PRESIDENT Barack Obama signed into law a measure easing a 35-year-old tax on foreign investment in US real estate, potentially opening the door to greater purchases by overseas investors, a major source of capital since the financial crisis.
Contained in the $1.1-trillion spending measure that was passed to avoid a government shutdown is a provision that treats foreign pension funds the same as their US counterparts for real-estate investments. The provision waives the tax imposed on such investors under the 1980 Foreign Investment in Real Property Tax Act, known as Firpta.
“Firpta has historically made direct investment in US property a nonstarter for trillions of dollars worth of foreign pensions,” said James Corl, a managing director at private equity firm Siguler Guff & Co. “This tax law modification is a game changer” that could result in hundreds of billions of new capital flows into US real estate.
Foreign investors have flocked to the US real estate since the global economic meltdown, drawn by the relative yields and perceived safety of assets, from office towers and shopping centers to apartments and warehouses. The demand has helped drive commercial real-estate prices to record highs. Many foreign investors structured their purchases to make themselves minority investors and bypass Firpta.
REIT purchases
The new law also allows foreign pensions to buy as much as 10 percent of a US publicly traded
real-estate investment trust (REIT) without triggering Firpta liability, up from 5 percent previously.
“By breaking down outdated tax barriers to inbound investment, the Firpta relief will help mobilize private capital for real estate and infrastructure projects,” Jeffrey DeBoer, president and CEO of the Real Estate Roundtable, an industry lobbying group, said in a news statement.
Cross-border investment in US real estate has totaled about $78.4 billion this year, or 16 percent of the total $483-billion investment in US property, according to Real Capital Analytics Inc. Pension funds accounted for about $7.5 billion, or almost 10 percent, of the foreign total, according to the New York-based property research firm.
“Foreign pensions are such a low percentage of foreign investment in US real estate because of Firpta,” Corl said.
Investment surges
Foreign investment has surged from just $4.7 billion in 2009, according to Real Capital. Foreign buying this year as a percentage of total investment in US real estate is about double the 8.1-percent average in the 10 years through 2012.
Despite a perception that Firpta was a response to the wave of Japanese buying of trophy US property in the late 1980s and early 1990s, including Rockefeller Center and Pebble Beach, the act was actually passed in 1980 in response to international investors buying US farmland.
Under old rules, foreign majority sellers had to pay 10 percent of gross proceeds from the sale of US real estate, as well as additional federal, state and local levies that could increase the total tax burden to as much as 60 percent, according to the National Association of Real Estate Investment Trusts.
The change “is a huge deal,” said Jim Fetgatter, chief executive of the Association of Foreign Investors in Real Estate. “There’s no question” it will increase the amount of foreign investment in US property, he said.