EXPLANATORY NOTE TO CVM INSTRUCTION NO. 206, OF JANUARY 14, 1994.

Regarding the preparation and dissemination of information by institutions administering Real Estate Investment Funds, for the securities market and submission to the Securities and Exchange Commission – CVM.

1. INTRODUCTION

With the enactment of Law No. 8,668, of June 25, 1993, creating Real Estate Investment Funds, there was a need for regulation to establish the general conditions for the constitution and operation of these new entities. To meet this need, the CVM issued Instruction No. 205, of January 14, 1994. This Instruction is being issued to detail the norms related to the accounting and preparation of information to be provided to the market by the administrators of these funds.

The principle followed by the CVM in drafting this Instruction was to establish general accounting rules and to define the minimum information to be provided by the administrators of the Funds, encouraging broad disclosure and granting freedom for each entity to establish its own accounting planning, in order to meet its external disclosure needs, as well as managerial demands, flexibilizing the process.

This Instruction defines, within this line, the minimum statements to be disclosed, including explanatory notes, the basic structure of assets and liabilities, the valuation criteria for asset elements, and the deadlines for submitting information to the CVM and the market.

2. FINANCIAL STATEMENTS AND INFORMATION

The statements to be disclosed: the balance sheet, the income statement, and the cash flow statement, evidencing operating, investing, and financing flows, aim to allow a clearer view of the movement of resources of the real estate investment fund over a period. In addition to these statements, the fund administrator may disclose the statement of added value and others it deems appropriate.

Among the information to be presented in explanatory notes, there is one referring to the market value of the assets and rights existing in the assets of each Fund. The administrator of the Fund must, in this regard, process this information under the rigor of a technical evaluation based, especially when referring to real estate, which can be done by external entities or persons or by the administrator institution itself. It is important to remember that all information must be clear, concise, and non-misleading, and that administrators are responsible for its quality.

Information regarding the administrative charges of the Fund must consider the total, related to the average semi-annual net equity, in currency of constant purchasing power.

The administrative charges of the Fund must be appropriated as expense whenever they are related to the operational activity of the entity and cannot justify their activation (capitalization).

Specific expenses directly related to the formation of assets and general expenses in the pre-operational phase are eligible for capitalization, as commented in item 3.

According to the regulation drafted by the administrator institution and approved by the Securities and Exchange Commission, a proposal for the distribution of results to the quota holders will be made, which will be presented together with the financial statements, with adequate explicitness.

The financial statements will be disclosed exclusively in currency of constant purchasing power. All its transactions will be recorded normally based on the national current currency, according to the documents and concepts that guide accounting bookkeeping, respecting the fundamental principles of accounting and specific norms established in this Instruction, and the numbers thus determined will be submitted to additional processing, to convert the values into currency of constant purchasing power and prepare the final reports.

In this line, it is recommended that in commercial bookkeeping the concepts of adjustment to present value and monetary update are already adopted, as established by the Instruction object of this Explanatory Note and CVM Instruction No. 191, of July 15, 1992, aiming to simplify the process.

In cases of post-fixed sales, subject to increases based only on inflationary indices, without explicit interest, they will also be submitted to adjustment to present value, to discount the installments referring to real interest, at market rates adequate to the terms and other conditions of the transactions.

Regarding monetary update, CVM Instruction No. 191/92 provides, in its article 3rd, the possibility of adopting three alternatives for the periodicity of variation of the inflationary index, for the purpose of recognizing its effect on equity:

a) daily variation of the value of the UMC; b) average monthly variation of the value of the UMC; and c) mixed criterion of the previous alternatives, without prejudice to the quality of information and with the adjustments required so that the revenues and expenses representative of the operations carried out are adequately reflected.

With the current inflationary level, the daily variation of the UMC is the most recommended criterion, however, considering operational difficulties, the mixed criterion, with the required adjustments, is the most practiced and also produces good results, as it is essentially the daily criterion done in a simplified manner.

Considering the financial movement and the nature of the applications of Real Estate Investment Funds, it is recommended, in the current context, only the adoption of alternatives "a" or "c" previously presented, aiming to avoid distortions in asset valuation.

Thus, all monetary updates of monetary and non-monetary items would respect the daily variations of inflation indices.

3. ASSET STRUCTURE AND VALUATION CRITERIA

This Instruction defines only the major asset groups and the valuation criteria for their elements, giving freedom to the administrator institution to define its accounting planning and accounting system, in order to meet the established requirements and managerial needs.

The values related to the sale of business points in "shopping malls" and similar ("res sperata") were defined as investment income, in addition to the rent of the initial period, due to a normal maturity period of the enterprise as a whole and of the specific enterprise of the tenant. This is a general rule and is not subject to exception. The average period for appropriating these values to the result must be informed in explanatory notes to the financial statements.

The date of the sale of the property was defined as the moment of its transfer of ownership. The cost of the sold property, including any portion to be paid, must also be registered at the same opportunity to allow the comparison of revenue with the corresponding expense.

The liability thus constituted will be adjusted by the Civil Construction Index (ICC) – Regional, which corresponds to the locality where the work is being executed, unless there is a contract for its execution with a fixed price, in which case the contract adjustment will prevail.

All provisioned costs must correspond to an estimate of the present value that is as close as possible to the actual future disbursement.

The monetary variations of the provisions will be appropriated as expenses of monetary variations, to be compared with the monetary adjustments on the corresponding liabilities, in the accounting system in currency of constant purchasing power.

The provision differences, after accounting for monetary variations, will be appropriated as the cost of sold properties, in the periods in which they occur.

The costs of works are considered all expenses incurred with their execution, including eventual real interest on credits granted by third parties (suppliers of materials, services, and land), in this concept included the real commercial financial expense. If identifiable administrative expenses are directly related to a specific work, they will also be incorporated into its cost.

General administrative expenses (accounting, auditing, planning, budgeting, treasury, legal, "marketing", personnel administration, consumption materials, and general services, etc.) will only be eligible for deferral in the pre-operational phase.

In the case of receipt for the sale of a property for future delivery, the registration must be made in the liability, as a customer advance.

4. SEMI-ANNUAL INFORMATION

The income statement, the cash flow statement, and others that may be prepared, such as the statement of added value, to be presented semi-annually, must reflect, in the first semester, the movement of this period and, in the second, the movement of the complete annual exercise, including comparative values, dispensing with the disclosure of values related to the second semester.

5. ANNEX

In the attached set, model guidelines for financial statements to be prepared by the administrators of Real Estate Investment Funds are presented, without implying rigid standardization, so that administrators can act with freedom in the sense of optimizing the disclosure of information.

Signed original by
TOMÁS TOSTA DE SÁ
President

ANNEX TO THE EXPLANATORY NOTE TO CVM INSTRUCTION NO. 206, OF JANUARY 14, 1994

REAL ESTATE INVESTMENT FUND

BALANCE SHEET

ASSETS
CURRENT AND LONG-TERM
Cash and cash equivalents
Financial Applications
Fixed income securities
Fixed income funds
Other accounts receivable
Real estate applications
Properties for sale
Under construction
Completed
Accounts receivable from customers
Deferred period expenses

LIABILITIES
CURRENT AND LONG-TERM
Obligations for construction of properties
Obligations for acquisition of properties
Taxes and fees
Customer advances
Other accounts payable

RESULT OF FUTURE EXERCISES

• Sale of properties
• Rental
• Res Sperata received (net value)
• Rent
• Res Sperata
• Other
• Other applications

PERMANENT
Properties for income
Under construction
Completed
Land
Deferred

EQUITY
Investment Quotas
Paid-in
Reserves
Accumulated profits (losses)

OBS.: CURRENT AND LONG-TERM VALUES MUST BE DISCLOSED SEPARATELY, ACCORDING TO REALIZATION AND MATURITY DATES.

REAL ESTATE INVESTMENT FUND

INCOME STATEMENT

Revenue from sale of properties
Revenue from rental of properties

• Rent
• Res Sperata
  (-) Deductions, cancellations, and rescissions NET REVENUE Cost of sold properties Cost of rented properties GROSS PROFIT

Revenues

• Financial Appl. (Financial Market – net value
  • highlight the most important)
• Financial (commercial)
• Equity method result
• Other

Expenses

• Commercial
• Administrative
• Equity method result
• Other

OPERATING PROFIT (LOSS)
Real financial expenses
Other non-operating expenses/revenues
NET PROFIT (LOSS)

REAL ESTATE INVESTMENT FUND

CASH FLOW STATEMENT – DIRECT METHOD

CASH FLOW FROM OPERATING ACTIVITIES
(includes appl. in properties for sale)
Receipts from customers
Payment of administration fee (expense)
Payment of investment consultants (expense)
Payment of other suppliers of materials and services Payment of other operational expenses Commercial interest received Interest received from financial applications Financial Appl./redemptions/balance variation (highlight the most relevant) Extraordinary payments (legal action, ....) Extraordinary receipts (insurance,...) NET CASH FROM OPERATING ACTIVITIES

CASH FLOW FROM INVESTING ACTIVITIES
Receipt from alienation of properties for income Receipt from alienation of other permanent assets Acquisition of properties for income Other acquisitions (discriminate when relevant) NET CASH FROM INVESTING ACTIVITIES

CASH FLOW FROM FINANCING ACTIVITIES
Paid-in quotas
Redemption of quotas
Payment of earnings and capital gains (includes IRRF) Principal payment of acquired properties (installment purchases) NET CASH FROM FINANCING ACTIVITIES

NET INCREASE/DECREASE IN CASH AND CASH EQUIVALENTS INFLATIONARY EFFECTS ON CASH BALANCE CASH AND CASH EQUIVALENTS – BEGINNING OF PERIOD CASH AND CASH EQUIVALENTS – END OF PERIOD

GUIDELINES ON CASH FLOW

1. Long-term financial applications will be considered in investing activity;
2. Receipts from the alienation of properties for sale, even if long-term, will be considered in operating activity, maintaining the original concept of the transaction;
3. Cash equivalents are considered the values of short-term financial applications capable of immediate conversion into money, without value alteration (disregarding taxes incident on redemptions);
4. Changes in equity that occurred without affecting cash, such as the acquisition of a financed land, transformation of credits into quotas, etc., as well as values included as cash equivalents, must be the subject of explanatory notes.
5. If the movement of resources in financial applications is not intense, preference should be given to the disclosure of gross values of applications and redemptions, expressing net values (balance variations) only in cases of intense movement of applications and redemptions;
6. When disclosure refers to the variation of an active asset account balance, the real financial revenue included in the period must be excluded, to represent the actual cash movement or its equivalent;
7. Real Estate Investment Funds must also present a reconciliation of the cash flow from operating activities of the direct method (shown above) with the net profit (loss) of the period, as exemplified below;
8. The indirect method of cash flow may also be used, with the substitution of the flow of operating activities by that presented in the reconciliation of the result, in which case the interest received, commercial and from financial applications, must be disclosed.

RECONCILIATION OF RESULT WITH NET CASH FROM OPERATING ACTIVITIES.

NET PROFIT (LOSS)
Reconciliation adjustments
Depreciation and amortization
Provision for doubtful debts
Profit/loss on sale of properties for income
Receipt from financed sale
Equity variations
Variation in accounts receivable
Variation in properties for sale
Variation in deferred period expenses
Variation in passive accounts related to expenses and properties for sale Variation in other asset accounts, values related to expenses and revenues.
NET CASH FROM OPERATING ACTIVITIES