Risk Factors

Risk factors that may influence the investment decision, in special, those related to:

a. The Company

We may have difficulties identifying and carry out new transactions for real estate development together with other companies active in the real estate market or new investments for indirect development of real estate (“Joint Ventures”), what may adversely affect us.

We carry out a portion of our projects as joint ventures with other companies. Our ability to successfully indentify and create new Joint Ventures is essential to our growth. However, we may encounter difficulties in identifying attractive business in the future or we may be unable to make new investments in joint ventures on favorable terms. Furthermore, our strategy of identifying our real estate operations and expanding geographically will depend on our ability to form partnerships with companies operating in several segments of the market and in other regions of Brazil. In addition, unfavorable economic conditions may increase our financing costs and limit our access to the capital market, reducing our ability to enter into new Joint Ventures.

If we are unable to make strategic acquisitions or to form new Joint Ventures, we may not grow as quickly as we expect, and this may adversely affect the Company.

We are a company whose results depend on the results of our subsidiaries, for which we have no assurance will be made available to us.

The Company’s ability to meet its financial obligations and to distribute dividends to its shareholders, including in the form of interest on shareholders’ equity, depends on the distribution of cash flow and income from its Subsidiaries. We have no control of part of our Subsidiaries, therefore the payment of dividends by such Subsidiaries is not mandatory, as such payments are generally determined by the majority of their shareholders. Therefore, there is no assurance that any such funds will be made available to the Company, or that the funds distributed to us will be sufficient to fulfill our financial obligations or to pay dividends to our shareholders.

The loss of members of our management and/or our inability to attract and retain qualified personnel could have an adverse effect on our business, financial condition or results of operations.

Our ability to maintain our competitive position largely depends upon the performance of our management team, mainly because of the business model and investments adopted by the Company. None of our managers is subject to long-term employment agreements or non-competitions agreements. There is no assurance that we will succeed in attracting and retaining qualified management personnel to assist us in our growth. The loss of services of any members of our management or our inability to attract and retain qualified personnel could have an adverse effect on our business, financial condition and operating results of the Company.

Some of our Subsidiaries depend on the credit facilities provided by the Caixa Econômica Federal (“CEF”), and institutional and/or operating changes in this government agency could adversely affect us.

We frequently use credit facilities provided by the CEF to finance the sale of residential units developed for middle and lower-middle income classes, especially those developed by our subsidiaries Goldfarb Incorporações e Construções S.A. (“Goldfarb”). These credit facilities are essential to leverage our residential unit sales capacity and to enable us to develop new projects because their availability reduces our need to use our own capital to grant loans to our customers. Being CEF a government agency, it is vulnerable to political influence and there may be changes to the current rules and policies for granting credit facilities that would reduce the availability or benefits of their financing. The failure to receive financing or the suspension, interruption or significant change in their financing could adversely affect the estimation of growth of our businesses. Furthermore, the suspension, interruption or slowdown of the CEFs activities in approving our projects, extending financing to our customers, and assessing the development of our construction projects, among other activities, could adversely affect our business, our financial condition, our operational results and/or the market price of our common shares (“Shares”). Additionally, such factors could, in the future, lead us to seek and use new forms of financing instead of the CEF. However, if such alternative sources of financing are not made available to our customers under similar conditions as those granted by CEF, our results of operations could be adversely affected.

The market value of the land we hold in stock may decrease, what could adversely affect our operating results.

We maintain some land in stock for part of our future developments and we intend to increase the size of our land bank as well as acquire larger parcels of land in the future. The market value of our land may significantly decrease from the time of acquisition to the time when such parcels are actually developed due to market or economic conditions. A decrease in the market value of our land bank may adversely affect the results of the sales of our developments and consequently our operating results.

We could be unable to sustain or increase our historical growth rate.

We have recently experienced a rapid growth, as well as a geographic expansion of our operations. We intend to continue expanding our business in the markets where we operate, as well as markets in other regions we have not yet explored, so we can take best advantage of opportunities to grow in existing and potential markets. However, we may be incapable of increasing or maintaining similar levels of growth in the future, and our operating results in recent periods may not be indicative of our future performance. If we are unable to grow and maintain a satisfactory composite index of annual growth, our financial results could be adversely affected.

Our internal growth has placed, and we expect it will continue to place substantial adjustments on our business, particularly our administrative, technical, operational and financial resources and internal controls. Additional growth and expansion in our existing markets and in new markets may further strain our resources and will depend substantially on our ability to implement and manage the expansion of these resources. If we are unable to respond rapidly and properly to such expansion, our operating results may be adversely affected.

We may need additional funds in the future and may issue additional securities, which may result in a dilution of investors‘ interests in our Shares.

We may need to raise additional capital and may opt to obtain such capital through the public or private placement of debt securities, shares or securities convertible into our common shares. In the event that public or private financing is unavailable, or if our shareholders so decide, such additional funds may be obtained through an increase in our capital, which may dilute the percentage of investors’ interest in our common shares.

Holders of our common shares may not receive any dividends or interest on shareholders‘ equity.

According to the Company’s bylaws (“By Laws”), we must pay our shareholders at least 25% of our annual adjusted net income as dividends or interest on shareholders‘ equity, as calculated and adjusted pursuant to the Brazilian Corporate Law. This adjusted net income may be capitalized, used to absorb losses or otherwise retained as allowed under Brazilian Corporate Law, and may not be made available for payment as dividends or interest on shareholders‘ equity. Additionally, Brazilian Corporate Law allows a publicly traded company like ours to suspend the mandatory distribution of dividends in any particular fiscal year if our Board of Directors informs the Annual General Meeting that such distribution would be inadvisable in view of our financial condition. If these events were to occur, the holders of our common shares may not receive dividends or interest on shareholders‘ equity.

b. The Controlling shareholder of the Company, directly or indirectly, or control group

The Company has no controlling shareholder.

c. The Company’s Shareholders

The relative volatility and limited liquidity of the Brazilian securities markets may substantially limit the ability of investors to sell our Shares at the desired price and time.

Investment in securities in developing markets such as Brazil frequently involves a greater degree of risk than in other markets. The Brazilian securities market is substantially smaller, less liquid, more concentrated and generally more volatile than the major international securities markets.

For example, the BM&FBOVESPA had a total market capitalization of approximately R$1.3 trillion as of December 31, 2009 and an average daily trading volume of R$5.3 billion at the same date. During the year a total of 81,75 million of businesses were done as of 61.02 million in the year before. These market characteristics may substantially limit our shareholders ability to sell our Shares at the price and time you wish and as consequence, could adversely affect the market value of our Shares.

The interests of our officers and employees could become excessively linked to the price of our shares, since they are granted stock options to purchase or subscribe to our common shares

We have a plan that grants options to purchase shares pursuant to Article 168, paragraph three of the Corporations Act. It was approved at the general meeting of shareholders held on January 9, 2007, later changed in the Extraordinary General Meeting that the Company held on December 21, 2007 (“Stock Option Plan” or “Plan”), with which we seek to stimulate improvement in our management and retention of our executives to achieve gains by compromising with the results of long term and short-term performance.

The fact that our managers and employees can receive stock options to purchase or subscribe to our common shares at a lower price than the market price of our common shares could lead their interests to become excessively linked to the price of our common shares which could have a negative impact on our business.

d. The subsidiaries and colligated Companies

The risks related to the subsidiaries and colligated Companies are the same related to us.

e. The Suppliers of the Company

The use of outsourced labor force could expose us to labor and social security liabilities.

The company and its subsidiaries have a reduced number of employees. Currently, approximately 80.97% of our direct and indirect labor force was outsourced (approximately 22,000 temporary employees on the date of this Form). The use of an outsourced labor force by our subsidiaries, mainly with respect to the hiring of construction companies, exposes us to labor and social securities liabilities. The assumption of such contingencies is inherent on the hiring of third parties, since it can be attributed to the Subsidiaries, as makers of third party services, the responsibility for the labor and social security debts of employees of service providers companies when they fail to comply with their labor and social security obligations. The Company itself could respond for labor and social security contingencies relating to its Subsidiaries, regardless of the right of the Company and its Subsidiaries to return action against the service providers companies. The occurrence of any contingencies is difficult to predict and quantify, and if they happen, it may adversely affect the financial condition and results of the Company.

Problems with our real estate projects that are beyond our control may damage our image, reputation, or our business, as well as expose us to indemnification payments as a result of civil liabilities.

In the normal course of our business, we acquire materials from third parties, and we outsource a portion of the labor services to develop our real estate projects to contractors. As a result, the timely completion and quality of our developments are subject to certain factors that are beyond our control, including, but not limited to, the quality and availability of construction materials supplied for use in our projects and the technical skills of the construction companies and contractors that we hire. Our image and reputation, as well as the technical quality of our real estate projects, are determining factors for the success of our sales and growth. The occurrence of one or more problems in our real estate projects may adversely affect our image, reputation, future sales and relationship with our customers, which in turn could adversely affect our business and results.

Additionally, pursuant to article 618 of the Brazilian Civil Code, we are required to provide our customers with a five-year warranty against significant structural problems in our developments, and we may be called upon to uphold these warranties. In this event, we may incur unanticipated costs and therefore be adversely affected.

f. The Company’s Clients

There is no risk related to the Company’s clients, considering that there is a wide dispersion of our clients.

g. Sectors of the economy in which the Company operates

The Brazilian real estate market is highly competitive, which could present a threat to our market position in Brazil and our expansion strategy.

The increasing competition in the Brazilian real estate market by our current and future competitors, including foreign competitors, could increase our land acquisition costs, hampering the expansion of our land bank or even making it impracticable to maintain its current size. Competition may also impact the profitability of our operations, including by reducing the prices and by increasing our marketing costs. As a consequence, our operations and profits may decrease, adversely affecting our financial condition.

In addition, the Brazilian real estate market is highly competitive and fragmented, and lacks high-entry barriers that would restrict new competitors from entering the market. The main competitive factors in the real estate development business include availability and location of land parcels, terms and availability of financing, characteristics of the projects, quality of the developed residential units, reputation and ability to enter into joint ventures with other developers. We compete with a number of residential and commercial developers and real estate companies in seeking: (i) land for acquisition; (ii) obtaining financial resources for development; and (iii) identifying prospective clients. New companies, including foreign companies working in joint ventures with local companies, may become active in the real estate development business in Brazil in the near future, further increasing competition in this industry.

To the extent that one or more of our competitors initiates a very successful sales or marketing campaign and, as a result, their sales increase significantly, our business, financial condition and operating results could be materially and adversely affected if we are not able to respond to such pressures as promptly and effectively as our competitors.

Furthermore, some of our competitors might obtain access to financial resources under better conditions than ours and, consequently, establish a capital structure that is better able to adapt to market pressures, principally in periods of instability in the real estate market.

The scarcity of available financing and/or increased interest rates may reduce demand for residential or commercial real estate units (“Units”), which could negatively affect the real estate market and adversely affect us.

Purchasers of our Units generally rely on loans to finance their acquisitions. The scarcity of financing resources available in the market, changes in current policies for the concession of financing and/or an increase in interest rates may adversely affect the ability or willingness of prospective buyers to purchase our Units. Most of the bank financing obtained by consumers for the purchase of real estate comes from the Sistema Financeiro de Habitação - SFH (the national housing system), which in turn is financed with funds raised from savings account deposits. Furthermore, the Conselho Monetário Nacional - CMN (the national monetary council) may reduce the amount of funds that banks are required to make available for real estate financing. If the CMN restricts the amount of funds available to finance the purchase of real estate, or if there is an increase in prevailing interest rates, demand for construction of new properties could decrease, which may have a material adverse effect on our business, financial condition and operating results.

Additionally, if the Brazilian economy experiences a recession, our sales may slow down and customers could default, which could also have an adverse effect on the Company.

Our business is subject to extensive regulation, which may increase our costs and limit our strategy of expansion.

The Brazilian real estate industry is subject to extensive building and zoning regulations imposed by various federal, state and municipal authorities that govern land acquisition and development and construction activities, primarily through zoning restrictions, license requirements and consumer protection laws. We are required to obtain the approval of various governmental authorities for our development projects. New laws or regulations could be adopted, enforced or interpreted in a manner that could adversely affect our business.

Our operations are also subject to Brazilian federal, state and municipal environmental laws and regulations. These environmental laws may result in delays, may cause us to incur substantial costs and may prohibit or severely restrict commercial and residential projects activities in environmentally sensitive regions. Regulations governing the Brazilian real estate industry as well as the environment have tended to become more restrictive over the years, and this increased regulation could adversely affect the Company.

In addition, zoning and environmental laws may change after the acquisition of a parcel of land and before its development, causing delays and modifications to the originally proposed project, which may have an adverse effect on our business and expected results.

The real estate industry is subject to risks generally associated to development and construction activities.

The risks associated with the development and construction activities of real estate companies like ours include, without limitation, the following: (i) due to the significant time lag between the commencement and completion of a project (18-36 months), possible changes in the macroeconomic scenario during such period, such as slowing economy, increased interest rates, currency fluctuations and political instability the devaluation of land stock, demographic changes, could occur and make our projects less attractive to our customers; (ii) construction costs may exceed initial estimates; (iii) the developer or the construction company may not be allowed to index their costs to certain industry inflation rates or to index their receivables, as currently permitted, which could potentially make the real estate project economically unattractive; (iv) the level of customer interest in a project, or the residential unit sales price necessary to sell all of the residential units, may not be sufficient to make the project profitable or the lack of customer interest or the difficulty in obtaining customer financing may reduce the pace of sales, generating additional selling and marketing costs; (v) possible interruptions in supply or shortage of construction materials and equipment may delay the conclusion of the project; (vi) construction and sales may not be concluded on time, resulting in higher costs; (vii) we may face difficulties in acquiring land, such as environmental and land-related negotiations; (viii) land that we acquire may be expropriated by the Brazilian government, or the beginning of public works may impair its use or access; and (ix) project costs may be increased as a consequence of delays during development and increases in the construction costs, since, except for Goldfarb and CHL, none of our Subsidiaries performs its own construction activities. The occurrence of one or more of these factors may have an adverse effect the Company.

Real estate projects entail risks usually associated with the granting of consumer financing.

As is common in our industry, we grant loans to some of our customers. As a result, we are subject to the risks associated with the granting of financing, including the risk of inflation, default in the payment of principal or interest of our loans and the risk of increased costs for the funds we raised. In addition to the interest rate of 12% per year, our sales agreements provide for monetary adjustment based on the National Index of the Construction Cost (Índice Nacional de Custo da Construção), or INCC, applicable during construction of the Units, and on the General Market Price Index (Índice Geral de Preços ao Mercado), or IGP-M, applicable after the completion of the work. Both these indexes vary according to the inflation rate. If there is an increase in the inflation rate, our customers‘ indebtedness may increase as a result of the sales agreements, causing higher customer default. This could have an adverse effect on our cash generation and therefore our operating results.

In the event of default of a customer after the delivery of the Units, Brazilian law provides for the filing of a judicial collection claim to recover the amount owed or to repossess the Unit. The collection of overdue amounts or the repossession of property usually takes two years. Thus, if a customer is in default, we cannot guarantee that we will recover the full amount of the unpaid principal, which could adversely affect our results.

Along with other real estate companies, we raise funds at different rates, and we may be unable to match our payment conditions with the terms of the loans we grant to our customers. This possible mismatch of rates and terms between the funds we raise and the loans we grant could adversely affect us.

The real estate market may be subject to a liquidity crisis.

Like other companies in the real estate industry, we depend on a variety of factors outside our control in order to build and develop real estate projects, including (i) the availability of market resources for the granting of financing to our customers for the acquisition of our Units and to us for the development of new real estate projects and (ii) relying on our customers to make timely payments related to the acquisition of our Units.

Any scarcity of market resources may decrease our sales capacity due to difficulties in obtaining credit for construction or land acquisition, or due to fewer launchings of new projects.

The combination of these risks could reduce our earnings, cash generation and results.

In addition, a possible change, allowing the employees to use the Severance Payment Fund (Fundo de Garantia por Tempo de Servico), or FGTS, for purposes other than the ones currently permitted, may reduce the overall funds available by financial institutions for purchase of real estate properties, especially the CEF.

We are exposed to numerous risks associated with the incorporation, construction, lease and sale of real estate properties.

We are dedicated to incorporation, construction, lease and sale of real estate properties and we intend to keep developing these activities. Besides all the risks that generally affect the Brazilian real estate market, such as changes in supply and volatility of materials and construction equipments, scarcity of qualified labor to provide services, changes in supply and demand for real estate projects in the regions in which we operate , strikes and environmental and zoning regulations, our activities are specifically affected by the following specific risks:

  • economic conditions in Brazil may adversely affect the growth of the real estate business as a whole, by means of an economic slowdown, an increase in interest rates, exchange rate fluctuations and political instability, among other factors;
  • new regulations or market conditions may prevent us from obtaining our receivables, in accordance with certain rates of inflation, as currently permitted, which could make a project economically or financially infeasible;
  • customer demand for new projects may wane or the unit sale price necessary to sell all of our units may be significantly lower than expected, which could make projects less profitable and/or the total value of units different than expected;
  • bankruptcy or significant financial difficulties of a major real estate company may adversely affect the real estate market as a whole, particularly if customers lose confidence in the real estate companies, including the Company;
  • we are affected by local or regional real estate market conditions such as the oversupply of lower-income residential projects, with sales price between R$60,000.00 and R$130,000.00;
  • potential buyers may have a negative perception of the security, convenience and attractiveness of our real estate properties and the areas in which they are located;
  • increases in operating costs, including insurance premiums, real estate taxes and utilities, may affect our profit margins;
  • we may be affected by the scarcity of well-located land for the development of our projects in areas where we operate, currently or in the future;
  • we may be affected by the interruption of the provision of materials and construction equipment;
  • real estate development opportunities may slow down or disappear; and
  • construction and sale of units may not be completed on schedule, resulting in increased construction costs or early termination of sales contracts.

The occurrence of any of these factors may have an adverse effect on our financial condition and operating results.

Additionally, pursuant to the terms of our standard contracts to sell our units, the purchasers have the right to terminate the contract, without incurring any penalty, and to receive back a significant portion of payments made to us as adjusted for inflation, if the purchased units are no timely delivered within 180 days counted as from the original delivery date. We cannot guarantee that we will not be subject to future construction delays in our projects. In addition, pursuant to article 618 of the Brazilian Civil Code, we must provide a five-year warranty with respect to structural defects that may be exercised during such period of time. The occurrence of any such events may also have an adverse effect on our financial condition.

h. The regulation of industries in which the Company operates

An increase in existing tax rates or the creation of new taxes while our sales contracts are in force may have an adverse effect on our financial condition and operating results.

The real estate industry is influenced by government policies and an increase in the tax rates applicable to the industry could adversely affect real estate transactions. In the past, the Brazilian government has changed tax rates and created new taxes, as well as modified the system of taxation with some frequency. If the government increases tax rates or creates new taxes on the purchase and sale of real estate while our sales contracts are in force, we may suffer an adverse effect to the extent that we cannot amend these agreements in order to pass such increased costs on to our customers.

In addition, an increase in, or creation of, new taxes on the purchase and sale of real estate that are passed on to our customers may increase the final price to our customers, which could potentially reduce the demand for our properties, causing an adverse effect on our results.

Furthermore, the Brazilian government may terminate the “presumed profit” method used to calculate corporate income taxes used by many of our Subsidiaries, in particular the special purpose vehicles established development of projects or for co-development activities, the tax burden on our special purpose vehicles would increase and our operating results could be adversely affected.

Our activities are subject to extensive environment regulation, which may increase our costs and limit our development, or in some other manner adversely affect our business.

Our operations are subject to federal, state and municipal environmental laws and regulations. We are required to obtain approval from various government authorities to develop our real estate business. New laws or regulations could be approved, implemented or interpreted in a way that could affect our results of operations, particularly if they become more rigid.

These environmental regulations could cause delays and cause us to incur significant compliance and other costs. They could also prohibit or severely restrict our business activities and residential construction in environmentally sensitive areas or regions. The laws that govern the Brazilian real estate sector, as well as environmental laws, tend to become more restrictive over time and any increase in restrictions could adversely and materially affect our operating results.

i. Foreign countries where the Company operates

Developments and perceptions of risk in other countries, especially in emerging market countries and the United States, could have an adverse effect on Brazilian securities market, including the market price of our common shares, and could cause a negative impact on our operating results and financial condition.

The market price of securities issued by Brazilian companies is influenced by economic and market conditions in other countries, particularly other Latin American and emerging market countries, as well as the United States. Although economic conditions in these countries may differ significantly from economic conditions in Brazil, the reaction of investors to events in these other countries may have an adverse effect on the market value of Brazilian securities, including our common shares. Crises in other emerging market countries could diminish investors‘ interest in securities of Brazilian issuers, including our common shares.

In the past, the development of adverse economic conditions in other emerging market countries resulted in a significant flow of funds out of the country and, consequently, in the reduction of foreign capital invested in Brazil. The financial crisis that began in the United States in the third quarter of 2008 created a global recession. Changes in the prices of common shares of public companies, lack of available credit, reductions in spending, the general slowdown of the global economy, exchange rate instability and inflationary pressure may adversely affect, directly or indirectly, the Brazilian economy and securities market. In addition, financial institutions may be unable to renew, extend, or grant new lines of credit under economically favorable conditions, or may even be unable or unwilling to honor existing obligations. Any of these factors could adversely affect the market price of our common shares, and could also make it more difficult for us to access the capital markets and finance our operations in the future on acceptable terms, or at all.

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