors that are connected persons which invest in the Fund’s quotas might opt to keep their quotas out of circulation, thereby affecting the liquidity of the Fund’s quotas on the secondary market. The Fund cannot guarantee that connected persons will not invest in its quotas or that, if they do so, they will not keep such quotas out of general circulation.

 

Sales or the perception of possible sales of a substantial number of the Fund’s quotas after this offering may adversely affect their price.

The investment advisor of the Fund, its members, the members of the Fund’s administration, its employees, and its customers, regardless of whether their investment decisions are taken exclusively by the investment advisor of the Fund and whether their management is active by the investment advisor of the Fund, will agree with the Brazilian placement agents and international placement agents not to carry out any of the following transactions with respect to the quotas owned by them: (i) offer, contract to sell, offer in guarantee, lend, grant any purchase option, or otherwise dispose of, directly or indirectly, the quotas; (ii) enter into any swap, hedge or other agreement that transfers, in whole or in part, any of the economic consequences of the ownership of the quotas, whether such transaction will be settled upon delivery of the quotas, in cash or otherwise, or; (iii) publicly disclose its intention to perform any of the transactions specified in items (i) and (ii) above, as applicable. After the expiration of the restrictions described above, all quotas held by such persons may be traded on the market. The sale or perception of a possible sale of a substantial volume of our quotas after completion could adversely affect the market price of the Fund’s quotas.

 

Your ability to invest in the quotas or to transfer any quotas may be limited by certain ERISA, Code and other considerations.

The ownership and holding of the quotas will be restricted so that none of the Fund’s assets will constitute “plan assets” of any Plan (as defined in “Certain ERISA Restrictions”).  The restrictions will be imposed based upon deemed representations. If the Fund’s assets were deemed to be “plan assets” of any Plan, certain transactions the Fund may enter into, or may have entered into, in the ordinary course of business might constitute or result in non-exempt prohibited transactions under Section 406 of ERISA or Section 4975 of the Code and might have to be rescinded.  Governmental plans, certain church plans and non-U.S. plans, while not subject to Title I of ERISA or Section 4975 of the Code, may nevertheless be subject to other state, local, non-U.S. or other laws or regulations that have similar effect. These laws are referred to as “Similar Laws.”

 

Each purchaser and subsequent transferee of the quotas will be deemed to represent and warrant that no portion of the assets used to acquire or hold the quotas constitutes or will constitute the assets of any Plan (as defined in “Certain ERISA Restrictions”). Any purported acquisition or holding of the quotas in contravention of the restriction described in such representation will be void ab initio.  See “Transfer Restrictions” and “Certain ERISA Restrictions,” for a more detailed description of certain ERISA, Code and other considerations relating to an investment in the quotas. If these remedies are not effective in allowing the Fund to avoid characterization of its assets as “plan assets,” the Fund may suffer the consequences described above.

 

The Fund may offer additional quotas in the future, which may cause the pro rata share of the Fund’s quotaholders’ interest in the Fund to be diluted.

The Fund may decide to issue additional quotas in the future. Any funds raised through the issuance of quotas or convertible securities or securities that may be exchanged for quotas could result in a decrease in the price of our quotas, and, if you do not for any reason exercise preemptive rights to subscribe for new quotas issued in connection with such new quota offerings, will result in the dilution of your stake in our quotas.

 

We cannot assure you that judgments for liabilities under the securities laws of the United States would be enforceable in Brazil, or that an original action can be brought in Brazil against the Fund for liabilities under applicable securities laws.

We are a close-end condominium (condomínio fechado) organized under the laws of Brazil and the Fund’s assets are located outside the United States. As a result, it may not be possible (or it may be difficult) for you to effect service of process upon the Fund within the United States or to enforce judgments obtained in United States courts against the Fund, the fund manager and the investment advisor, including those predicated upon the civil liability provisions of the federal securities laws of the United States. See “Enforceability of Judgments.”