Almost three decades after their creation in the Brazilian legal system in 1993, Real Estate Investment Funds (Fundos de Investimento Imobiliário - FIIs) have multiplied and gained new uses, formats, and characteristics, especially in recent years, when their number has more than doubled and their use as a form of financing has consolidated and continues to mature.
In this article, we discuss the possibility for FIIs to appear as developers and subdividers of the real estate developments that make up their corporate purpose. Typically, "brick" FIIs, intended for the construction of real estate, develop their ventures indirectly, using a special purpose entity (SPE), in which they hold an equity interest, to exercise the position of developer.
The question is: would it be possible for the FII to develop real estate ventures directly, without the use of an SPE as a vehicle? We believe that yes, and the answer presented here is constructed according to a real estate and registry perspective and part of the consolidated concepts adopted by the law, by the normative instructions (IN) of the Brazilian Securities and Exchange Commission (CVM), and by the domestic case law.
The FII Law and the CVM's understanding regarding IN 472/2008
The first point to be assessed is the fact that the law regulating FIIs (Law No. 8,668/93 - the FII Law) procies for the investment of funds of FIIs in real estate developments.
By “investment", however, one does not infer "direct development" of real estate ventures, and the CVM is in charge of providing for and regulating this scenario in its Instruction No. 472, of October 31, 2008 (IN 472). Article 45, paragraph 1, of this Instruction expressly authorizes FIIs to develop construction projects. In this case, the FII trustee should exercise effective and direct control over the development of the project. It is also the role of the trustee to represent the FII broadly in all actions necessary to achieve the purpose and investment policy of the FII.
This provision is led by a guiding principle, reflected in various other provisions of IN 472, and is designed to grant the trustee autonomy and full powers to carry out and manage the projects that make up the FII's assets.
The underlying legal logic is that the FII does not have legal personality. Therefore, it is incumbent on its trustee to exercise the attributes inherent to personality. This logic is the result of a discussion regarding the very legal nature of the FII, at the end of which, in a legislative exegesis, the understanding prevailed that the assets are fiduciarily held by the trustee of the FII.
If, on the one hand, the CVM is aligned with the understanding that it is fully possible for the trustee to carry out the development constituting the FII's purpose, the situation is uncertain in the Real Estate Registries.
The IRIB (Brazilian Real Estate Registration Institute) has already been consulted on the subject and has taken a position advocating for the impossibility for FIIs to procure real estate development directly. Some Real Estate Registries occasionally align with this understanding, alleging two reasons: that FIIs do not have legal personality and that there is an incompatibility between the corporate purposes of the trustee and the real estate subdivider and/or developer. In other words, it is argued that FIIs could not be subject to the rights and obligations arising from devleopments and subdivisions. Even if the title were recognized as being that of the trustee instead of the FII, the trustee's actions would not be valid, since the FII trustee's corporate purpose would be incompatible with the activity of a real estate developer.
We believe that this position may be revised in light of the considerations already made regarding the legislator's choice to draw in the concept of FIIs closer to that of the fiduciary business. We will address each point individually to clarify the reasons why we believe that the alleged obstacles do not continue.
Absence of legal personality of the FII and sufficient fiduciary title to the IFI's assets for the trustee to perform the development
One of the practical consequences of the FII's lack of legal personality is that it is not possible for it to directly own its real estate. 
The legal abstraction from which one departs is that ownership of real estate assets comprising the FII's assets is held by the fund’s trustee on a fiduciary basis, in a binding arrangement, which segregates the FII's assets from the trustee's assets and allocates them for an exclusive purpose.
Thus, the trustee will now concentrate, in a secure and legitimate manner, in its name, the assets and liabilities emerging from the complex of obligations necessary to satisfy the corporate purpose, enjoying all the attributes inherent to ownership.
Recognizing the trustee as fiduciary owner, it is certain that the law itself, in this regard, in addition to not generating obstacles to assumption of the position of real estate developer by the trustee, expressly encourages and mandates it, as provided for in the first paragraph of article 45 of IN CVM 472 (mentioned above), in order to ensure the fund's success, providing the necessary security for FIIs to remain attractive to investors.
Absence of compatibility between the corporate purposes of the trustee and the real estate developer and absence of legal prohibition in the laws and regulations on the development of real estate ventures
The possibility of developing ventures must have authorization on two levels: legal and contractual.
From a legal point of view, article 5 of the FIIs provides that FIIs shall be managed by a multiservice bank with an investment portfolio or a real estate credit portfolio, an investment bank, a real estate credit company, a brokerage house, or a securities distribution company, or other legally equivalent entities, provided that they have proper authorization from the CVM to exercise such activity.
The Real Estate Development Law (Federal Law No. 4,591/64), in turn, provides that a developer is considered to be “an individual or legal entity, whether or not a merchant, that, although not carrying out the construction, compromised or effected the sale of ideal fractions of land [...] coordinating and carrying out the development and being responsible, as the case may be, for the delivery, at a certain time, a certain price and conditions, of the completed works." It may be the owner or promissory purchaser of the property on which the real estate development will take place. In turn, the Urban Land Parceling Law (Federal Law No. 6,766/79) believes that the subdivider must be the owner of the property for such purpose, except for the cases of popular parceling in which this proof of ownership is waived.
As is extracted from a review of the laws and regulations applicable to the development of real estate projects, there is, in fact, no real estate development or urban land parceling, a prohibition on having the FII appear as a developer or subdivider. Since the FII may directly acquire ownership of the property on which it seeks to develop the venture via a fiduciary transaction, in which the FII's trustee lends it its legal personality, the requirement of the Real Estate Development Law and the Land Parceling Law would be respected.
In addition, we do not see any incompatibility between the corporate purpose of the FII’s trustee and the activity of a real estate developer. This is because the subject to be reviewed is that provided for in the FII's bylaws and its investment policy. In this respect, it is worth noting once again that the law recognizes the lawfulness of the management of FIIs by various agents, with the trustee being charged with the duty of assuming direct completion of the venture to be developed by the FII.
In view of the above, the legal construction seems to us to be coherent and cohesive to the same effect: that of guaranteeing security for investors and purchasers of real estate products.
The FII Law and IN CVM 472, by expressly encouraging and mandating the direct achievement of the purpose of the FII by the trustee, impute to it not only the choice, but also the duty, to perform acts of development of the purpose in a direct manner, ensuring to investors greater predictability of investments. Purchasers of FII products, especially autonomous units, will have a legal guarantee of segregation of assets, generally absent from other development formats, and a guarantee of development by entities with consolidated expertise and reputation, which will be subject to strict control by a regulatory agency, which mitigates the social risk associated with the failure of the development.
However, few institutions have provided management services to FIIs that have as their purpose activities involving real estate development or land subdivision. In addition to the uncertainty mentioned above regarding the possibility of implementing the applicable registrations in the Real Estate Registries, experience shows us that the risk for investors and FIIs trustee linked to the activity, especially in a structure that does not have the limited liability for obligations conferred by a structure that has SPEs, has decreased the appetite of the institutions for this type of product.
For those who wish to explore the evident possibility of direct development, it is advisable to take into consideration the specificities of the specific case and analyze the tax and regulatory issues in order to be sure that the format of direct real estate development by the FII is the most appropriate. It is also necessary to evaluate the risks inherent to the activity of developers and real estate subdividers that would be assumed directly by the FIIs and not by the vehicle (SPE) in which the FII holds an equity interest.
 In March of 2015, the number of FIIs registered with the CVM was 249, rising to 540 in March of 2020. Source: Real Estate Market Bulletin, B3, No. 89, of March 19, 2020. Available at: http://www.b3.com.br/data/files/2B/92/A2/B0/B5991710CF51CE07AC094EA8/Boletim%2 0Mercado%20Imobiliario%20-%202020%2003.pdf.
 The historical construction of the legal nature of FIIs, at the Brazilian and international levels, has taken place under the debate of several theories, defended by revered legal scholars, conceiving of FIIs either as condominiums or as unincorporated companies. Law No. 8,668/93, in its literal provisions, aligned itself with the so-called "fiduciary property theory" and established as positive law the understanding that FIIs are a commonality of resources under the trustee's ownership. Considering that the Real Estate Registries incline to the latter theory, we have adopted it to achieve the objective proposed. This controversy over the legal nature of the investment funds has currently been overcome due to the enactment of Law No. 13,874/19, which, upon including the new article 1,386-C in the Civil Code, establishes that "investment funds are a commnoality of resources, organized in the form of a condominium of a special nature, intended for investment in financial assets, goods, and rights of any nature."
 Law No. 8,668/93. Article 1. Real Estate Investment Funds are established, without legal personality, characterized by commonality of the funds raised through the Securities Distribution System, in the manner set forth in Law No. 6,385, of December 7, 1976, intended for investment to real estate ventures. (emphasis added)
 IN CVM 472. Article 45. The fund's participation in real estate projects may occur through acquisition of the following assets: I - any rights in rem in real estate; [...] § 1 When the FII's investment is in construction projects, the trustee shall, irrespective of the hiring of specialized third parties, exercise effective control over the development of the project.
 IN CVM 472. Article 30. It is incumbent on the trustee, in compliance with the rules: [...] I - to carry out all operations and perform all acts that relate to the purpose of the fund. and IN CVM 472. Article 32. The fund trustee must: [...] IV - enter into legal transactions and carry out all operations necessary for the execution of the fund's investment policy, exercising, or endeavoring to exercise, all rights related to the assets and activities of the fund. (emphasis added)
 Search filed under No. 9.441, of August 28, 2012.
 Article 5 of Law No. 8,668/93 provides that FIIs shall be managed by a multiservice bank with an investment portfolio or a real estate credit portfolio, an investment bank, a real estate credit company, a brokerage house, or a securities distribution company, or other legally equivalent entities.
Such restriction does not apply to other types of assets, such as securities.
 Article 7: "The assets and rights that are part of the assets of the Real Estate Investment Fund, in particular real estate held under the fiduciary ownership of the trustee institution, as well as profit and income therefrom, are not mixed with the assets of the latter [...]."
As they do not have legal personality, investment funds do not currently confer limited liability on the investment made by their unitholders. Law No. 13,874/19 established that an investment fund’s bylaws may establish: (a) limitation on the liability of each investor to the value of its units; and (b) limitation of the liability, as well as the parameters for its assessment, of the service providers of the investment fund, vis-à-vis the condominium and among themselves, for fulfilment of the particular duties of each one, without joint and several liability. However, this limitation of liability is still pending regulation by the CVM. After the CVM issues rules to this effect, it is possible that the institutions will have more comfort in managing FIIs that have as their purpose activities involving real estate development or subdivision, due to the possible limitation of liability to the investor and to the trustee itself as service provider.