As foreigninvestment in U.S. real estate continues to increase, experts say foreigninvestors, sellers and rival bidders alike should be wary of potential tax hurdles,differences in deal-making style and other cultural customs. U.S. gatewaymarkets like New York, Los Angeles and Washington stand out as "safehavens" for cash from less economically stable regions around the world,and the trend of foreign investors picking up trophy properties in these citiescontinues to grow.
But expertssay that each party to such a transaction — the investor, any potential rivalbidders and the seller — should carefully consider the unique challenges thatarise when parties from different countries do a deal.
Here are three things to look out forwhen representing foreign investors or those working with them.
Foreign Investors: Prepare forFinancing and Tax Trip-Ups
Attorneysrepresenting the foreign investors looking to purchase U.S. property often facethe challenge of working with clients who are unfamiliar with U.S. financingand tax structure, experts say.
Taxconsequences can vary widely from client to client, based on their tax statusin the U.S. and in their own country and on the tax treaties between the two.Foreign individuals not considered U.S. tax residents may be subject towithholding taxes, either as estimates of taxes that they might owe or as flattax amounts, regardless of a deal's profitability.
In practice,this can mean a foreign investor is subject to tax on interest, leases ordividends, impacting how property ownership is structured, according to DanaNewman, a partner with Pillsbury Winthrop Shaw Pittman LLP.
Getting themoney back out of the U.S. after it's invested in a property here withoutpaying a disproportionate amount of sales tax can also be a major hurdle,Newman said.
"The overall issue is tax planning for a foreigninvestor to maximize their ability to get profits free of U.S. incometaxes," she said.
Financingcan be a problem for foreign investors as well, according to Wei Min Tan of NewYork buy-side condominium brokerage Rutenberg Realty, because U.S. banks lendto them at higher rates and require larger down payments.
"Thekey is to work with an experienced mortgage broker who has done many foreignertransactions," he said. "Just because a bank offers a foreignermortgage program doesn't mean all of its bankers are experienced working withforeign buyers, because that's a niche market."
And on somedeals, it may be necessary to explain concepts that U.S.-based clients take forgranted, such as the fact that a trusted third party, and not a family member,should conduct the deal, and that a deal must be written and signed in order tobe binding.
"It'simportant to explain this to foreign buyers because in many countries verbalagreements are binding," Tan said.
Sellers: Anticipate DifferingNeeds and Customs
Many of theforeign investors that are currently flocking to the U.S. are attracted toproperties with specific characteristics, and they also may not have atraditional way of going about acquiring them.
Because ofthe tax issues mentioned above, many foreign investors have a strong preferencefor buying property through acquiring real estate investment trust shares,according to John Sullivan, a partner with DLA Piper.
"Ifyou're a U.S. seller and you want to maximize the potential buyers for yourproperty, if you hold it in a private REIT, you make buying that property moreattractive for certain non-U.S. investors," Sullivan said.
This trend has led to an increase in thenumber of properties companies will put into private REITs even if there is noimmediate benefit to the company, with an eye toward attracting foreigninvestors in the future, according to Sullivan.
When itcomes to making the actual deal, experts say there are also some things thatmost U.S. investors might do as a matter of course that do not work for manyforeign investors, such as setting the deal up through limited liabilitycompanies. More typically, non-U.S. investors prefer to use offshorecorporations.
"Forsome non-U.S. investors, [using an LLC] has a very adverse tax result,"Sullivan said.
Rival Bidders: Beware ForeignInvestors' Pricing Power
The biggestissue for attorneys representing U.S.-based investors looking to compete withforeign investors on major deals — an increasingly common situation — is thedisparity in price constraints, experts say.
While manyU.S. investors look to purchase a property in an effort to make a quick return,either because they are investing through a fund with a short life or becausetheir investors expect to see the benefit of the deal quickly for otherreasons, a great number of the foreign investors currently doing deals in theU.S. are more concerned about stability than yields.
"They'rewilling to pay a premium, and many times they are the top bidder because theywill pay more for a certain type of asset," said Manny Fishman, ashareholder with Buchalter Nemer PLC.
But thereare ways to beat out foreign bidders, even if an investor can't offer the samehigh price.
Having agood track record of closing deals and being able to do so quickly, can put aU.S. investor ahead of a foreign rival, according to Fishman.
"Aseller is looking for someone that will close and has a track record ofclosing, and sometimes the foreign investor is not that person, even with thehigher price," he said.
Created on Dec 31st 1969 18:00. Viewed 0 times.
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