Proposed changes to the Foreign Investment in Real Property Tax Act (FIRPTA) could increase potential foreign investment in gateway markets such as New York and San Francisco, while providing a significant boost in other core central business districts (CBDs) such as Chicago, according to a new report from CBRE Group, Inc.
Under FIRPTA, foreign investors selling real estate in the U.S. must withhold 10% of a property’s sale price to ensure payment of any taxes owed.
The proposed changes to FIRPTA would exempt foreign pension funds (though not other foreign investors) from this requirement, freeing up the withheld capital for immediate reinvestment.
According to the report, Foreign Investment in Real Property Tax Act (FIRPTA): Proposed Changes Could Reallocate Foreign Investment in U.S., the proposed changes could result in an increase in cross-border capital flows — which comprised slightly less than 10%, or $26.9 billion, of total U.S. commercial real estate transaction volume in 2012 — as foreign pension funds would be more willing to invest in U.S. real estate assets knowing they could immediately realize all proceeds from the sale of a real estate asset.
The CBRE analysis, written by Jeffrey Kottmeier, CBRE’s director of research & analysis, Washington, D.C., and Jim Costello, head of americas Investment Consulting and Strategy, finds that the proposed modification would be particularly beneficial for core CBD markets that have historically exhibited lower rates of return, such as downtown Chicago, where the value of the 10% withholding can exceed the entire capital gain realized by the sale.
“Foreign investors have largely targeted the strongest gateway markets like New York City, Washington, D.C. and San Francisco when entering the U.S. market. The proposed FIRPTA changes could spur foreign investment beyond these traditional gateway markets to other core CBD markets like Chicago and Atlanta, where investment returns have historically been somewhat lower,” said Kottmeier.
The CBRE report also notes that the potential FIRPTA changes could also increase clarity and transparency for investors by replacing the varying sets of tax regulations, exemptions and withholding requirements currently in place for foreign and domestic investors with a single, clearly defined tax scheme.