How to Build Direcional´s Model


The Brazilian Macroeconomic Environment: Direcional’s financial condition and performance are particularly influenced by factors such as the Brazilian macroeconomic environment, inflation, credit availability and interest rates.

Effects of Macroeconomic Conditions on the Brazilian Real Estate Development Industry and on the Results: Direcional’s business is directly affected by the Brazilian macroeconomic conditions. Changes in short-term and long-term interest rates, unemployment, inflation, real estate financing programs, consumer confidence and government policies may decrease the availability of credit and the purchasing power of the Company’s target public, adversely affecting demand for new units.

Minha Casa, Minha Vida Program: The Minha Casa, Minha Vida Program is a housing program created by the Brazilian federal government in April 2009. Direcional believes, based on experience with similar programs in other countries, that this program represents the beginning of public policies to decrease the housing deficit. The Company believes that it is among the few real estate development and construction companies that can participate in all income segments covered by the program.

Revenue Recognition and Development Costs: The Company’s sales are mostly made through installment sales, in which Direcional receives payments until the delivery of the units. After the delivery of the units, the Company looks to transfer its receivables portfolio to commercial banks, decreasing its risk in connection with receivables. For installment sales of completed units, the revenue is recognized when the sale occurs, regardless of the term to receive full payment.


Sales of real estate. Revenues from the sale of real estate consist of amounts received from the sale of our units. Pursuant to CFC Resolution No. 963, we recognize revenues from the development and sale of units to the extent of the financial completion of the development. Even if the development has been completely sold, revenues from the development and sale of units are only recognized in full to extent the construction is completed. Revenues from the sale of real estate are also comprised of revenues from adjustments for inflation for installment payments for units not yet completed.

Services rendered. Revenues from services rendered are derived from construction services rendered for third parties, primarily (i) under global construction agreements entered into with the CEF pursuant to the PAR and the Minha Casa, Minha Vida Program, and in states and municipalities under in the PAC, and (ii) administrative fees received in connection with projects developed in partnership.

Deductions from Revenues. Deductions from revenues are comprised of PIS and COFINS, which are levied according to criteria established by applicable tax law, which, in Direcional’s case, are levied on a cash basis. The Company also deducts taxes on services (Imposto Sobre Serviços). These taxes are recorded based on recognized revenues from real estate developments.


Operating Costs: The Company’s costs for units sold consist of land acquisition costs, construction costs (including foundation, equipment, structure, finishing, construction materials and labor) and development costs (including architectural projects, decoration of areas of common use, notarization fees and others), fees from loans and financings in connection with the construction of projects and management costs. Direcional’s costs also include financial expenses from loans granted by the SFH. The Company’s principal operating costs consist of construction costs. In the past years, construction costs represented, on average, between 50.0% – 55.0% of the VGV for each of its developments.

General and Administrative Expenses: General and administrative expenses include: services (auditing, consulting, attorneys’ fees and others), lease payments, payroll for employees providing support services, social contribution taxes, corporate expenses (preparation of minutes, financial statements), legal expenses (notaries, board of trade) and other expenses.

Selling Expenses: Selling expenses include expenses from sales commissions, advertising, setting up of sales kiosks and decoration of the model apartments.

Income Tax and Social Contribution: Income and social contribution taxes are calculated based on criteria established by applicable tax law, at 15.0% plus an additional 10.0% for income tax and 9.0% for social contribution. Pursuant to Brazilian tax law, we have elected the real profit regime. Most of our subsidiaries and affiliates have opted for the presumed profit regime. Pursuant to the presumed profit regime, our subsidiaries and affiliates determine their tax bases on gross revenues during the period. Income and social contribution tax bases are 8.0% and 12.0%, respectively, for real estate development revenues, and 32.0% of revenues from services rendered. Over these tax bases, the normal income and social contribution tax rates apply.

A real estate development company subject to the asset appropriation regime usually elects the Regime Especial. This regime levies a 6.0% rate for the following taxes: income and social contribution taxes, PIS and COFINS. The rate is calculated on the monthly property sales income realized from each real estate development. The tax rate from the Regime Especial is reduced to 1.0% on the monthly income from sales of units (i) subject to the Regime Especial, (ii) sold as part of the Minha Casa, Minha Vida program, and (iii) whose values do not exceed R$60,000. It is important to note that we have not yet used such benefit, and as a result, it has not affected our results. We estimate that we will take advantage of such tax benefit in future fiscal years, until such benefit terminates in 2013.

Since the accounting practice for the provision and payment of charges is different from the tax practice, we calculate assets or liabilities of deferred taxes and federal social contribution to reflect such temporary differences.