President Barack Obama has signed into law measures easing of a 35-year-old tax on foreign investment in United States 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.
“FIRPTA has historically made direct investment in US property a non-starter for trillions of dollars worth of foreign pensions,” said James Corl, a managing director at private equity firm Siguler Guff & Company. “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 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.
The new law also allows foreign pensions to buy as much as 10 per cent of a US publicly traded real estate investment trust without triggering FIRPTA liability, up from 5 per cent previously.
“By breaking down outdated tax barriers to inbound investment, the FIRPTA relief will help mobilize private capital for real estate and infrastructure projects,” said Jeffrey Doer, president and chief executive officer of the Real Estate Roundtable