New legislation could impact commercial real estate companies

Proposed changes to tax laws may spur increased foreign investment in commercial real estate.

Two U.S. Senators pushed for legislation that calls for foreign investment incentives in commercial real estate with the hope of reactivating commercial tenant interest.

In an effort to bolster commercial real estate activity and allow commercial real estate companies greater access to capital, U.S. Senator Robert Menendez, a Democrat from New Jersey, and Senator Mike Enzi, a Republican from Wyoming, proposed legislation that would relax tax obligations aimed at discouraging foreign investors.

"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." 

Significant penalties imposed by tax rules – such as the Foreign Investment in Real Property Tax Act – discourages foreign investments in U.S. real estate. Under these laws, a withholding tax is imposed on any gains made by foreign capital investment on domestic assets – tax laws that do not apply to any other form of investment class. 

It is precisely these restrictive tax laws that Menendez and Enzi seek to reform. Without reform, the more than $2 trillion in commercial-mortgage back securities and loans could go into default when payments are due in 2018. Consequently, if alternative investment channels are not opened up, there could be a drastic number of foreclosures. The Real Estate Investment and Jobs Act, if approved, would seek to reform such prohibitive tax laws, thereby freeing up greater amounts of capital to U.S. businesses.

"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." 

The Real Estate Investment and Jobs Act
Most notable of the changes proposed is the increase of stock a foreign investor can hold without enacting the FIRPTA tax. Foreign investors can only hold 5 percent of a companies stock. Under the new legislation, investors could hold 10 percent, allowing willing investors to participate to a greater degree without penalization.

An older position by the IRS would also be reinstated under the new legislation. Domestically controlled REITs liquidating distributions and redemptions would, once again, be treated the same way as a sale of stock, not as a sale of real estate that is subject to taxes.

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