Investing in Brazil in Times of Covid

26 Oct 2020

For a few months in the first part of 2020, we thought the world was at a standstill because, in fact, it almost literally was. The Covid 19 virus brought with it new restrictions on movement that directly affect foreign travel and investments in Ceará. Everyone has been affected. Surely your company has as well.

Can you tell us a bit about R.Amaral and the services it offers? What is that makes your company stand apart from others of the same specialty?

Amaral was established 15 years ago in 2005, with the goal of rendering specialized services to companies and investors in Northeast Brazil with the same quality and standards that could be found in southwest Brazil, mainly in São Paulo.

We have grown into a multidisciplinary team, with economists, accountants, environmental engineers, and technicians, and currently have a total of 130 people in our office, including 56 lawyers. These lawyers specialize in different fields. On the transactional side, we have attorneys that focus on corporate and mergers and acquisitions, finance and capital markets, foreign investment, infrastructure, contracts, tax, energy, wealth management and estate planning and real estate. We also have attorneys that focus on litigation and arbitration. And then we have attorneys that straddle the transactional and ligation spheres that work in labor, environmental, public and regulatory, bankruptcy and restructuring, compliance and intellectual property.  So you can see we have alot going on!

The office is based on a meritocracy and partnership system, which has helped attract the most talented and driven professionals in the market.

We are regularly rewarded and recognized by different specialized magazines and associations as one of Brazil’s top law firms. Perhaps one of our proudest accomplishments is that we are also certified by GPTW (Great Place to Work) as one of the best companies in Ceará to work for.

Due to our organic growth, consistent quality performance and public recognition of the same, we have developed an extensive portfolio of clients in different sectors.

Grupo Edson Queiroz, one of the largest business conglomerates in Brazil, Grupo J. Macedo, the largest wheat flour manufacturer in Brazil, Betânia Lacteos, the largest dairy company in Northeast Brazil; Solar Br, the 2nd largest Coca-Cola products manufacturer in Brazil; Aço Cearense, the largest independent steel distributor in Brazil,

Arco Educação, one of the largest education groups in Brazil that recently made its IPO at Nasdaq; Can-Pack Brazil, a subsidiary of the multinational group that is one of the largest global manufacturers of metal and glass packaging; and Posco Engenharia, the Brazilian subsidiary of the 4th largest steel producer in the World.

That is incredible. Can you tell us a little bit about some of your recent transactions?

Sure, I’ll give you three examples of recent M&A transactions we have been involved in.

We represented Grupo Edson Queiroz and led the buy-side in the purchase of Nestlé Waters operations in Brazil .We also represented Fujisan Hemoterapias in their of a controlling interest in H.Hemo.

In the purchase of Liquigás, a relevant subsidiary of Petrobras, by Copagaz, Itausa, and Nacional Gás, we represented Nacional Gás.  The transaction was valued at R$ 3.700.000.000,00 (three billion and seven hundred million reais).

What sets us apart from other firms in Northeast Brazil, especially those that advise foreign investors, is that we are a complete team of professionals specialized in many different legal areas and business sectors. This allows us to provide very tailored and specialized legal advice to our clients each steps of the way.

Can you give us your thoughts on this subject as it relates to the new legal restrictions imposed on travelers going and coming back to and from Brazil?

What about the necessary COVID 10 testing? How long do you foresee it lasting?

Any foreigner, regardless of nationality, can freely enter Brazil by air, through all airports, except those in Goiás, Mato Grosso do Sul, Rio Grande do Sul, Rondônia, Roraima, and Tocantins. The only obligation is to have life insurance in place for a minimum amount of BRL 30,000.00 which covers the period of stay. There are no longer testing or quarantine requirements for COVID-19.

What if any are legal complexities to address in the pandemic world we are all adjusting to for the near future for foreign investors in Brazil?

There are many new regulatory, labor, and health measures the companies need to observe which arose during this crisis and continuously change based on different factors, such as the number of cases of COVID-19 and the mortality rate. There are also some tax flexibilities approved to help the companies to overcome this negative phase. The rules vary tremendously, depending on the economic sector of the company.

Another important point of attention is the necessity to address the pandemic’s risks and effects in the contracts to be formalized. The future and outcomes of such a dark moment are still very nebulous, and it is highly recommended to reflect in the contracts how such effects and risks should be regulated. A simple example might help for a better understanding. Imagine a real estate rental agreement for a company. If the authorities impose a new measure that forbids the company to operate, what would be the effects on the rental relationship? Should the monthly rental should be kept the same? Could it be a proportional reduction up to a certain amount? This is just a simple and practical example. Still, the pandemic effects in the contracts are very diversified, and it is crucial to reflect and address them adequately carefully.

For Real Estate purchases, there has not been any relevant change due to the pandemic.

Has the devaluation of the Brazilian currency, reais, had a positive impact on foreign investors’ appeal for Brazil?

Considering what we have seen in the market and with our clients, we have noticed a difference between new investors and investors that already have assets in Brazil. For new investors, there was a dramatic reduction due to the uncertainties that everybody was facing in their own countries. Naturally, they were more cautious about investing in other places. The news about Brazil in the international media was often depreciative, depicting a situation way worse than reality. The physical restrictions to travel also contributed to that. So all these factors had probably a negative effect. Yet on the other hand, we have seen many clients that already had businesses or real estate properties here that used this currency devaluation as an opportunity to invest more in Brazil at a lower price. Among the emergent countries, the Brazilian currency was the one that suffered the most significant depreciation. So, to those who want to invest or raise their investments here, we might be seeing a perfect storm and a unique opportunity. The most probable scenario is an intense valorization of the real during the next years, especially if the reforms that have been discussed in Congress are approved.

What is the biggest challenge your legal team has had during this time?

We have worked hard to assess all the created and changed regulations during such period to produce materials to keep our clients updated in the different fields. We circulated a kind of magazine daily with all the changes and new regulations, especially in the tax, labor, and regulatory areas. This demanded a considerable amount of energy and dozens of people monitoring different sources of news.

In your experience what are some of the most important pitfalls to avoid for a foreign investor looking to invest in Ceara?

Before investing in another country, the most important point is to find reliable people that can assist you through all the necessary steps. This is the key point for success. In our view and experience the two things that are more important to a foreign investor are 1) security and 2) predictability. Both of them are faces of the same coin.

To achieve that, it is essential to choose a good law firm from which the investor has good references, and that is used to work with foreign investors since some many details and peculiarities differ from an investment made by a resident.

There is also standard advice. If you are investing in real estate, it is important to undertake due diligence review to be sure if everything is you are buying what you think you are buying from who you think you are buying. We have attended many clients who had purchased properties without having a professional checking if everything was legally correct and then subsequently faced significant problems.  It is essential to check if the property has any problem in its registrations, if it is either a rural or urban property, if it is buildable or not, if the person signing on behalf of the sellers has the necessary powers. It is not uncommon when the seller is a company whose articles of association or incorporation demand prior authorization from all the shareholders or a minimum quorum. This is something that is many times neglected by the buyers in many cases.

When we are assisting a client, we always seek to understand the client’s plans what they will mean short and long term. Insisting on the real estate example, if the client wants to build a house to live in or use for holiday home, there are some points to observe. Suppose the client wants to build a hotel, industry, or other more complex projects. The analysis is entirely different since we also have to assess if such projects can be implemented in such property, neighborhood, city, etc.

We also study and structure what is the best corporate structure to have in order for  such a project (e.g., setting up a company, choosing the best tax regime, assessing the necessity of getting a visa for the shareholders, etc.).

What are some of the steps an investor needs to get a construction license in Ceara? What is the difference between Semmam and Semace, and whose decision is final? How long does the process take, and what kind of cost generally speaking does it have?

This is one of the most important points for anyone who wants to invest in Brazil. Before purchasing any property, in the due diligence, it is essential to check the eventual limitations to build something in the land under the plans of the investor (e.g., building a house, a hotel, and industry, etc.). It is not uncommon to see investors who have acquired a property ignoring this and finding out later that certain limitations would directly affect their initial intentions.

For coastal properties, the attention must be closer since, under the Brazilian Law, many rules and restrictions are applied to such areas due to their natural and environmental conditions.

In Ceará, the leading authority for environmental licensing is SEMACE, the Estate Superintendency of Environment. Through a written agreement, SEMACE might authorize some cities to approve projects upon fulfilling certain conditions, such as having specific municipal legislation and a technical body duly qualified and selected by a public process.

The city of Fortim has signed such agreement, fulfilled the requirements, and created a local Secretary of Environment called SEMMAN.

As a general rule, projects that generate only local impacts will be licensed by SEMMAN. When it comes to projects with the capacity to generate regional impacts, SEMACE will be responsible.

Some practical examples might help a better understanding.

Whether single-family or multifamily, residential projects would be examples of those that generate only local impacts and are, therefore, within SEMMAN’s competence.

Allotments of up to 100 ha would be of local impact and under SEMMAN’s competence. Above that, SEMACE would be responsible.

Hotels with up to 240 rooms are considered shall be licensed in SEMMAN, and above that in SEMACE.

These are general rules, but it is important to mention that, of course, there are some exceptions that attract to SEMACE the power to process the license, like projects that are inserted in more than a city at once.

The environmental licensing procedure usually has these phases:

  • Preliminary License (LP):Awarded at the preliminary stage of planning the project or activity. In this phase, the project’s general aspects are analyzed by the environmental agency, such as the impacts to be generated and the feasibility itself of what is intended to be carried out in that specific place. It is the phase in which the central environmental studies are requested and analyzed. The Environmental Authority then concludes that the project may or may not be developed in that area and stipulates conditions to be fulfilled.
  • Installation License (LI):This is the license that will authorize the project’s construction. In this phase, which is generally shorter, more detailed aspects of what will be built are analyzed, such as executive projects and the compliance with the conditions stipulated in the Preliminary License. When it comes to residential projects, it is the last license in the environmental process.
  • Operation License (LO):This is the license that authorizes the beginning of the project’s activities from the environmental perspective.

Using a hotel as an example. The preliminary license would analyze the feasibility of building a hotel with X rooms, X floors, swimming pool in a specified area of the city X and with X m2. The installation license would analyze the hotel’s executive projects and whether the conditions imposed by the Preliminary License were fulfilled. The Operating License would assess whether all the previous licenses’ requirements have been met and whether the hotel can start operating.

Costs vary widely depending on the type of project and the area in which it will be located. There are variable costs with studies and measures to mitigate environmental impacts that may be applied. However, using the city of Fortim and the construction of a house as an example, the direct costs of environmental licensing would usually range from R$ 5,000.00 (five thousand reais) to R$ 10,000.00 (ten thousand reais).

In addition to environmental licenses, a building permit granted by the Secretary of Urban Development, in the case of Fortim, is also required as the last step before the construction, but this step is usually fast and does not  have relevant costs.

In the case of commercial or industrial projects, several other licenses and authorizations may be required.

To outline everything that was said; this is one of the most sensitive points any investor should have attention to and count with specialized support.

Our office has a multidisciplinary environmental team composed of lawyers, environmental technicians and engineers that have the necessary expertise to guide our clients throughout all the steps of the way, either for a small house project or a multibillion industry.

Can you tell us if foreign investors that purchased a piece of land, say one lot in 2005-2007 can legally lose ownership and why?

Yes. Unfortunately, many foreign investors have purchased lands here without ever taking any action aside from the purchase’s legal and bureaucratic aspects. In many cases, such properties are not even fenced nor have any billboard with the name of the owner, being hard to differentiate from the other lands around.

In Brazil, as you have in most western jurisdictions, there is a law that allows someone to become the rightful owner of an asset, including real estate, by having the peaceful possession of such asset over time. In Brazil, it is called usucapião. In the French legislation, it is called prescription acquisitive, and in the British and American legislations (common law), it is called adverse possession.

Under the Brazilian Law, the time to someone gets the ownership of a real estate property due to its peaceful occupation ranges from 2 to 5 to 15 years, depending on a series of different factors.

In other words there is a high risk for any investor to lose their land if the land is  not being used for any specific purpose, if it is not adequately fenced/marked and has a trusted party checking the land to ensure there is no invasion etc.

I have seen that as well in a beach own in Ceara called Fortim. I have invested in Fortim since 2004 and I have seen a dramatic increase in investments and land values. There were quite a few investors that purchased without ever coming to Pontal de Maceio’s west side. Why do they risk losing their lands? Q 49 of Loteamento Planalto for example is entirely invaded. What should other owners and investors do to avoid a similar loss?

Indeed, this is a major problem and risk. We are very well versed in the city of Fortim. We have been working there since 2007 and have many clients and friends in the region.

Unfortunately, dozens of investors purchased lands there (this also happens a lot in other cities) without never going there either before or after and not even paying the annual tax over urban property (IPTU). They paid a seller hoping that one day would make a big profit with the development of the place and literally abandoned such lands, in many cases, without even having anyone to look them or put a fence and a small billboard with the owner’s name.

Having a real estate property partially or fully abandoned is not recommended anywhere in the world, and in Brazil is no different.

For Fortim and Praia das Agulhas specifically, there are many lands totally abandoned by the investors who have purchased them. There are a lot of people who have, along the years, start occupying them, planting some trees, building small barracks, cleaning now and then, and by doing that, these people are exercising the possession over the real estate property.

As explained before, the peaceful possession over time makes possible the acquisition of the ownership due/by the usucapião (prescription acquisitive, adverse possession). Unfortunately, in Praia das Agulhas, many investors are already in such a situation.

What do you suggest investors that buy land to do to minimize risc?

Four straightforward measures are very helpful to avoid or minimize this problem. 1) Put a nice fence or build a wall around the land, clearly marking all its borders from the next lots; 2) Put one or more billboards (depending on the size of the land) with the owner’s name and contact; 3) Have someone check the land now and then to see if everything is OK and take pictures; 4) Contact the authorities and a lawyer as fast as possible if anyone tries to occupy the property.

These are simple measures derived from common sense but perhaps this common sense for us and for prior and current landowners is derived from experience. For those who have lands that are already invaded, it is highly recommended to hire a good law firm to assess the correct strategy and possibly file a lawsuit to regain possession as soon as possible.

How do you see the neat future of Ceara’s socio-economic development? Why is your company important in this future growth. Amaral is known as one of the best legal advisors in the northeast Brazil. Can you tell us briefly what you offer to foreign investors today?

Ceará is a blessed place due to its geographical location, weather, and natural beauties.

Ceará occupies a strategic position to be a strategic hub for many different businesses and sectors, such as technology, maritime commerce, and aviation. We are at the corner of the Atlantic Ocean, being, at the same time, close to the USA, Europe, and Africa. For example, Fortaleza is already the second-largest hub for submarine cables in the World, second only to Fujairah, one of the United Arab Emirates.

A second important example is the Port of Pecém, now managed with the Port of Rotterdam’s participation, that celebrated a contract with the Ceará Estate Government in 2018 to become a shareholder and now has 30% of the shares.

In their own words: “Pecém’s strategic location gives it the potential to become the logistical and industrial hub of Northeast Brazil. It has expanded by an average of 26% annually over the past ten years. Due to the growth of the national and international economy and related market demand, Pecém can expect to increase throughput to 45 million tons in 2030.”

The Port of Pecém is inserted in an industrial complex that counts with an Export Processing Zone (ZPE), providing tax incentives and exemptions and currency flexibility to attract investments.  The strategy has been working, and it already brought the largest private project in the history of Ceará, the Steel Plant of Pecém (CSP), a multibillion-dollar project made by a joint venture between the giant Vale and the Korean Companies Posco and Dongkuk, two of the largest steel players in the World. CSP now generates more than 20.000 thousand jobs and has been giving a vital contribution to the local GDP.

Last but not least, another example is the development of the airport infrastructure. Ceará has many local airports, and its largest one, in Fortaleza, was privatized to the German Group Fraport, which has implemented a vast expansion and modernization. The plan is already in motion to transform Ceará into an aviation hub, as one of the main entries to South America. During the last two years, the number of direct flights from Europe has been increased, and we are looking forward to the next steps post the global pandemic.

There would still be dozens of very exciting things to mention about the development of Ceará, since the state has been growing more than the rest of the country and has many other axes of development, such as renewable energies, agriculture, and tourism, technology, and industry.

Amaral has been advising foreign investors since its foundation in 2005. We are proud to have participated in many significant projects to the estate, like the steel plant’s construction. Our goal is to provide investors with all the legal support they will need in the different fields, with a very direct and straightforward approach and always being business-oriented. We like to see our firm as much more than a traditional law firm, and we always like to know deeply the markets where our clients are inserted.

It is to achieve those goals in a full-service law firm that we number more than 130 professionals, including lawyers, accountants, environmental engineers, and technicians and, of course, a broad chain of business partners who complement our work.

Our office is a one-stop-shop to any investor and also a safe harbor.

Finally, how optimistic are you that we are going to continue where we left off in terms of development?

I am very optimistic. In a global scenario with negative interest, I firmly believe there will be a massive investment in growing economies like Brazil, especially infrastructure.  Congress and the Ministry of Economy are finally aligned to deliver the structural reforms the country needs, like the tax and administrative.

What do you foresee in terms of future development in Fortim?

Real depreciation also plays an essential role in the investments’ attraction. I believe we shall expect a continuous and robust development for Fortim, especially in the next years. We have many clients involved in the construction market, being the lawyers of many construction companies and associative institutions like the Union of the construction companies and the National Chamber of Civil Construction. We have seen during the pandemic that the real estate transactions of holiday houses and condos skyrocketed. It is hard for us to say if this was a global phenomenon, but it was astonishing here in Brazil.  Every week we hear or are involved in a new beach project in different locations, including Fortim. This makes us believe due to the unique beauty and location of Fortim that it has the potential to grasp this moment and face a massive phase of growth.

Thank you very much for your time. We wish you and your colleagues continued success.

Note. Ilo Marques can be contacted at  Ilo.marques@ramaral.com


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