What is an FII?

The Real Estate Investment Fund (FII – Fundo de Investimento Imobiliário) is a pool of resources which are allocated to assets in the real estate market. The administrator, a specific financial institution, is responsible for setting up the fund and carrying out the fundraising process with the investors through the sale of quotas.

The main advantages of a FII in relation to direct investment in real estate assets are: (i) lower value of the investment compared to direct investments in real estate; (ii) tax benefit to quotaholders and relatively lower administration cost; (iii) higher liquidity compared with ownership of a real estate assets; and (iv) no concerns with tenants, property maintenance, leasing, billing process, among others.

The main differences between the two ways of investing in real estate are:

Properties

FII

Liquidity

The sale of a property involves many variables, which can make liquidity more difficult.

Quotas are traded on the stock exchange or over-the-counter market.

Fractionation of Investment

The fractional acquisition of a property requires the same documentation of the acquisition of a property in full, as well as information from each of the individuals involved in the transaction.

The FII investor may acquire a fractional interest in several real estate projects.

Simplicity

The regular negotiation of a property involves an extensive documentation, bureaucracy and payment of high fees.

A home broker account, with which the investor can access the capital market through a financial institution, allows the direct trading of quotas in the market.

Tax Benefit

Income tax on rents from directly owned properties.

Individual investors are exempt from income tax on the income distributed by the fund, provided that legal requirements are met (1).

Acquisition and sale costs

The costs involved in a sale of a property are high, and can reach 2% to 6% of the value of the property.

When buying and selling quotas in the market, the investor pays for the transaction brokerage service, which can range from R$0 to R$15 per lot of quotas.

Management

In general, the owner of a rental property does not have the time and/or expertise to observe the sector’s behavior, not being able to identify ways to maximize gains.

As a general rule, the FII has the resources to hire professionals specialized in the real estate sector.

Risk

Ownership of a property exposes the owner to the risk of vacancy and default.

Depending on the asset portfolio, the FII may invest in large projects with diversification of tenants or low-risk single-tenant properties.

Properties

The investor has access to a restricted number of assets and the quality of the property corresponds to the amount available for the investment.

The FII can have access to a large volume of prime developments, which can maximize gains.

(1) This tax benefit will be granted only to individual investors resident in Brazil, provided that (i) the FII has at least 50 (fifty) quotaholders and (ii) has quotas admitted to trading on a stock exchange or over-the-counter market. The tax benefit will not be granted to individuals who holds quotas representing 10% or more of the total quotas issued by the FII or whose quotas generate an income of more than 10% of the total income earned by the FII.