FAF International explores Brazilian expansion (in English)
13 November 2009
Today's real estate market is increasingly going global. Global connectivity and the integration of business and social activity on a worldwide scale are contributing to a dramatic rise in international transactions and real estate investment. Cross-border residential and commercial real estate acquisitions along with mortgage and equity financing are the driving forces behind the increasing globalization of title insurance.
Historically, title insurance was only available in the United States. International title insurance policies, now becoming increasingly available on a global basis, are now mitigating the risks of real estate investment in virtually all global regions - including Brazil.
The interest of foreign investors, individuals and commercial buyers, institutional lenders, multinational corporations and real estate developers, among others -in Brazilian real estate has been steadily increasing as Brazil has improved its climate for foreign investment. Capital market reforms that are raising the levels of financing available and other developments are resulting in a rise in acquisitions of all property types and an increase in real estate activity. By shaking off the old restraints of inflexible land-use policies, a bureaucratic regulatory environment, high interest rates and a lack of transparency, Brazil has laid the groundwork to accelerate real estate investment even further.
The interest of real estate investors has been steadily increasing as Brazil has improved its climate for foreign investment.
The real estate due diligence process in Brazil and the United States has both similarities and differences. One very important distinction has to do with the different systems in place in both nations for closing and transferring property titles. Title insurance is a uniquely American product invented to manage real estate investment risk. In the US, it has become a part of almost every real estate transaction and is the culmination of extensive title research and document examination. A title policy insures good, clear, marketable title and provides protection to the buyer and/or lender against a wide variety of potential risks and defects. Once only available in the US, title insurance is becoming a well-established financial instrument for mitigating risks in property acquisition, financing and securitization on a global basis, including Brazil.
Can foreigners freely buy, sell and rent real estate in Brazil in the first place?
Foreign individuals and foreign owned companies have the right to acquire real estate under almost the same conditions applied to Brazilian companies and individuals. A passport is usually enough to sign a lease agreement. To purchase property as an individual, a Brazilian taxpayer number known as a CPF (or Cadastro de Pessoas Ffsicas) is needed. The CPF is the identification number used for all documentation and registration purposes throughout the lifecycle of the transaction. Corporations must be registered according to Brazilian law. In actuality, there are few restrictions on foreign ownership of property in Brazil. This is in stark contrast to Mexico's Restricted Zone rules in which foreigners are prohibited from obtaining title to land within 100 kilometers of the border and 50 kilometers of the coast.
Buying, selling and renting real estate in Brazil is not as onerous a process as one might think.
In the Mexican case, acquiring property in the restricted zone requires the creation of a trust (fideicomiso) where a Mexican bank holds title to the property. These trusts, which can be costly and bureaucratic, have a maximum duration of 50 years, but are renewable.
In Brazil, a title search or examination is made at the Real Estate Registry Office (Cartorio do Registro de Imoveis). There is at least one such office in each city and more in the larger metropolitan areas. The city of Sao Paulo has 18 registry offices. The Real Estate Registry office maintains a document called a matrfcula which is unique to each property. The matrfcula contains a detailed description and historical records of all legal, judicial and financial transactions pertaining to the property. It provides comprehensive information such as a full description of the property, its precise address and location, past and present ownership information, and all third-party rights such as mortgages or easements as well as any other real estate lien in connection with the property.
The title search can be done by a lawyer, a real estate broker or a real estate registry clerk. The process of collecting and analyzing all documents related to the property takes between 10 and 90 days. The ultimate time frame hinges on the complexity of the property being researched. Hiring a local real estate attorney for this due diligence work in Brazil is not mandatory but highly recommended.
Any instrument that affects rights to a property must be recorded in the Real Estate Registry. The main legal document binding the transaction is the public deed of purchase and sale (escritura publica). Once the escritura is executed, the closing process ends, but not the entire process of acquiring the real estate. Property rights in Brazil are 100% enforceable only when the escritura is duly registered at the proper Real Estate Registry.
Despite the protection that recording title provides, purchasers of Brazilian real estate may still be liable for previous problems with the property.
There exists the real possibility of errors committed by clerks in the Real Estate Registry. Risks or title defects could include survey errors, title flaws, fraud, forgery, undisclosed liens and encumbrances, and a host of other problems. Attorneys identify these risks, but if by chance, the attorney misses something (a hidden defect for example) buyers could face substantial losses or damages with no remedy. In one notable case, a US buyer of beachfront property in Northeast Brazil lost his land after the deceased seller's illegitimate children surfaced after closing and claimed possession of the property. In addition, a buyer may be liable for environmental violations even though they occurred before the acquisition. Brazil has a stringent environmental liability system, composed of civil, criminal and administrative liability.
It can take years and cost a tremendous amount of money to settle title disputes.
Investors and lenders historically have relied on title opinions from local counsel. Brazilian attorneys also provide opinions -legal opinions -based on the documentation they review. A legal opinion is in essence a disclosure document, in which counsel carefully defines the state of the title and related issues, identifying but not eliminating risks. There is no guarantee that a problem will not occur with title to a property. One recourse is to take legal action against the attorney or seller. However, getting involved in litigation in Brazil is not the most prudent course of action especially if you are a foreigner. And despite the extra investment, the outcome doesn't always favor the buyer.
A title insurance policy reduces your legal risks and provides a guarantee. It is protection that goes beyond a legal opinion to underwrite risks and ensure clean title. The policy protects investors against the ultimate risk of failure and property loss as well as the cost of litigation to defend against title claims. It also insures against defects and encumbrances related to title, and against compliance problems with zoning, codes and permits.
Title insurance policies will simplify the technical due diligence and legal requirements for owners, lenders, their counsel, and the credit rating agencies. For example, on multi-property portfolios, standardized title insurance covering the entire group of properties can dramatically accelerate the due diligence process, document reviews and closings. In addition, it provides a solution for restrictive covenants, which can affect the value of the property and the cost of financing, as well as the ability to close the transaction. This is particularly important today, when global property owners and lenders typically are financial institutions and corporations, managed by professionals with fiduciary obligations to protect their investors against the legal risks inherent in real estate transactions.
Title risks related to indirect transactions, where there may not be a certification by an attorney or transfer in a land registry, can also be covered by title insurance. This includes the sale of interests in limited partnerships, units in real estate funds and shares in property companies. Real estate professionals are increasingly aware of the role that title insurance can play in making international securitization and REIT markets safer and more efficient. There are other advantages in obtaining title insurance on property in Brazil, underwritten by a reputable title insurance company, and insured through an international policy. For example, the policy is in English, in US dollars and with claims made in the US. And a reputable insurer will also work with local Brazilian attorneys to efficiently research the title and prepare the title report.
Overall, international title insurance provides cost-effective, comprehensive protection.
Ultimately, if you have a title insurance policy, you can make your claim directly with the title insurance provider. The provider has the obligation to defend you as well as indemnify you against covered losses. In the final analysis, it is highly recommended to purchase title insurance for your Brazilian real estate investment.