WASHINGTON, D.C. – June 19, 2013 – (RealEstateRama) — U.S. Senators Robert Menendez (D-NJ) and Senator Mike Enzi (R-WY) today re-introduced legislation to promote access to private capital that will help boost America’s commercial real estate in the face of decreased property values and limited loan opportunities. This legislation will help communities avoid more vacant storefronts, lost jobs and lower tax revenues which would make full economic recovery more difficult.
“An empty storefront is a missed opportunity for growth and job creation,” said Enzi. “By encouraging more investment in the U.S. commercial real estate market, we can help revitalize communities across Wyoming and the country through job creation and increased economic opportunities.”
“As communities across the country continue to recover from the economic downturn and falling property values, commercial real estate properties throughout the nation are confronting an equity crisis that we must address,” said Menendez. “By increasing investment in commercial real estate, we can create American jobs and generate a need to build up surrounding infrastructure, including new sidewalks, roads and light rail projects. That’s the kind of positive chain reaction our economy needs.”
By 2018, more than $2 trillion dollars of loans held by insurance companies, thrifts, banks, and in commercial mortgage-backed securities will mature. Similar to home mortgages, if these borrowers cannot secure other funding options when these payments come due, commercial properties across the country risk foreclosure.
Certain tax rules – most of which were drafted before the current crisis could be foreseen – impose significant penalties on foreign investments in domestic real estate that do not exist on other types of U.S. investments such as corporate stocks and bonds. These rules, created by the Foreign Investment in Real Property Tax Act (FIRPTA) freeze out foreign investment in our real estate markets by imposing an arbitrary withholding tax on the gains realized by overseas capital invested in domestic properties.
At a time of fierce global competition for capital investment, we are still living by rules which penalize overseas investors for investing in U.S. real estate at a time when their capital is sorely needed, rules which apply to no other investment class.
Without reform of these rules, hundreds of billions of dollars in debt could go into default, triggering massive foreclosures, significant decreases in property values and a severe constriction of capital available for U.S. consumers and businesses.
The bipartisan Real Estate Investment and Jobs Act would implement efficient and meaningful reform of these tax rules to encourage more equity investment in U.S. real estate. These reforms would help save communities all across America from the drag of a wave of commercial real estate foreclosures, help to restart the credit markets, and free up capital to create jobs and economic opportunities for families in every region of the country.
These provisions would:
Reverse a misguided IRS Notice that drove investment out of US commercial real estate: The bill would reinstate a previous IRS position to allow redemptions and liquidating distributions to be treated the same as sales of stock in the case of a domestically controlled REIT. Before 2007, such distributions generally were treated as sales of the REIT’s stock, and not subject to US tax. In 2007, the IRS issued Notice 2007-55 which concluded that such distributions should be treated as sales of real estate and therefore subject to FIRPTA and possibly, branch profits tax. This proposal could not have come at a worse time as it joined with the economic crisis to devastate commercial real estate property values as foreign investors fled US real estate companies.
Increase the amount of stock minority shareholders can hold without triggering FIRPTA tax: Currently, foreign shareholders can own up to 5 percent of publicly-traded companies without triggering FIRPTA. There are numerous investors around the world who own just under 5 percent of these companies’ stock, but despite their willingness to invest in US companies, won’t dare to go over for fear of being ensnared by FIRPTA. The proposal would increase from 5 percent to 10 percent the exemption level threshold and apply the new threshold to investors in certain widely held qualified collective investment vehicles.