By: Anya Coverman, Senior Vice President of Government Affairs and General Counsel at the Institute for Portfolio Alternatives
As our industry evolves, our products continue to attract new investors, including foreign investors seeking access to high-quality U.S. real estate. Now, as the United States emerges from the pandemic, these foreign investments in our local communities will support a broad domestic recovery.
However, for these investors, the tax and regulatory burdens of the Foreign Investment in Real Property Tax Act (FIRPTA) of 1980 remain a significant barrier to foreign investments in U.S. real estate, specifically in public non-traded real estate investment trusts, preventing much needed economic support in communities across the country.
In the current economic environment, there is a critical need for additional investment in U.S. real estate. We should look for ways to increase the supply of affordable housing, ensure the U.S. tax code keeps pace with evolutions in the marketplace, and support the development of the U.S. real estate market and post pandemic recovery. Fortunately, a minor modernization to FIRPTA for public non-traded REITs—aligning their treatment under the rule to that of their publicly traded counterparts—could unlock this needed investment as we head into the next phase of recovery.
For the last year, our industry has been working closely with influential policymakers to help modernize the tax code through legislation that will advance parity between public non-traded REITs and exchange-traded REITs in the Internal Revenue Code. One result of this effort is H.R. 3123, Parity for Non-Traded REITs Act, a bill that was introduced in the U.S. House of Representatives in early May by Tom Suozzi (D-NY) and Darin LaHood (R-IL).
FIRPTA in the 1980s vs. FIRPTA Today
FIRPTA was debated in the late 1970s as a response from Congress to rising concerns with foreign investors buying U.S. real estate. FIRPTA is a tax law that imposes U.S. income tax withholding requirements on foreign persons selling real estate. Under FIRPTA, the Internal Revenue Service (IRS) requires withholding of 15 percent of the total amount realized on the sale of U.S. real property interests by foreign investors.
Since its inception, the bill has been met with bipartisan criticism for creating barriers to foreign investment in U.S. real estate. And in 2015, House Ways and Means Committee Chairman Kevin Brady (R-TX) and Congressman Joseph Crowley (D-NY), along with Senators Mike Enzi (R-WY) and Robert Menendez (D-NJ) successfully introduced the Protecting Americans from Tax Hikes Act (PATH Act), which made several important changes to the FIRPTA rules.
The PATH Act included provisions to encourage investment into U.S. real estate by exempting certain foreign investors from FIRPTA restrictions and increasing the amount of publicly traded REIT shares a foreign investor may own before triggering FIRPTA taxation.
One academic study showed foreign pension funds immediately and significantly increased their investments in U.S. exchange-traded REITs as a result of the changes made by the PATH Act. In whole, these changes made the application of FIRPTA for investment into U.S. real estate through publicly traded REITs less burdensome and more attractive to foreign investors, both individuals and institutions.
Parity for Public Non-Traded REITS
Since the PATH Act, non-traded REITs have evolved, resulting in a significant increase in demand from foreign investors. The products now offer increased liquidity, price transparency, and corporate governance, which have attracted global institutional asset managers – like Blackstone, Jones Lang LaSalle, Starwood Capital Group, and Nuveen TIAA – to sponsor and manage public non-traded REIT products.
The bill in Congress now would make investment in non-traded REITs more appealing for foreign investors by relieving these investors of a significant administrative filing burden. It has the potential to drive additional investment in multifamily housing at a miniscule cost – $36 million over 10 years according to a private estimate – to the federal government.
Importantly, recent surveys of public non-traded REITs indicate that approximately 63 percent of their investments in multifamily housing support workforce housing, defined as multifamily housing with rent less than 25 percent of mean family income in the surrounding area. Multifamily housing makes up 17.3 percent of non-traded REIT holdings as of June 30, 2020.
Parity for Non-Traded REITs Act
H.R. 3123 would expand the existing FIRPTA exception for “small” (i.e., no more than 10 percent of the REIT) foreign shareholders of publicly traded REITs to also benefit “small” foreign shareholders of public non-traded REITs. This legislation is consistent with long-standing tax policy – small shareholders in widely-held companies should not be subject to FIRPTA.
Without this exception, FIRPTA subjects foreign investor gains from U.S. real estate to U.S. tax and creates a U.S. tax return filing obligation. The latter has been found to significantly discourage foreign investment in U.S. real estate.
Now is the time to modernize FIRPTA and remove this barrier to foreign investments into U.S. real estate. Updating the tax treatment of public non-traded REITs and creating parity will encourage substantial investment into the U.S., bringing critical economic opportunity, job growth and support for affordable housing to communities across the U.S.
Together, as an industry, we must encourage Congress to advance the Parity for Non-Traded REITs Act. We have great champions of this bill on both sides of the aisle, and we look forward to moving this legislation through the halls of Congress in the months ahead.
Anya Coverman is senior vice president of government affairs and general counsel at Institute for Portfolio Alternatives where she leads all public policy and advocacy efforts.
The views and opinions expressed in the preceding article are those of the author and do not necessarily reflect the views of The DI Wire.