Congress allows foreign investors bigger stakes in U.S. REITs
Publish Date: January 07, 2016
Federal legislation passed Dec. 18 will allow U.S.-based REITS to attract more capital from foreign investors. The new law, which relaxes the strict tax rules that govern foreign investment in real estate, had the support of ICSC and other commercial real estate trade associations. As an offset for this provision, there were updates to the REIT rules, including limits on REIT spinoffs from non-real-estate holding companies. Both provisions were part of a two-year tax-extenders package titled the Tax Increase Prevention and Real Estate Investment Act of 2015.
The first provision changes the Foreign Investment in Real Property Tax Act (FIRPTA) to increase the opportunities for U.S.-based real estate companies to attract foreign capital. Besides increasing the size of the stake a foreign investor may take in a REIT, this bill would modify the rules for determining whether an entity is domestically controlled for FIRPTA purposes, and also exempt U.S. real-property interests held by foreign pension funds from FIRPTA altogether.
The second provision, which limits the types of entities that may spin real estate holdings off into a REIT, is designed to pay for the FIRPTA changes, according to ICSC’s Office of Global Public Policy. The provision will not affect companies that have already started the process to spin off their real estate holdings. “It is important to note that this change will not stop real estate companies from electing REIT status, but will make it exceedingly difficult for a non-real-estate company to spin off its real estate portfolio into a REIT,” said Jennifer Platt, ICSC’s vice president of federal operations.
In addition to the FIRPTA reforms, the legislation includes a permanent 15-year depreciation schedule for leasehold, restaurant and retail improvements; a two-year extension of the Section 179D–enhanced deduction for energy-efficient commercial buildings (with changes to the efficiency standard); and technical modifications to the new partnership audit rules, such as changes to the method of determining underpayments with regard to the passive losses of publicly traded partnerships and the period of limitations for making adjustments.