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10/23/2012

Risk Factors

Risks Relating to the Company

Sonae Sierra Brasil may not succeed in implementing its business strategy.

Sonae Sierra Brasil considers the development of new shopping centers to be a key component of its strategy of growth. This growth depends on various factors and some of these factors are not under its control, such as the opportunity to acquire land on favorable conditions, approval of its new projects by governmental bodies, increases in consumer spending, stability of construction costs, and other risks related to it and the industry in which it operates. Additionally, competition in the Brazilian shopping center industry is increasing. Competition from other shopping centers may result in higher levels of investment than the Company would typically make in similar developments. The strategy may not be fully implemented or achieved. Sonae Sierra Brasil may also be unable to replicate its business structure in its new developments. If the Company fails to implement its strategy, its financial condition, results of operations and the trading price of its common shares could be adversely affected.

In addition, actual conditions may differ from the Company‘s estimates for expected occupancy, lease rates and its tenants’ sales volume, and it may be unable to operate successfully in new markets where acquired properties are located, due to a lack of market knowledge or understanding of local economies.

Moreover, the Company‘s future performance will depend on its ability to manage these new developments to generate growth in its operations. Sonae Sierra Brasil cannot assure you that it will manage its expansion successfully or that it will not adversely interfere with the existing structure. If the Company is unable to manage its growth successfully, it may not be able to maintain its current position in the market, which could adversely affect its financial condition, results of operations and the trading price of its common shares.

The development and construction activities of Sonae Sierra Brasil subject it to risks associated with this type of activity.

The Company intends to continue to selectively develop and construct new shopping center as new opportunities arise. Its development and construction activities include the following risks:

  • The Company may not proceed with development opportunities after expending resources to determine feasibility;
  • The construction costs of a project may exceed the original estimates;
  • Occupancy rates and rents at a newly completed property may not be sufficient to provide adequate returns on invested capital;
  • Rental rates per square meter could be less than projected;
  • Although leverage is not part of the Company‘s main strategy, financing may not be available to it on favorable terms for development of a property;
  • The Company may not complete construction and lease-up on schedule, resulting in increased debt service expense and construction costs;
  • The Company may experience a delay in being able to register its rights in some of the properties in the relevant real estate registry;
  • The Company may be held liable for defects and problems in the construction; and
  • The Company may not be able to obtain, or may experience delays in obtaining, the necessary zoning, land use, building, occupancy and other required governmental permits and authorizations.

Additionally, the time frame required for development, construction and lease-up of these properties means that the Company may have to wait years for a significant cash return. If any of the above events occur, the development of properties may hinder the Company‘s growth and have an adverse effect on its results of operations. In addition, new development activities, regardless of whether or not they are ultimately successful, typically require substantial time and attention from management.

Any of these factors relating to greenfield development and construction activities may adversely effect the Company.

Financial difficulties at anchor stores may reduce revenues.

Including movie theaters, leisure and supermarkets, approximately 59.5% of the GLA in the shopping center portfolio was occupied by anchor stores, such as C&A, Walmart or Lojas Renner, as of September 30, 2010. If, due to financial difficulties or other considerations, any of these anchor stores defaults on its lease payments, terminates its leases or fails to renew them upon their expiration, Sonae Sierra Brasil may not be able to replace these anchor stores with stores of the same category and/or under the same terms, on a timely basis or at all. This in turn may negatively affect the mix of stores in a given shopping center, and its attractiveness to new tenants, and may adversely affect the Company.

The shopping centers are located in large urban areas and may be adversely affected by urban violence.

The shopping centers of Sonae Sierra Brasil are located in large urban areas which can be subject to high levels of crime and urban violence. If violence (or fear of violence) escalates or poses a threat to the safety of customers, tenants and employees, foot traffic in the shopping centers could decrease or the Company may be forced to close the shopping centers temporarily, which may adversely affect its results of operations.

Sonae Sierra Brasil may not succeed in integrating future acquisitions of shopping centers into its business, which may adversely affect its operating results.

The strategy of Sonae Sierra Brasil also contemplates possible future acquisitions of shopping centers. When the Company acquires a shopping center, it is integrated into the existing business. However, the Company may not be successful in acquiring new shopping centers at reasonable prices or conditions or with regularity, and this may undermine its growth capacity. In addition, the store mix and other characteristics in the shopping centers the Company acquires may not be compatible with its existing business or its future strategy and, to the extent that it is required to devote its time and financial resources to integrate them into its portfolio, management may lose its focus on other aspects of the business, which in turn may adversely affect the Company‘s financial condition and results of operations.

In addition, acquisitions of interests in new shopping centers also expose the Company to the pre-existing and contingent liabilities relating to the acquired shopping centers or their management. The due diligence procedures in connection with any acquisition and any contractual warranties or indemnities that Sonae Sierra Brasil may obtain from the sellers may be insufficient to fully protect or compensate it for possible contingencies. A material contingency related to an acquisition may adversely affect the Company.

Sonae Sierra Brasil may be subject to unfavorable judicial or administrative decisions.

Sonae Sierra Brasil is required to defend itself against legal and administrative proceedings related to civil, antitrust, labor and tax matters. The Company cannot assure you that it will obtain favorable decisions in such proceedings, or that they will be dismissed, or that any provisions that it records in respect of such proceedings will be sufficient to cover actual losses. Judicial or administrative decisions requiring the Company to pay substantial sums, which conflict with its interests or impede its operations as planned, may have an adverse effect on the Company.

Properties acquired may contain environmental risks and the construction activities could expose Sonae Sierra Brasil to environmental risks that could adversely affect its operating results.

The acquisition of properties and construction activities may subject the Company to liabilities, including environmental liabilities. Operating expenses could be higher than anticipated due to the cost of complying with existing or future environmental laws and regulations. In addition, under various federal and local laws, ordinances and regulations, Sonae Sierra Brasil may be considered an owner or operator of real property or to have arranged for the disposal or treatment of hazardous or toxic substances. As a result, it may become liable for the costs of removal or remediation of certain hazardous substances released on or in its property. Sonae Sierra Brasil may also be liable for other potential costs that could relate to hazardous or toxic substances (including governmental fines and injuries to persons and property). The Company could incur liability whether or not it knew of, or was responsible for, the presence of any hazardous or toxic substances. This potential liability could be of substantial magnitude, resulting in significant monetary damages, and divert management’s attention from other aspects of the business and, as a result, could have a material adverse effect on the Company‘s operating results and financial condition.

Some of the properties acquired to develop activities are not registered as owned by Sonae Sierra Brasil or its subsidiaries.


Sonae Sierra Brasil has acquired some properties to develop the activities relating to Shopping Penha and Boavista Shopping that have legal issues associated with them and which demand a certain period of time to be regularized. As a consequence, the Company has executed instruments of acquisition of these properties which cannot be registered in the relevant real estate registry prior to the execution of the final public deed of purchase and, consequently, it is not considered their owner for all legal aspects. This can subject Sonae Sierra Brasil to risks such as the sale of the same property by the seller to a third party or the creation of a lien on this property due to issues involving the seller until the Company is registered as the owner in the relevant real estate registry.

Relating to the Company‘s direct or indirect controlling shareholder or group

The interest of the controlling shareholders may conflict with those of investors.

After the conclusion of this offering, the Company‘s principal shareholder, Sonae Sierra Brazil 1, B.V., which is controlled by its indirect controlling shareholders DDR and Sonae Sierra, will own approximately [•]% of the common shares, without taking into account the exercise of the overallotment option. If the current indirect controlling shareholders continue to vote together as a single block, they will be able to, among other actions, elect a majority of the members of the board of directors of Sonae Sierra Brasil and determine the results of the resolutions that require shareholders’ approval, including transactions with related parties, acquisitions, financings, corporate restructurings and the payment of any future dividends, subject to mandatory dividend payment requirements imposed by the Brazilian Corporate Law. The controlling shareholders may have interests that could conflict with the interests of the Company‘s other future investors.

Sonae Sierra Brasil depends on key members of its management and its indirect controlling shareholders.

The Company‘s business is dependent upon the efforts of its board of directors and other members of the management team. If some of the key members of the board or senior management team were to leave the company, it may face difficulties in replacing them with comparably qualified individuals, which could have a material adverse effect on the Company.

The business is also dependant on the know-how and experience of its indirect controlling shareholders DDR and Sonae Sierra. The Company believes that their sponsorship represents a significant competitive advantage for the development and growth of its business activities. The indirect controlling shareholders are free to sell their interest in the Company to third parties subject to the terms of their shareholders’ agreement and Sonae Sierra Brasil cannot assure you that they will continue to be shareholders or be actively involved in the business.

Sonae Sierra Brasil holds minority interests in some of its shopping centers and depends on the consent of other investors, whose interests may differ from that of the Company.

Sonae Sierra Brasil holds minority interests in four of its ten shopping centers in operation, sharing the control with institutional investors, including pension funds and other groups whose interests may differ from that of the Company. In September 30, 2010, 10.1% of revenues from lease payments was derived from shopping centers controlled jointly or by third parties. The Company depends on the consent of these other investors to take certain significant decisions affecting its shopping centers.

The partners in some shopping centers may have economic interests different from that of the Company and may not support its strategic policies and business purposes. In the event that Sonae Sierra Brasil is not able to achieve sufficient support to approve certain actions that could affect its shopping centers, it may not succeed in adequately implementing its business strategies, which may adversely affect the Company.

Disputes between Sonae Sierra Brasil and its partners could result in litigation or arbitration, which may increase its expenses and reduce its margins, in addition to preventing its directors and officers from maintaining full focus on the business, which may adversely affect the Company.

Related to the Company‘s Suppliers

Sonae Sierra Brasil does not foresee any risks related to its suppliers.

Related to the Company‘s clients

The Company‘s financial performance depends on the results of its shopping centers, which in turn depends on tenants’ sales and its ability to maintain high levels of occupancy. The financial and operating results of Sonae Sierra Brasil depend to a large degree on the amount of rent received from its tenants. The rent is, to a significant extent, linked to tenant sales, which are in turn dependent on various factors related to consumer spending and other factors that affect consumer income, including prevailing economic conditions in Brazil and in the specific regions in which its shopping centers are located (and to a lesser extent, worldwide), general business conditions, interest rates, inflation, availability of consumer credit, taxation, consumer confidence in future economic conditions, employment levels and salaries. A reduction in the consumer flow in the Company‘s shopping centers as a result of any of these or other factors, or as a result of increased competition in the proximity of the shopping centers, could result in a decline in sales volumes, which could adversely affect the Company.

In addition, the Company‘s financial and operating results are dependent on its ability to maintain high levels of occupancy. As of September 30, 2010, 98.4% of available GLA in the Company‘s shopping centers was occupied. Certain events relating to tenants’ leases, including default in lease payments or lease renewal actions, could result in increased vacancy in the shopping centers, and Sonae Sierra Brasil can make no assurance that it will be able to maintain its current level of occupancy. Failure to maintain occupancy could have an adverse impact on the Company‘s operating revenue and results of operations.

Certain events relating to tenant’s leases, including default in lease payments, lease renewal actions or increased vacancy in its shopping centers, may have an adverse affect on the Company.

Income from rent, through lease agreements, is the Company‘s primary source of revenue. Any default in lease payments, changes in lease prices resulting from lease renewal actions or increase in vacancy levels of the shopping centers, including a decision by tenants to vacate their premises before their lease agreement expire, will result in a reduction of revenues, which may adversely affect the Company.

The fact that its shopping centers are public spaces may result in the occurrence of incidents beyond the control of Sonae Sierra Brasil, which could result in material damages to the image of its shopping centers and expose it to civil liability and unexpected costs.

The Company‘s shopping centers, as spaces opened for public use, have a high flow of consumers and as a result are exposed to a variety of incidents beyond its control and its prevention policy, such as accidents, thefts and robbery, which may harm its consumers and visitors and cause serious damages to its image. If any of these incidents or other incidents not foreseen by the Company were to occur, the shopping center’s flow of customers could be reduced due to lack of confidence in the premises’ safety, which could affect the volume of sales by the tenants and the results of operations of the shopping center. In addition, Sonae Sierra Brasil may be exposed to civil liability and be required to compensate victims, which could result in a decrease in its profit margin and results of operations. Any of these events could result in an adverse effect on the Company.

Related to the sectors of the economy in which the Company operates

Adverse conditions in Brazil and/or the regions where the shopping centers are located may adversely affect occupancy levels and the ability to lease available areas, as well as the sales of tenants.

The results of operations of Sonae Sierra Brasil depend substantially on its ability to lease the areas available in its shopping centers and on sales of tenants. Adverse conditions throughout Brazil and/or in the specific regions where the shopping centers are located may reduce occupancy levels and restrict the Company‘s ability to lease available areas efficiently and negotiate favorable lease rates and other terms, which may reduce tenants’ revenues, as well as the Company‘s revenues deriving from lease payments and consequently adversely affect its results of operations. In addition, the Company may be unable to reverse the effects of these adverse conditions in sufficient time or at all. The following factors, among others, may adversely affect the operating performance of the shopping centers:

Adicionalmente, a Companhia compartilha o controle ou é acionista minoritária em quatro dos dez Shopping Centers em funcionamento. É possível que precise obter a autorização desses outros investidores para tomar determinadas decisões significativas que afetem os objetivos estratégicos desses Shopping Centers. Os interesses econômicos de alguns dos parceiros nesses Shopping Centers podem ser diferentes dos da Sonae Sierra Brasil e os parceiros podem não apoiar ou aprovar tais medidas, o que afetaria ou evitaria a implementação das estratégias de negócios. Além disso, as disputas entre os parceiros e a Companhia podem resultar em litígios e processos de arbitragem que demandariam recursos adicionais e tempo. Esses tipos de risco poderiam afetar adversamente a Companhia.

  • Decreases in the occupancy level of the shopping centers and/or an increase in defaults by tenants could result in a decline in revenues from leases;
  • Declines in revenues due to economic recessions or a slowdown of the Brazilian economy;
  • Negative perceptions regarding the security, convenience and attractiveness of the locations where the shopping centers are located;
  • Increases in expenses relating to maintenance, renovations, repairs and re-leasing properties;
  • The inability to attract and maintain anchor stores;
  • Defaults or breaches by tenants of their contractual obligations;
  • Increases in the taxes levied on the business or in tenants’ businesses;
  • Increases in general, administrative and operational costs;
  • Regulatory changes affecting the shopping-center industry, including zoning rules; and
  • Competition by other types of retail stores and retail channels, such as e-commerce.
Sonae Sierra Brasil may experience losses not covered by insurance.

Although Sonae Sierra Brasil maintains insurance policies customary in the industry for the protection of its shopping centers, certain types of losses, such as losses resulting from acts of war, terrorism and civil disturbances and other acts of violence and criminal activity are not covered by insurance. If any such uninsured events occur, the Company‘s properties may adversely be affected, and it may be required to incur additional expenses. Sonae Sierra Brasil cannot guarantee that the amount of insurance it maintains will be sufficient to protect it against relevant losses. It also may not be able to renew its insurance policies on the same terms and conditions. Accordingly, it could be held liable for, and be required to compensate victims of accidents or other events beyond its control that occur within or affect its shopping centers. To the extent that these events are not fully covered by insurance, the Company could be adversely affected.

Many of the shopping centers face strong competition.

The shopping center industry in Brazil is highly competitive and fragmented, and there are limited barriers restricting new competitors from entering the market. The main competitive factors in the shopping center industry include entrepreneurship, vision, availability and location of land, price, funding, design, quality and reputation. In addition to competing with the Company in acquiring existing shopping centers, a number of shopping center developers also compete with it in seeking land for acquisition, financial resources for shopping centers and prospection of potential tenants.

The construction of a new shopping center or other commercial centers in the areas surrounding any of the shopping centers of Sonae Sierra Brasil may affect its ability to lease stores and areas in the shopping centers under favorable conditions. The arrival of new domestic or international competitors in the regions where it operates could require unplanned investments in the shopping centers, which may adversely affect the Company. Also, to the extent that one or more of the Company‘s competitors is able to increase its sales, its business could be materially and adversely affected. Sonae Sierra Brasil also faces competition from sales outlets, telemarketing and e-commerce. A reduction in consumer flows as a result of competition, or the lease of areas to tenants by competitors on more favorable terms than that of the Company, may lead to difficulty in renewing store leases, which in turn could result in an increase of vacancy rates in the shopping centers and have an adverse effect on the Company.

Political, economic and social developments and the perception of risk in other countries may adversely affect the market price of Brazilian securities, including the common shares issued by the Company.

The Brazilian securities market is affected to varying degrees by economic and market conditions in other countries, including other Latin American and emerging market countries. Although economic conditions in these countries may differ significantly from economic conditions in Brazil, investors’ reactions to developments in these other countries may have an adverse effect on the market price of securities of Brazilian companies. Crises or economic policies of other countries may diminish investor interest in securities of Brazilian companies, including the common shares issued by Sonae Sierra Brasil. In the past, political, economic and social developments in emerging market countries, including in Latin America, have adversely affected the availability of foreign capital to Brazilian companies, which resulted in significant amounts of capital leaving Brazil and a reduction in the amount of capital invested in Brazil. The occurrence of any such events in another emerging market country could adversely affect the market price of the common shares and could also make it more difficult for the Company to access the capital markets and finance its operations in the future on acceptable terms, or at all.

Global financial crises, such as the one observed in 2008, may adversely affect economic growth in Brazil, limit the access of Sonae Sierra Brasil to the financial markets and, therefore, negatively impact its business and financial condition.

The global financial crisis in 2008, principally driven by the subprime mortgage market in the United States, has substantially affected the international financial system, including the Brazilian stock market and economy. A deterioration of the global economic and financial principles or the occurrence of new financial and credit crises in the international financial system may have a negative effect on economic growth in Brazil. The liquidity and credit to fund the continuation and expansion of industrial business operations worldwide may be adversely affected again. The shortage of liquidity and credit combined with substantial losses in worldwide stock markets, including in Brazil, could lead to an extended worldwide economic recession or depression. A prolonged slowdown in economic activity in Brazil could reduce consumer demand and, consequently, adversely affect the Company‘s results of operations.

Sonae Sierra Brasil may also face significant liquidity challenges if conditions in the financial markets deteriorate. The Company‘s ability to access the capital markets or the commercial bank lending markets may be severely restricted at a time when it would like, or need, to access such markets, which could have an impact on its flexibility to react to changing economic and business conditions and its ability to carry out its growth-centered business strategy. The financial and credit crisis could have a negative impact on consumers or on the ability of the Company‘s service providers to meet their obligations to it, consequently adversely affecting the demand for its services and its ability to fund growth opportunities.

The Brazilian government has exercised, and continues to exercise, significant influence over the Brazilian economy. This influence, as well as Brazilian political and economic conditions, may adversely affect Sonae Sierra Brasil and the market price of its common shares.

The Brazilian government frequently intervenes in the Brazilian economy and occasionally makes significant changes in policy and regulations. The Brazilian government’s actions to control inflation and implement other policies and regulations frequently involve, among other measures, increases in interest rates, price and wage controls, currency devaluations, restrictions on remittances abroad, limits on imports and freezing of current accounts. Sonae Sierra Brasil does not have any control over what policies or regulations the Brazilian government may adopt in the future or the ability to anticipate them. The Company‘s business, financial condition and results of operations may be adversely affected by changes in policy or regulations that involve or affect certain factors, such as:

  • Inflation;
  • Exchange rate policies;
  • Domestic economic growth;
  • Social instability;
  • Reduction in liquidity of domestic capital and credit markets;
  • Monetary policies;
  • Interest rates;
  • Tax policies and changes to tax legislation;
  • Changes to labor policies and rules;
  • Power shortages; and
  • Other political, social and economic developments in or affecting Brazil.

Measures adopted by the Brazilian government or speculation about future governmental actions could lead to uncertainties concerning the Brazilian economy and increase the volatility of the domestic capital markets, which could adversely affect the Company‘s business, financial condition and results of operations.

A recent example of changes to tax policies was the collection of IOF on the inflow of funds to Brazil by non-resident investors for purposes of investments in the financial and capital markets in a registered public offer, at the rate of [2]% as of October 5, 2010. Uncertainty over the implementation of changes by the Brazilian government in the policies or rules that may affect these or any other factors in the future may contribute to economic uncertainty in Brazil and increase the volatility of the Brazilian securities market and the securities issued abroad by Brazilian companies. Accordingly, such uncertainties and other future developments in the Brazilian economy may adversely affect the Company‘s business, results of operations and the market price of its common shares.

Inflation and the federal government‘s efforts to combat inflation could contribute significantly to economic uncertainty in Brazil, which could adversely affect the Company‘s operations and the market price of its common shares.

Brazil has historically experienced high rates of inflation. Inflation, along with government measures to combat inflation and with public speculation about possible future government measures, have had significant negative effects on the Brazilian economy and have contributed to economic uncertainty in Brazil and heightened volatility in the Brazilian securities market. According to the General Market Price Index (Índice Geral de Preços—Mercado), or IGP-M, inflation rates were 7.7% in 2007, 9.8% in 2008, (1.7)% (deflation) in 2009 and 7.9% in September 30, 2010, and according to the Broad Consumer Price Index (Índice Nacional de Preços ao Consumidor Ampliado), or IPCA, published by the Brazilian Institute of Geography and Statistics (Instituto Brasileiro de Geografia e Estatística), or IBGE, Brazilian consumer price inflation rates were 4.5% in 2007, 5.9% in 2008, 4.3% in 2009 and 3.6% in September 2010.

If Brazil experiences high inflation in the future, this could increase the Company‘s costs and reduce the net income and operating margins of Sonae Sierra Brasil. The Company may not be able to adjust the rents it charges its tenants to offset the effects of inflation on its cost structure. Additionally, if inflation rates increase, potential anti-inflationary policies implemented by the Brazilian government may decrease economic growth and consumer purchasing power, which may have an adverse effect on the Company.

Exchange rate instability may adversely affect the Brazilian economy, the Company‘s results of operations and the market price of its common shares.

The Brazilian currency has been devalued periodically in relation to the U.S. dollar and other foreign currencies during the last four decades. During this period, the Brazilian government has implemented various economic plans and a number of exchange rate policies, including sudden devaluations, periodic mini-devaluations (during which the frequency of adjustments has ranged from daily to monthly) and floating exchange rate systems. From time to time, there have been significant fluctuations in the exchange rate between the real and the U.S. dollar and other foreign currencies. For example, the real depreciated 18.7%, 52.3% and 18.2% against the U.S. dollar in 2001, 2002 and 2003, respectively, and appreciated 8.1%, 11.8%, 8.7% and 17.2% against the U.S. dollar in 2004, 2005, 2006 and 2007, respectively. In 2008, primarily as a result of the international financial crisis, the real depreciated by 31.9% against the U.S. dollar and prompted foreign investors to remove billions of reais from the BM&FBOVESPA. In 2009, the real appreciated 25.5% against the U.S. dollar and as of December 31, 2009, the exchange rate was R$1.74 to U.S.$1.00. As of September 30, 2010, the real/U.S. dollar exchange rate was R$1.69 to U.S.$1.00. Sonae Sierra Brasil cannot not make any assurances that the real will not depreciate or be devalued against the U.S. dollar in the future.

Depreciations of the real in relation to the U.S. dollar could create additional inflationary pressures in Brazil and lead to increases in interest rates, which may negatively affect the Brazilian economy as a whole, including the level of consumption and, in particular, the Company‘s results of operations and the market price of its common shares. On the other hand, the appreciation of the real in relation to the U.S. dollar may impact Brazil’s current accounts and balance of payments, as well as reduce the gross domestic product due to increased importation of goods. For these reasons, foreign exchange volatility could have an adverse effect on the Company.

Fluctuations in interest rates may negatively affect the Company‘s business.

The Central Bank sets the basic interest rates generally available to the Brazilian banking system, based on the expansion or contraction of the Brazilian economy, inflation rates and other economic indicators. In 2002 and 2003, the basic interest rate fluctuated between 18.0% and 26.5%. The basic interest rate remained at high levels until June 2003, when the Central Bank began to gradually decrease it. Subsequently, during 2004 and in the first months of 2005, the Central Bank decided to increase the basic interest rate. Beginning in 2006, the basic interest rate declined, and as of December 31, 2009 the basic interest rate was 8.75% per year. As of September 30, 2010 the basic interest rate increased, reaching 10.75% per year. Any material increase in prevailing interest rates may have a negative effect on economic activity in Brazil, thereby reducing the spending power of the consumer markets that Sonae Sierra Brasil targets and, in turn, the volume of consumer purchases at its shopping centers, resulting in an adverse effect on the Company.

Increases in prevailing interest rates may cause the related costs and payments to increase through the floating-rate debt held by Sonae Sierra Brasil, resulting in an adverse effect on the Company. Moreover, Sonae Sierra Brasil may need to borrow money on a fixed-rate basis in the future to fund its working capital, acquisitions or developments, in which case high prevailing interest rates may adversely affect the Company.

Related to the sectors in which the Company operates

Lease agreements in the Brazilian shopping-center industry have specific provisions that create risks for the Company‘s business.

The commercial lease agreements for stores located within the Company‘s shopping centers are regulated by the Brazilian Lease Law (Lei do Inquilinato), which grants certain protective rights to tenants, such as the compulsory renewal of their leases if certain legal conditions are met. A compulsory renewal of a lease agreement represents two principal risks that may adversely affect the Company‘s results: (i) if it plans to vacate a store in order to change or adapt a shopping center’s mix of stores, such plan may be blocked if the tenant obtains a judicial order allowing it to keep possession of the store for the period of time stated in the judicial order; and (ii) if it desires to increase the lease rate for a store that is to become unoccupied, however subject to compulsory renewal, a court must determine the amount of the increase. In certain instances, a leaseholder may simply request a modification of its lease rate in court. The new lease rate, whether at the Company‘s or the tenant’s request, is subject to judicial interpretation and decision, based upon market considerations. Pursuant to this law, the court could decide to award the tenant a lease rate that is lower than the original lease rate paid by the tenant. Accordingly, Brazilian Lease Law may materially limit the Company‘s ability to manage the mix of stores in its shopping centers and on its ability to obtain lease rates from tenants that it deems to be acceptable, thus adversely affecting its financial condition and results of operations.

The Brazilian shopping-center industry is subject to extensive regulation, which may result in higher expenses or hurdles for the development of certain projects and adversely affect the Company.

The activities of Sonae Sierra Brasil are subject to federal, state and municipal laws, and to regulations, authorizations and license requirements with respect to construction, zoning, land use, environmental protection, historical heritage, leasing and condominiums, all of which affect its business. The Company is required to obtain licenses and permits from various governmental entities in order to develop, operate and manage its shopping centers. In the event of noncompliance with such laws, regulations, licenses and authorizations, the Company may face penalties or fines, shopping center closings, cancellation of licenses or revocation of authorizations, in addition to other civil and criminal penalties.

The companies in the industry in which Sonae Sierra Brasil operates are subject to increases of tax rates, new taxes and changes in the taxation regime. The Company‘s business is also subject to laws and governmental regulation that may restrict commercial activities of shopping centers, including prohibitions on charging for parking spaces and increases in property tax rates, such as the municipal tax on real estate (Imposto Predial e Territorial Urbano), or IPTU.

In addition, the Brazilian government may enact new and more stringent standards and regulations, or interpret existing laws and regulations in a more restrictive manner, which may require companies in the shopping center and real estate industries, including Sonae Sierra Brasil, to spend more funds to comply with these new rules.

Any such fines, cancellations, revocations or other penalties, or any new standards or regulations with which Sonae Sierra Brasil must comply may lead to adverse effects on it.

Sonae Sierra Brasil depends on the availability of public utilities and services, especially water and electricity. Any reduction in or interruption of these services may affect the operation of the Company‘s shopping centers and results of operations.

Public utilities, especially water and electricity, are fundamental for the sound and safe operation of the Company‘s shopping centers. Any material interruption of these services could result in an increase in costs and failures in its ability to provide services. In addition, if Sonae Sierra Brasil became responsible for the operation of these utility services, it would be required to hire outsourced and specialized contractors, which would likely involve additional costs and a significant increase in its operating expenses. Accordingly, any interruption in the provision of these utility services may adversely affect the Company‘s results of operations.

Related to the foreign countries in which the Company operates

Sonae Sierra Brasil does not operate in foreign countries.