PART I

 

ITEM 1.                      IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

 

Not applicable.

 

ITEM 2.                      OFFER STATISTICS AND EXPECTED TIMETABLE

 

Not applicable.

 

ITEM 3.                      KEY INFORMATION

 

A.      Selected Financial Data

 

The following selected financial data have been derived from our financial statements. The selected financial data as of and for the years ended December 31, 2010 and 2009 have been derived from our financial statements, prepared in accordance with Brazilian GAAP, included elsewhere in this annual report. The selected financial data as of and for the years ended December 31, 2008, 2007 and 2006 have been derived from our financial statements prepared in accordance with Prior Brazilian GAAP. Our financial statements, prepared in accordance with Prior Brazilian GAAP, for the years ended December 31, 2009 and 2008 are included in this annual report for comparative purposes.

 

Our financial statements are prepared in accordance with Brazilian GAAP which differs in significant respects from US GAAP. For a discussion of the significant differences relating to these financial statements and a reconciliation of net income and shareholders’ equity from Brazilian GAAP to US GAAP, see notes to our audited financial statements included elsewhere in this annual report.  See also “Presentation of Financial and Other Information.”

 

This financial information should be read in conjunction with our audited financial statements and the related notes included elsewhere in this annual report.

 

The following table sets forth financial information as of and for the years ended December 31, 2010 and 2009 and have been prepared in accordance with Brazilian GAAP in effect as of December 31, 2010.  Certain information below is presented in accordance with US GAAP.

 

		As of and for the year ended December 31,
		2010 As restated (1)				2009 As restated (2)
		(in thousands except per share, per ADS and operating data)(4)
Consolidated Income Statement data:
Brazilian GAAP:
Net operating revenue		R$	3,403,050			R$	3,036,357
Operating costs			(2,460,918	)			(2,143,762	)
Gross profit			942,132				892,595
Operating expenses, net			(549,403	)			(600,815	)
Financial expenses, net			(82,117	)			(111,006	)
Income before income and social contribution taxes			310,612				180,774
Income and social contribution taxes			(22,128	)			(37,812	)
Net income for the year			288,484				142,962
Net income for the year attributable to noncontrolling interest			(23,919	)			(41,222	)
Net income for the year attributable to owners of Gafisa S.A.		R$	264,565			R$	101,740
Share and ADS data(3):
Per common share data—R$ pre share:
Earnings per share—Basic			0.6415				0.3808
Earnings per share—Diluted			0.6109				0.3242
Weighted average number of shares outstanding—in thousands			412,434				267,174
Dividends and interest on equity declared—in thousands of R$			98,812				50,716

 

 

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		As of and for the year ended December 31,
		2010 As restated (1)				2009 As restated (2)
		(in thousands except per share, per ADS and operating data)(4)
Earnings per share—R$ per share (10)			0.6140				0.6100
Number of common shares outstanding as at end of period—in thousands			430,915				166,778
Earnings per ADS—R$ per ADS (4)			1.2279				1.2200
US GAAP:

Net operating revenue			1,929,130				1,700,940
Operating costs			(1,472,084	)			(1,256,317	)
Gross profit			457,045				444,623
Operating expenses, net			(575,777	)			(575,024	)
Financial expenses, net			(97,809	)			(102,925	)
Loss before income and social contribution taxes and equity pick-up			(216,540	)			(233,326	)
Income and social contribution taxes			(100,811	)			40,367
Equity pick-up			42,161				88,913
Net loss for the year			(73,569	)			(104,046	)
Net income  attributable to noncontrolling interests			(21,214	)			(30,333	)
Net loss attributable to owners of Gafisa S.A. (5)			(94,783	)			(134,379	)

Per share and ADS data(3):
Per common share data—R$ per share:
Earnings (loss) per share—Basic			(0.2298	)			(0.5030	)
Earnings (loss) per share—Diluted			(0.2298	)			(0.5030	)
Weighted average number of shares outstanding – in thousands			412,434				267,174
Dividends declared and interest on equity			98,812				50,716
Per ADS data—R$ per ADS(4):
Earnings (loss) per ADS—Basic (4)			(0.4596	)			(1.0060	)
Earnings (loss) per ADS—Diluted (4)			(0.4596	)			(1.0060	)
Weighted average number of ADSs outstanding – in thousands			412,434				267,174
Dividends and interest on equity declared			98,812				50,716

Consolidated Balance Sheet data:
Brazilian GAAP:
Cash, cash equivalents and short term investments		R$	1,201,148			R$	1,424,053
Current and non-current properties for sale			2,206,072				1,748,457
Working capital(5)			4,808,337				3,195,413
Total assets			9,040,791				7,455,421
Total debt(6)			3,290,109				3,122,132
Total equity			3,632,172				2,384,181
US GAAP:

Cash and cash equivalents, short-term and restricted short-term investments			1,127,382				1,395,668
Current and non-current properties for sale			3,690,328				3,068,738
Working capital(5)			3,940,576				2,762,165
Total assets			8,482,267				7,320,057
Total debt(6)			3,081,276				3,057,092
Total Gafisa equity			2,611,844				1,679,418
Equity for noncontrolling interests			20,833				18,426
Total equity			2,632,677				1,697,844

Consolidated Cash Flows provided by (used in):
Brazilian GAAP
Operating activities			(1,079,643	)			(692,084	)
Investing activities			122,888				(762,164	)
Financing activities			920,197				1,555,745

 

 

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		As of and for the year ended December 31,
		2010 As restated (1)				2009 As restated (2)
		(in thousands except per share, per ADS and operating data)(4)
Consolidated Operating data:
Number of new developments			127				69
Potential sales value(7)		R$	4,491,835			R$	2,301,224
Number of units launched(8)			22,233				10,810
Launched usable area (m2)(9)			3,008,648				1,415,110
Sold usable area (m2)(9)			1,690,160				1,378,177
Units sold			20,744				21,952

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(1)

Our 2010 consolidated financial statements previously filed with the Brazilian Securities Comission (CVM) on March 24, 2011 and those furnished as unaudited on Form 6-K to the U.S. Securities and Exchange Commission, filed on January 17, 2012, were restated to reflect a correction of errors related to budget of costs and certain reclassifications on the balance sheet, as disclosed in Note 2.1.4.

 

(2)	Our Brazilian GAAP financial statements as of and for the years ended December 31, 2009 reflect the initial adoption of new Brazilian GAAP standards, which we retroactively applied beginning on January 1, 2009.

 

(3)

On February 22, 2010, a stock split of our common shares was approved, giving effect to the split of one existing share into two new issued shares, increasing the number of shares from 167,077,137 to 334,154,274. All Brazilian GAAP and US GAAP information relating to the numbers of shares and ADSs have been adjusted retroactively to reflect the share split on February 22, 2010. All Brazilian GAAP and US GAAP earnings per share and ADS amounts have been adjusted retroactively to reflect the share split on February 22, 2010

 

(4)	Earnings per ADS is calculated based on each ADS representing two common shares.

 

(5)	Working capital equals current assets less current liabilities.

 

(6)	Total debt comprises loans, financings and short term and long term debentures. Amounts exclude loans from real   estate development partners.

 

(7)	Potential sales value is calculated by multiplying the number of units sold in a development by the unit sales price.

 

(8)	The units delivered in exchange for land pursuant to barter transactions are not included.

 

(9)	One square meter is equal to approximately 10.76 square feet.

 

(10)	Earnings per share is calculated from the number of common shares outstanding as at end of period.

 

The following table sets forth financial information as of and for the years ended December 31, 2008, 2007 and 2006 and have been prepared in accordance with Brazilian GAAP in effect at such time.  See “Presentation of Financial and Other Information.”  Significant changes were introduced to Brazilian GAAP in 2010 which were applied retroactively to January 1, 2009 but not to prior periods.  Therefore the financial information as of and for the years as of ended December 31, 2008, 2007 and 2006 is not comparable to the financing information as of and for the years ended December 31, 2010 and 2009. Certain information below is presented in accordance with US GAAP.

 

		As of and for the year ended December 31,
		2008 (1)				2007 (1)				2006 (1)
		(in thousands except per share, per ADS and operating data)(2)
Consolidated Income Statement data:
Brazilian GAAP:
Gross operating revenue		R$	1,805,468			R$	1,251,894			R$	681,791
Net operating revenue			1,740,404				1,204,287				648,158
Operating costs			(1,214,401	)			(867,996	)			(464,766	)
Gross profit			526,003				336,291				183,392
Operating expenses, net			(357,798	)			(236,861	)			(118,914	)
Financial income (expenses), net			7,815				28,628				(11,943	)
Income before income and social contribution taxes			176,020				128,058				52,535
Income and social contribution taxes			(43,397	)			(30,372	)			(8,525	)
Net income for the year			132,623				97,686				44,010
Net income for the year attributable to noncontrolling interest			(22,702	)			(6,046	)			—

 

 

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		As of and for the year ended December 31,
		2008 (1)				2007 (1)				2006 (1)
		(in thousands except per share, per ADS and operating data)(2)
Net income for the year attributable to owners of Gafisa S.A.			109,921				91,640				44,010
Share and ADS data(2):
Per common share data—R$ pre share:
Earnings (loss) per share—Basic			—				—				—
Earnings (loss) per share—Diluted			—				—				—
Weighted average number of shares outstanding—in thousands			—				—				—
Dividends and interest on equity declared			26,104				26,981				10,938
Earnings per share—R$ per share			0.8458				0.7079				0.4258
Number of common shares outstanding as at end of period			129,962,546				129,452,121				103,369,950
Earnings per ADS—R$ per ADS (3)			1.6916				1.4158				0.8516
US GAAP as restated:
Net operating revenue			1,306,627				997,975				659,514
Operating costs			(979,604	)			(817,770	)			(487,881	)
Gross profit			327,023				180,205				171,633
Operating expenses, net			(114,658	)			(190,430	)			(139,188	)
Financial income (expenses), net			76,653				31,629				4,022
Income before income taxes, equity in results			289,018				21,404				36,467
Taxes on income			(49,279	)			5,223				(11,776	)
Equity in results			29,873				18,997				894
Cumulative effect of a change in an accounting principle:			—				—				(157	)
Net income			269,612				45,624				25,428
Less: Net income attributable to noncontrolling interests			(17,485	)			(15,236	)			(1,125	)
Net income attributable to owners of Gafisa S.A. (4)			252,127				30,388				24,303
Per share and ADS data(2):
Per preferred share data—R$ per share:
Earnings per share—Basic			—				—				0.0759
Earnings per share—Diluted			—				—				0.0749
Weighted average number of shares outstanding – in thousands			—				—				3,402
Per common share data—R$ per share:
Earnings per share—Basic			0.9722				0.1206				0.1244
Earnings per share—Diluted			0.5726				0.0915				0.1229
Weighted average number of shares outstanding – in thousands			259,341				252,063				197,592
Dividends declared and interest on equity			26,104				26,981				10,938
Per ADS data—R$ per ADS(3):
Earnings per ADS—Basic (3)			1.9444				0.2411				0.2487
Earnings per ADS—Diluted (3)			1.1452				0.1830				0.2458
Weighted average number of ADSs outstanding – in thousands			129,671				126,032				98,796
Dividends and interest on equity declared			26,104				26,981				10,938
Balance sheet data:
Brazilian GAAP:
Cash, cash equivalents and short-term investments		R$	605,502			R$	517,420			R$	266,159
Current and non-current properties for sale			2,028,976				1,022,279				486,397
Working capital(5)			2,448,305				1,315,406				926,866
Total assets			5,538,858				3,004,785				1,558,590
Total debt(6)			1,552,121				695,380				295,445
Total equity			1,612,419				1,498,728				807,433
US GAAP:
Cash and cash equivalents			510,504				512,185				260,919
Current and non-current properties for sale			2,663,737				1,204,881				500,026
Working capital(5)			2,653,630				1,322,692				926,866
Total assets			5,381,926				2,878,331				1,558,590

 

 

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		As of and for the year ended December 31,
		2008 (1)				2007 (1)				2006 (1)
		(in thousands except per share, per ADS and operating data)(2)

Total debt(6)			1,525,138				686,524				289,416
Total Gafisa equity			1,465,866				1,264,919				793,539
Noncontrolling interests			420,165				29,156				1,050
Total equity			1,886,031				1,294,075				794,589
Consolidated Cash flow provided by (used in):
Brazilian GAAP
Operating activities			(812,512	)			(451,929	)			(271,188	)
Investing activities			(78,300	)			(149,290	)			(25,609	)
Financing activities			911,817				842,629				429,065
Operating data:
Number of new developments			64				53				30
Potential sales value(7)			2,763,043				2,235,928				1,005,069
Number of units launched(8)			10,963				10,315				3,052
Launched usable area (m2)(9) (10)			1,838,000				1,927,821				407,483
Sold usable area (m2)(9) (10)			1,339,729				2,364,173				357,723
Units sold			11,803				6,120				3,049

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(1)

Our Brazilian GAAP financial statements as of and for the years ended December 31, 2007 and 2006 reflect the changes introduced by Law 11,638/07 and the new accounting standards issued by the CPC in 2008, which we retroactively applied beginning on January 1, 2006.  The Brazilian GAAP financial information was restated to correct the accounting treatment for net income attributable to non-controlling interest related to an unincorporated venture to financial expenses.

 

(2)

On January 26, 2006, all our preferred shares were converted into common shares. On January 27, 2006, a stock split of our common shares was approved, giving effect to the split of one existing share into three newly issued shares, increasing the number of shares from 27,774,775 to 83,324,316. All US GAAP information relating to the numbers of shares and ADSs have been adjusted retroactively to reflect the share split on January 27, 2006. All US GAAP earnings per share and ADS amounts have been adjusted retroactively to reflect the share split on January 27, 2006. Brazilian GAAP earnings per share and ADS amounts have not been adjusted retroactively to reflect the share split on January 27, 2006.

 

(3)	Earnings per ADS is calculated based on each ADS representing two common shares.

 

(4)	The following table sets forth reconciliation from US GAAP net income to US GAAP net income available to common shareholders:

 

		As of and for the year ended December 31,
		2008				2007				2006
Reconciliation from US GAAP net income attributable to Gafisa to US GAAP net income available to common shareholders (Basic):
US GAAP net income (Basic)			252,127				30,388				24,303
Undistributed earnings for Preferred Shareholders (Basic earnings)			—				—				(258	)
US GAAP net income available to common shareholders (Basic earnings)			252,127				30,388				24,045
Reconciliation from US GAAP net income attributable to Gafisa to US GAAP net income available to common shareholders (Diluted):
US GAAP net income			243,880				24,443				24,303
Undistributed earnings for Preferred Shareholders (Diluted earnings)							—				(259	)
US GAAP net income available to common shareholders (Diluted earnings)			243,880				24,443				24,045

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(5)	Working capital equals current assets less current liabilities.

 

 

 

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(6)	Total debt comprises loans, financings and short term and long term debentures. Amounts exclude loans from real   estate development partners.

 

(7)	Potential sales value is calculated by multiplying the number of units sold in a development by the unit sales price.

 

(8)	The units delivered in exchange for land pursuant to barter transactions are not included.

 

(9)	One square meter is equal to approximately 10.76 square feet.

 

(10)	Does not include data for FIT, Tenda and Bairro Novo.

 

Exchange Rates

 

All transactions involving foreign currency in the Brazilian market, whether carried out by investors resident or domiciled in Brazil or investors resident or domiciled abroad, must now be conducted on the consolidated exchange market through institutions authorized by the Central Bank and subject to the rules of the Central Bank.

 

The Central Bank has allowed the real to float freely against the U.S. dollar since January 15, 1999. Since the beginning of 2001, the Brazilian exchange market has been increasingly volatile, and, until early 2003, the value of the real declined relative to the U.S. dollar, primarily due to financial and political instability in Brazil and Argentina. According to the Central Bank, in 2005, 2006 and 2007, however, the period-end value of the real appreciated in relation to the U.S. dollar 13.4%, 9.5% and 20.7%, respectively. In 2008, the period-end value of the real depreciated in relation to the U.S. dollar by 24.2%.   In 2009, the period-end value of the real appreciated in relation to the U.S. dollar by 34.2%. In 2010, the real appreciated by 4.3% against the U.S. dollar. On December 31, 2010, the period-end real /U.S. dollar exchange rate was R$1.666 per US$1.00. In 2011, the real depreciated by 11.2% against the U.S. dollar.  In the five-month period ended May 31, 2012, the real depreciated by 7.8% against the U.S. dollar.  On December 31, 2011, the period-end real /U.S. dollar exchange rate was R$1.8758 per US$1.00. Although the Central Bank has intervened occasionally to control unstable movements in the foreign exchange rates, the exchange market may continue to be volatile as a result of this instability or other factors, and, therefore, the real may substantially decline or appreciate in value in relation to the U.S. dollar in the future.

 

The following table shows the selling rate, expressed in reais per U.S. dollar (R$/US$), for the periods and dates indicated.

 

		Period-end				Average for period(1)				Low				High
		(per U.S. dollar)
Year Ended:
December 31, 2007			R$1.771				R$1.793				R$1.762				R$1.823
December 31, 2008			2.337				2.030				1.559				2.500
December 31, 2009			1.741				2.062				1.702				2.422
December 31, 2010			1.665				1.759				1.655				1.880
December 31, 2011			1.876				1.718				1.535				1.902
Month Ended:
October 2011			1.689				1.787				1.689				1.886
November 2011			1.811				1.810				1.727				1.894
December 2011			1.876				1.829				1.783				1.876
January 2012			1.739				1.804				1.739				1.868
February 2012			1.709				1.720				1.702				1.738
March 2012			1.822				1.774				1.715				1.833
April 2012			1.892				1.859				1.826				1.892
May 2012			2.022				1.998				1.915				2.082
June 2012			2.021				2.054				2.018				2.090

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(1)	Average of the lowest and highest rates in the periods presented.

 

Source: Central Bank.

 

On June 29, 2012, the selling rate was R$2.021 to US$1.00. The real /dollar exchange rate fluctuates and, therefore, the selling rate at June 29, 2012 may not be indicative of future exchange rates.

 

 

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B.           Capitalization and Indebtedness

 

Not applicable.

 

C.           Reasons for the Offer and Use of Proceeds

 

Not applicable.

 

D.           Risk Factors

 

This section is intended to be a summary of the more detailed discussion included elsewhere in this annual report. Our business, results of operations, financial condition or prospects could be adversely affected if any of these risks occurs, and as a result, the trading price of our common shares and ADSs could decline. The risks described below are those known to us and those that we currently believe may materially affect us.

 

Risks Relating to Our Business and to the Brazilian Real Estate Industry

 

Our business, results of operations, financial condition and the market price of our common shares or the ADSs may be adversely affected by weaknesses in general economic, real estate and other conditions.

 

The residential homebuilding and land development industry is cyclical and is significantly affected by changes in general and local economic conditions, such as:

 

·	employment levels;

 

·	population growth;

 

·	consumer demand, confidence, stability of income levels and interest rates;

 

·	availability of financing for land home site acquisitions and the availability of construction and permanent mortgages;

 

·	inventory levels of both new and existing homes;

 

·	supply of rental properties; and

 

·	conditions in the housing resale market.

 

Furthermore, the market value of undeveloped land, buildable lots and housing inventories held by us can fluctuate significantly as a result of changing economic and   real   estate market conditions. If there are significant adverse changes in economic or   real   estate market conditions, we will have to sell homes at a loss or hold land in inventory longer than planned.

 

For example, in 2008, the global financial crisis adversely impacted Brazil’s gross domestic product, or “GDP” resulting in a decrease in both the number of developments launched and the rate of sales of our units. Worldwide financial market volatility may also adversely impact government plans for the Brazilian real estate industry, which may have a material adverse effect on our business, our financial condition and results of operations.

 

The Brazilian   real   estate industry is highly competitive and fragmented. We compete with several developers on the basis of land availability and location, price, funding, design, quality, and reputation as well as for partnerships with other developers. Because our industry does not have high barriers to entry, new competitors, including international companies working in partnership with Brazilian developers, may enter into the industry, further intensifying this competition. Some of our current potential competitors may have greater financial and other resources than we do. Furthermore, a significant portion of our   real   estate development and construction activity is conducted in the states of São Paulo and Rio de Janeiro, areas where the   real   estate market is highly competitive due to a scarcity of properties in desirable locations and the relatively large number of local competitors. If we are not able to compete effectively, our business, our financial condition and the results of our operations could be adversely affected.

 

 

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Problems with the construction and timely completion of our real estate projects, as well as third party projects for which we have been hired as a contractor, may damage our reputation, expose us to civil liability and decrease our profitability.

 

The quality of work in the construction of our   real   estate projects and the timely completion of these projects are major factors that affect our reputation, and therefore our sales and growth. We may experience delays in the construction of our projects or there may be defects in materials and/or workmanship. Any defects could delay the completion of our   real estate projects, or, if such defects are discovered after completion, expose us to civil lawsuits by purchasers or tenants. These factors may also adversely affect our reputation as a contractor for third party projects, since we are responsible for our construction services and the building itself for five years. Construction projects often involve delays in obtaining, or the inability to obtain, permits or approvals from the relevant authorities. In addition, construction projects may also encounter delays due to adverse weather conditions, natural disasters, fires, delays in the provision of materials or labor, accidents, labor disputes, unforeseen engineering, environmental or geological problems, disputes with contractors and subcontractors, unforeseen conditions at construction sites, disputes with surrounding landowners, or other events. In addition, we may encounter previously unknown conditions at or near our construction sites that may delay or prevent construction of a particular project. If we encounter a previously unknown condition at or near a site, we may be required to correct the condition prior to continuing construction and there may be a delay in the construction of a particular project. The occurrence of any one or more of these problems in our   real   estate projects could adversely affect our reputation and our future sales.

 

We may incur construction and other development costs for a project that exceeds our original estimates due to increases over time in interest rates, real estate taxes or costs associated with materials and labor, among others. We may not be able to pass these increased costs on to purchasers. Construction delays, scarcity of skilled workers, default and or bankruptcy of third party contractors, cost overruns and adverse conditions may also increase project development costs. In addition, delays in the completion of a project may result in a delay in the commencement of cash flow, which would increase our capital needs.

 

Our inability to acquire adequate capital to finance our projects could delay the launch of new projects and adversely affect our business.

 

We expect that the continued expansion and development of our business will require significant capital, including working capital, which we may be unable to obtain on acceptable terms, or at all, to fund our capital expenditures and operating expenses, including working capital needs. We may fail to generate sufficient cash flow from our operations to meet our cash requirements. Furthermore, our capital requirements may vary materially from those currently planned if, for example, our revenues do not reach expected levels or we have to incur unforeseen capital expenditures and make investments to maintain our competitive position. If this is the case, we may require additional financing sooner than anticipated, or we may have to delay some of our new development and expansion plans or otherwise forgo market opportunities. Future borrowing instruments such as credit facilities are likely to contain restrictive covenants, particularly in light of the recent economic downturn and unavailability of credit, and/or may require us to pledge assets as security for borrowings under those facilities. Our inability to obtain additional capital on satisfactory terms may delay or prevent the expansion of our business, which would have an adverse effect on our business. As of December 31, 2010, our net debt level payable to venture partners (indebtedness from debentures, working capital, project financing and payables to venture partners balance, net of our cash position) was in excess of R$2,469 million: our cash and cash equivalents and short-term investments was in excess of R$1,201 million and our total debt was R$3,290 million and obligations to venture partners was R$0.4 million.

 

Changing market conditions may adversely affect our ability to sell our property inventories at expected prices, which could reduce our margins and adversely affect the market price of our common shares or the ADSs.

 

We must constantly locate and acquire new tracts of land for development and development home sites to support our homebuilding operations. There is a lag between the time we acquire land for development or development home sites and the time that we can bring the properties to market and sell homes. As a result, we face the risk that demand for housing may decline, costs of labor or materials may increase, interest rates may increase, currencies may fluctuate and political uncertainties may occur during this period and that we will not be able to dispose of developed properties at expected prices or profit margins or within anticipated time frames or at all. Significant expenditures associated with investments in   real   estate, such as maintenance costs, construction costs

 

 

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and debt payments, cannot generally be reduced if changes in the economy cause a decrease in revenues from our properties. The market value of property inventories, undeveloped tracts of land and desirable locations can fluctuate significantly because of changing market conditions. In addition, inventory carrying costs (including interest on funds unused to acquire land or build homes) can be significant and can adversely affect our performance. Because of these factors, we may be forced to sell homes and other real properties at a loss or for prices that generate lower profit margins than we anticipate. We may also be required to make material write-downs of the book value of our   real   estate assets in accordance with Brazilian and US GAAP if values decline. The occurrence of any of these factors may adversely affect our business and results of operations.

 

We are subject to risks normally associated with permitting our purchasers to make payments in installments; if there are higher than anticipated defaults or if our costs of providing such financing increase, then our profitability could be adversely affected.

 

As is common in our industry, we and the special purpose entities, or “SPEs,” in which we participate permit some purchasers of the units in our projects to make payments in installments. As a result, we are subject to the risks associated with this financing, including the risk of default in the payment of principal or interest on the loans we make as well as the risk of increased costs for the funds raised by us. In addition, our term sales agreements usually bear interest and provide for an inflation adjustment. If the rate of inflation increases, the loan payments under these term sales agreements may increase, which may lead to a higher rate of payment default. If the default rate among our purchasers increases, our cash generation and, therefore, our profitability could be adversely affected.

 

In the case of a payment default after the delivery of financed units, Brazilian law provides for the filing of a collection claim to recover the amount owed or to repossess the unit following specified procedures. The collection of overdue amounts or the repossession of the property is a lengthy process and involves additional costs. It is uncertain that we can recover the full amount owed to us or that if we repossess a unit, we can re-sell the unit at favorable terms or at all.

 

The affordable entry-level segment is strongly dependent on the availability of financing, including from the Minha Casa, Minha Vida program and from Caixa Econômica Federal , or “CEF.” The scarcity of financing, the increase in interest rates, the reduction in financing terms, share of financing per unit and subsidies or any other modification in other financing terms and conditions may adversely affect the performance of the affordable entry-level segment.

 

If we or the SPEs in which we participate fail to comply with or become subject to more onerous government regulations, our business could be adversely affected.

 

We and the SPEs in which we participate are subject to various federal, state and municipal laws and regulations, including those relating to construction, zoning, soil use, environmental protection, historical sites, consumer protection and antitrust. We are required to obtain, maintain and renew on a regular basis permits, licenses and authorizations from various governmental authorities in order to carry out our projects. We strive to maintain compliance with these laws and regulations. If we are unable to achieve or maintain compliance with these laws and regulations, we could be subject to fines, project shutdowns, cancellation of licenses and revocation of authorizations or other restrictions on our ability to develop our projects, which could have an adverse impact on our business, financial condition and results of operations. In addition, our contractors and subcontractors are required to comply with various labor and environmental regulations and tax and other regulatory obligations. Because we are secondary obligors to these contractors and subcontractors, if they fail to comply with these regulations or obligations, we may be subject to penalties by the relevant regulatory bodies.

 

Regulations governing the Brazilian   real   estate industry as well as environmental laws have tended to become more restrictive over time. We cannot assure you that new and stricter standards will not be adopted or become applicable to us, or that stricter interpretation of existing laws and regulations will not be promulgated. Furthermore, we cannot assure you that any if enacted, such more onerous regulations would not cause delays in our projects or that we would be able to secure the relevant permits and licenses. Any such event may require us to spend additional funds to achieve compliance with such new rules and therefore make the development of our projects more costly, which can adversely affect our business and the market price of our common shares or the ADSs.

 

 

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Scarcity of financing and/or increased interest rates could cause a decrease in the demand for real estate properties, which could negatively affect our results of operations, financial condition and the market price of our common shares or the ADSs.

 

The scarcity of financing and/or an increase in interest rates or in other indirect financing costs may adversely affect the ability or willingness of prospective buyers to purchase our products and services, especially prospective low income buyers. A majority of the bank financing obtained by prospective buyers comes from the Housing Financial System ( Sistema Financeiro de Habitação ), or “SFH,” which is financed by funds raised from savings account deposits. The Brazilian Monetary Council ( Conselho Monetário Nacional ), or the “CMN,” often changes the amount of such funds that banks are required to make available for   real   estate financing. If the CMN restricts the amount of available funds that can be used to finance the purchase of   real   estate properties, or if there is an increase in interest rates, there may be a decrease in the demand for our residential and commercial properties and for the development of lots of land, which may adversely affect our business, financial condition and results of operations.

 

We and other companies in the real estate industry frequently extend credit to our clients. As a result, we are subject to risks associated with providing financing, including the risk of default on amounts owed to us, as well as the risk of increased costs of funding our operations. An increase in inflation would raise the nominal amounts due from our clients, pursuant to their sales agreements, which may increase their rates of default. If this were to occur, our cash generation and, therefore, our operating results may be adversely affected. In addition, we obtain financings from financial institutions at different rates and subject to different indexes and may be unable to match our debt service requirements with the terms of the financings we grant to our clients. The mismatch of rates and terms between the funds we obtain and the financings we grant may adversely affect us.

 

Some of our subsidiaries use significant funding from the home financing programs of the CEF, including the Minha Casa, Minha Vida program, and, as a result, are subject to institutional and operating changes in the CEF and enhance customer risk profiles associated with clients eligible for these programs.

 

The CEF has several home financing programs for the low-income segment, which are used by Construtora Tenda S.A., or Tenda, to fund its activities. The CEF is a state-owned financial institution and is subject to political influence, which may change the availability or the terms of the home financing programs. The cancelation, suspension, interruption or a significant change in such programs may affect our growth estimates and our business. Furthermore, the suspension, interruption or slowdown in the CEF’s activities to approve projects, grant financing to our clients and evaluate construction process, among other activities, may adversely impact our business, financial position, results of operations and the market price of our common shares and ADSs.

 

Also, in March 2009, the Brazilian government announced the creation of a public housing program called “ Minha Casa, Minha Vida ,” with an announcement in 2010 of a second phase of the program from 2011 until 2014, that aims to finance two million houses, twice as much as was financed in the first phase of the program. The Program aims to reduce the housing deficit in Brazil, which as of 2010 was estimated to be 5.5 million houses. The program calls for government investment of more than R$30 billion in the first phase and more than R$72 billion during the second phase, to be made through financing available from   CEF, and is focused on building one million houses for families with monthly incomes of up to ten times the minimum wage. Under the second phase of this program, 800 thousand houses will be built for families with monthly incomes of three to ten times the minimum wage, which are our target clients through our Tenda brand. This program offers, among other things, long-term financing, lower interest rates, greater share of the property financed to the client, subsidies based on income level, lower insurance costs and the creation of a guarantor fund to refinance debt in case of unemployment.

 

Financing to the affordable entry-level segment is primarily made available through the CEF. Any changes in such financing would force us to seek new sources of financing and the availability of funds under similar conditions is limited, which would have an adverse effect on our results of operations.

 

We may sell portions of our landbank located in nonstrategic regions, which is in line with our future strategies.  As a result, we will prepare an annual analysis for impairment of our landbank.

 

As part of our strategy to focus our future operations on regions where our developments have historically been successful, and where we believe there is homebuilding potential based on market opportunities, we may sell portions of our landbank located outside of these regions.  As a result, we will prepare an annual impairment

 

 

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analysis of our landbank based on the acquisition cost of the land in our portfolio.  As of December 31, 2010, there was no landbank classified as available for sale and there were no impairment indicators identified, thus no provision for impairment was required at this date. During 2011 we made a decision to sell a portion of our landbank and our evaluation of impairment resulted in recording a provision for impairment in the amount of R$92.1 million.

 

The real estate industry is dependent on the availability of credit, especially in the affordable entry-level segment.

 

One of our main strategies is to expand our operations to the affordable entry-level segment in which clients are strongly dependent on bank financing to purchase homes. This financing may not be available on favorable terms to our clients, or at all. Changes in the Real Estate Financing System ( Sistema de Financiamento Imobiliário ), or “SFI”, and in the SFH rules, the scarcity of available resources or an increase in interest rates may affect the ability or desire of such clients to purchase homes, consequently affecting the demand for homes. These factors would have a material adverse effect on our business, financial condition and results of operations.

 

Because we recognize sales revenue from our real estate properties under the percentage of completion method of accounting under Brazilian GAAP as generally adopted by construction companies and under US GAAP, when we meet the conditions specified by the respective accounting standards, an adjustment in the cost of a development project may reduce or eliminate previously reported revenue and income.

 

We recognize revenue from the sale of units in our properties based on the percentage of completion method of accounting, which requires us to recognize revenue as we incur the cost of construction. Total cost estimates are revised on a regular basis as the work progresses, and adjustments based upon such revisions are reflected in our results of operations in accordance with the method of accounting used. To the extent that these adjustments result in an increase, a reduction or an elimination of previously reported income, we will recognize a credit to or a charge against income, which could have an adverse effect on our previously reported revenue and income.

 

Our participation in SPEs creates additional risks, including potential problems in our financial and business relationships with our partners.

 

We invest in SPEs with other   real   estate developers and construction companies in Brazil. The risks involved with SPEs include the potential bankruptcy of our SPE partners and the possibility of diverging or inconsistent economic or business interests between us and our partners. If an SPE partner fails to perform or is financially unable to bear its portion of the required capital contributions, we could be required to make additional investments and provide additional services in order to make up for our partner’s shortfall. In addition, under Brazilian law, the partners of an SPE may be liable for certain obligations of an SPE, including with respect to tax, labor, environmental and consumer protection laws and regulations. These risks could have an adverse effect on us.

 

We may experience difficulties in finding desirable land tracts and increases in the price of land may increase our cost of sales and decrease our earnings.

 

Our continued growth depends in large part on our ability to continue to acquire land and to do so at a reasonable cost. As more developers enter or expand their operations in the Brazilian home building industry, land prices could rise significantly and suitable land could become scarce due to increased demand, decreased supply or both. A resulting rise in land prices may increase our cost of sales and decrease our earnings. We may not be able to continue to acquire suitable land at reasonable prices in the future, which could adversely affect our business.

 

The market value of our inventory of undeveloped land may decrease, thus adversely affecting our results of operations.

 

We own tracts of undeveloped land that are part of our inventory for future developments. We also intend to increase our inventory and acquire larger tracts of land. The market value of these properties may significantly decrease from the acquisition date to the development of the project as a result of economic downturns or market conditions, which would have an adverse effect on our results of operations.

 

 

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Increases in the price of raw materials and fixtures may increase our cost of sales and reduce our earnings.

 

The basic raw materials and fixtures used in the construction of our homes include concrete, concrete block, steel, aluminum, bricks, windows, doors, roof tiles and plumbing fixtures. Increases in the price of these and other raw materials, including increases that may occur as a result of shortages, duties, restrictions, or fluctuations in exchange rates, could increase our cost of sales. Any such cost increases could reduce our earnings and adversely affect our business.

 

If we are not able to implement our growth strategy as planned, or at all, our business, financial condition and results of operations could be adversely affected.

 

We plan to grow our business by selectively expanding to meet the growth potential of the Brazilian residential market. We believe that there is increasing competition for suitable   real   estate development sites. We may not find suitable additional sites for development of new projects or other suitable expansion opportunities.

 

We anticipate that we will need additional financing to implement our expansion strategy and we may not have access to the funding required for the expansion of our business or such funding may not be available to us on acceptable terms. We may finance the expansion of our business with additional indebtedness or by issuing additional equity securities. We could face financial risks and covenant restrictions associated with incurring additional indebtedness, such as reducing our liquidity and access to financial markets and increasing the amount of cash flow required to service such indebtedness, or associated with issuing additional stock, such as dilution of ownership and earnings.

 

There are risks for which we do not have insurance coverage or the insurance coverage we have in place may not be sufficient to cover damages that we may suffer.

 

We maintain insurance policies with coverage for certain risks, including damages arising from engineering defects, fire, landslides, storms, gas explosions and civil liabilities stemming from construction errors. We believe that the level of insurance we have contracted for accidents is consistent with market practice. However, there can be no assurance that such policies will always be available or provide sufficient coverage for certain damages. In addition, there are certain risks that may not be covered by such policies, such as damages resulting from war, force majeure or the interruption of certain activities and, therefore any requirement to pay amounts not covered by our insurance may have a negative impact on our business and our results of operations. Furthermore, we are required to pay penalties and other fines whenever there is delay in the delivery of our units, and such penalties and fines are not covered by our insurance policies.

 

Moreover, we cannot guarantee that we will be able to renew our current insurance policies under favorable terms, or at all. As a result, insufficient insurance coverage or our inability to renew existing insurance policies could have an adverse effect on our financial condition and results of operations.

 

Our level of indebtedness could have an adverse effect on our financial health, diminish our ability to raise additional capital to fund our operations and limit our ability to react to changes in the economy or the real estate industry.

 

As of December 31, 2010, our total debt and investor obligations was R$3.7 billion and our short-term debt was R$0.8 billion. In addition, as of December 31, 2010, our cash and cash equivalents and short-term investments available was R$1.2 billion and our net debt represented 68.0% of our shareholders’ equity including the noncontrolling interest. Our indebtedness has variable interest rates. A hypothetical 1% adverse change in interest rates would have had an annualized unfavorable impact of approximately R$36.7 million on our earnings and cash flows, based on the net debt level as of December 31, 2010.

 

Our level of indebtedness could have important negative consequences for us. For example, it could:

 

·	require us to dedicate a large portion of our cash flow from operations to fund payments on our debt, thereby reducing the availability of our cash flow to fund working capital, capital expenditures and other general corporate purposes;

 

 

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·	increase our vulnerability to adverse general economic or industry conditions;

 

·	limit our flexibility in planning for, or reacting to, changes in our business or the industry in which we operate;

 

·	limit our ability to raise additional debt or equity capital in the future or increase the cost of such funding;

 

·	restrict us from making strategic acquisitions or exploring business opportunities; and

 

·	place us at a competitive disadvantage compared to our competitors that have less debt.

 

Certain of our debt agreements contain financial and other covenants and any default under such debt agreements may have a material adverse effect on our financial condition and cash flows.

 

Certain of our existing debt agreements contain restrictions and covenants and require the maintenance or satisfaction of specified financial ratios, ratings and tests. Our ability to meet these financial ratios, ratings and tests can be affected by events beyond our control and we cannot assure that we will meet those tests, especially given the lower yield environment in which the industry currently operates. Failure to meet or satisfy any of these covenants, financial ratios or financial tests could result in an event of default under these and other agreements, as a result of cross-default provisions. If we are unable to comply with our debt covenants, we could be forced to seek waivers. We cannot guarantee that we will be successful in obtaining any waivers or renewing existing waivers. As of December 31, 2011, we and our subsidiary Tenda were in default on the contractual covenants provided for in certain of our debentures, for which we obtained a waiver and renegotiated certain covenant ratios in March 2012. In each of January, April and June 2012, we were in default on restrictive covenants for a bank loan ( cédula de crédito imobiliário ) or CCB in the amount of R$100 million as a result of a downgrade in our corporate rating. In each instance, we obtained a waiver to avoid early redemption of this indebtedness.  If we are unable to renew these and/or receive other waivers, a large portion of our debt could be subject to acceleration. While we do not believe such occurrence to be likely, if it were to happen, we could be required to renegotiate, restructure or refinance our indebtedness, seek additional equity capital or sell assets, which could materially and adversely affect us.

 

We may not be successful in managing and integrating the businesses and activities of Alphaville, Cipesa and Tenda.

 

We have acquired controlling stakes in three Brazilian real estate companies: (1) Alphaville Urbanismo S.A., one of the largest residential community development companies in Brazil; (2) Cipesa Empreendimentos Imobiliários S.A., the leading homebuilder in the State of Alagoas; and (3) Construtora Tenda S.A., a residential homebuilder with a focus on the affordable entry-level segment. However, we may not be successful in managing and integrating these companies, which could adversely affect our business.

 

Failures or delays by our third party contractors may adversely affect our reputation and business and expose us to civil liability.

 

We engage third party contractors to provide services for our projects. Therefore, the quality of work in the construction of our real estate projects and the timely completion of these projects may depend on factors that are beyond our control, including the quality and timely delivery of building materials and the technical skills of the outsourced professionals. Such outsourcing may delay the identification of construction problems and, consequently, the correction of such problems. Any failures, delays or defects in the services provided by our third party contractors may adversely affect our reputation and relationship with our clients, which would adversely affect our business and results of operations.

 

Unfavorable judicial or administrative decisions may adversely affect us.

 

We currently are, and may be in the future, defendants in several judicial and administrative proceedings related to civil, labor and tax matters. We cannot assure you that we will obtain favorable decisions in such proceedings, that such proceedings will be dismissed, or that our provisions for such proceedings are sufficient in the event of an unfavorable decision. Unfavorable decisions that impede our operations, as initially planned, or that result in a claim amount that is not adequately covered by provisions in our balance sheet, may adversely affect our business and financial condition.

 

We may be held responsible for labor liabilities of our third party contractors.

 

We may be held responsible for the labor liabilities of our third party contractors and obligated to pay for fines imposed by the relevant authorities in the event that our third party contractors do not comply with applicable legislation. As of December 31, 2010, we had a total of R$80.7 million of labor liabilities and provisions for such liabilities in the amount of R$23.8 million. 86% of the labor claims were commenced by employees of our third party contractors. An adverse result in such claims would cause an adverse effect on our business.

 

Failure to keep members of our senior management and/or our ability to recruit and retain qualified professionals may have a material adverse effect on our business, financial condition and results of operations.

 

Our future success depends on the continued service and performance of our senior management and our ability to recruit and retain qualified professionals. None of the members of our senior management are bound to long-term labor contracts or non-compete agreements and there can be no assurance that we will successfully recruit and retain qualified professionals to our management as our business grows. The loss of any key professionals or our inability to recruit or retain qualified professionals may have an adverse effect on our business, financial condition and results of operations.

 

We may be unable to successfully implement our strategy of reorganizing our operational organization and performance.

 

We intend to carry out a strategy seeking to reorganize our operational organization and promote performance. This strategy includes the implementation of a new management structure that, among other things, assigns each brand manager direct responsibility for the operating performance of each brand, and implementing a corporate culture shift within our Tenda brand focused on aligning incentives to improve project execution. This strategy is intended to pursue the goal of helping to produce more stable cash flow and contributing toward a return to sustainable growth. However, there we can be no assurance that we will be able to successfully implement such strategy, and therefore we may also be unsuccessful in achieving such goals behind such strategy, which could result in a material adverse effect with respect to our business, financial condition or results of operations.

 

 

 

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Changes in Brazilian GAAP due to its migration towards IFRS may adversely affect our results.

 

Brazilian corporate law was amended by Law No. 11,638 dated December 28, 2007 in order to facilitate the convergence of Brazilian GAAP with IFRS, and thereafter, the CPC issued new accounting standards that converged adapted Brazilian GAAP to IFRS.

 

Through December 31, 2009, our financial statements were prepared in accordance with Brazilian GAAP in effect at the time.  We elected January 1, 2009 as a transition date to full adoption of the new Brazilian GAAP as generally adopted by construction companies in Brazil, and amended certain accounting practices in the Brazilian GAAP financial statements.  Our financial statements as of and for the year ended December 31, 2009 have been restated to reflect these adjustments.  As the prior period Brazilian GAAP financial statements were not adjusted to the new Brazilian GAAP as generally adopted by construction companies in Brazil, these financial statements are not comparable to the restated financial statements as at and for the years ended December 31, 2010 and 2009 (restated). Guideline OCPC 04 - Application of the Technical Interpretation ICPC 02 to the Brazilian Real Estate Development Entities and CPC 37 has been applied in preparing the financial statements for the years ended December 31, 2010 and 2009 (restated).

 

Certain matters related to the meaning and application of the continuous transfer of the risks, benefits and control over the real estate unit sales are under consideration by the International Financial Reporting Interpretation Committee or “IFRIC.” The results of this consideration may cause us to revise our accounting practices related to the recognition of our revenues.

 

There can be no assurance that these modifications will not materially and adversely affect our financial statements, on a retrospective or prospective basis, in particular the recognition of our revenues and related costs and our financial position and results of operations and impact the comparability of our financial statements for future periods with our financial statements presented herein and our financial covenants as defined in our credit facilities.

 

Material weaknesses identified in our internal control over financial reporting could result in a material misstatement in our financial statements as well as result in our inability to file periodic reports within the timeframes required by federal securities laws, which could have a material adverse effect on our business and stock price.

 

We are required to design, implement and maintain effective controls over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of a company’s annual or interim financial statements will not be prevented or detected on a timely basis.

 

In connection with the preparation of our financial statements as of and for the year ended December, 31, 2010, we identified material weaknesses as discussed more fully in Item 15 regarding the following:

 

·	revenue recognition under U.S. GAAP principally related to evaluation of the contractual  provisions existing within our sales contracts that provide for a potential refund to our customers and classification of certain items in both the income statement and balance sheet;

 

·	budgets of the costs of works in progress for both Brazilian and U S GAAP where we did not identify the adjustments to budgets in connection with our revenue recognition accounting;

 

·	cash equivalents classification under U.S. GAAP;

 

·	business combination accounting under U.S. GAAP related to accounting for goodwill and related income taxes and the purchase obligation for the non-controlling interest related to the Alphaville Urbanismo S.A. purchase contract;

 

·	income tax accounting in respect to deferred tax asset realization assessment, presentation net and classification of presumed income tax payable; and

 

·	financial statement closing process as related to consolidation and other matters.

 

 

 

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Failure to remediate timely any identified deficiencies in internal control could cause us to spend significant resources and costs in an attempt to complete remediation and ensure compliance with our reporting obligations. The rules of the SEC require that we file periodic reports containing our financial statements within a specified time following the completion of annual fiscal periods, and we were not in compliance with these timely filing requirements with respect to our 2010 and 2011 annual reports on Form 20-F. This and any future failure by us to timely file our periodic reports with the SEC may result in a number of adverse consequences that could materially and adversely affect our business, including, without limitation, potential action by the SEC against us, shareholder lawsuits, delisting of our stock and general damage to our reputation.

 

Risks Relating to Brazil

 

Brazilian economic, political and other conditions, and Brazilian government policies or actions in response to these conditions, may negatively affect our business and results of operations and the market price of our common shares or the ADSs.

 

The Brazilian economy has been characterized by frequent and occasionally extensive intervention by the Brazilian government and unstable economic cycles. The Brazilian government has often changed monetary, taxation, credit, tariff and other policies to influence the course of the Brazilian economy. For example, the government’s actions to control inflation have at times involved setting wage and price controls, blocking access to bank accounts, imposing exchange controls and limiting imports into Brazil. We have no control over, and cannot predict, what policies or actions the Brazilian government may take in the future.

 

Our business, results of operations, financial condition and prospects, as well as the market prices of our common shares or the ADSs, may be adversely affected by, among others, the following factors:

 

·	exchange rate movements;

 

·	exchange control policies;

 

·	expansion or contraction of the Brazilian economy, as measured by rates of GDP;

 

·	inflation;

 

·	tax policies;

 

·	other economic, political, diplomatic and social developments in or affecting Brazil;

 

·	interest rates;

 

·	energy shortages;

 

·	liquidity of domestic capital and lending markets; and

 

·	social and political instability.

 

Uncertainty over whether the Brazilian government may implement changes in policy or regulations may contribute to economic uncertainty in Brazil and to heightened volatility in the Brazilian securities markets as well as securities issued abroad by Brazilian issuers. As a result, these uncertainties and other future developments in the Brazilian economy may adversely affect us and our business and results of operations and the market price of our common shares and the ADSs.

 

 

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Inflation, and government measures to curb inflation, may adversely affect the Brazilian economy, the Brazilian securities market, our business and operations and the market prices of our common shares or the ADSs.

 

At times in the past, Brazil has experienced high rates of inflation. According to the General Market Price Index ( Índice Geral de Preços—Mercado ), or “IGP-M”, inflation rates in Brazil were 3.8% in 2006, 7.8% in 2007, 9.8% in 2008, (1.7)% in 2009, 11.3% in 2010, 5.1% in 2011 and 2.5% in the five month period ended May, 2012. In addition, according to the Expanded Consumer Price Index ( Índice de Preços ao Consumidor Ampliado ), or “IPCA,” Brazilian consumer price inflation

rates were 3.1% in 2006, 4.5% in 2007, 5.9% in 2008, 4.3% in 2009 and 5.9% in 2010, 6.5% in 2011 and 2.2% in the five month period ended May, 2012. Our term sales agreements usually provide for an inflation adjustment linked to the National Construction Cost Index ( Índice Nacional de Custo de Construção ), or “INCC”. The INCC increased by 6.2% in 2007, 11.9% in 2008, 3.14 % in 2009, 7.77% in 2010, 7.49% in 2011 and 4.39% in the five month period ended May, 2012. The Brazilian government’s measures to control inflation have often included maintaining a tight monetary policy with high interest rates, thereby restricting availability of credit and reducing economic growth. Inflation, actions to combat inflation and public speculation about possible additional actions have also contributed materially to economic uncertainty in Brazil and to heightened volatility in the Brazilian securities markets.

 

Brazil may experience high levels of inflation in future periods. Periods of higher inflation may slow the rate of growth of the Brazilian economy, which could lead to reduced demand for our products in Brazil and decreased net sales. Inflation is also likely to increase some of our costs and expenses, which we may not be able to pass on to our customers and, as a result, may reduce our profit margins and net income. In addition, high inflation generally leads to higher domestic interest rates, and, as a result, the costs of servicing our reais -denominated debt may increase, resulting in lower net income. Inflation and its effect on domestic interest rates can, in addition, lead to reduced liquidity in the domestic capital and lending markets, which could affect our ability to refinance our indebtedness in those markets. In addition, increases in inflation rates would increase the outstanding debt of our customers, which could increase default levels and affect our cash flows. Any decline in our net operating revenue or net income and any deterioration in our financial condition would also likely lead to a decline in the market price of our common shares and the ADSs.

 

Social, political and economic events and the perception of risks, especially in other emerging economies, may adversely affect the Brazilian economy, and consequently, our business, financial condition, results of operations and the market price of our securities.

 

The Brazilian capital markets are influenced by the Brazilian market and economic conditions and, to a certain extent, by the conditions in other Latin American countries and other emerging market countries. Investors’ reactions to developments in certain countries may have an adverse effect on the market value of the securities of Brazilian issuers. Crises in other Latin American and emerging market countries normally trigger a significant outflow of funds and the reduction of foreign investment in Brazil. For example, in 2001 Argentina announced a moratorium on its public debt after a recession and a period of political instability, which affected investor perceptions towards the Brazilian capital markets for many years. Crises in other Latin American and emerging market countries may diminish investor interest in the securities of Brazilian issuers, including ours, which could negatively affect the market price of our common shares.

 

The market for securities issued by Brazilian companies is influenced, to a varying degree, by international economic and market conditions generally, especially in the United States. The prices of shares traded on the Sao

Paulo Stock Exchange ( BM&F Bovespa S.A. – Bolsa de Valores Mercadorias e Futuros ), or the “BM&FBOVESPA” have been historically affected by the fluctuation of interest rates and stock exchange inde xes in the United States. Events in other countries or capital markets could have an adverse effect on the price of our shares, which could make it more difficult for us to access the capital markets and obtain financing on acceptable terms in the future, or at all.

 

Fluctuations in interest rates may have an adverse effect on our business and the market prices of our common shares and the ADSs.

 

The Central Bank establishes the basic interest rate target for the Brazilian financial system by reference to the level of economic growth of the Brazilian economy, the level of inflation and other economic indicators. Debts of companies in the real estate industry, including ours, are subject to the fluctuation of market interest rates, as established by the Central Bank. Should such interest rates increase, the costs relating to the service of our debt obligations would also increase.

 

 

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As of December 31, 2010 our indebtedness was denominated in reais and subject to Brazilian floating interest rates, such as the Reference Interest Rate ( Taxa Referencial ), or “TR,” and the Interbank Deposit Certificate Rate ( Certificado de Depósito Interbancário ), or “CDI rate.” Any increase in the TR rate or the CDI rate may have an adverse impact on our financial expenses, our results of operations and on the market price of our common shares or the ADSs. We are not a party to any hedging instruments with respect to our indebtedness.

 

Restrictions on the movement of capital out of Brazil may adversely affect your ability to receive dividends and distributions on the ADSs and on our common shares, or the proceeds of any sale of our common shares.

 

Brazilian law permits the Brazilian government to impose temporary restrictions on conversions of Brazilian currency into foreign currencies and on remittances to foreign investors of proceeds from their investments in Brazil whenever there is a serious imbalance in Brazil’s balance of payments or there are reasons to expect a pending serious imbalance. The Brazilian government last imposed remittance restrictions for approximately six months in 1989 and early 1990. The Brazilian government may take similar measures in the future. Any imposition of restrictions on conversions and remittances could hinder or prevent holders of our common shares or the ADSs from converting into U.S. dollars or other foreign currencies and remitting abroad dividends, distributions or the proceeds from any sale in Brazil of our common shares. Exchange controls could also prevent us from making payments on our U.S. dollar-denominated debt obligations and hinder our ability to access the international capital markets. As a result, exchange controls restrictions could reduce the market prices of our common shares and the ADSs.

 

Changes in tax laws may increase our tax burden and, as a result, adversely affect our profitability.

 

The Brazilian government regularly implements changes to tax regimes that may increase our and our customers’ tax burdens. These changes include modifications in the rate of assessments and, on occasion, enactment of temporary taxes, the proceeds of which are earmarked for designated governmental purposes. In April 2003, the Brazilian government presented a tax reform proposal, which was mainly designed to simplify tax assessments, to avoid internal disputes within and between the Brazilian states and municipalities, and to redistribute tax revenues. The tax reform proposal provided for changes in the rules governing the federal Social Integration Program ( Programa de Integração Social ), or “PIS,” the federal Contribution for Social Security Financing ( Contribuição para Financiamento da Seguridade Social ), or “COFINS,” the state Tax on the Circulation of Merchandise and Services ( Imposto Sobre a Circulação de Mercadorias e Serviços ), or “ICMS,” and other taxes. The effects of these proposed tax reform measures and any other changes that result from enactment of additional tax reforms have not been, and cannot be, quantified. However, some of these measures, if enacted, may result in increases in our overall tax burden, which could negatively affect our overall financial performance.

 

Risks Relating to Our Common Shares and the ADSs

 

International economic and market conditions, especially in the United States, may adversely affect the market price of the ADSs.

 

The market for securities issued by Brazilian companies is influenced, to a varying degree, by international economic and market conditions generally. Because our ADSs are listed on the New York Stock Exchange, or the “NYSE,” adverse market conditions and economic and/or political crises, especially in the United States, such as the subprime mortgage lending crisis in 2007 and 2008 and the financial and credit crises in 2008, have at times resulted in significant negative impacts on the market price of our ADSs. Despite the fact that our clients, whether financed by us or by Brazilian banks through resources obtained in the local market, are not directly exposed to the mortgage lending crisis in the United States, there are still uncertainties as to whether such crisis may indirectly affect homebuilders worldwide. The uncertainties generated by the subprime crisis may affect the market prices of our ADSs 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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Developments and the perception of risks in other countries, especially emerging market countries, may adversely affect the market prices of our common shares and the ADSs.

 

The market for securities issued by Brazilian companies is influenced, to varying degrees, by economic and market conditions in other emerging market countries, especially other Latin American countries. Although economic conditions are different in each country, the reaction of investors to developments in one country may cause the capital markets in other countries to fluctuate. Developments or adverse economic conditions in other emerging market countries have at times resulted in significant outflows of funds from, and declines in the amount of foreign currency invested in, Brazil. For example, in 2001, after a prolonged recession, followed by political instability, Argentina announced that it would no longer continue to service its public debt. The economic crisis in Argentina negatively affected investors’ perceptions of Brazilian securities for several years. Economic or political crises in Latin America or other emerging markets may significantly affect perceptions of the risk inherent in investing in the region, including Brazil.

 

The Brazilian economy is also affected by international economic and general market conditions, especially economic and market conditions in the United States. Share prices on the BM&FBOVESPA for example, have historically been sensitive to fluctuations in U.S. interest rates as well as movements of the major U.S. stock indexes, particularly in the current worldwide economic downturn. Developments in other countries and securities markets could adversely affect the market prices of our common shares and the ADSs 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.

 

The relative volatility and the lack of liquidity of the Brazilian securities market may adversely affect you.

 

The Brazilian securities market is substantially smaller, less liquid, more concentrated and more volatile than major securities markets in the United States. This may limit your ability to sell our common shares and the common shares underlying your ADSs at the price and time at which you wish to do so. The BM&FBOVESPA, the only Brazilian stock exchange, had a market capitalization of approximately US$1.4 trillion as of March 31, 2012 and an average daily trading volume of US$3.5 billion for 2012. In comparison, the NYSE had a domestic market capitalization of US$12.4 trillion (excluding funds and non-U.S. companies) as of March 31, 2012 and an average daily trading volume of approximately US$45 billion for 2012.

 

There is also a large concentration in the Brazilian securities market. The ten largest companies in terms of market capitalization represented 44.3% of the aggregate market capitalization of the BM&FBOVESPA as of March 31, 2012. The top ten stocks in terms of trading volume accounted for 44.3% of all shares traded on the BM&FBOVESPA in 2010. Gafisa’s average daily trading volume on the BM&FBOVESPA and in the NYSE in 2012 was US$8.9 million and US$2.4 million, respectively.

 

Shares eligible for future sale may adversely affect the market value of our common shares and the ADSs.

 

Certain of our shareholders have the ability, subject to applicable Brazilian laws and regulations and applicable securities laws in the relevant jurisdictions, to sell our shares and the ADSs. We cannot predict what effect future sales of our shares or ADSs may have on the market price of our shares or the ADSs. Future sales of substantial amounts of such shares or the ADSs, or the perception that such sales could occur, could adversely affect the market prices of our shares or the ADSs.

 

The economic value of your investment in our company may be diluted.

 

We may need additional funds in the future, and as a result, we may issue additional common shares and/or convertible securities. Any additional funds obtained by such a capital increase may dilute your interest in our company. We will acquire the remaining 20% of Alphaville’s shares that we currently do not own through the issuance of an estimated 70,251,551 shares, which we intend to complete by the first semester of 2012, as per material fact issued on June 8, 2012. As a result of these new issuances of shares, you may experience additional dilution of your investment in our company. See “Item 4. Information on the Company—A. History and Development of the Company.”

 

 

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

 

According to our by-laws, we must generally pay our shareholders at least 25% of our annual net profit as dividends or interest on shareholders’ equity, as calculated and adjusted under the Brazilian corporate law method. This adjusted net profit may used to absorb losses or for the payment of statutory participation on profits to debenture holders, employees or members of our management, which would ultimately reduce the amount available to be paid as dividends or interest on shareholders’ equity. Additionally, the Brazilian corporate law allows a publicly traded company like us to suspend the mandatory distribution of dividends in any particular year if our board of directors informs our shareholders that such distributions would be inadvisable in view of our financial condition or cash availability. For 2003, 2004 and 2005, we did not distribute dividends. In 2007, we distributed dividends for fiscal year 2006 in the total amount of R$11.0 million, or R$0.10 per share (without giving effect to the stock split of one existing share into two newly issued shares approved at our shareholders’ meeting held on February 22, 2010 and excluding shares held in treasury). In April 2008, our shareholders approved the distribution of dividends for the fiscal year 2007 in the amount of R$27.0 million, or R$0.21 per share (without giving effect to the stock split of one existing share into two newly issued shares approved at our shareholders’ meeting held on February 22, 2010 and excluding shares held in treasury), which were fully paid to our shareholders on April 29, 2008. On April 30, 2009, our shareholders approved the distribution of dividends for the fiscal year 2008 in the amount of R$26.1 million, or R$0.20 per share (without giving effect to the stock split of one existing share into two newly issued shares approved at our shareholders’ meeting held on February 22, 2010 and excluding shares held in treasury), which was fully paid to our shareholders on December 18, 2009. On April 27, 2010, our shareholders approved the distribution of dividends for the fiscal year 2009 in the amount of R$50.7 million, or R$0.12 per share (giving effect to the stock split of one existing share into two newly issued shares approved at our shareholders’ meeting held on February 22, 2010 and excluding shares held in treasury), which was fully paid to our shareholders on December 15, 2010. Based on the results of the fiscal year 2010, on April 29, 2011, our shareholders approved the distribution of a dividend in the amount of R$98.8 million, or R$0.23 per share, which were fully paid to our shareholders on December 28, 2011. See “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—Dividend Policy.”

 

Holders of ADSs may find it difficult to exercise voting rights at our shareholders’ meetings.

 

Holders of ADSs may exercise voting rights with respect to our common shares represented by ADSs only in accordance with the terms of the deposit agreement governing the ADSs. Holders of ADSs will face practical limitations in exercising their voting rights because of the additional steps involved in our communications with ADS holders. For example, we are required to publish a notice of our shareholders’ meetings in specified newspapers in Brazil. Holders of our common shares will be able to exercise their voting rights by attending a shareholders’ meeting in person or voting by proxy. By contrast, holders of ADSs will receive notice of a shareholders’ meeting from the ADR depositary following our notice to the depositary requesting the depositary to do so. To exercise their voting rights, holders of ADSs must instruct the ADR depositary on a timely basis. This voting process necessarily will take longer for holders of ADSs than for holders of our common shares. Common shares represented by ADSs for which no timely voting instructions are received by the ADR depositary from the holders of ADSs shall not be voted.

 

Holders of ADSs also may not receive the voting materials in time to instruct the depositary to vote the common shares underlying their ADSs. In addition, the depositary and its agents are not responsible for failing to carry out voting instructions of the holders of ADSs or for the manner of carrying out those voting instructions. Accordingly, holders of ADSs may not be able to exercise voting rights, and they will have little, if any, recourse if the common shares underlying their ADSs are not voted as requested.

 

No single shareholder or group of shareholders holds more than 50% of our capital stock, which may increase the opportunity for alliances between shareholders as well as conflicts between them.

 

No single shareholder or group of shareholders holds more than 50% of our capital stock. There is no guidance in Brazilian corporate law for publicly-held companies without an identified controlling shareholder. Due to the absence of a controlling shareholder, we may be subject to future alliances or agreements between our shareholders, which may result in the exercise of a controlling power over our company by them. In the event a controlling group is formed and decides to exercise its controlling power over our company, we may be subject to unexpected changes in our corporate governance and strategies, including the replacement of key executive officers. Additionally, we

 

 

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may be more vulnerable to a hostile takeover bid. The absence of a controlling group may also jeopardize our decision-making process as the minimum quorum required by law for certain decisions by shareholders may not be reached and, as a result, we cannot guarantee that our business plan will be affected. Any unexpected change in our management team, business policy or strategy, any dispute between our shareholders, or any attempt to acquire control of our company may have an adverse impact on our business and result of operations.

 

Holders of ADSs will not be able to enforce the rights of shareholders under our by-laws and Brazilian corporate law and may face difficulties in protecting their interests because we are subject to different corporate rules and regulations as a Brazilian company.

 

Holders of ADSs are not direct shareholders of our company and are unable to enforce the rights of shareholders under our by-laws and Brazilian corporate law.

 

Our corporate affairs are governed by our by-laws and Brazilian corporate law, which differ from the legal principles that would apply if we were incorporated in a jurisdiction in the United States, such as the State of Delaware or New York, or elsewhere outside Brazil. Although insider trading and price manipulation are crimes under Brazilian law, the Brazilian securities markets are not as highly regulated and supervised as the U.S. securities markets or the markets in some other jurisdictions. In addition, rules and policies against self-dealing or for preserving shareholder interests may be less well-defined and enforced in Brazil than in the United States and certain other countries, which may put holders of the ADSs at a potential disadvantage. Corporate disclosures also may be less complete or informative than for a public company in the United States or in certain other countries.

 

Holders of ADSs may face difficulties in serving process on or enforcing judgments against us and other persons.

 

We are a corporation organized under the laws of Brazil, and all of our directors and executive officers and our independent public accountants reside or are based in Brazil. Most of the assets of our company and of these other persons are located in Brazil. As a result, it may not be possible for holders of ADSs to effect service of process upon us or these other persons within the United States or other jurisdictions outside Brazil or to enforce against us or these other persons judgments obtained in the United States or other jurisdictions outside Brazil. Because judgments of U.S. courts for civil liabilities based upon the U.S. federal securities laws may be enforced in Brazil only if certain conditions are met, holders may face greater difficulties in protecting their interests in the case of actions by us or our directors or executive officers than would shareholders of a U.S. corporation.

 

Changes in Brazilian tax laws may have an adverse impact on the taxes applicable to a disposition of the ADSs.

 

According to Law No. 10,833 of December 29, 2003, the disposition of assets located in Brazil by a non-resident to either a Brazilian resident or a non-resident is subject to taxation in Brazil, regardless of whether the disposition occurs outside or within Brazil. Thus, gains arising from a disposition of our common shares by a non-resident of Brazil to another non-resident of Brazil are subject to income tax.

 

Our interpretation of Law No. 10,833 is that ADSs should not be regarded as assets located in Brazil. Accordingly, the disposition of our ADSs by a non-resident to either a Brazilian resident or a non-resident should not be subject to taxation in Brazil. However, in the event that a disposition of our ADSs is considered a disposition of assets located in Brazil, this tax law could result in the imposition of withholding taxes on the disposition of our ADSs by a non-resident of Brazil. We are not aware of precedents on the application of Law No. 10,833 to ADSs and, accordingly, we are unable to predict whether Brazilian courts would apply it to a disposition of our ADSs by a non-resident of Brazil. See “Item 10. Additional Information—E. Taxation—Brazilian Tax Considerations—Gains.”

 

Any gain or loss recognized by a U.S. Holder (as defined in “Item 10. Additional Information—E. Taxation— U.S. Federal Income Tax Considerations”) would be treated as U.S. source gain or loss for all foreign tax credit purposes. U.S. Holders should consult their tax advisers as to whether the Brazilian tax on gain would be creditable against the holder’s U.S. federal income tax on foreign-source income from other sources.

 

 

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Judgments of Brazilian courts with respect to our common shares will be payable only in reais.

 

If proceedings are brought in the courts of Brazil seeking to enforce our obligations in respect of the common shares, we will not be required to discharge our obligations in a currency other than reais. Under Brazilian exchange control limitations, an obligation in Brazil to pay amounts denominated in a currency other than reais may be satisfied in Brazilian currency only at the exchange rate, as determined by the Central Bank, in effect on the date the judgment is obtained, and such amounts are then adjusted to reflect exchange rate variations through the effective payment date. The then, prevailing exchange rate may not afford non-Brazilian investors with full compensation for any claim arising out of or related to our obligations under our common shares or the ADSs.

 

Holders of ADSs may be unable to exercise preemptive rights with respect to our common shares underlying the ADSs.

 

Holders of ADSs will be unable to exercise the preemptive rights relating to our common shares underlying ADSs unless a registration statement under the U.S. Securities Act of 1933, as amended, or the “Securities Act,” is effective with respect to those rights or an exemption from the registration requirements of the Securities Act is available. We are not obligated to file a registration statement with respect to the shares relating to these preemptive rights or to take any other action to make preemptive rights available to holders of ADSs. We may decide, in our discretion, not to file any such registration statement. If we do not file a registration statement or if we, after consultation with the ADR depositary, decide not to make preemptive rights available to holders of ADSs, those holders may receive only the net proceeds from the sale of their preemptive rights by the depositary, or if they are not sold, their preemptive rights will be allowed to lapse.

 

An exchange of ADSs for common shares risks loss of certain foreign currency remittance and Brazilian tax advantages.

 

The ADSs benefit from the certificate of foreign capital registration, which permits Citibank N.A., as depositary, to convert dividends and other distributions with respect to our common shares into foreign currency, and to remit the proceeds abroad. Holders of ADSs who exchange their ADSs for common shares will then be entitled to rely on the depositary’s certificate of foreign capital registration for five business days from the date of exchange. Thereafter, they will not be able to remit non-Brazilian currency abroad unless they obtain their own certificate of foreign capital registration, or unless they qualify under Resolution CMN 2,689, which entitles certain investors to buy and sell shares on Brazilian stock exchanges without obtaining separate certificates of registration.

 

If holders of ADSs do not qualify under Resolution CMN 2,689, they will generally be subject to less favorable tax treatment on distributions with respect to our common shares. There can be no assurance that the depositary’s certificate of registration or any certificate of foreign capital registration obtained by holders of ADSs will not be affected by future legislative or regulatory changes, or that additional Brazilian law restrictions applicable to their investment in the ADSs may not be imposed in the future.

 

A portion of the compensation of our officers and members of the senior management is paid in form of stock options, which could tie their interest to the market price of our shares and ADSs.

 

We have established stock option plans for our officers and members of our senior management. Potential benefits under the stock option plans are tied to the appreciation of the market price of our shares and ADSs.

 

As a result, our compensation policy may influence our officers and members of the senior management and their interest to the market price of our shares and ADSs, which may conflict with the interests of our shareholders. Our officers and members of the senior management may be influenced to focus on short-term rather than long-term results because a significant portion of their compensation is tied to our results and the market price of our shares and ADSs. See “Item 6. Directors, Senior Management and Employees—E. Share Ownership—Stock Option Plans” in this annual report.

 

 

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ITEM 4.      INFORMATION ON THE COMPANY

 

A.    History and Development of the Company

 

General

 

Gafisa S.A. is a corporation organized under the laws of Brazil. We were incorporated on November 12, 1996 for an indefinite term . Our registered and principal executive offices are located at Av. Nações Unidas No. 8,501, 19th floor, 05425-070, São Paulo, SP, Brazil, and our general telephone and fax numbers are + 55 (11) 3025-9000 and + 55 (11) 3025-9348, respectively.

 

We are a leading diversified national homebuilder serving all demographic segments of the Brazilian market. Established over 58 years ago, we have completed and sold more than 1,000 developments and constructed over 12 million square meters of housing under the Gafisa segment, which we believe is more than any other homebuilder in Brazil. Recognized as one of the foremost professionally-managed homebuilders, we are also one of the best-known brands in the real estate development market, enjoying a reputation among potential homebuyers, brokers, lenders, landowners, and competitors for quality, consistency and professionalism. Our segments include Tenda, which serves the affordable entry-level housing segments, Gafisa, which offers a variety of residential options to the mid to higher income segments and Alphaville, which focuses on the identification, development and sale of high quality residential communities. In addition, we provide construction services to third parties.

 

Our core business is the development of high-quality residential units in attractive locations. For the year ended December 31, 2010, approximately 48% of the value of our launches was derived from high and mid high-level residential developments under the Gafisa brand. We are also engaged in the development of land subdivisions, also known as residential communities, representing approximately 16% of the value of our launches under the Alphaville brand, and affordable entry-level housing, which represents approximately 36% of the value of our launches under the Tenda brand. In addition, we provide construction services to third parties.

 

We are one of Brazil’s most geographically-diversified homebuilders and currently operate in more than 140 cities, including São Paulo, Rio de Janeiro, Salvador, Fortaleza, Natal, Curitiba, Belo Horizonte, Manaus, Porto Alegre and Belém, across 23 states and the Federal District. Many of these developments are located in markets where few large competitors currently operate. For the year ended December 31, 2010, approximately 47% of the value of our launches was derived from our operations outside the states of São Paulo and Rio de Janeiro.

 

In the fourth quarter of 2011, we conducted an extensive review of our operations and the operations of our subsidiaries, and our combined business strategy. As a result of this review, the following changes were made: temporary reductions of the activities of the Tenda segment, increase in investments in the Alphaville segment and focus the Gafisa segment on the markets of Sao Paulo and Rio de Janeiro.

 

Our common shares are listed on the BM&FBOVESPA under the symbol “GFSA3” and the ADSs are listed on the NYSE under the symbol “GFA.”

 

Our agent for service of process in the United States is National Corporate Research, Ltd. located at 10 East 40th Street, 10th floor, New York, NY 10016.

 

Historical Background and Recent Developments

 

Gomes de Almeida Fernandes Ltda., or “GAF,” was established in 1954 in the city of Rio de Janeiro with operations in the real estate markets in the cities of Rio de Janeiro and São Paulo. In December 1997, GP Investimentos S.A. and its affiliates, or “GP,” entered into a partnership with the shareholders of GAF to create Gafisa S.A. In 2004, as a result of a corporate restructuring, GP assumed a controlling position in our company. In 2005, an affiliate of Equity International Management, LLC, or “Equity International,” acquired approximately 32% of our company through a capital contribution. In February 2006, we concluded our initial public offering in Brazil, resulting in a public float of approximately 47% of our total share capital at the conclusion of the offering.

 

In September 2006, we created Gafisa Vendas Intermediação Imobiliária Ltda., or “Gafisa Vendas,” to function as our internal sales division in the state of São Paulo and in February 2007, we created a branch of Gafisa Vendas in Rio de Janeiro, or “Gafisa Vendas Rio,” to function as our internal sales division in the metropolitan region of Rio de Janeiro.

 

 

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In October 2006, we entered into an agreement with Alphaville Participações S.A. to acquire 100% of Alphaville Urbanismo S.A., or “Alphaville,” one of the largest residential community development companies in Brazil in terms of units and square meters, focused on the identification, development and sale of high quality residential communities in the metropolitan regions throughout Brazil targeted at upper and upper-middle income families. On January 8, 2007, we successfully completed the acquisition of 60% of Alphaville’s shares for R$198.4 million, of which R$20 million was paid in cash and the remaining R$178.4 million was paid in exchange for 6.4 million common shares of Gafisa. The acquisition agreement provided for the purchase of the remaining 40% in two phases: 20% was purchased in 2010 for R$126.5 million through the issuance of 9,797,792 new common shares by Gafisa and the remaining 20% will be purchased in 2012, either in cash or shares issued by us, at our sole discretion.  Alphaville is operating as one of our subsidiaries based in the city of São Paulo.

 

As per material fact released on June 8, 2012 regarding the Third Phase of the Investment Agreement and Other Covenants entered into on October 2, 2006 (“Investment Agreement”), which established rules and conditions for Gafisa acquiring and holding shares of the corporate capital of Alphaville Urbanismo S.A. (“AUSA”), the Company informs that the final amount of the operation (acquisition of remaining 20%) was established as R$359.0 million which will be settled by the issuance of an estimated 70,251,551 common shares, issued by Gafisa, as set forth in the Investment Agreement. The number of shares that will be issued to settle this transaction is going to be decided in an arbitration process, initiated by the other shareholders of AUSA, as per material fact release on July 3, 2012. In case of issuance of 70,251,551 common shares of Gafisa to the other shareholders of AUSA, these shareholders of AUSA will receive 13.96% of Gafisa’s total capital stock and will become relevant shareholders of Gafisa.

 

On March 17, 2007, we concluded our initial public offering of common shares in the United States, resulting in a public float of 78.6% of our total share capital at the conclusion of the offering. Upon completion of the offering, entities related to Equity International and GP controlled 14.2% and 7.3% of our total capital stock, respectively. In June 2007, Brazil Development Equity Investments, LLC, a company affiliated with GP, sold its remaining stake in our company (7.1% of our capital stock at the time).

 

On March 15, 2007, we created a new wholly-owned subsidiary, Fit Residencial Empreendimentos Imobiliários Ltda., or “FIT,” for the development, construction and management of lower and lower-middle income residential projects. On October 21, 2008, Gafisa and Tenda concluded a business combination in which FIT was merged into Tenda. The purpose of the merger was to consolidate the activities of FIT and Tenda in the lower-income segment in Brazil focused on developing real estate units with an average price of less than R$200.0 million. As a result of the business combination, Gafisa became the owner of 60.0% of the total and voting capital stock of Tenda. On December 30, 2009, the shareholders of Gafisa and Tenda approved a corporate restructuring to consolidate Gafisa’s noncontrolling share ownership in Tenda. The restructuring was accomplished by exchanging all of the remaining Tenda shares not held by Gafisa into Gafisa shares.  As a result of the restructuring, Tenda became a wholly-owned subsidiary of Gafisa. On October 26, 2007, Gafisa acquired 70% of Cipesa Engenharia S.A., a leading homebuilder in the State of Alagoas at the time.

 

On October 1, 2010, Equity International sold its remaining stake in our company and as a result, we do not have any shareholders holding over 5.0% of our shares.

 

Capital Expenditures

 

In 2008, we invested R$63.1 million in property and equipment, primarily information technology equipment, software, expenses for the construction of sales stands, facilities, model apartments and related furnishings and new office facilities in Rio de Janeiro and in São Paulo. Our main investments during the period were the construction of sales stands, which totaled R$35.5 million, investments in information technology equipment and software, which totaled R$3.7 million, in office facilities, which totaled R$4.2 million and the implementation of the enterprise application software SAP, which totaled R$2.0 million.

 

In 2009, we invested R$45.1 million in property and equipment, primarily information technology equipment, software, expenses for the construction of sales stands, facilities, model apartments and related furnishings and new office facilities in São Paulo. Our main investments during the period were the construction of sales stands, which totaled R$23.2 million, investments in information technology equipment and software, which totaled R$4.9 million, in office facilities, which totaled R$7.6 million and the SAP implementation, which totaled R$5.0 million.

 

 

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In 2010, we invested R$63.5 million in property and equipment, primarily information technology equipment, software, expenses for the construction of sales stands, facilities, model apartments and related furnishings and new office facilities in São Paulo. Our main investments during the period were the construction of sales stands, which totaled R$43.4 million, investments in information technology equipment and software, which totaled R$10.8 million, in construction equipment, which totaled R$4.4 million and in machine and equipment, which totaled R$3.9 million.

 

Our capital expenditures are all made in Brazil and are usually funded by internal sources. We currently do not have any significant capital expenditures in progress.

 

B.           Business Overview

 

General Overview

 

We believe we are one of Brazil’s leading homebuilders. Over the last 50 years, Gafisa has been recognized as one of the foremost professionally-managed homebuilders, having completed and sold more than 1,000 developments and constructed over 12 million square meters of housing, which we believe is more than any other residential development company in Brazil. We believe our segments “Gafisa,” “Alphaville,” and “Tenda” are well-known brands in the Brazilian real estate development market, enjoying a reputation among potential homebuyers, brokers, lenders, landowners and competitors for quality, consistency and professionalism.

 

Our core business is the development of high-quality residential units in attractive locations. For the year ended December 31, 2010, approximately 48% of the value of our launches was derived from high and mid high-level residential developments under the Gafisa segment. We are also engaged in the development of land subdivisions, also known as residential communities, representing approximately 16% of the value of our launches under the Alphaville brand, and affordable entry-level housing, which represents approximately 36% of the value of our launches under the Tenda brand. In addition, we provide construction services to third parties.

 

We are one of Brazil’s most geographically-diversified homebuilders currently operating in more than 140 municipalities, including São Paulo, Rio de Janeiro, Salvador, Fortaleza, Natal, Curitiba, Belo Horizonte, Manaus, Porto Alegre and Belém, across 23 states and the Federal District, which represents approximately 90% of the national population and approximately 90% of the gross domestic product as of December 31, 2010. Many of these developments are located in markets where few large competitors currently operate. For the year ended December 31, 2010 approximately 47% of the value of our launches was derived from our operations outside the states of São Paulo and Rio de Janeiro.

 

As a result of the review of our operations in the fourth quarter of 2011, the Gafisa segment will focus mainly on the São Paulo and Rio de Janeiro markets, as we will increase investments in the Alphaville segment and temporarily reduce the activities of the Tenda segment.

 

Our Markets

 

We are present in more than 140 municipalities, including Ananindeua, Aracajú, Barueri, Bauru, Belém, Belford Roxo, Belo Horizonte, Betim, Brasília, Camaçari, Campina Grande, Campinas, Campo Grande, Caruaru, Caxias do Sul, Contagem, Cotia, Cuiabá, Curitiba, Diadema, Duque de Caxias, Fortaleza, Foz do Iguaçú, Goiânia, Governador Valadares, Gramado, Gravataí, Jandira, João Pessoa, Juiz de Fora, Lauro de Freitas, Londrina, Macaé, Maceió, Manaus, Mossoró, Natal, Niterói, Nova Iguaçu, Nova Lima, Petrópolis, Piracicaba, Porto Alegre, Porto Velho, Recife, Resende, Ribeirão Preto, Rio das Ostras, Rio de Janeiro, Sabará, Salvador, Santos, São Bernardo do Campo, São Gonçalo, São José dos Campos, São Luis, São Paulo, São Vicente, Sobradinho, Sorocaba, Suzano, Teresina, Uberlândia, Vila Velha and Vitória, across 23 states and the Federal District throughout Brazil.

 

Our Real Estate Activities

 

Our real estate business includes the following activities:

 

·	developments for sale of:

 

 

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·	residential units;

 

·	land subdivisions (also known as residential communities), and

 

·	commercial buildings;

 

·	construction services to third parties; and

 

·	sale of units through our brokerage subsidiaries, Gafisa Vendas and Gafisa Vendas Rio, jointly referred to as “Gafisa Vendas.”

 

The table below sets forth our sales from new developments generated for each of our real estate activities and as a percentage of total real estate amount generated during the periods presented:

 

 

		For year ended December 31,
		2010				2010				2009 (1)				2009				2008(2)				2008
		(in thousands of R$)				(% of total)				(in thousands of R$)				(% of total)				(in thousands of R$)				(% of total)
Residential buildings			3,751,242				83.1				1,726,399				73.9				1,829,780				80.4
Land subdivisions			740,593				16.4				419,512				17.6				405,678				17.8
Commercial			0				0.0				155,313				6.5				3,100				0.1
Pre-sales			4,491,835				99.5				2,301,224				98.0				2,238,558				98.4
Construction services			24,289				0.5				47,999				2.0				37,268				1.6
Total real estate sales			4,516,124				100.0				2,349,223				100.0				2,275,826				100.0

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(1)	Consolidates all sales of Tenda since January 1, 2009.

 

(2)	Includes sales of Tenda since October 22, 2008.

 

 

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Developments for Sale

 

The table below provides information on our developments for sale activities during the periods presented:

 

		As of and for year ended December 31,
		2010				2009				2008
		(in thousands of R$, unless otherwise stated)
São Paulo
Potential sales value of units launched(1)			1,537,604				804,937				918,156
Developments launched (9)			26				11				13
Usable area (m2)(2)			357,699				157,755				288,028
Units launched(3)			3,336				1,490				2,301
Average sales price (R$/m2)(2)			4,568				5,102				3,188
Rio de Janeiro
Potential sales value of units launched(1)			158,953				95,955				443,516
Developments launched (9)			3				3				8
Usable area (m2)(2)			36,075				19,015				196,189
Units launched(3)			285				436				837
Average sales price (R$/m2)(2)(4)			4,406				5,046				2,261
Other States (7)
Potential sales value of units launched(1)			458,766				363,628				551,728
Developments launched (9)			17				13				15
Usable area (m2)(2)			221,747				138,503				163,61
Units launched(3)			1,504				1,487				1,811
Average sales price (R$/m2)(2)(4)			2,068				2,625				3,372
Total Gafisa
Potential sales value of units launched(1)			2,155,323				1,264,520				1,913,400
Developments launched (9)			46				27				36
Usable area (m2)(2)			615,521				315,273				647,827
Units launched(3)			5,124				3,413				4,949
Average sales price (R$/m2)(2)(4)			3,626				4,011				2,954
Alphaville
Potential sales value of units launched(1)			740,592				419,512				312,515
Developments launched (9)			15				10				11
Usable area (m2)(2) (8)			1,705,121				1,039,434				956,665
Units launched(3)			3,607				2,096				1,818
Average sales price (R$/m2)(2)(4)			434				403				327
Tenda(5)(6)
Potential sales value of units launched(1)			1,595,919				617,191				1,448,325
Developments launched (9)			66				31				1
Usable area (m2)(2)			709,106				—				—
Units launched(3)			13,502				5,286				112
Average sales price (R$/m2)(2)(4)			2,251				—				—
FIT(7)
Potential sales value of units launched(1)			—				—				496,147
Developments launched			—				—				16
Usable area (m 2 )(2)			—				—				—
Units launched(3)			—				—				3,759
Average sales price (R$/m 2 )(2)(4)			—				—				—
Bairro Novo(8)
Potential sales value of units launched(1)			—				—				25,311
Developments launched			—				—				1
Usable area (m 2 )(2)			—				—				16,487
Units launched(3)			—				—				325
Average sales price (R$/m 2 )(2)(4)			—				—				1,535

 

 

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(1)	Potential sales value is calculated by multiplying the number of units sold in a development by the unit sales price.

 

(2)	One square meter is equal to approximately 10.76 square feet. Values for Gafisa's interest in the project. For Gafisa, it includes the usable area of the projects acquired in 2010, ANAU À and Igloo Alphaville.

 

(3)	The units delivered in exchange for land pursuant to barter transactions are not included.

 

(4)	Average sales price per square meter excludes the land subdivisions. Average sales price per square meter (including land subdivisions and excluding Tenda’s ventures) was R$1,259, R$1,369 and R$1,225 in 2010, 2009 and 2008, respectively.

 

(5)	Because Tenda launched very few units in 2008, we believe the full impact of the merger was not reflected until 2009.

 

(6)

On December 30, 2009, the shareholders of Gafisa and Tenda approved a corporate restructuring to consolidate Gafisa’s noncontrolling share ownership in Tenda. The restructuring was accomplished by exchanging all of the remaining Tenda shares not held by Gafisa into Gafisa shares (merger of shares). As a result of the restructuring, Tenda became a wholly-owned subsidiary of Gafisa.

 

(7)	FIT was merged into Tenda on October 21, 2008.

 

(8)

On February 27, 2009, Gafisa and Odebrecht entered into an agreement to terminate the partnership created in February 2007 for the development, construction and management of large scale, low income residential projects with more than 1,000 units each. Gafisa withdrew from Bairro Novo, terminating the Shareholders’ Agreement then effective between Gafisa and Odebrecht. Therefore Gafisa is no longer a partner in Bairro Novo. The ongoing real estate ventures that were being jointly developed by the parties were separated as follows: Gafisa continued developing the Bairro Novo Cotia real estate venture and Odebrecht continued developing the other real estate ventures of the dissolved partnership, in addition to the operations of Bairro Novo. Further, on June 29, 2009, Gafisa sold its equity interest in the company developing the Bairro Novo Cotia real estate venture to Tenda.

 

(9)	Does not consider stake acquisitions and cancelled projects for 2010 and 2009.

 

Our developments for sale are divided into three broad categories: (1) residential buildings, (2) land subdivisions, and (3) commercial buildings.

 

Overview of Residential Buildings

 

In the residential buildings category, we develop three main types of products: (1) luxury buildings targeted at upper-income customers; (2) buildings targeted at middle-income customers; and (3) affordable entry-level housing targeted at lower-income customers. Quality residential buildings for middle- and upper-income customers are our core products and we have developed them since our inception. A significant portion of our residential developments is located in São Paulo and Rio de Janeiro where we have held a leading position over the past five years based upon area of total construction. However, beginning in 2006, we began our national expansion to pursue highly profitable opportunities in residential buildings outside these cities. For the year ended December 31, 2010, approximately 47% of the value of our launches was derived from our operations outside the states of São Paulo and Rio de Janeiro and therefore these states are responsible for more than 50% of our operations.

 

Luxury Buildings

 

Luxury buildings are a high margin niche. Units usually have over 180 square meters of private area, at least four bedrooms and three parking spaces. Typically, this product is fitted with modern, top-quality materials designed by brand-name manufacturers. The development usually includes swimming pools, gyms, visitor parking, and other amenities. Average price per square meter generally is higher than approximately R$9,000. Luxury building developments are targeted to families with monthly household incomes in excess of approximately R$30,000.

 

The table below sets forth our luxury building developments launched between January 1, 2008 and December 31, 2010:

 

 

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Project Description		Year Launched		Gafisa Participation (%)				Usable Area (m2) (1) (2)				Completion Year				Number of Units (2)				Units Sold (%) (As of December 31, 2010)
Fradique Coutinho - MOSAICO		2010			100				6,058				2012				62				96
Smart Perdizes		2010			100				7,310				2013				82				62
Smart Vila Mariana		2010			100				6,542				2013				74				100
Anauá		2010			80				11,395				2012				25				70
Zenith - It Fase 3		2010			100				8,464				2013				24				26
Vistta Laguna		2010			80				26,287				2012				129				36
Lumière		2010			100				6,701				2013				25				4
iGLOO		2010			50				4,544				2013				89				88
Lorian Qd2A		2010			100				34,429				2013				131				16
The Place - Stake Aqcuisition		2010			20				1,496				2012				4				46
Verdemar – Phase 2		2009			100				12,593				2012				77				34
Supremo Ipiranga		2009			100				13,904				2012				108				93
Sorocaba		2009			100				7,046				2012				81				85
Vistta Santana		2009			100				27,897				2012				179				95
The Place		2009			80				5,984				2012				17				46
Magno		2009			100				8,686				2012				34				93
London Ville		2009			100				18,768				2012				195				59
Vision Brooklin		2009			100				20,536				2012				266				91
IT Style		2009			100				16,208				2013				204				92
London Green – Phase 2		2008			100				15,009				2010				140				67
Horto – Phase 2		2008			50				22,298				2011				92				98
Costa Maggiore		2008			50				9,386				2010				60				92
Chácara Sant’Anna		2008			50				30,517				2011				158				57
Details		2008			100				7,802				2011				38				97
Quintas do Pontal		2008			100				21,915				2010				91				27
Laguna di Mare		2008			80				17,454				2011				146				35
Nouvelle		2008			100				5,367				2012				12				49
MontBlanc		2008			80				30,479				2011				112				35
Manhattan Square – Phase 1 Com		2008			50				25,804				2011				716				40
Reserva Laranjeiras		2008			100				11,740				2010				108				97
Verdemar – Phase 1		2008			100				13,084				2011				80				44

 

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(1)	One square meter is equal to approximately 10.76 square feet.

 

(2)	Values for 100% of the building development, except on projects with stake acquisition.

 

Middle Income Buildings

 

Buildings targeted at middle-income customers have accounted for the majority of our sales since our inception. Units usually have between 90 and 180 square meters of private area, three or four bedrooms and two to three underground parking spaces. Buildings are usually developed in large tracts of land as part of multi-building developments and, to a lesser extent, in smaller lots in attractive neighborhoods. Average price per square meter ranges from approximately R$5,000 to R$9,000. Developments in Rio de Janeiro tend to be larger due to the large tracts of land available in Barra da Tijuca. Middle-income building developments are tailored to customers with monthly household incomes between approximately R$10,000 and R$30,000.

 

The table below sets forth our middle-income building developments launched between January 1, 2008 and December 31, 2010:

 

Project Description		Year Launched		Gafisa Participation (%)				Usable Area (m2) (1) (2)				Completion Year				Number of Units (2)				Units Sold (%) (As of December 31, 2010)
Weekend (Vitória Régia)		2010			100				15,004				2013				37				44
Reserva Ecoville		2010			50				38,455				2012				256				65
Pq Barueri Cond Clube F2A - Sabiá		2010			100				15,101				2013				171				34
Alegria - Fase2B		2010			100				14,599				2012				139				62
Pátio Condomínio Clube - Harmony		2010			100				10,370				2012				96				67
Mansão Imperial - Fase 2b		2010			100				19,210				2012				89				61

 

 

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Project Description		Year Launched		Gafisa Participation (%)				Usable Area (m2) (1) (2)				Completion Year				Number of Units (2)				Units Sold (%) (As of December 31, 2010)
Golden Residence		2010			100				6,377				2012				78				70
Riservato		2010			100				4,078				2012				42				78
Pateo Mondrian (Mota Paes)		2010			100				16,012				2012				115				80
Jatiuca - Maceió - AL - Fase 2		2010			50				4,256				2012				48				19
Grand Park Varandas - FI		2010			50				14,654				2013				188				100
Canto dos Pássaros_Parte 2		2010			80				7,428				2012				112				16
Grand Park Varandas - FII		2010			50				12,242				2013				150				100
Grand Park Varandas - FIII		2010			50				8,965				2013				114				100
JARDIM DAS ORQUIDEAS		2010			50				20,811				2012				204				98
JARDIM DOS GIRASSOIS		2010			50				21,000				2012				300				98
Pátio Condomínio Clube - Kelvin		2010			100				10,370				2012				96				53
Vila Nova São José QF		2010			100				10,771				2012				152				36
CWB 34 - PARQUE ECOVILLE Fase1		2010			50				18,326				2013				204				62
GRAND PARK - GLEBA 05 - F4A		2010			50				6,085				2013				74				89
Barão de Teffé - Fase1		2010			100				14,479				2013				142				95
Jardins da Barra Lote 3		2010			50				15,470				2013				222				99
Luis Seraphico		2010			100				29,990				2013				233				46
Barão de Teffé - Fase 2		2010			100				12,742				2013				124				83
Parque Ecoville Fase 2A		2010			50				22,354				2013				202				17
GRAND PARK - GLEBA 05 - F4B		2010			50				6,085				2013				75				75
Igloo		2010			80				9,705				2012				184				100
Quadra C13 - direita - Jardim Goiás com outorga		2010			100				11,073				2013				111				9
Pq Barueri Cond Clube F2B - Rouxinol		2010			100				15,101				2013				171				37
GRAND PARK - GLEBA 05 - F4C		2010			50				6,085				2013				89				28
PA14 - SINDICATO - Fase 1		2010			80				21,002				2013				158				27
Euclides da Cunha 2		2010			100				14,345				2014				174				65
BOM RETIRO F1		2010			100				22,393				2013				252				80
BOM RETIRO F2		2010			100				22,393				2013				252				66
Prime - Gleba 6 - F1		2010			50				25,714				2013				222				51
Horizonte - Stake Aqcuisition		2010			20				1,501				2011				6				100
Parc Paradiso - Stake Aqcuisition		2010			5				2,321				2012				22				97
Reserva Ibiapaba - Stake Aqcuisition		2010			20				4,603				2012				52				97
Privilege - Stake Aqcuisition		2010			20				3,235				2011				39				95
Carpe Diem - Niterói - Stake Aqcuisition		2010			20				10,134				2011				23				61
Brink – Phase 2 – Campo Limpo		2009			100				8,576				2011				95				93
Alegria – Phase 2		2009			100				14,599				2012				139				84
Canto dos Pássaros		2009			80				7,428				2012				112				45
Grand Park - Parque Árvores - Seringueira(1)		2009			50				5,576				2011				76				99
Vila Nova São José – Phase 1 – Metropolitan		2009			100				10,370				2011				96				58
Grand Park - Parque Árvores - Salgueiro(1)		2009			50				5,576				2011				76				100
City Park Brotas		2009			50				9,404				2012				185				100
Grand Park Árvores – Bambu		2009			50				5,576				2011				76				99
Reserva Ibiapaba — Phase 1		2009			80				9,206				2012				104				91
City Park Acupe		2009			50				12,105				2012				190				96
Reserva Ibiapaba — Phase 2		2009			80				9,206				2012				104				66
Parque Maceió – Phase 2		2009			50				14,478				2012				252				3
Vista Patamares		2009			50				24,883				2012				336				80
City Park Exclusive		2009			50				8,779				2012				146				68
Stake Aquisition Horizonte		2009			80				6,004				2011				23				100
Stake Aquisition Parc Paradiso		2009			5				2,321				2012				22				100
Stake Aquisition Carpe Diem — Belem		2009			80				10,134				2012				93				61
Stake Aquisition Mistral		2009			10				1,485				2012				20				79
Stake Aquisition Reserva Bosque Resort — Phase 1		2009			20				3,448				2012				27				97
Stake Aquisition Reserva Bosque Resort — Phase 2		2009			20				3,481				2012				29				68
Mistral		2008			100				1,856				2011				25				82
Parque Barueri		2008			50				58,437				2012				677				75

 

 

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Project Description		Year Launched		Gafisa Participation (%)				Usable Area (m2) (1) (2)				Completion Year				Number of Units (2)				Units Sold (%) (As of December 31, 2010)
Brink - Campo Limpo – Phase 1		2008			100				17,280				2010				191				62
Patio Condominio Clube – Phase 1A		2008			100				20,741				2011				192				29
Mansão Imperial – Phase 1		2008			100				18,778				2011				87				19
Reserva do Bosque - Lauro Sodré – Phase 2		2009			100				4,200				2011				35				71
Alegria - Mãe dos Homens – Phase 1		2008			100				29,199				2011				278				66
Dubai		2008			50				19,316				2011				240				51
Reserva do Bosque – Phase 1		2008			100				4,151				2011				34				97
Ecolive		2008			100				12,255				2011				122				65
Manhattan Square - Res 2		2008			50				28,926				2011				270				20
Manhattan Square - Res 3		2008			50				37,879				2011				621				22
Reserva Santa Cecília		2008			100				8,350				2010				92				25
Terraças Tatuapé		2008			100				14,386				2011				105				50
Barueri II – Phase 1		2008			100				58,437				2011				677				50
Carpe Diem - Belém – Pará		2008			70				13,951				2011				90				65
Grand Park - Parque das Águas – Phase 2		2008			50				12,960				2011				150				56
Nova Petropolis		2008			100				41,182				2011				300				55
Terraças Alto da Lapa		2008			100				24,525				2010				192				70
Raízes Granja Viana		2008			50				18,022				2010				73				37
Magnific		2008			100				10,969				2010				31				64
Carpe Diem – Itacoatiara		2008			80				12,667				2010				116				53

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(1)	One square meter is equal to approximately 10.76 square feet.

 

(2)	Values for 100% of the building development, except on projects with stake acquisition.

 

Affordable Entry-Level Developments

 

Affordable entry-level housing consists of building and house units. Units usually have between 42 to 60 square meters of indoor private area and two to three bedrooms. Average price per square meter ranges from approximately R$2,000 to R$3,000. Affordable entry-level housing developments are tailored to families with monthly household incomes between approximately R$1,500 and R$3,600.

 

As part of our strategy of expanding our foothold in the affordable entry-level residential market, on March 15, 2007 we incorporated a wholly-owned subsidiary, FIT, to focus exclusively on this market. The principal emphasis of FIT was on five standardized residential developments in the peripheries of large metropolitan regions. Financing for FIT’s developments primarily came from the CEF, and such financing was structured so that customers paid low monthly installments without increasing our credit risk.

 

On October 21, 2008, Gafisa and Tenda concluded a business combination in which Gafisa’s wholly-owned subsidiary FIT was merged into Tenda. The purpose of the merger was to consolidate the activities of FIT and Tenda in the lower-income sector in Brazil and to develop real estate units with an average value of less than R$200,000. As a result of the business combination, Gafisa received 60.0% of the total and voting capital stock of Tenda and FIT was merged into Tenda. Because Tenda launched very few units in 2008, we believe the full impact of the merger was not reflected in Gafisa’s results of operations until 2009.

 

On December 30, 2009, the shareholders of Gafisa and Tenda approved a corporate restructuring to consolidate Gafisa’s noncontrolling share ownership in Tenda. The restructuring was accomplished by exchanging all of the remaining Tenda shares not held by Gafisa into Gafisa shares. As a result of the restructuring, Tenda became a wholly-owned subsidiary of Gafisa.

 

The table below sets forth our affordable entry-level housing developments launched by us between January 1, 2008 and December 31, 2010:

 

 

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Project Description		Year Launched		Gafisa Participatio (%)				Usable Area (m2) (1) (2)				Completion Year				Number of Units (2)				Units Sold (%) (as of December 31, 2010)
Grand Ville das Artes - Monet Life IV		2010			100				2,983				2010				56				87
Grand Ville das Artes - Matisse Life IV		2010			100				2,983				2010				60				93
Fit Nova Vida - Taboãozinho		2010			100				8,326				2010				137				99
São Domingos (Fase Única)		2010			100				13,376				2011				192				93
Espaço Engenho III (Fase Única)		2010			100				9,919				2011				197				99
Portal do Sol Life IV		2010			100				3,188				2010				64				94
Grand Ville das Artes - Matisse Life V		2010			100				5,966				2010				120				75
Grand Ville das Artes - Matisse Life VI		2010			100				5,966				2012				120				80
Grand Ville das Artes - Matisse Life VII		2010			100				4,972				2012				100				90
Residencial Buenos Aires Tower		2010			100				6,518				2011				88				100
Tapanã - Fase I (Condomínio I)		2010			100				14,460				2012				274				62
Tapanã - Fase I (Condomínio III)		2010			100				8,676				2011				164				54
Estação do Sol - Jaboatão I		2010			100				9,749				2012				159				75
Fit Marumbi Fase II		2010			100				24,266				2010				335				89
Portal do Sol Life V		2010			100				4,883				2010				96				72
Florença Life I		2010			100				8,731				2010				199				71
Cotia - Etapa I Fase V		2010			100				11,929				2012				272				98
Fit Jardim Botânico Paraiba - Stake Acquisition		2010			100				23,689				2011				155				81
Coronel Vieira Lote Menor (Cenário 2)		2010			100				7,951				2012				158				97
Portal das Rosas		2010			100				8,158				2011				132				100
Igara III		2010			100				14,704				2012				240				21
Portal do Sol - Fase 6		2010			100				3,199				2011				64				62
Grand Ville das Artes - Fase 9		2010			100				6,709				2011				120				31
Gran Ville das Artes - Fase 8		2010			100				5,590				2011				100				54
Vale do Sol Life		2010			100				3,976				2012				79				85
Engenho Life IV		2010			100				9,919				2012				197				68
Residencial Club Cheverny		2010			100				28,215				2012				384				48
Assunção Life		2010			100				30,347				2012				440				89
Residencial Brisa do Parque II		2010			100				5,678				2012				105				43
Portal do Sol Life VII		2010			100				3,199				2011				64				45
Vale Verde Cotia F5B		2010			100				5,182				2011				116				95
San Martin		2010			100				9,242				2011				132				98
Jd. Barra - Lote 4		2010			50				9,683				2012				224				100
Jd. Barra - Lote 5		2010			50				9,683				2012				224				100
Jd. Barra - Lote 6		2010			50				9,683				2012				224				100
ESTAÇÃO DO SOL TOWER - Fase 2		2010			100				9,763				2011				160				81
Assis Brasil Fit Boulevard		2010			70				19,170				2012				319				29
Cesário de Melo II - San Marino		2010			100				8,731				2012				199				87
Parque Arvoredo - F1		2010			100				24,154				2013				360				80
GVA 10 a 14		2010			100				31,307				2012				559				56
Portal do Sol — Fase 8 a 14		2010			100				22,391				2011				448				37
Flamboyant Fase 1		2010			100				14,536				2013				264				38
Assunção Fase 3		2010			100				10,412				2012				158				89
Viver Itaquera (Agrimensor Sugaya)		2010			100				11,123				2012				199				28
Firenze Life		2010			100				11,855				2012				240				100
Villagio Carioca - Cel Lote Maior		2010			100				11,927				2012				237				46
FIT COQUEIRO I - Stake Acquisition		2010			100				35,614				2011				60				100
FIT COQUEIRO II - Stake Acquisition		2010			100				35,614				2011				48				100
Alta Vista		2010			100				10,941				2011				160				84
Bosque dos Pinheiros		2010			100				8,440				2012				118				77
Cassol F2a		2010			100				12,077				2013				180				58
Araçagy - F1		2010			50				38,584				2013				372				92
Vista Club (Estrada de Itapecerica)		2010			100				7,314				2013				157				43
PORTO BELLO		2010			100				13,144				2012				256				40
Vivendas do Sol		2010			100				18,977				2012				400				3

 

 

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Project Description		Year Launched		Gafisa Participatio (%)				Usable Area (m2) (1) (2)				Completion Year				Number of Units (2)				Units Sold (%) (as of December 31, 2010)
Colubandê Life		2010			100				7,197				2012				160				26
Mirante do Lago F3		2010			100				13,298				2013				180				4
Residencial Germânia Life F1		2010			100				22,023				2012				340				12
Arpoador		2010			100				14,906				2012				218				48
Jardins do Horto		2010			100				17,090				2013				328				40
São Matheus II		2010			100				7,453				2012				160				40
Ananindeua		2010			80				22,286				2012				540				10
FELICITÁ F1		2010			100				9,017				2013				126				69
FELICITÁ F2		2010			100				9,017				2013				126				77
FELICITÁ F3		2010			100				9,017				2013				126				13
Vila Atlântico		2010			100				7,071				2012				128				47
Araçagy - F2		2010			50				14,469				2013				280				92
Guaianazes Life		2010			100				8,849				2012				168				30
Vivai - Stake Acquisition		2010			100				37,427				2012				64				86
Mirante do Lago F2 - Stake Acquisition		2010			30				33,947				2011				703				59
MIRANTE DO LAGO - Stake Acquisition		2010			30				33,947				2011				703				91
ICOARACI - Stake Acquisition		2010			20				6,541				2012				294				62
FIT MIRANTE DO PARQUE - Stake Acquisition		2010			40				42,259				2011				420				100
Vila Real Life - Sitio Cia		2009			100				10,603				2011				178				99
FIT Giardino – Phase 1		2009			80				10,864				2011				259				21
FIT Icoaraci		2009			80				6,540				2011				294				54
Le Grand Vila Real Tower		2009			100				1,588				2011				92				100
Green Park Life Residence		2009			100				16,002				2012				220				91
Vermont Life		2009			100				11,190				2011				192				100
FIT Dom Jaime - Bosque dos Passaros		2009			100				6,466				2011				364				54
Bairro Novo – Phase 3		2009			100				26,111				2010				448				100
Bariloche		2009			100				1,457				2011				80				100
Mirante do Lago – Phase 2A		2009			70				8,664				2011				188				63
Parma		2009			100				5,717				2010				36				100
Marumbi – Phase 1		2009			100				29,989				2011				335				46
Bosque das Palmeiras		2009			100				2,098				2011				144				100
Residencial Club Gaudi Life		2009			100				15,384				2011				300				99
Tony - Passos – Phase 1 - Recanto das Rosas		2009			100				23,996				2012				240				80
Residencial Jardim Alvorada		2009			100				10,320				2011				180				99
FIT Bosque Itaquera		2009			100				15,558				2012				256				94
FIT Lago dos Patos		2009			100				14,888				2011				140				99
Cotia – Phase 4 - Stage I		2009			100				4,256				2010				96				100
Clube Garden – Mônaco		2009			100				11,441				2011				186				100
Vivenda do Sol I		2009			100				7,744				2010				200				98
Parque Green Village		2009			100				3,991				2011				176				97
Fit Marodin – Jardins		2009			70				15,432				2011				171				64
Mirante do Lago – Phase 2B		2009			70				7,368				2011				310				53
Residencial Monet Life - Le Grand Villa das Artes		2009			100				1,165				2011				200				89
Cotia – Phase 4 - Etapa II		2009			100				4,256				2010				224				97
Portal do Sol Life I		2009			100				2,354				2012				64				78
Portal do Sol Life II		2009			100				2,354				2012				64				55
Portal do Sol Life III		2009			100				2,354				2012				64				83
Residencial Monet II (Grand Ville das Artes – Phase 3)		2009			100				4,937				2011				120				76
Residencial Mogi Das Cruzes Life		2008			100				16,009				2011				351				100
Residencial Itaim Paulista Life I		2008			100				1,166				2011				160				100
Residencial Curuca		2008			100				1,216				2009				160				98
Residencial Bunkyo		2008			100				13,944				2011				332				100
Residencial Ferraz Life I		2008			100				1,166				2012				792				100
Residencial Portal Do Sol		2008			100				16,889				2012				282				100
Residencial Das Flores		2008			100				1,166				2010				156				100
Residencial Colina Verde		2008			100				1,166				2011				200				100
Residencial Spazio Felicitta		2008			100				1,906				2011				180				99
Residencial Parque Ipe		2008			100				1,049				2010				77				100
Residencial Recanto Dos Passaros I		2008			100				9,134				2012				200				100
Residencial Clube Vivaldi		2008			100				1,166				2011				174				94
Residencial Monaco		2008			100				1,384				2012				233				100
Residencial Vila Nova Life		2008			100				1,166				2011				108				94
Residencial Brisa Do Parque		2008			100				2,753				2010				53				100
Residencial Renata		2008			100				9,031				2009				200				73
Residencial Villaggio Do Jockey II		2008			100				2,488				2011				188				100

 

 

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Project Description		Year Launched		Gafisa Participatio (%)				Usable Area (m2) (1) (2)				Completion Year				Number of Units (2)				Units Sold (%) (as of December 31, 2010)
Residencial Jardim Girassol II		2008			100				3,089				2010				520				93
Residencial Parque Romano		2008			100				1,107				2011				362				100
Residencial Santana Tower I		2008			100				1,694				2011				448				98
Residencial Santana Tower II		2008			100				1,694				2012				448				88
Residencial Salvador Life I		2008			100				1,166				2010				280				100
Residencial Salvador Life II		2008			100				1,166				2010				180				100
Residencial Salvador Life III		2008			100				1,166				2011				480				93
Residencial Vila Mariana Life		2008			100				5,362				2010				92				100
Residencial Villa Rica Life		2008			100				12,822				2010				220				89
Residencial Ciro Faraj		2008			100				4,235				2009				71				100
Residencial Parque Lousa		2008			100				17,718				2011				302				83
Le Grand Orleans Tower		2008			100				5,929				2011				112				94
Residencial Bela Vista		2008			100				4,242				2008				101				89
Residencial Marata		2008			100				19,583				2011				400				90
Parque Toulouse Life		2008			100				11,190				2010				192				100
Residencial Ilha De Capri		2008			100				13,614				2012				224				4
Residencial Parque Das Aroeiras Life		2008			100				13,988				2010				240				84
Residencial Monte Carlo I		2008			100				2,965				2010				92				100
Residencial Chacaras Bom Jesus Life		2008			100				9,325				2011				143				25
Residencial Arvoredo Life		2008			100				906				2009				14				100
Residencial Sao Francisco Life		2008			100				1,166				2010				80				100
Residencial Betim Life		2008			100				8,752				2011				108				100
Residencial Portinari Tower		2008			100				7,200				2011				136				100
Residencial Madri Life I		2008			100				9,325				2011				160				100
Residencial Madri Life II		2008			100				9,325				2011				160				100
Residencial Bahamas Life		2008			100				1,166				2010				40				100
Residencial Napole Life		2008			100				1,166				2011				140				100
Residencial San Pietro Life		2008			100				2,798				2010				172				87
Residencial Boa Vista		2008			100				2,215				2010				38				92
Residencial Villa Bella		2008			100				21,429				2009				16				100
Residencial Bologna Life		2008			100				1,049				2010				306				100
Residencial Chacara Das Flores		2008			100				1,166				2011				120				100
Residencial Las Palmas Life		2008			100				8,160				2011				131				96
Residencial Arezzo Life		2008			100				6,994				2011				120				100
Residencial Di Stefano Life		2008			100				6,994				2011				120				100
Residencial Vermont Life		2008			100				11,190				2011				192				100
Residencial Piedade Life		2008			100				23,080				2010				1008				97
Residencial Jangadeiro Life		2008			100				10,491				2010				180				98
Residencial Atelie Life		2008			100				6,564				2010				108				100
Residencial Cidades Do Mundo Life		2008			100				8,393				2009				144				100
Nova Marica Life		2008			100				21,603				2012				468				94
Casa Blanca Life		2008			100				9,325				2011				154				96
Residencial Malaga Garden		2008			100				15,246				2009				300				98
Residencial Gibraltar Garden		2008			100				15,246				2009				300				97
Espaco Engenho Life I		2008			100				4,663				2010				80				100
Espaco Engenho Life II		2008			100				4,604				2010				79				96
Comendador Life I		2008			100				13,615				2011				210				7
Comendador Life II		2008			100				10,697				2013				165				7
Moinho Life		2008			100				12,065				2011				207				1
America Life		2008			100				8,101				2011				139				94
Porto Life		2008			100				4,663				2011				76				96
Residencial Mondrian Life		2008			100				36,369				2011				624				97
Residencial Parque Arboris Life		2008			100				13,056				2011				214				80
Residencial Daltro Filho		2008			100				9,325				2009				160				98
Residencial Bartolomeu De Gusmao		2008			100				15,154				2008				260				100
Residencial Papa Joao XXIII		2008			100				13,056				2011				224				96
Residencial Vivendas Do Sol II		2008			100				11,657				2010				200				96
Residencial Juscelino Kubitschek I		2008			100				9,325				2011				160				76
Residencial Juscelino Kubitschek II		2008			100				15,154				2011				260				85
Residencial Figueiredo II		2008			100				12,822				2010				220				95
Residencial Figueiredo I		2008			100				12,822				2011				220				99
Parque Baviera Life		2008			100				29,142				2011				500				84
FIT Vila Allegro		2008			50				35,804				2011				298				100

 

 

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Project Description		Year Launched		Gafisa Participatio (%)				Usable Area (m2) (1) (2)				Completion Year				Number of Units (2)				Units Sold (%) (as of December 31, 2010)
FIT Terra Bonita		2008			51				5,736				2011				304				42
Città Lauro de Freitas		2008			50				17,778				2010				304				100
FIT Coqueiro - Stake Acquisition		2008			20				35,614				2010				570				100
FIT Mirante do Lago – Phase 1		2008			70				33,947				2011				461				70
FIT Mirante do Parque		2008			60				42,259				2011				420				90
FIT Palladium		2008			70				19,498				2010				229				100
FIT Parque Lagoinha I		2008			75				12,712				2010				212				41
FIT Planalto		2008			100				34,682				2010				472				96
FIT Jardim Botânico Paraiba		2008			50				23,689				2011				310				78
FIT Parque Maceió		2008			50				29,474				2010				470				52
FIT Cristal		2008			70				11,278				2011				154				96
FIT Vivai		2008			90				37,427				2011				640				96
Città Itapoan		2008			50				27,775				2010				374				100
FIT Novo Osasco		2008			100				17,331				2011				296				99

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(1)	One square meter is equal to approximately 10.76 square feet.

 

(2)	Values for 100% of the building development, except on projects with stake acquisition.

 

Land Subdivisions under our Gafisa Segment

 

In 2001, we started developing residential land subdivisions for sale upon which residential buildings can be developed. Land subdivisions under our Gafisa segment are usually smaller than our Alphaville residential communities and do not include some of the facilities available in our Alphaville residential communities, such as various amenities, shopping centers and schools. We usually provide the infrastructure for a given land subdivision planning such as the electric, water and sewage systems, paved streets, and common recreational areas. Our land subdivisions are typically located in affluent suburban areas close to major highways leading to the states of São Paulo and Rio de Janeiro. A typical lot has between 250 and 1,500 square meters. Average price per square meter ranges from approximately R$150 to R$800. We target clients with monthly household incomes in excess of approximately R$5,000 for these land subdivisions.

 

The table below sets forth our land subdivision developments launched between January 1, 2008 and December 31, 2010:

 

Project Description		Year Launched		Gafisa Participation (%)				Usable Area (m2) (1) (2)				Completion Year				Number of Units (2)				Units Sold (%) (as of December 31, 2010)
Alta Vista - Fase 2		2010			50				168,299				2012				236				4

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(1)	One square meter is equal to approximately 10.76 square feet.

 

(2)	Values for 100% of the building development.

 

Land Subdivisions under our Alphaville Segment

 

The Alphaville brand was created in the 1970s when the first Alphaville community was developed in the cities of Barueri and Santana do Paranaíba in the metropolitan region of São Paulo. Beginning in the 1990s, Alphaville developed residential communities in several other cities in Brazil, such as Campinas, Goiânia, Curitiba, Londrina, Maringá, Salvador, Fortaleza, Belo Horizonte, Natal, Gramado, Manaus, Cuiabá, Campo Grande, São Luis and Rio de Janeiro.

 

Whenever we develop a new Alphaville community, we provide all the basic civil works for supporting the construction on the lots, such as electrical, telephone and data communications cabling, hydraulic (water and sewer) mains and treatment facilities, landscaping and gardening, lighting and paving of the streets and driveways and security fencing. In most Alphaville communities, we also build a social and sports club for the residents, with

 

 

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soccer, golf and tennis fields, jogging and bicycle tracks, saunas, swimming pools, ballrooms, restaurants and bars, and other facilities. In addition, most Alphaville projects have a shopping center where residents can shop for clothes and groceries. Additionally, whenever we develop a new Alphaville community far from large urban centers, we seek to assist in establishing schools near the community by forming partnerships with renowned educational institutions. Throughout our Alphaville communities, we also seek to stimulate the local economy by drawing new businesses to that area.

 

We believe that the maintenance of a development’s quality is essential. For this reason, we impose on every Alphaville community a series of building and occupancy standards that are more rigorous than those required by applicable local legislation. Every Alphaville community has an Alphaville association formed by us before delivery of the community starts, and is funded by maintenance fees paid by the residents. The purpose of the association is to allow community involvement in the management and maintenance of the premises and to ensure orderly and harmonious relationships among the residents.

 

Upon completion of a sale, a purchaser of an Alphaville property will receive, along with the purchase and sale contract, documentation that sets out the regulations on land use and occupancy, and these will serve as private zoning regulations that are binding on the resident. These regulations set forth, among other things, the maximum number of floors allowed in an Alphaville building, the minimum number of meters between buildings and land coverage limits, thereby maintaining the uniformity and quality of the Alphaville properties.

 

The table below sets forth our residential communities launched between January 1, 2008 and December 31, 2010:

 

Project Description		Year Launched		Gafisa Participation (%)				Usable Area (m2) (1) (2)				Completion Year				Number of Units (2)				Units Sold (%) (as of December 31, 2010)
Alphaville Ribeirão Preto 1		2010			60				182,253				2012				352				92
Alphaville Mossoró 2		2010			53				35,417				2012				93				27
Alphaville Ribeirão Preto 2		2010			60				99,078				2012				182				21
Alphaville Brasília		2010			34				112,807				2012				170				87
Alphaville Alphaville Jacuhy 3		2010			65				103,995				2012				168				100
Alphaville Brasília Terreneiro		2010			13				44,579				2012				67				87
Living Solution Burle Marx		2010			100				1,537				2011				5				100
Alphaville Teresina		2010			79				283,223				2012				589				97
Alphaville Belém 1		2010			73				168,159				2012				337				81
Alphaville Belém 2		2010			72				136,696				2012				289				42
Terras Alpha Petrolina		2010			75				117,241				2012				366				96
Terras Alpha Foz do Iguaçu 2		2010			74				120,320				2012				342				16
Reserva Porto Alegre		2010			92				8,075				2012				19				4
Alphaville Porto Velho		2010			76				291,741				2012				631				14
Alphaville Caruaru		2009			70				79,253				2011				172				100
Alphaville Granja		2009			33				65,360				2011				110				100
Alphaville Votorantim 2		2009			30				59,166				2011				51				87
Conceito A Rio das Ostras		2009			100				12,354				2011				106				67
Alphaville Capina Grande		2009			53				91,504				2011				205				45
Alphaville Porto Alegre		2009			64				258,991				2011				429				87
Alphaville Piracicaba		2009			63				112,351				2011				216				100
Alphaville Gravataí 2		2009			64				91,040				2011				225				51
Alphaville Costa do Sol 3		2009			58				234,966				2011				293				67
Terras Alpha Foz do Iguaçu		2009			27				34,269				2011				104				89
Alphaville Jacuhy II		2008			65				177,981				2010				330				84
Alphaville Cuiabá II		2008			60				150,896				2010				424				100
Alphaville João Pessoa		2008			100				61,782				2010				124				100
Alphaville Rio Costa do Sol II		2008			58				349,186				2010				366				100
Alphaville Manaus II		2008			62.5				166,938				2010				335				96
Alphaville Litoral Norte II		2008			66				150,813				2010				391				91
Alphaville Manaus Comercial		2008			60				48,252				2010				42				93
Alphaville Barra da Tijuca		2008			65				173,251				2011				251				100
Alphaville Votorantim		2008			30				246,315				2010				472				87
Alphaville Mossoró		2008			70				65,912				2010				170				98

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(1)	One square meter is equal to approximately 10.76 square feet.

 

(2)	Values for 100% of the building development.

 

 

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The table below discloses the projects that were completed in 2010 or in prior years and where the number of units sold as of December 31, 2010 was less than 90%.

 

Project Description		Units Sold (%) (as of December 31, 2010)
Grand Ville das Artes - Monet Life IV (a)			87
Grand Ville das Artes - Matisse Life V (b)			75
Fit Marumbi Fase II (c)			87
Carvalhaes - Portal do Sol Life V (d)			75
Florença Life I (e)			70
Residencial Parque Das Aroeiras Life (f)			85
Residencial San Pietro Life (g)			85
FIT Parque Lagoinha I (h)			60
FIT Parque Maceió (i)			31
Quintas do Pontal (j)			42
Reserva Santa Cecília (k)			31
Raízes Granja Viana (l)			57
Magnific (m)			64
Carpe Diem – Itacoatiara (n)			53
Alphaville Jacuhy II (o)			84
Alphaville Votorantim (p)			87
Residencial Renata (q)			87

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(a)

Grand Ville das Artes - Monet Life IV .  According to our then-existing business plan, this development’s selling forecast indicated sales of the unsold units within a short time period with sales value higher than the accumulated cost. As of April 30, 2012, 88.3% of the units were sold. We currently have no reason to believe that the carrying value of this property is greater than its market value.

 

(b)

Grand Ville das Artes - Matisse Life V.   According to our then-existing business plan, this development’s selling forecast indicated sales of the unsold units within a short time period with sales value higher than the accumulated cost. As of April 30, 2012, 85.6% of the units were sold. We currently have no reason to believe that the carrying value of this property is greater than its market value.

 

(c)

Fit Marumbi Fase II.   According to our then-existing business plan, this development’s selling forecast indicated sales of the unsold units within a short time period with sales value higher than the accumulated cost. As of April 30, 2012, 84.2% of the units had been sold , a decrease in relation to 2010, due to certain contract terminations during the period . We currently have no reason to believe that the carrying value of this property is greater than its market value.

 

(d)

Carvalhaes - Portal do Sol Life V.   According to our then-existing business plan, this development’s selling forecast indicated sales of the unsold units within a short time period with sales value higher than the accumulated cost. As of April 30, 2012, 90.8% of the units were sold. We currently have no reason to believe that the carrying value of this property is greater than its market value.

 

(e)

Florença Life I.   According to our then-existing business plan, this development’s selling forecast indicated sales of the unsold units within a short time period with sales value higher than the accumulated cost. As of April 30, 2012, 63.2% of the units had been sold. We currently have no reason to believe that the carrying value of this property is greater than its market value.

 

 

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(f)

Residencial Parque Das Aroeiras Life.   According to our then-existing business plan, this development’s selling forecast indicated sales of the unsold units within a short time period with sales value higher than the accumulated cost. As of April 30, 2012, 61.6% of the units had been sold. We currently have no reason to believe that the carrying value of this property is greater than its market value.

 

(g)

Residencial San Pietro Life.   According to our then-existing business plan, this development’s selling forecast indicated sales of the unsold units within a short time period with sales value higher than the accumulated cost. As of April 30, 2012, 92.8% of the units had been sold. We currently have no reason to believe that the carrying value of this property is greater than its market value.

 

(h)

FIT Parque Lagoinha I.   According to our then-existing business plan, this development’s selling forecast indicated sales of the unsold units within a short time period with sales value higher than the accumulated cost. As of April 30, 2012, 97.2% of the units had been sold. We currently have no reason to believe that the carrying value of this property is greater than its market value.

 

(i)

FIT Parque Maceió.   According to our then-existing business plan, this development’s selling forecast indicated sales of the unsold units within a short time period with sales value higher than the accumulated cost. As of April 30, 2012, 81.3% of the units had been sold. We currently have no reason to believe that the carrying value of this property is greater than its market value.

 

(j)

Quintas do Pontal.- Quintas do Pontal was 83.6% completed at April 30, 2012 and 82.1% of the units were sold as of that date. This project originally had 115 units and during 2011, after a debris flow that destroyed part of the development structure, we decided to build only 91 units.  Due to the aforementioned issue, the development was not available for selling during a period of time.  According to our business plan, this development’s selling forecast indicated sales of the unsold units by December 31, 2012.

 

(k)	Reserva Santa Cecília.   As of April 30, 2012, 77.1% of the units had been sold, since the development has faced competition from developments built by our competitors.  We currently have no reason to believe that the carrying value of this property is greater than its market value.

 

(l)

Raízes Granja Viana.   According to our development’s selling forecast indicated sales of the unsold units until December 31, 2012 period with sales value higher than the accumulated cost. As of April 30, 2012, 96.8% of the units had been sold. We currently have no reason to believe that the carrying value of this property is greater than its market value.

 

(m)

Magnific.   According to our then-existing business plan, this development’s selling forecast indicated sales of the unsold units until December 31, 2012. This development is a luxury building and exhibits lower sales velocity as compared to standard buildings. As of April 30, 2012, 74.2% of the units had been sold. We currently have no reason to believe that the carrying value of this property is greater than its market value.

 

(n)

Carpe Diem – Itacoatiara.   According to our then-existing business plan, this development’s selling forecast indicated sales of the unsold units within a short time period with sales value higher than the accumulated cost. As of April 30, 2012, 76.4% of the units had been sold. We currently have no reason to believe that the carrying value of this property is greater than its market value.

 

(o)

Alphaville Jacuhy II According to our then-existing business plan, this development’s selling forecast indicated sales of the unsold units within a short time period with sales value higher than the accumulated cost. As of April 30, 2012, 81.8% of the units had been sold. We currently have no reason to believe that the carrying value of this property is greater than its market value.

 

(p)

Alphaville Votorantim According to our then-existing business plan, this development’s selling forecast indicated sales of the unsold units within a short time period with sales value higher than the accumulated cost. As of April 30, 2012, 100.0% of the units were sold. We currently have no reason to believe that the carrying value of this property is greater than its market value.

 

(q)

Residencial Renata.   According to our then-existing business plan, this development’s selling forecast indicated sales of the unsold units within a short time period with sales value higher than the accumulated cost. As of April 30, 2012, 89.2% of the units had been sold. We currently have no reason to believe that the carrying value of this property is greater than its market value.

 

 

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Commercial Buildings

 

In 2009, we launched four commercial buildings:  Centro Empresarial Madureira, Paulista Corporate, Reserva Eco Office Life and Global Offices. As of December 31, 2010 we had four commercial buildings under development for sale: Sunplaza Personal Office and Icaraí Corporate, both in the state of Rio de Janeiro, Manhattan Wall Street in Salvador and JTR in Maceió.

 

In 2010, we did not launch any commercial buildings.

 

Construction Service

 

We provide construction services to third parties, building residential and commercial projects for some of the most well-known developers in Brazil. This practice allows us to benchmark our construction costs, facilitates our access to new constructions materials, techniques and service providers such as architects and sub-contractors, and provides larger economies of scale. Third-party construction services are a significant, less volatile source of revenues, which does not require us to allocate capital. Our principal construction services clients are large companies, many of them developers that do not build their own projects. As of December 31, 2010 our principal construction services clients were Fibra Empreendimentos Imobiliários S.A., Helbor LM Investimentos Imobiliários Ltda., Incons Champagnat Empreendimento Imobiliário SPE Ltda, Incons Curitiba Empreendimento Imobiliário SPE Ltda., MBigucci Villa Reggio Empreendimentos Imobiliários Ltda, SDI Desenvolvimento Imobiliário Ltda, Tanguá Patrimonial Ltda and Concivil   Construtora e Incorporadora Ltda. We also provide construction services on certain developments where we retain an equity interest.  We provide a warranty period of five years from the delivery date to cover expenditures for repairing construction defects.

 

The table below sets forth the real estate building developments we have constructed exclusively for third parties between January 1, 2008 and December 31, 2010:

 

Project		First Year of Construction		Client		Type of Project
Residencial Helbor Spazio Vita		2010		LM Investimentos Imobiliários Ltda		Residential
Edifício Monde Champagnat		2010		Incons Champagnat Empreendimento Imobiliário SPE Ltda		Residential
Essenza		2010		Villa Reggio Empreendimentos Imobiliários Ltda		Residential
Neosuperquadra		2010		Tanguá Patrimonial Ltda		Residential/ Commercial
New Age		2009		Incols Curitiba Empreedimentos Imobiliários SPE		Residential
Duetto Volare		2009		Fibra Empreendimentos Imobiliários		Residential
Duetto Fioratta		2009		Fibra Empreendimentos Imobiliários		Residential
Carlyle  (RB2)		2009		Fibra Empreendimentos Imobiliários		Commercial
RB2		2009		Fibra Empreendimentos Imobiliários		Commercial
Acqua Faria Lima		2009		SDI Desenvolvimento Imobiliário Ltda		Commercial
Open View (Oscar Freire)		2008		Grupo Sisan		Residential
Open View (Oscar Freire)		2008		Grupo Sisan		Residential

The table below sets forth the real estate developments we have constructed for third parties, in which we also have an equity interest, between January 1, 2008 and December 31, 2010:

 

Project		First Year of Construction		Gafisa Participation (%)		Partner		Type of Project		Status as of the date of this annual report
Igloo Alphaville		2010		50		BKO		Residential		Construction
Reserva Ecoville Residencial		2010		50		Agre		Residential		Construction
Panamby Ribeirão Preto		2010		55		Stefani Nogueira		Residential		Construction
Grand Park Prime		2010		50		Franere		Residential		Construction
Grand Park Varandas		2010		50		Franere		Residential		Construction
Vistta Patamares		2010		50		OAS Empreendimentos Imobiliários Ltda.		Residential		Construction

 

 

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Project		First Year of Construction		Gafisa Participation (%)		Partner		Type of Project		Status as of the date of this annual report
City Park Exclusive		2010		50		OAS Empreendimentos Imobiliários Ltda.		Residential		Construction
City Park Brotas		2010		50		OAS Empreendimentos Imobiliários Ltda.		Residential		Construction
City Park Acupe		2010		50		OAS Empreendimentos Imobiliários Ltda.		Residential		Construction
Manhattan Square – Phase 1 (Wall Street)		2009		50		OAS Empreendimentos Imobiliários Ltda.		Commercial		Construction
Chácara Santanna		2009		50		Monza Incoporadora		Residential		Concluded
Montblanc		2009		80		Yuny		Residential		Concluded
Carpe Diem RJ		2009		80		Mattos & Mattos		Residential		Concluded
Mistral		2009		80		Premiun		Residential		Concluded
Reserva do Bosque		2009		80		GM		Residential		Construction
Ecoville		2009		50		Abyara Empreendimentos Imobiliários Ltda		Residential		Construction
Enseada das Orquideas		2008		80		Yuny		Residential		Concluded
Evidence		2008		50		Park Empreendimentos Ltda.		Residential		Concluded
Art Ville		2008		50		OAS Empreendimentos Imobiliários Ltda.		Residential		Concluded
Palm Ville		2008		50		OAS Empreendimentos Imobiliários Ltda.		Residential		Concluded
Grand Park - Park das Águas – Phase 1		2008		50		Franere		Residential		Concluded
Grand Park - Park Árvores – Phase 1		2008		50		Franere		Residential		Concluded
Privilege		2008		80		Mattos & Mattos		Residential		Concluded
Horizonte		2008		80		Premiun		Residential		Concluded
Horto Panamby		2008		50		OAS Empreendimentos Imobiliários Ltda.		Residential		Concluded

 

Sale of Units Through Our Brokerage Subsidiaries

 

In September 2006, we created a new subsidiary, Gafisa Vendas, to function as our internal sales division in the state of São Paulo. In February 2007, we created another new subsidiary, Gafisa Vendas Rio, to function as our internal sales division in the metropolitan region of Rio de Janeiro. These wholly-owned subsidiaries promote sales of our projects in the states of São Paulo and Rio de Janeiro and focus their efforts on: (1) launches – our internal sales force focuses on promoting launches of our developments; however, we also use outside brokers, thus creating what we believe to be a healthy competition between our sales force and outside brokers; (2) inventory – Gafisa Vendas and Gafisa Vendas Rio each have a team focused on selling units launched in prior years; and (3) web sales – Gafisa Vendas and Gafisa Vendas Rio each have a sales team dedicated to internet sales as an alternative source of revenues with lower costs.

 

Our Clients

 

Our clients consist of development and construction service clients. Development clients are those who purchase units in our developments. As of December 31, 2010, our development-client database was comprised of more than 118,000   individuals. We currently have approximately 72,000 active clients. Our construction-services clients are large companies, many of them developers that do not build their own projects. As of December 31, 2010, we had, among our main construction services clients, the following companies: Fibra Empreendimentos Imobiliários S.A., Helbor LM Investimentos Imobiliários Ltda., Incons Champagnat Empreendimento Imobiliário SPE Ltda, Incons Curitiba Empreendimento Imobiliário SPE Ltda., MBigucci Villa Reggio Empreendimentos Imobiliários Ltda, SDI Desenvolvimento Imobiliário Ltda, Tanguá Patrimonial Ltda and Concivil Construtora E Incorporadora Ltda. No individual client represents more than 5% of our revenues from residential developments or construction services.

 

 

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Our Operations

 

The stages of our development process are summarized in the diagrams below:

 

Land Acquisition

 

We use results from our extensive market research to guide our land reserves strategy and process. Our marketing and development teams monitor market fundamentals and trends. We have developed a sophisticated database to support our search for and analysis of new investment opportunities. Key decision factors used by our management for land acquisition and new developments include location, type of product to be developed, expected demand for the new developments, current inventory of units in the region and acquisition cost of the land.

 

Whenever we identify an attractive tract of land, we first conduct a study of the project to define the most appropriate use of the space. Afterwards, the basic design of the project enters the economic feasibility study stage, where we consider preliminary revenues and expenses associated with the project. This study will determine project profitability. We collect and analyze information on demand, competition, construction budget, sales policy and funding structure to ensure economic viability of the new development. We then initiate a legal due diligence of the property to identify liens, encumbrances and restrictions, potential solutions to such issues and the relevant costs. Before acquiring the land, we conduct a thorough due diligence process including an environmental review. Each decision to acquire land is analyzed and approved by our investment committee. See “Item 6. Directors, Senior Management and Employees—C. Board Practices” elsewhere in this annual report for further information on the activities of our committees and boards.

 

We seek to finance land acquisition through swaps, in which we grant the seller a certain number of units to be built on the land or a percentage of the proceeds from the sale of units in such development. As a result, we reduce our cash requirements and increase our returns. In the event we cannot do so or in order to obtain better terms or prices, we acquire land for cash, alone or in partnership with other developers. We purchase land both for immediate development and for inventory.

 

As a new strategy defined in the end of 2011, we are selling landbank located in cities and places where there is no intention to run operations with new developments.

 

As of December 31, 2010, we had an inventory of 177 land parcels in which we estimate we could develop a total of 92,882 residential units with a sales value of R$18.1 billion, of which 40% represents land acquired through barter transactions. The table below sets forth the breakdown of our land reserves by location and by the type of development.

 

 

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		Gafisa								Alphaville								Tenda
		Future Sales Value (% Gafisa)(1)				% Bartered				Future Sales Value (% Gafisa)(1)				% Bartered				Future Sales Value (% Gafisa) (1)				% Bartered
Land bank - Per geographic location:		(in thousands of reais )								(in thousands of reais )								(in thousands of reais )
São Paulo			3,996,995				34.4				1,422,664				96.9				1,350,498				53.7
Rio de Janeiro			910,472				42.8				648,220				98.7				867,060				39.0
Other states			3,337,992				42.9				3,151,636				96.7				2,368,896				34.8
Total			8,245,459				38.7				5,222,520				97.0				4,586,453				42.4

(1) Information presented at Company’s stake.

 

Project Design

 

In order to meet evolving preferences of our customers, we invest considerable resources in creating an appropriate design and marketing strategy for each new development, which includes determining the size, style and price range of units. Our staff, including engineers and marketing and sales professionals, works with recognized independent architects on the planning and design of our developments. Their activities include designing the interior and exterior, drafting plans for the execution of the project, and choosing the finishing construction materials. A team responsible for preparing the business plan and budget and assessing the financial viability for each of our projects is also involved. Simultaneously with the planning and design of our developments, we seek to obtain all the necessary licenses and regulatory approvals from local authorities, which usually take three to twelve months in the case of our residential buildings and three years in the case of our residential communities.

 

Marketing and Sales

 

Our marketing efforts are coordinated by our internal staff of approximately 30 professionals. Our specialized team generally coordinates with several outsourced brokerage companies with a combined sales force of more than 5,000 representatives, monitoring such sales representatives in order to promote loyalty and ensure performance. Our marketing team is also responsible for gathering information on the needs and preferences of potential customers to provide guidance on our land acquisition and project design activities. Gafisa Vendas was created as our internal sales division and it currently consists of 160 sales consultants and 11 sales managers.

 

The creation of Gafisa Vendas was intended to establish a strategic channel for us to access our clients and to reduce our dependence on outside brokers for marketing. Because the sales force at Gafisa Vendas is trained to sell our products exclusively, we believe that it is able to focus on the sale of our developments, articulate the unique features of our development, manage our current customers and capture new customers more effectively. Gafisa Vendas was initially established in São Paulo in 2006 and opened a branch in Rio de Janeiro in 2007. In 2008 and 2009, Gafisa Vendas was our most successful sales team, responsible for approximately   34 % and 40% of our sales in the states of São Paulo and Rio de Janeiro, respectively. In 2010, Gafisa Vendas was responsible for approximately 37% and 53% of our sales in the states of São Paulo and Rio de Janeiro, respectively.

 

We will continue to utilize independent real estate brokerage firms as we believe this provides a healthy competition between our internal sales force and outside brokers. Independent brokers provide us with a broad reach, access to a specialized and rich database of prospective customers, and flexibility to accommodate the needs of our diverse offering and clientele. In line with our results-oriented culture, we compensate brokers based on their profit contribution rather than on sales. Brokers are required to attend periodic specialized training sessions where they are updated on customer service and marketing techniques, competing developments, construction schedules, and marketing and advertising plans. We emphasize a highly transparent sales approach, as opposed to the traditional high-pressure techniques, in order to build customer loyalty and to develop a sense of trust between customers and us. At our showrooms, brokers explain the project and financing plans, answer questions and encourage customers to purchase or sign on to receive a visit or additional information.

 

We typically initiate our marketing efforts 30 days before the launch of a development. We normally have a showroom on or near the construction site, which includes a model unit furnished with appliances and furniture. We

 

 

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leverage our reputation for quality, consistency, on-time delivery and professionalism to increase sales velocity. We have been successful with this strategy, usually selling approximately 60% of the units before construction starts.

 

Our subsidiary Alphaville has also been successful in its sales and marketing efforts. For example, in Vitória, Alphaville Jacuhy development with more than 700 lots, was 85% sold within 48 hours after launch; in João Pessoa, Paraiba, the sales team needed only five hours to sell all of its residential lots; in Barra da Tijuca, Rio de Janeiro, 90% of the Alphaville lots available (valued at R$150 million) were sold during the weekend of launch; and Alphaville Caruaru in Recife, Alphaville Teresina in Piaui, Alphaville Granja Viana in São Paulo, Alphaville Piracicaba and Ribeirão Preto, both cities in the State of São Paulo, were 100% sold in the same day of their launch. In Brasilia, Alphaville launched the first phase of a twenty million square meter urban development. All the 600 residential lots were sold within a few hours of launch.

 

We market our developments through newspapers, direct mail advertising and by distributing leaflets in neighboring areas, as well as through telemarketing and websites. In addition, on a quarterly basis, we publish the magazine “Gafisa Way” which is distributed to our customers and offers news on our most recent developments and progress updates on buildings under construction. The Alphaville developments also publish special magazines geared to their specific communities.

 

Tenda’s sales and marketing efforts are coordinated through 18 store fronts located across the principal metropolitan areas of the country. A direct sales force is trained to offer advice to first-time home buyers and to assist these buyers in finding the best financing solution. In addition, this sales force provides information on the benefits under the public housing program “Minha Casa, Minha Vida,” including the process of obtaining a mortgage through the Caixa Econômica Federal (“CEF”). Because the Tenda sales force is specially trained to provide information on the affordable entry-level segment, we believe that they are uniquely positioned to provide us with an advantage in this segment.

 

In addition to direct sales, Tenda markets its developments through telemarketing, which generates more than 28,000 calls per month and results in over 6,000 visits per month to its store fronts. Tenda also gathers information on its customers’ preferences to better tailor its marketing efforts and has implemented a customer relationship management department in order to improve its client satisfaction. Finally, Tenda focuses on improving its sales during the launch of a development using a specific strategy for each type of development. For example, with large developments, Tenda has successfully combined its direct sales force with independent real estate brokerage firms, and the increase in cost associated with such combined efforts was offset by the significant increase in sales during the initial months after launch.

 

Under Brazilian law, we may establish a term within and the conditions under which we are entitled to cancel the development. According to our regular purchase contracts, if we are not able to sell at least 60% of the units within 180 days of launching, we can cancel the development. Under those circumstances, we usually consider changing the project or selling the land, but, in any of those cases, we have to return the cash payment made by our customers adjusted for inflation but with no interest. Customers, however, are not entitled to other remedies.

 

Construction

 

Gafisa has been engaged in the construction business for over 50 years. Our experience spans across the entire construction chain. Before engaging in each new project, we develop sketches and research and develop projects and plans to create the most appropriate product possible. Our standardized construction techniques and unique control system are designed to optimize productivity and minimize raw material losses. Our monitoring tools are available on our intranet where all employees regularly review costs and key performance indicators of each development such as actual versus budget comparisons, volume consumption for each raw material, and construction schedule.

 

We use strict quality control methods. We have developed proprietary procedure manuals that describe in significant detail each task of each stage of the construction project. These manuals are also used for the training sessions that we require all of our workers to attend. In addition, we keep quarterly records of projects delivered. The reviews focus on identifying problems in order to take corrective and preventive actions in projects underway and thus avoid costly repetition. We have adopted a quality management system that was certified for ISO 9002 by Fundação Bureau Veritas , from Universidade de São Paulo. In 2007, we received a certification from Programa Brasileiro de Qualidade e Produtividade do Habitat (PBQP-H), which is part of the Ministry of Cities. In addition,

 

 

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the Eldorado Business Tower building was certified as a Green Building, category Platinum, by the U.S. Green Building Council, which attests that it is environmentally sustainable, through the rational use of energy, natural lighting and pollution control and recycling. There are only three other buildings in the world that have achieved this category.

 

We invest in technology. Our research and development costs amounted to R$2.5 million,   R$1.4 million and R$1.5 million in each of 2010, 2009 and 2008 respectively. We believe that we have pioneered the adoption of advanced construction techniques in Brazil such as dry wall and plane pre-stressed slabs, which present numerous advantages over traditional techniques. We also optimize costs by synchronizing our projects’ progress so as to coordinate the purchase of raw material and benefit from economies of scale. We have long-term arrangements with a number of suppliers which allow us to build our developments with quality, using brand name construction materials and equipment, and advanced technology. Moreover, our centralized procurement center enables us to achieve significant economies of scale in the purchase of materials and retention of services.

 

We do not own heavy construction equipment and we employ directly only a small fraction of the labor working on our sites. We generally act as a contractor, supervising construction while subcontracting more labor-intensive activities. Substantially all on-site construction is performed for a fixed price by independent subcontractors. We have policies in place in order to hire reputable, cost-oriented and reliable service providers that are in compliance with labor laws and have performed their work diligently and on time in the past. Hiring subcontractors instead of employing workers directly has some financial and logistical advantages. For instance, we do not need to incur fixed costs to maintain a specialized labor force even when they are not actively working at a construction site and we do not need to pay for frequent transfers of labor to different construction locations.

 

Our construction engineering group coordinates the activities of service providers and suppliers, monitors compliance with safety and zoning codes, and monitors completion of the project on a timely basis. We provide a five-year limited warranty covering structural defects in all our developments.

 

Risk Control

 

Our risk control procedures require that all of our projects be approved by our investment committee, which meets on a monthly basis, or more frequently on an as-needed basis, and consists of our chief executive officer and two members of our board of directors. Our investment committee carefully reviews the various studies conducted by us and described above. In addition, we have a board of officers, which meets monthly, and is in charge of overseeing and approving major decisions. See “Item 6. Directors, Senior Management and Employees—E. Share Ownership” in this annual report.

 

Customer Financing

 

The table below sets forth the terms of customer financing we provide for each type of our developments:

 

Sales Term		Luxury				Middle Income				Affordable Entry-Level(1)				Land Subdivisions (2)
Mortgage lending (delivery)			40	%			80	%			60	%			—
Caixa Econômica Federal			—				—				40	%			—
Gafisa 36 months			35	%			10	%			—				45	%
Gafisa 60 months			20	%			5	%			—				55	%
Gafisa 120 months			5	%			5	%			—				—

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(1)	Includes Tenda developments.

 

(2)	Includes both Gafisa and Alphaville land subdivisions.

 

Mortgages . In 2010, 72% of our sales value was financed by bank mortgages, where the customer paid us approximately 20% to 30% of the sales price of the property during the period of construction, and upon delivery of the property paid the balance of the sales price through a bank mortgage. We analyze the credit history of each customer at the time of sale to see if the customer would qualify for a bank mortgage based on banks’ standard credit rating policies. Although there is no assurance that the customer will qualify for a mortgage at the time of

 

 

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delivery, our analyses have been fairly successful in predicting whether the customer would qualify for a mortgage. The following table sets forth the credit limits established by mortgage sources available in Brazil:

 

Credit Lines		Typical Interest rate		Maximum Home Value		Maximum Loan Value
Mortgage portfolio ( Carteira Hipotecária ) or CH		≤ 12% annually + TR(1)		No limit		No limit
Housing Finance System (S istema Financeiro da Habitação) or SFH		≤ 10% annually + TR		R$500,000		R$450,000
Government Severance Indemnity Fund for Employees ( Fundo de Garantia sobre Tempo de Serviços) or FGTS.		≤ 8.16% annually + TR		R$130,000		R$130,000

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(1)	TR refers to the daily reference rate.

 

Mortgage financing for Tenda’s developments primarily comes from CEF. The financing is structured so that customers with monthly income of up to ten times the Brazilian minimum wage pay low monthly installments without increasing our credit risk because CEF assumes the credit risk of each customer. Additionally, Tenda is currently working with certain private banks in addition to the CEF to provide financing for homebuyers with monthly income between three and 20 times the Brazilian minimum wage which was approximately R$510 as of December 31, 2010 with similar terms as the financing provided by the CEF.

 

Financing by Gafisa during construction. We finance some of our own sales during the construction period, with a down payment of 20-30% and financing of the balance through monthly installments up to the delivery of the unit.

 

Financing by Gafisa after delivery. In addition, we offer financing plans to prospective customers using our own capital, where we finance purchases for up to 120 months after the completion of the construction. For completed units we require a down payment of 30 % and financing of the remaining balance with up to 120 monthly installments. For units under construction we require a down payment of 10 % and provide financing of 25-35 % with up to 30 monthly installments until the delivery of the unit and financing of the remaining 75-65 % , respectively , with up to 120 additional monthly installments. All of our financing plans are guaranteed by a conditional sale of the unit, with the transfer of the full property rights of the unit to the customer upon the full payment of the outstanding installments.

 

We have developed a strict credit policy in order to minimize risks. We take the following steps whenever we conduct a credit review process:

 

·	trained independent brokers interview each potential customer to collect personal and financial information and fill out a registration form;

 

·	registration forms are delivered, along with a copy of the property deed, to us and, if the bank providing the financing requests, to an independent company specialized in real estate credit scoring;

 

·

credit is automatically extended by us to the customer if his or her credit analysis is favorable. However, if the credit analysis report raises concerns, we will carefully review the issues and accept or reject the customer’s application depending on the degree of risk. To the extent financing is provided by a bank, such financial institution will follow their own credit review procedures; and

 

·	after approving the application, our staff accepts the down payment which is given as a deposit on the purchase of the unit.

 

Sales contracts . Our sales contracts generally provide for adjustment of the sales price according to the INCC during construction and at an annual interest rate of 12% plus IGP-M over the receivables balance after a stated date in our sales contracts. We have historically experienced a low rate of customer default on our sales. In May 2012, our clients’ default level was 6.94% of our accounts receivable for Gafisa and 6.49% for Tenda. We attribute our low default rate to the fact that:  (1) we conduct database research on the socio-economic background of our prospective customers; (2) our agreements discourage default and cancellation of the purchase by imposing

 

 

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immediate penalty fees, interest and liquidated damages which are adjusted for inflation, and we retain approximately 60-65% (Gafisa), 20% (Tenda) and 20% (Alphaville) of the total amount paid during the construction period plus expenses incurred by us, which in general represents all or a substantial portion of the amount that the defaulted clients have already paid us; and (3) we offer several options to our customers if they experience financial difficulties, such as offering them a greater number of installment payments or exchanging the unit bought for a less expensive one. When a default occurs, we endeavor to renegotiate the outstanding loan with our customers before taking any legal action. We will only transfer title of the unit to a buyer after the release of the certificate of acceptance of occupancy by local authority and/or the full payment of all outstanding installments. We have decreased the percentage of mortgages that our customers obtain from us from approximately 33% in 2006 to 28% in 2010. This decrease reflects the growing interest of commercial banks in financing the Brazilian housing industry. See “Item 5. Operating and Financial Review and Prospects—A. Operating Results—Launches and Contracted Sales—Contracted Sales” for a discussion of the sales value of contracts cancelled by our customers and penalties paid in connection with such cancellations.

 

The table below sets forth the client’s default level breakdown segment as of May 30, 2012.

 

		Gafisa				Alphaville				Tenda
Default level by segment			6.94	%			3.22	%			6.49	%

Cancelation of sales contracts. Gafisa, Alphaville and Tenda sales contracts are irrevocable under Brazilian law. That means that a customer does not have the unilateral ability to terminate a contract once it is executed, nor does the customer have an ability to require a refund of amounts previously paid unless we agree. To the extent that a customer is not in compliance with its obligations under a contract, we may at our option either force compliance through the Brazilian courts, or agree to a “default” by the customer. Should we agree at our sole discretion to refund part of amounts paid to the defaulting party, we will normally apply the penalty set forth in the contract.

 

In the event either we or the customer do not agree to enter into a commercial negotiation following a customer default there are two courses of action available:

 

1.

The first option is that we may seek to enforce the agreement in Court to collect the amount outstanding and effectively transfer ownership of the unit to the buyer.

 

2.

As provided in the contract and contemplated in Brazilian law we have the right to force the unit to be auctioned. When the unit is purchased in auction by a third party the proceeds from the auction are used in part to settle in full (including interest and penalties for late payments) the amount owed by the customer to Gafisa and the remaining balance is paid to the customer. When no third party is willing to acquire the unit in the auction, the title to the unit returns to Gafisa or Tenda without any disbursement, except for the auctioneers fees. Provisions in the Gafisa contract indicate that when such auction occurs it is without prejudice of the penalties set forth in this contract (meaning that the penalty provisions survive). Upon consultation, our legal counsel advised us that the customer has a right to request that amounts paid by him be returned after the contractual “penalty” has been deducted.

 

The table below provides the number and sales value of contracts terminated by customers for the periods presented:

 

Year		2010								2009								2008
Segment		Number of contracts				Sales value (R$ thousands)				Number of contracts				Sales value (R$ thousands)				Number of contracts				Sales value (R$ thousands)
Gafisa
Contracted sales			5,374				2,218,670				4,510				1,637,961				4,099				1,484,854
Volume/Sales value of terminations			(601	)			(244,353	)			(320	)			(127,886	)			(366	)			(139,442	)
Percentage			11.2	%			10.1	%			7.1	%			7.8	%			8.9	%			9.4	%
Sales value, net of termination			4,773				1,974,317				4,190				1,510,075				3,733				1,345,412
Tenda
Contracted sales			19,768				1,970,516				21,193				1,804,193				12,348				1,055,892
Volume/Sales value of terminations			(6,703	)			(537,391	)			(5,322	)			(443,089	)			(5,796	)			(462,635	)
Percentage			33.4	%			27.0	%			25.1	%			24.6	%			46.9	%			43.8	%
Sales value net of terminations			13,065				1,433,125				15,871				1,361,105				6,552				593,257
Alphaville
Contracted sales			3,056				630,755				2,23				402,599				1,621				310,343
Volume/Sales value of terminations			(150	)			(31,817	)			(279	)			(25,714	)			(103	)			(10,454	)
Percentage			8.3	%			9.1	%			12.5	%			6.4	%			6.4	%			3.4	%
Sales value net of termination			2,906				598,938				1,951				376,885				1,518				299,889
Total sales value net of termination			20,744				4,006,380				22,012				3,248,065				11,803				2,238,558

 

 

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Receivables securitization . (CCI and FIDC) We release capital for new projects by seeking not to maintain receivables after our projects are completed. We have been active in the securitization market and we are capitalizing on an increasing investor demand for mortgage-backed securities. The securitization (mortgage-backed securities) market in Brazil is relatively new but we believe it is rapidly expanding. This expansion is helped significantly by recent development in Brazilian foreclosure laws.

 

With the growing availability of mortgages from commercial banks and the increasing liquidity of mortgage-backed securities (CRIs), we expect to further reduce our role as a financing provider to our customers. Our goal is to optimize our working capital by transferring the financing activities to securitization companies and banks.

 

Main Raw Materials and Suppliers

 

We purchase a wide variety of raw materials for our operations. Even though these raw materials have represented on average, over the last three years, approximately 34% of our total costs of development, aside from land, the only raw material that represents more than approximately 5% of our total costs is steel. Prices of some raw materials have significantly increased over the last two years at a rate much higher than inflation. The index that measures the fluctuation of construction costs, the INCC, increased 24.5% during the three year period ended December 31, 2010. During that same period, the IGP-M increased 20.1%, resulting in an increase in unit prices. We have been working on the development of new construction techniques and the utilization of alternative materials in order to reduce costs and improve our construction process with advanced technology.

 

We contract with major suppliers for the materials used in the construction of the buildings. We receive general pricing proposals from various suppliers of raw materials and select the proposal with the best terms and conditions for each development. In addition to pricing, we select our suppliers by the quality of their materials. We set forth specific minimum quality requirements for each construction project, and the chosen supplier must meet this quality requirement. The materials for our developments are readily available from multiple sources and, accordingly, we do not rely on any one supplier for our raw materials.

 

Our five largest suppliers in terms of volume are Gerdau Aços Longos S.A., Votorantim Cimentos Brasil Ltda., Supermix Concreto S.A., Cia. Brasileira de Concreto S.A. and Elevadores Otis Ltda.. In general terms, we purchase products for our construction based on the scheduled requirements, and we are given approximately 28 days to pay. The products we purchase generally come with a five-year warranty. We do not have any exclusive arrangements with our suppliers. We work closely with suppliers, enabling them to schedule their production in order to meet our demand or notify us in advance in the event they anticipate delays. We have good relationships with our suppliers and have experienced no significant construction delays due to shortages of materials, but significant delays due to suppliers of services have occurred in recent years. We do not maintain inventories of construction materials.

 

 

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We achieve significant economies of scale in our purchases because we:

 

·	use standard construction techniques,

 

·	engage in a large number of projects simultaneously, and

 

·	have long-term relationships with our suppliers. We periodically evaluate our suppliers. In the event of problems, we generally replace the supplier or work closely with them to solve the problems.

 

Customer Service

 

In our industry, customer satisfaction is based in large part on our ability to respond promptly and courteously to buyers before, during and after the sale of our properties, including providing an owner’s guide.  We use innovative and personalized customer service techniques beginning with the initial encounter with a potential customer. We believe we were one of the first homebuilders in Brazil to introduce services such as breakfast for customers at construction sites and providing monthly photos to customers on the progress of the construction. These services are provided with the objective of educating customers on the progress of the construction and improving customers’ experience with the purchase of our units. Other customer service efforts include:

 

·	a dedicated outsourced call center with consultants and specialists trained to answer our customers’ inquiries;

 

·	the development of the “Gafisa Viver Bem” web portal, through which our customers can, for example, follow the project’s progress, alter their registration information, simulate unit designs and check their outstanding balances;

 

·	the development of the “Comunidade Alphaville” web portal, which aims to foster a sense of community among the residents of our residential communities; and

 

·	the development of the “Gafisa Personal Line,” through which buyers of certain units are able to customize their units in accordance with plans and finishing touches offered by Gafisa. Such options vary by development.

 

As part of our customer service program in our residential developments, we conduct pre-delivery inspections to promptly address any outstanding construction issues. Prior to the delivery of each unit, we maintain regular contact with the customer by sending the customer our magazine “Gafisa Way.”  We also conduct monitored inspections of our developments to allow buyers to gather more information from our technical personnel. In addition, we send a monthly status report on the construction of the unit. We conduct another evaluation of the customer’s satisfaction with his or her unit, as well as the customer’s experience with our sales personnel and our various departments (customer services, construction and title services) 18 months after the release of the certificate of acceptance of occupancy by the relevant local authority. We also provide a five-year limited warranty covering structural defects, which is required by Brazilian law.

 

We also promote a program called the “Alphaville Clubes – Lazer Brasil,” which allows owners of the Alphaville developments and other registered members to use the facilities of all Alphaville health and fitness clubs throughout the country. News on our Alphaville communities are posted on Alphaville’s website, which also contains documents and information related to each of our Alphaville developments exclusively for owners of Alphaville developments.

 

Competition

 

The real estate market in Brazil is highly fragmented and competitive with low barriers to entry. The main competitive factors include price, financing, design, quality, reputation, reliability, meeting delivery expectations, partnerships with developers and the availability and location of land. Certain of our competitors have greater financial resources than we do, which could provide them an advantage over us in the acquisition of land using cash. In addition, some of our competitors have better brand recognition in certain regions, which could give them a competitive advantage in increasing the velocity of their sales. Because of our geographic diversification, we believe that we have access to different markets within Brazil that have different demand drivers.

 

 

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Because of the high fragmentation of the markets in which we operate, no single developer or construction company is likely to obtain a significant market share. With the exception of São Paulo and Rio de Janeiro, where we face competition from major publicly-traded competitors, in other regions we generally face competition from small and medium-sized local competitors that are not as well-capitalized. We expect additional entrants, including foreign companies in partnership with Brazilian entities, into the real estate industry in Brazil, particularly the São Paulo and Rio de Janeiro markets.

 

The table below sets forth the data available on our market share in the São Paulo and Rio de Janeiro markets:

 

São Paulo (1) – Gafisa’s Market Share
		Year ended December 31,
Year		2010				2009				2008
		(Launches in R$ million)
Local market			20,935				12,718				17,365
Gafisa(2)			1,069				896				1,187
Gafisa’s market share			5.1	%			7.0	%			6.8	%

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Source: EMBRAESP and SECOVI.

 

Rio de Janeiro (1) – Gafisa’s Market Share
		Year ended December 31,
Year		2010				2009				2008
		(Launches in R$ million)
Local market			6,786				2,809				4,260
Gafisa(2)			159				85				629
Gafisa’s market share			2.3	%			3.0	%			14.8	%

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Source: ADEMI.

 

(1)	Metropolitan region.

 

(2)	Gafisa stake.

 

We believe we are the leader in residential community developments. Our subsidiary Alphaville has a sizable and what we believe to be non-replicable land reserves, which will foster our future growth in the upcoming years.

 

Seasonality

 

Although the Brazilian real estate market is not generally seasonal, there are a few months of the year when the market slows down (January, February and July) each year. These months coincide with school vacations and result in the postponement of investment decisions. We are impacted similarly as the rest of the market during such periods.

 

Subsidiaries

 

We carry out our real estate developments directly or through our subsidiaries or our jointly-controlled entities in partnership with third parties. As of December 31, 2010, we had 197 subsidiaries and 74 jointly-controlled entities under operations, all of such subsidiaries and jointly-controlled entities are incorporated as special purpose entities and headquartered in Brazil. Our subsidiaries and jointly-controlled entities operate exclusively in the real estate sector.

 

Many of our subsidiaries and joint-ventures are SPEs, many of which have been incorporated by us as joint ventures together with other real estate and construction companies in Brazil.  Of our 271   SPEs, 68% are wholly-owned by us and 13% are majority-owned by us, and we hold an interest of 50% or less in the remaining 19%.

 

 

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Intellectual Property

 

Trademarks

 

Our trademarks are filed or registered in Brazil with the Brazilian Institute of Industrial Property ( Instituto Nacional de Propriedade Industrial ), or the “INPI,” which is the competent body for, among others, trademarks’ and patents’ registries in Brazil.  Besides, the trademark “Gafisa” is also registered before the competent agency for registering trademarks in the United States.

 

Currently, the registration process of a trademark takes approximately 30 to 36 months from the date of filing of the application until the definitive registration. From the date of filing of the application to the date of the definitive registration, the applicant has an expectation of right for the use of the trademark in connection with the products and services for which the trademark was applied for.

 

Each trademark registration is effective for a 10-year period and is renewable for equal and successive periods. The renewal of a trademark registration is granted upon request accompanied by payment of renewal fees during the final year of the trademark’s registration period or within the 6-month waiting period after its expiration. In case of non-payment, the registration is cancelled by INPI.

 

A trademark registration may be terminated in case (1) of expiration of its validity term; (2) the trademark owner or holder waives in whole or in part the rights granted by registration; (3) of forfeiture, or the applicant’s or the holder’s failure to use a registered trademark in connection with related goods or services for a period longer than five years; or (4) failure to appoint a Brazilian resident with powers to represent the applicant or holder in administrative or judicial proceedings, in cases where the applicant or the holder resides abroad.

 

As of the date of this annual report, we had approximately 150 pending trademark applications and 131 trademarks registered in Brazil with the INPI of which approximately (1) 12 pending applications and 110 registered trademarks refer to Alphaville, and (2) 37 pending applications and 12 registered trademarks refer to Tenda.

 

Our most significant trademark is “Gafisa,” which is duly registered with the INPI in the relevant market segment. Other relevant trademark we own, such as “Alphaville” and “Tenda,” are also registered with the INPI in several classes in connection with our daily activities.

 

Domain Name

 

As of the date of this annual report, we, together with our subsidiaries, were the owners of approximately 73   domain names including our and our subsidiaries’ principal websites. The term of each domain name registration is one year and is renewable for equal and successive periods. An annual fee payment is necessary for the maintenance of the domain name registrations. Other than non-payment of the annual fee, domain name registration may be cancelled by: (1) express waiver of the owner; (2) irregularities in the data form as requested by the respective agency; (3) non-compliance with applicable regulations; (4) judicial order; or (5) in the case of foreign companies, non-compliance with the obligation to initiate our activities in Brazil. Our domain names will, unless renewed, expire between July 2012 and April 2021. We will seek to renew our domain names expiring in 2012, after evaluating their continuing applicability.

 

Patents

 

We have no patents registered in our name.

 

Software Licenses

 

Most of the software we use in our daily business refers to common computer programs, such as Windows, SAP and AutoCAD. Additionally, we own all required licenses of use in connection with such software. The use of computer software without the acquisition of proper licenses is considered a felony subject to both criminal and civil liabilities, including the payment of fines and restrictions of future use of the applicable software.

 

 

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Licenses

 

Under Brazilian laws, we are required to obtain a variety of licenses for each of our new developments. As of the date of this annual report, we have obtained all necessary licenses and permits to operate our business.

 

Insurance

 

We maintain insurance policies with leading Brazilian insurance companies, such as Allianz Seguros S.A., UBF Garantias & Seguros S.A., Itau Unibanco Seguros e J.Malluceli Seguros S.A., Fator Seguradora S.A. and Áurea Seguros S.A., with coverage for, among others, (1) potential risks arising from the commencement of construction, including property damages, business interruption, engineering risks, fire, falls, collapse, lightning, and gas explosion; (2) construction errors; (3) performance bonds; and (4) losses arising from damages or defense costs associated with litigation resulting from misconduct of directors and officer. Such insurance policies contain customary specifications, limits and deductibles. Additionally, we do not maintain any insurance policy for our properties after construction is completed.

 

According to Brazilian Federal Law, it is mandatory that homebuilders have insurance policies in force with coverage for, among others, damages and losses related to civil liabilities and performance bonds. Failure or default in contracting any compulsory insurance required by applicable legislation is subject to a penalty amounting to the higher amount between (1) twice the premium price of the insurance that should have been contracted; and (2) ten percent of the insured property value. Additionally, no operating authorization or license (or the renewal of any existing license) shall be granted to companies subject to compulsory insurance in default of the aforementioned obligations.

 

Our management believes that the insurance coverage for our properties is adequate and that our insurance policies are customary for our industry in Brazil and adequate for applicable regulations. Although no assurance can be given, we believe that the amount of insurance we carry will be sufficient to protect us from material loss in the future.

 

Regulatory Framework

 

Brazilian Government and Real Estate Sector Regulations.

 

The real estate sector is directly regulated by the Brazilian government and is indirectly impacted by the government’s regulations on the availability of credit. Regulations include development policies, zoning restrictions and environmental laws which can determine the availability of different products offered in the market. For example, city master plans restrict the types of real estate developments that can be constructed in a given area.

 

As a general rule, the NBCC requires that the transfer of title of real estate properties, as well as the assignment, transfer, change or waiver of rights on real estate properties, be carried out by means of a public deed, except in certain cases, such as when the Real Estate Finance System ( Sistema Financeiro Imobiliario ), or SFI, or the SFH, are involved. The intent of this rule is to increase the security of property transfers.

 

According to applicable law, transfer of real estate title is only deemed effective upon the registration of the transfer with the relevant Real Estate Registry Office. The procedure for the execution of public deeds and also the respective registration with the Real Estate Registry Office ( Registro Imobiliário ) is regulated by the Brazilian Law of Public Registers ( Lei de Registros Públicos ).

 

Real estate development

 

Real estate development activities are regulated by Law No. 4,591 of December 16, 1964, as amended, or Law No. 4,591. The main duties of a developer are to: (1) obtain all required construction approvals and authorizations from the proper authorities; (2) register the development with the Real Estate Registry Office (without registration, the developed units cannot be sold); (3) indicate in the preliminary documents the deadline for the developer to withdraw from the development; (4) indicate in all advertisements and sales contracts the registration number of the development with the Real Estate Registry Office; (5) oversee the construction of the project established by the contract which must be in accordance with the approval granted by the authorities; (6) deliver to the final owner the