Risk Factors

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

a. The Company

Brazil’s economic situation and the demand for properties exposes PDG Realty to risks related to real estate development, construction and sale.

The Company focuses on the development, construction and sale of residential and commercial properties, as well as on allotments, and intends to continue carrying out such activities. In addition to the risks that affect the real estate industry, such as the provision of supplies and price dispersion of construction equipment and input, changes in product demand, protests, strikes, lack of manpower and environmental and zoning regulations, our activities may also be affected by the following risks:

  • Buyer’s interest may change thanks to the consumer confidence index, disposable income, employment index and other macroeconomic factors;
  • Brazil’s economic situation may adversely affect growth in the real estate industry as a whole, due to an economic slowdown, increase in interest rates that affect financing costs for both the Company and our customers, political instability and uncertainties regarding the direction of the country’s economy;
  • Profit margins may be affected because of increases in the Company’s operating costs, reduction in the return on investments, increase in real estate taxes, increase in inflation, among other costs;
  • Because of new regulations or market conditions, the Company may be prevented from monetarily adjusting its receivables based on inflation rates, as currently permitted, which could make a development economically or financially unfeasible;
  • In the event of serious financial difficulties of other companies in the real estate industry, the industry as a whole may be adversely affected, which could reduce the trust of consumers, financial institutions and the government in other companies operating in the industry;
  • Profit margins may be affected by increases in the Company’s operating costs, investments, real estate taxes, among other costs;
  • The construction and sale processes of units may not be concluded on the expected time, resulting in increases in construction costs or cancellation of contracted sales;
  • Development opportunities with minimum returns established by the Company’s Management may decrease over time;
  • Although the Company has so far met all the obligations set forth in its Court-Supervised Reorganization Plan, if any future requirement provided for in the Plan is not met, the Company’s recovery process may be made unfeasible. It is worth noting that all the obligations, as well as PDG’ Court-Supervised Reorganization Plan, in its entirety, are available on the websites of the CVM, B3 and the Company.

The current Coronavirus pandemic may adversely affect the Company’s business plans, as well as its suppliers and consumers.

COVID-19 spread throughout the world in early 2020, and more broadly in Brazil as of March 2020.

The impact of the pandemic on PDG‘s business will depend on future developments, which are highly uncertain, such as the duration, geographic distribution and severity of the pandemic, as well as the measures to prevent and fight against the pandemic to be adopted by governments and health authorities, which may adversely affect the real estate and financial businesses conducted by the Company.

The pandemic has caused macroeconomic and financial market uncertainties, reflecting in social and economic risks.

The economic slowdown resulting from the uncertainty generated by both the pandemic and the restriction on circulation may increase unemployment. These factors may impact the behavior of the Company‘s customers, which may cause a reduction in sales and future revenues. The Company estimates that the effects of COVID-19, which have not yet been materialized, may affect operations that require physical contact with our customers, such as visits to developments, or that depend on external sectors, which have suspended or reduced their activities, such as municipal agencies and real estate registry offices.

With the beginning of the pandemic, the Company immediately adopted measures to retain cash as much as possible by revising monthly payments and conducting potential renegotiations, monitoring the default rate on a daily basis, and adoption of the benefits generated by Provisional Presidential Decree (postponement of tax payment). Also as a measure to retain cash and in view of market uncertainties, the Company decided to temporarily suspend any launch scheduled for 2020, as well as all other previously planned investments.

In view of a possible drop in sales, a scenario that began at the end of March, the Company needed to revise its projections and make new estimates foreseeing different revenue reduction scenarios. The Company considered several scenarios of revenue reduction, including quite critical ones, with an impact expected on revenues for the entire year of 2020 and early 2021.

Regarding a possible decline in real estate market prices, the Company does not currently reckon on any adjustment to inventory prices that may impact results.

The company has carefully adopted the health recommendations of the State Government and the Ministry of Health, and has managed to maintain all of its operations without any interruptions, mainly preserving the health of its employees. However, these measures may not be enough to mitigate the risks posed by the COVID-19 pandemic.

The effects resulting from the COVID-19 pandemic are constant and, therefore, we will continue to evaluate the developments arising from it in our businesses.

We may have difficulties identifying and carrying out new real estate developments with other companies operating in the real estate market or new investments for indirect development of real estate properties ("Partnerships"), which may adversely affect us.

Part of our projects are carried out in partnership with other developers, investors or partner companies. Our ability to successfully identifying and creating new Partnerships is also essential for our growth. However, we may have difficulties in identifying attractive opportunities or be unable to make investments on economically favorable terms. Furthermore, our strategy of resuming activities in the real estate industry will depend on our ability to enter into partnerships with developers or investors operating in the industry that have the requirements demanded by the Company. In addition, unfavorable economic conditions, as well as the Court-Supervised Reorganization process, may increase our financing costs and limit our access to capital markets, reducing our ability to enter into new partnerships and develop new projects.

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

The loss of management members and/or our inability to attract and retain qualified personnel could adversely affect our activities, financial situation or operating results.

Maintaining a competitive position depends on the quality of our management and the Company‘s staff. Although PDG offers an attractive package for maintaining its employees’ skills, none of them is bound by a long-term employment contract neither has any non-competition obligation. We cannot guarantee that we will succeed in attracting and maintaining employees in our management to monitor our restructuring process with a view to the resumption of our activities. The loss of any management member or our inability to attract and maintain skilled personnel may adversely affect our activities, financial situation and operating results.

The scarcity of credit for production finance and consumer finance may affect the Company’s pace of growth

The availability of credit for production finance is key to maintain or resume our operations, given that it supports the development of new Company projects (launches), as well as the completion of works already started. In addition, payment conditions are facilitated when credit is granted to our customers to finance the purchase of units. This type of financing may undergo changes in credit granting policies that reduce the availability or the benefits of such financing. The failure to implement, suspend, interrupt or significantly change such financing may significantly affect our business.

In addition, any future shortage of credit may force us to seek new forms of financing to replace the current ones. However, if such alternative financing sources are not made available under conditions similar to those currently available, our operating results may be adversely affected.

The market value of our land bank may decrease, adversely affecting our operating results.

He have a land bank to be used in part of our future developments. The value of such land may significantly decrease from the time of acquisition to the time of the development of the project, 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.

In addition, the Company has plots of land that no longer fit its strategy and, therefore, are aimed for sale. A decrease in the market value of such land may adversely affect asset monetization and, consequently, lead to both lower cash inflow and amortization to creditors.

We may be unable to maintain or increase our growth record.

PDG has recorded rapid growth in recent years, as well as a large geographical expansion of its operations. The Company has currently been going through an extensive restructuring process, limiting its growth and restricting its operations to certain regions.

The Company intends to optimize the growth opportunities in the regions defined in its strategic planning, as a way to consolidate the improvement in its management, and in its operating and financial results.

If we are unable to grow and maintain a satisfactory compound annual growth index, our financial results could be adversely affected.

The value of our units in inventory may vary and affect the guarantee of accounts receivable in an unfavorable economic environment.

The market value of our units in inventory may vary over time, impacted by market prices, adjustment to the National Civil Construction Index (INCC), among other factors. Such price decrease many adversely impact the Company’s future receivables and directly impact its cash flow.

The deterioration in Brazil’s economic environment may impact the cancellation of contracted sales.

PDG has a strict credit policy and controls its default rates, measuring the credit risk of its customers at the time of sale as effectively as possible, so that they can make the due payments until the delivery of the unit, either through settlement or bank transfer. Some of the criteria complied with are: (i) the amount paid until the delivery of the unit; (ii) the commitment of income; (iii) credit quality before the market.

However, an unfavorable economic environment may have an impact on the supply of credit or on the increase of financing rates, making it difficult or impossible to carry out customer’s bank transfers, thus increasing the number of sales cancellations.

PDG Realty is under court-supervised reorganization, and the Company cannot guarantee that the Court-Supervised Reorganization Plan will be concluded in a satisfactory manner.

Throughout 2017, PDG took a very important step in its restructuring process by filing its request for Court-Supervised Reorganization on February 22, whose main objectives were: (i) to continue progressing in the restructuring process, in an organized manner and with pre-defined terms and procedures, together with all of those involved in the restructuring process; (ii) to seek the maintenance of the Company‘s regular operations; (iii) to preserve value and protect the Company‘s cash.

Another significant step related to the Court-Supervised Reorganization was the granting, on March 2, 2017, of the filing for court-supervised reorganization. Some of the main measures established include: (i) the appointment of PricewaterhouseCoopers Assessoria Empresarial Ltda. as Legal Administrator; (ii) the suspension of the ongoing lawsuits and executions against PDG for 180 days; (iii) the issue of notice, pursuant to paragraph 1 of article 52 of the Tax Liability Law (LRF), with a period of 30 days for presentation of qualifications and/or divergences of credit under the Court-Supervised Reorganization Process; (iv) the presentation of Grupo PDG‘s Court-Supervised Reorganization Plan within 60 business days.

The filing and granting of the Filing for Court-Supervised Reorganization represent a significant progress in the continuity of the restructuring process.

Accordingly, the Company and its advisors made great efforts to design the Court-Supervised Reorganization Plan, which are essential for the Company’s rebalancing and the continuity of its operations.

On November 30, 2017, nine months after filing for its Court-Supervised Reorganization, the Plan was approved at the General Creditor’s Meeting and ratified on December 18, 2017.

The approval and ratification of the Company’s Court-Supervised Reorganization Plan will provide for a thorough restructuring of its liabilities and, consequently, its capital structure, in addition to the continuity of its operations.

Clearly, PDG‘s Court-Supervised Reorganization Process represents, since the beginning, a pioneering milestone, given that it involved unprecedented terms and amounts in recent history: (i) the Plan was designed, negotiated, approved and ratified in just over nine months after the Company‘s filing for court-supervised reorganization; (ii) the Plan was approved by the creditors in all credit classes; (iii) overall, more than 20 thousand creditors had their credits renegotiated; and (iv) the amount of restructured credit exceeded R$4.6 billion.

Among the main restructuring measures of the Company’s liabilities approved in the plan are: (i) recovery of debt fines and interest of approximately R$818.5 million in the Company’s liabilities; (ii) translation of debt into equity (capital increase) in the amount of R$74.2 million; and (iii) extension of the Company’s remaining debt to up to 25 years.

In 2018, we started the implementation of PDG’s Court-Supervised Reorganization Plan and underwent several challenges throughout this period. The Company took important measures towards its reorganization during this period, the most important being the full payment of the six installments provided for in the Plan, totaling more than R$91.0 million. Additionally, on June 15, we concluded the capital increase related to the translation of debt into equity, in the amount of R$74.2 million. Moreover, still under the Court-Supervised Reorganization Plan, a total of R$84.3 million corresponded to giving in payment agreements.

In 2019, the Company repaid approximately R$30 million in debt subject to the reorganization plan.

In total, considering the payment of the installments, the capital increase, and the giving in payment agreements, the Company has already settled R$281 million in debt subject to the reorganization plan, that is, debts that were restructured within the Court-Supervised Reorganization Plan.

As a result, the Company has fully complied with what was established in its Court-Supervised Reorganization Plan, meeting the obligations agreed upon with its labor creditors, unsecured creditors and suppliers.

Since the beginning of said Process, the Company has successfully met all the commitments assumed in its Court-Supervised Reorganization Plan, however, we cannot guarantee that the Plan will be satisfactorily concluded.

b. The Company’s direct or indirect controlling shareholder or control group

Not applicable, since the Company does not have a controlling shareholder.

c. The Company’s shareholders

Shareholders may not receive any dividends or interest on equity.

According to the Company’s Bylaws ("Bylaws"), we must pay our shareholders at least 25% of our annual net income as dividends or interest on equity, as calculated and adjusted pursuant to Law 6,404 of December 15, 1976 ("Brazilian Corporate Law"). Net income may be capitalized, used to absorb losses or otherwise retained as allowed by Brazilian Corporate Law, and may not be used to pay dividends or interest on equity. Additionally, Brazilian Corporate Law allows a publicly held company, like PDG, to suspend the mandatory distribution of dividends in a given fiscal year if the Board of Directors informs the General Meeting that such distribution would conflict with the Company’s financial situation. In case of any of these events, our shareholders may not receive dividends or interest on equity.

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

We may need to raise additional funds and may choose to obtain them through public or private placement of debt securities or shares, or securities convertible into shares. If public or private financing is unavailable, or if shareholders so decide, such additional funds may be obtained through capital increase, which may dilute investors’ interest in the Company’s shares.

Capital increase resulting from credit capitalization.

Clause 4.4.1.3.3 of the Company’s Court-Supervised Reorganization Plan provides for Optional Credit Capitalization, when specific creditors may choose to have Unsecured Credits paid with Shares upon capitalization of the respective Credit every third (3rd) anniversary of the Ratification of the Court-Supervised Reorganization Plan.

The capitalization of credits provided for in the Plan may dilute investors’ interest in our Shares.

Accordingly, under the Plan, on June 15, we concluded the capital increase related to the translation of debt into equity, in the amount of R$74.2 million.

Developments and perceptions of risk in other countries, especially in emerging markets and the United States and Europe, could adversely affect the Brazilian securities market, including the trading of our shares, adversely impacting our operating results and financial situation.

The market price of securities issued by Brazilian companies is influenced by the economic and market conditions of other countries, along with Latin American countries and emerging markets, including the United States and Europe. Although the economic conditions in these countries significantly differ from the economic conditions in Brazil, investors’ reactions to developments in these other countries may adversely affect the market price of securities issued by Brazilian companies, including our shares. Crises in other emerging markets may reduce investors‘ interest in securities issued by Brazilian companies, including those issued by us.

In the past, the development of adverse economic conditions in other emerging markets usually resulted in investment outflows and, consequently, in the reduction of foreign funds invested in Brazil, variations in the security prices of publicly held companies, problems with credit availability, reduced spending, general slowdown of the world economy, currency instability and inflationary pressure.

The volatility and lack of liquidity of the Brazilian securities market may significantly reduce investors’ ability to sell Shares at the desired price and time.

Investment in securities traded in emerging markets, such as Brazil, frequently involves risks higher than in other markets. The Brazilian securities market is relatively smaller, less liquid, more volatile and more concentrated than some of the major international securities markets.

These characteristics may significantly limit our shareholders’ ability to sell our Shares at the desired price and time and, consequently, adversely affect the market price of the Company’s Shares.

d. Company’s subsidiaries and affiliates

The risks related to the subsidiaries and affiliates are substantially the same as those related to the Company.

e. Company’s suppliers

The use of outsourced labor could expose us to labor and social security obligations. The Company and its subsidiaries outsource manpower. The use of outsourced labor, mainly with respect to the hiring of contractors and subcontractors, may expose us to labor and social security obligations. The assumption of such contingencies is inherent to the hiring of third parties, since the responsibility for labor and social security debts of employees from the companies providing services can be attributed to the Company or its subsidiaries, as third-party service takers, when they fail to comply with their labor and social security obligations. The Company, in turn, may be held liable any for labor and social security contingencies related to its subsidiaries, regardless of whether the Company and its subsidiaries are assured the right of recourse against the service providing companies. It is difficult to predict and quantify any contingencies and, if they happen, they may adversely affect the Company’s financial situation and results.

Problems with the supply of materials and provision of services in our real estate developments that are beyond our control may tarnish our image, reputation and businesses, and subject us to any compensatory payments arising from a civil liability.

In the normal course of business, the Company acquires construction materials from third parties and outsources part of labor to develop its real estate projects. As a result, the deadline and quality of real estate developments are subject to factors that may be beyond the Company’s control, including, but not limited to, the timely delivery of construction materials supplied for works and the technical skills of the outsourced professionals and employees, such as contractors. Our image and reputation, as well as the technical quality of our real estate developments, are essential for the success of our sales and growth. Any problems occurred in our real estate developments may tarnish our image, reputation, future sales and the relationship with our customers, which, in turn, may adversely affect our business and results.

Additionally, pursuant to article 618 of Law 10,406, of January 10, 2002 ("Brazilian Civil Code"), we are required to provide our customers with a five-year warranty against significant structural problems in our developments, and may be required to comply with said warranty.

In these cases, although the Company creates a provision for part of its results as a warranty for the properties, we may incur unexpected expenses, which, in turn, may adversely affect the Company.

The activities of our suppliers may be adversely affected by the developments of the COVID19 pandemic, resulting in delays or the impossibility to deliver the product or service contracted by the Company.

f. The Company’s customers

The unavailability of funds to obtain financing and the increase in interest rates may impair the ability or willingness of potential buyers to finance the properties acquired.

The unavailability of funds in the market to obtain financing and the increase in interest rates may impair the ability or willingness of buyers to finance the properties acquired. This may reduce demand for the residential and commercial properties and allotments offered by the Company, affecting its financial situation and operating results.

Given that Grupo PDG is under Court-Supervised Reorganization, some financial institutions may not grant credit to the Company, which may adversely impact the expected resumption of the Company‘s launches, and the completion of the works already started.

g. Sectors in which the Company operates

The Brazilian real estate market is highly competitive, which may be a threat to our market position in the Brazilian market and to our expansion strategy.

The aggravation in the industry’s competitive scenario may affect the margin of our operations as a whole, reducing sales prices and increasing costs, which may lead to lower operations and profits, adversely affecting our financial situation.

In addition, the Brazilian real estate market is highly competitive and fragmented and lacks high barriers to entry that would restrict new competitors from joining the market. The main competitive factors in the real estate development business include availability and location of land, prices and availability of financing, project characteristics, quality of the development, reputation and partnerships with developers. We compete with a number of developers operating in the real estate industry for: (i) acquiring land; (ii) obtaining funds for developments; and (iii) identifying prospective customers. New companies, including foreign companies in partnership with local companies, may actively operate in the real estate development business in Brazil, further increasing competition in the 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 situation 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.

In addition, some of our competitors may have access to better financial resources and, consequently, establish a capital structure more adequate to market demands, mainly in periods of instability in the real estate market.

The scarcity of financing and/or the increase in interest rates may reduce demand for residential or commercial units ("Units"), which may adversely affect the real estate market and, consequently, our business.

Buyers of our Units usually rely on loans to finance their acquisitions. The scarcity of financing resources available in the market, changes in current policies for granting financing and/or increases in interest rates may adversely affect the ability or willingness of prospective buyers to purchase our Units. Most financing obtained by consumers for the purchase of properties comes from the Housing Finance System ("SFH"), which, in turn, is financed with funds raised from savings deposits. Furthermore, the National Monetary Council ("CMN") 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 properties, or if there is an increase in prevailing interest rates, the demand for our real estate developments may decrease, adversely affecting our business, financial situation and operating results.

Additionally, the Brazilian economy is facing a significant downturn that has impacted the speed of sales of our Units. An increase of unemployment in Brazil, resulting from the economic slowdown, may increase customer default, which may also adversely affect on the Company.

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

The Brazilian real estate industry is subject to strict building and zoning regulation imposed by various federal, state and municipal authorities that govern land acquisition and real estate development and construction activities, through zoning restrictions, license requirements and consumer protection laws. We need the approval of various government authorities to carry out our real estate projects. New laws or regulations may be adopted, enforced or interpreted in a manner that could adversely affect our business.

Our operations are also subject to federal, state and municipal environmental laws and regulations that may result in delays, cause us to incur substantial costs to meet them and prohibit or severely restrict development and construction activities in environmentally sensitive areas or regions. The laws that govern the Brazilian real estate industry, such as environmental laws, tend to become more restrictive, and any increase in restrictions may adversely affect the Company.

In addition, zoning and environmental laws may change after the acquisition of land and before its development, resulting in changes to the originally proposed project, which may adversely affect our business and expected results. Such effects may even make it impossible to use the land acquired, forcing the sale of the asset at a price that may be even lower than the acquisition price.

The real estate industry is subject to risks usually related to development and construction activities.

The risks related to the development and construction activities carried out by real estate companies like ours include, without limitation, the following: (i) a long period between the beginning of a real estate development and its completion (18-36 months on average), during which changes in the macroeconomic scenario may occur and jeopardize the success of such development, for instance, a slowdown in the economy, an increase in interest rates, currency fluctuations and political instability, devaluations of land bank and demographic changes; (ii) operating costs, which may exceed the original estimates; (iii) the developer/construction company may be prevented from indexing costs or receivables to certain inflation indexes as currently permitted, which could make a real estate development economically unattractive; (iv) the buyer’s level of interest in a recently launched real estate development or the sale price required to sell all Units may not be sufficient to make the project profitable, or the lack of buyers’ interest or the difficulty in obtaining customer financing may slow down the speed of sales, implying additional selling and marketing costs; (v) possible interruptions of supply or shortage of construction equipment and materials causing delays in the completion of a real estate project; (vi) construction and sales may not be completed on time, resulting in higher costs; (vii) any difficulties in acquiring land and any environmental and land-related questionings; (viii) expropriation of land acquired by public authorities or public works that impair its use or the access to it; and (ix) project costs may be increased because of delays in the development of real estate projects and increases in construction costs; (x) interruption of financial production by financial institutions. The occurrence of one or more of these factors may adversely affect the Company.

The real estate industry is subject to a crisis in the availability of resources.

Real estate companies, including us, depend on a number of exogenous factors to carry out real estate construction and development activities, among which: (i) the availability of resources in the market for the granting of financing to our customers aimed to the acquisition of our Units and for the development of new real estate developments; and (ii) customers’ timeliness in meeting their financial obligations related to the acquisition of our Units.

Therefore, any scarcity of funds may reduce our capacity and the speed of sales, either due to our customers’ difficulties in obtaining financing for the acquisition of a property or to a reduction in the speed of new launches.

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

In addition, any change to the allocation of resources from the Guarantee Fund for Length of Service (FGTS) to other activities may reduce funds made available by financial institutions for the acquisition of properties.

We are exposed to risks associated with real estate development and construction and sale of properties.

We are committed to the development, construction and sale of residential and commercial properties, and allotments. In addition to the risks that affect the Brazilian real estate market in general, such as supply interruptions and price volatility of construction materials and equipment, shortage of qualified labor for the provision of services, changes in the supply and demand of developments in certain regions, strikes and environmental and zoning regulations, our activities are specifically affected by the following risks:

  • Brazil’s economic scenario may jeopardize the growth of the real estate industry as a whole, through economic slowdown, higher interest rates, currency fluctuation and political instability, among other factors;
  • New regulations or market conditions may prevent us from monetarily adjusting our receivables, in accordance with certain inflation rates, as currently permitted, which could make a project economically or financially unfeasible;
  • Buyer’s level of interest in a new project launched or the sales price per unit required to sell all units may be significantly lower than expected, which may make it less profitable and/or the total value of all units to be sold may become significantly different than expected;
  • In the event of significant financial difficulties of a large real estate company, the industry as a whole can be affected, which may reduce customers’ confidence in other companies operating in the industry, including the Company;
  • We are affected by conditions in the local or regional real estate market, such as the excess supply of projects aimed at consumers in the segments in which the Company operates;
  • Potential buyers may have a negative perception of the security, convenience and attractiveness of our real estate developments and the areas in which they are located;
  • Our profit margins may be affected by higher operating costs, including investments, real estate taxes, public tariffs and insurance premiums;
  • We may be affected by the scarcity of land in regions where the Company operates;
  • We may be affected by an interruption in the supply of construction equipment and materials;
  • Development opportunities significantly decrease; and

The construction and sale of project units may not be completed within the planned schedule, thus increasing construction costs or resulting in cancellation of sales contracts.

The occurrence of any of the above risks may adversely affect our financial situation and operating results.

In addition, in accordance with our sales contracts, customers have the right to cancel the contract and receive back part of the amounts paid, adjusted for inflation, if delivery is not made within 180 days as of the scheduled date (except in cases of force majeure). We cannot guarantee that we will not be subject to future construction delays. In addition, pursuant to article 618 of the Brazilian Civil Code, we must provide a five-year warranty against significant structural problems, and may be required to comply with said warranty. Should such events occur, our financial situation will be adversely affected, even if such amounts are duly provisioned by the Company.

The Company complies with the impacts arising from the "Termination Law", Law 13,786, of December 27, 2018, which became a legal framework for real estate sale contracts. With the new rules, the fines arising from cancellation requests (termination of property acquisition contract) are well defined and aim to avoid a number of questions from customers in case of waiver of the purchase. The Company understands that the Law ensured customers with more transparency and legal security. However, because of the short enforcement time of the "Termination Law", the Company is not yet able to measure the impacts arising from it.

h. Regulation of the sectors in which the Company operates

An increase in existing tax rates or the creation of new taxes during the term in which our installment sales contracts are in force may adversely affect our financial situation and operating results.

The real estate industry is influenced by government policies and an increase in the tax rates applicable to the industry may adversely affect it. In the past, the Brazilian government often increased tax rates, created new taxes and changed the tax regime. If the Brazilian government increases existing tax rates or creates new taxes on the purchase and sale of real estate while our installment sale contracts are in force, we may be adversely affected to the extent that we cannot amend these contracts to pass such cost increase on to our customers.

In addition, an increase 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 and reduce demand for our properties or affect our margins and profitability, adversely affecting our results.

Furthermore, the Brazilian government may cancel the presumed profit method used to calculate taxes on income, which is the method used by many of our Subsidiaries, in particular the special purpose companies ("SPEs") established for real estate development activities, created by the Company together with other companies operating in the real estate market ("Co-merger"), which may increase the tax burden of our SPEs and, therefore, adversely affect our operating results.

Our activities are subject to a thorough environment regulation, which may increase our costs and limit our development, or adversely affect our business.

Our operations are subject to federal, state and municipal environmental laws and regulations. We need the approval from various government authorities to carry out our real estate business. New laws or regulations may be approved, enforced or interpreted in a manner that could adversely affect our operating results, particularly if they become more rigid.

These environmental regulations may result in delays, cause us to incur substantial costs to comply with them, as well as other costs, and prohibit or severely restrict residential development and construction activities in environmentally sensitive areas or regions. The laws that govern the Brazilian real estate industry, as well as the environmental laws, tend to become more restrictive, and any increase in restrictions may adversely and materially affect our operating results.

i. Foreign countries where the Company operates

The Company does not operate in markets other than the Brazilian market.

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