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AdvancedBrazilian REITs · Lesson A3.3 · Module A3

Can a fund cheat its investors?

Module A3: Can the manager destroy your capital?

11 slides~5 minquiz at the end

In this lesson

  • An appraisal is an estimate, not a price
  • Three sales, three per-share outcomes
  • What the rules require to buy and sell
See the slides
Handshake over an office desk

Brazilian REITs · Lesson A3.3

Is selling for R$ 9M what's worth R$ 10M theft?

Sometimes it's the best decision. Sometimes it's a serious violation. Here's how to tell them apart.

perzon seo · Wikimedia Commons · CC BY 2.0

First, the appraisal

An appraisal is an estimate, not a price

R$ 10M

is what the appraiser thinks the building is worth — not what someone will pay

Property is illiquid: the real price only shows up when a buyer does.

One sale, three stories

Legitimate, bad or illegal

Legitimate

R$ 9M

  • Pays off expensive debt

Bad call

R$ 9M

  • No need to sell; the buyer resells for R$ 11M

Illegal

R$ 1M

  • To a firm tied to the manager, with no vote

Illustrative fund: 1 million shares and R$ 100M in net assets.

Story 1 · legitimate

Book value dips, results improve

R$ 10Mappraisal−R$ 9Msale=−R$ 1book value per share (−1%)
R$ 1.26M14% interest gone−R$ 800k8% rent gone=+R$ 460ka year

The R$ 9M pays off R$ 9M of debt at 14% a year.

Story 3 · illegal

The damage lands on your share

R$ 10Mappraisal−R$ 1Msale to related party=R$ 9Mfund's loss
R$ 9M÷1Mshares=−R$ 9per share (−9%)

Done without a meeting vote, it's a serious violation (CVM Resolution 175, Annex III, arts. 31 and 46).

What the rules require

Buying has more locks than selling

Buying propertySelling property
Prior appraisalmandatorynot required
Related partyprior voteprior vote
Third partymanager's callmanager's call, with fiduciary duty

CVM Resolution 175, Annex III, arts. 31 and 40. A sale with material impact must be disclosed as a material fact.

To judge a sale

Four questions that tell them apart

  • Counterpartyis the buyer tied to the manager?
  • Needwas there costly debt, vacancy, a deadline?
  • Processappraisal, bids, a vote when required
  • Transparencydid the disclosure show the numbers?

Remember this

Three takeaways

  1. Below appraisal isn't theftAppraisals are estimates; selling to pay costly debt can improve the fund.
  2. Related parties need a voteSelling to the manager, administrator or a related party without prior approval is a serious violation.
  3. Look at the processCounterparty, need, process and transparency separate management from fraud.

Quick quiz · 1 of 2

The manager sold a fund building to their own company, with no vote. That is…

See answer

Serious violation. Deals with related parties need prior, specific and informed approval by the meeting. An appraisal doesn't replace the vote.

Quick quiz · 2 of 2

Sold below appraisal and paid off 14% debt. What can happen?

See answer

It can improve. In the example, book value falls R$ 1 per share, but the fund stops paying R$ 1.26M in interest and loses only R$ 800k in rent.

Lesson complete

Next lesson

A3.4Advanced · Lesson A3.4The safeguards: appraisal, meeting, CVM and courtsThere are real safeguards against the manager, and every one has a gap.Continue
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Educational content, written for learners. Not investment advice.