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Co-working: the collaborative economy and the Brazilian real estate market

30 / 04 / 2018

A long-term effect of the 2008 financial crisis is that markets have innovated to focus  more on sustainability, cost mitigation and collaborative business structures.

In this changing world, asset-sharing was a natural development for the real estate business.

Complex collaborative work spaces remedy an array of vacancy problems, such as empty desks, underused meeting rooms and substantial maintenance costs. In addition, co-working spaces with aggregated ancillary service packages help smaller companies and freelancers to focus on their main business activities, while scaling up the administrative office services they are able to enjoy. Such spaces also create an environment of business development and cooperation among users.

The first shared workspace appeared in New York during the 90s; collaborative spaces quickly became a here-to-stay trend. An independent survey[1] indicates that, as of December 2017, 18,900 co-working spaces, with an average of 130 members per workspace. were operating worldwide. While the shared co-working market is still largely dominated by specialized companies[2], it is now engaging traditional real estate players.[3]

In Brazil, co-working represents a disruption to the customary use of real estate property. Currently, there are over 1,000 co-working generating more than 5,000 direct jobs and over 1 million indirect jobs[4] in Brazilian territory. These numbers evidence the importance of such activity in our challenging market.

In Brazil, shared office services with tailored short-term contracts have benefited individuals, startups, small companies and even incubator affiliates of larger corporations. As this trend grows, one consequence being observed in Brazil is that long-term engagements (eg, lease agreements) are being replaced by flexible legal ties.

The current challenge in Brazil is to define the legal framework applicable to such collaborative work spaces, which combine concepts of short-term commercial lease with service rendering − a hybrid form of contract that so far is pending any supporting legal framework.

A federal collaborative workspace bill, # 8.300/2017, now moving through the House of Representatives,[5] aims to oversee such co-working activity.

The bill has not yet undergone formal review and rewording, but in its current form, it would set out that a manager of a co-working spaces is a service renderer and not a lessor.

The existence of this bill is a sign that Brazilian law is considering the co-working industry in much the same way that it regards the hospitality sector: that is, such business activity is mainly a service rather than a lease relationship. One consequence of this approach is an impact on taxation.

With regard to tax levying and related fiscal duties repercussions, it is important to highlight that service providers in Brazil are subject to a municipal service tax.

In addition, a recent São Paulo Municipality Law 16.757/2017, intending to tighten the tax control on emerging business, established that co-working providers are deemed jointly and severally liable for the payment of services tax with regards to the users of shared spaces that are not duly registered with the São Paulo municipal authority.[6]

The latter law generated significant opposition considering that the co-working service providers would assume a supervisory role with regard to the respective user as well as a potential liability before the tax authorities.[7] The debate around taxation of the co-working industry is ongoing.

On the other hand, it is interesting to note that the interpretation stated in bill 8.300/2017 − which treats co-working as a service − also aligns the co-working providers’ interests: the Brazilian Lease Law, 8.245/1991, is quite protective to lessees.

In a high-level analysis of the Lease Law, while lessees usually are allowed to terminate a lease without cause during the lease term −- as long as a non-substantial penalty is paid − termination by a lessor requires specific conditions, such as (a) a contractual breach by the lessee; (b) lack of guarantee; (c) government determination of urgent need for works; or (d) specific circumstances, in the case of a sale of the real estate asset.

There are also certain conditions in which a lessee has the right to require the automatic renewal of the commercial lease in order to protect the goodwill of the business.

Therefore, the categorization of  co-working as a service in the bill is interesting, from both the tax control and property management perspectives; but − again − this bill is not yet formally a law.

While the formal approval of other laws is pending, the definition of the co-working legal structure depends on the contract structure and the normative documents covering the use of the facilities and the interrelationship of the users.

Considering the lack of legislation on the matter, prudent businesses operating in Brazil are seeking to ensure that relevant contracts are well designed, including a detailed scope of services (if any) and use conditions, to help ensure that multi-users may operate in appropriate work conditions and  to avoid disputes concerning each user’s licensing, labor and tax regimes.

It is widely understood in Brazil that because the concept of co-working itself is constantly expanding, the need for further directives is growing.

Meanwhile, co-living projects in Brazil are taking baby steps. A project in São Paulo is integrating collaborative co-working spaces and temporary residences, mostly for freelancers and startup entrepreneurs willing to have an establishment and network in the Brazilian financial capital.[8]

Although the collaborative economy is a reality in Brazil, discussions about its impact and effects will not cease as long as the relevant tax treatment and legal framework remain uncertain.

CONTACTS:
Rafael Bussière
Partner of real estate
T: +55 21 3262-3048
E: rbussiere@cmalaw.com

Ana Beatriz Barbosa
Associate of real estate
T: +55 21 3262-3012
E: ana.barbosa@cmalaw.com

[1] 2018 Global Coworking Survey, Article By Carsten Foertsch referring to 2018 Global Coworking Survey supported by Nexudus, Essensys & WUN Systems – Access on 03/26/18 http://www.deskmag.com/en/1-7-million-members-will-work-in-coworking-spaces-by-the-end-of-2018-survey

[2] 5 Minute Guide: The Impact of Coworking Spaces on Real Estate, by Profimex. Access on 03/26/18 https://www.profimex.com/wp-content/uploads/2017/08/5MinuteGuide-TheImpactofCoworkingSpacesonRealEstateFV.pdf

[3] As an example, the French hospitality group AccorHotels has recently entered into an association with NextDoor, the co-working branch of Bouygues Immobilier. Access on 03/26/18 https://www.lopinion.fr/edition/economie/geants-l-immobilier-se-mettent-coworking-133291

[4] As per the rational for the Deputy bill # 8.300/2017 and research by the national co-working association ANCEV – Associação Nacional dos Coworkings e Escritórios Virtuais. Access on 03/26/18 http://www.camara.gov.br/proposicoesWeb/fichadetramitacao?idProposicao=2147960

[5] Deputy bill # 8.300/2017 – Access on 03/25/2018 http://www.camara.gov.br/proposicoesWeb/fichadetramitacao?idProposicao=2147960

[6] Access on 03/26/2018 http://www.ibet.com.br/wp-content/uploads/2017/11/LEI-16757.2017.pdf

[7] Access on 03/26/2018 http://www.coad.com.br/home/noticias-detalhe/84422/coworking-e-iss-a-economia-compartilhada-na-mira-do-municipio-de-sp

[8]See http://www.startupsstars.com/2015/05/co-living-em-sao-paulo-uma-nova-experiencia-empreendedora/ Access on 03/26/18.