Congress Punts Funding Deadlines … SEC to Vote March 6 on Climate Disclosures … Roundtable Urges EB-5 Guidance Correction

A bill passed by both chambers of Congress yesterday and signed by President Biden today punts a set of government funding deadlines to March 8 and 22, thereby preventing a partial government shutdown that was scheduled to start at midnight. (ABC News, March 1 | House bill text)

New Stopgap Goals

  • The new two-tiered stopgap bill gives policymakers some time to negotiate a full-year appropriations bill as a House-passed tax package is under consideration in the Senate. (See tax story below).
  • On Wednesday, congressional leaders announced the deal, which extends funding for the departments of Housing and Urban Development, Commerce, Energy, Transportation, and others from March 1 through March 8. The bill also extends funding for the Pentagon, Health and Human Services, Labor, and other agencies from March 8 through March 22.

SEC to Vote March 6 on Climate Rule

  • The U.S. Securities and Exchange Commission (SEC) announced a vote next week on whether it will adopt final rules requiring companies to provide certain climate-related information in their registration statements and annual reports.
  • The SEC’s “open meeting” to consider the climate rule will take place on Wednesday, March 6 at 9:45 am and will be webcast at www.sec.gov.

Roundtable Urges Congress to Correct EB-5 Guidance

  • The Real Estate Roundtable urged the leaders of the Senate and House Judiciary Committees this week to correct defective “guidance” enacted by the U.S. Citizenship and Immigration Services (USCIS) that is undermining the EB-5 Reform and Integrity Act of 2022 (RIA). [Roundtable EB-5 letter, Feb. 28, 2024]
  • The USCIS’s arbitrary guidance states that EB-5 investments made after RIA’s enactment must “remain invested for at least two years.” This position contradicts regulations kept by USCIS on its rulebooks for decades.
  • RER’s letter also explains that USCIS’s defective guidance exacerbates CRE’s current liquidity issues. For example, the agency’s position effectively eliminates the availability of EB-5 investment capital to help finance projects to convert underutilized commercial buildings to multifamily housing.  

The Roundtable is calling on Congress to correct the error with a short statutory change that codifies the long-standing regulatory approach, which couples the periods for EB-5 capital sustainment and conditional residency.

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U.S. Appeals Court Blocks Law Restricting Foreign Investment in Florida Real Estate

Congressional Research Service Report - Foreign Investment State Laws

A federal appeals court recently blocked enforcement of a Florida law that could have negative consequences for foreign investment in U.S. property and agriculture land. The Real Estate Roundtable has urged Florida officials for months to consider changes to the interpretation of the law’s broad language. As currently written, the measure could prevent U.S.-managed funds from pursuing investment opportunities in the state if there is any level of investor participation in the fund from “countries of concern.” (Roundtable Weekly, Feb. 2 and Dec. 15 | Reuters and WFTV, Feb. 2)

Foreign Investment in U.S. Property

  • The outcome of the case (Shen v Simpson) involving the Florida law (SB 264) could have national ramifications. At least 15 other states enacted similar legislation restricting foreign investment in U.S. real estate during the first six months of 2023. An additional 20 states are considering the issue. (Congressional Research Service, July 2023 and Gibson Dunn, Sept. 2023)
  • On Feb. 5, BisNow quoted a Sept. letter from Real Estate Roundtable President and CEO Jeffrey DeBoer to the Florida Real Estate Commission. The letter emphasized that non-U.S. investors may include small investors from China, who routinely subscribe to funds controlled or advised by regulated U.S. asset managers. Third-party, passive investors ordinarily invest as limited partners in the partnership, and do not have the right to participate in the partnership’s management, or exercise control over its underlying investments.
  • “Our concern with the new law is that these U.S.-managed investment funds, which are controlled and managed by U.S. nationals, may now be precluded from pursuing investment opportunities in Florida if there is any level of investor participation in the fund from countries of concern like China,” DeBoer wrote. (Roundtable letter, Sept. 5, 2023)
  • The Roundtable also submitted a comment letter on Jan. 30 to the Florida Department of Agriculture and Consumer Services, which is considering implementing SB 264 measures addressing foreign investment in Florida’s agricultural land. The Roundtable’s letter raised concerns about the unintended and negative consequences for investment in Florida and future economic growth. (Roundtable letter and Roundtable Weekly, Feb. 2)

SB 264 & FIRRMA

11th U.S. Circuit Court of Appeals
  • The 11th U.S. Circuit Court of Appeals, above, considered a ban authorized by SB 264 restricting certain Chinese citizens from owning homes or land in the state. The U.S. Department of Justice filed a “statement of interest” in the case, noting that SB 264 violates federal law and the U.S. Constitution. (Politico and NBC News, Feb. 2)
  • CFIUS is an interagency federal committee authorized to review certain transactions involving foreign investment in the United States and certain real estate transactions by foreign persons.
  • Roundtable Chairman John Fish (Chairman & CEO, Suffolk) was quoted in Bloomberg about Florida’s SB 264, stating, “The law is far-reaching, very, very confusing, and the unintended consequences would be very, very detrimental.” (Bloomberg, Dec. 11 | Bisnow and Inman, Dec. 12)

Oral arguments in Shen v Simpson are scheduled for this April. (Appeals Court order)

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Roundtable Recommends Changes to Implementation of Florida Law Limiting Certain Foreign Investments in Real Estate

Florida Department of Agriculture and Consumer Services

On Jan. 30, The Real Estate Roundtable urged the Florida Department of Agriculture and Consumer Services to consider several recommendations on implementing a new law that could have negative consequences for foreign real estate investment in the state. Twenty states have enacted restrictions on foreign investors in real estate or agricultural land, eight states are considering similar measures, and others are exploring the issue. (Roundtable letter)

Restrictions on Foreign Investment in U.S. Real Estate

  • The Florida agency is considering various aspects of the proposed rule, published on Sept. 21, which implements State Senate Bill 264 (SB 264). The law aims to limit and regulate the sale and purchase of certain Florida real property by “Foreign Principals” from “Foreign Countries of Concern.”
  • The Roundtable’s Jan. 30 letter commended the national security intentions of the Florida measure yet emphasized that the technical language of SB 264 is much broader in scope than the publicly stated intent of the law. The Roundtable also offered several recommendations to help achieve the law’s stated goals without discouraging U.S.-managed investment funds from pursuing investment opportunities in Florida.
  • Real estate and agricultural land are a critical element of Florida’s economy, with state property taxes contributing over 18% of its overall tax revenue. If legal language in SB 264 is not corrected, implementation of the law could have unintended and negative consequences for investment in Florida and the state’s economy.

Roundtable Recommendations

Real Estate Roundtable President and CEO Jeffrey DeBoer
Real Estate Roundtable President and CEO
Jeffrey DeBoer

The Real Estate Roundtable’s concerns with Section 204 (692.202) of SB 264 include:

  • The new law may prevent U.S. investment funds, controlled and managed by U.S. nationals, from pursuing investment opportunities in Florida if there is any level of investor participation in the fund from countries of concern like China. Non-U.S. investors routinely subscribe for small, generally passive minority interests in these funds. These third-party investors do not have the right to participate in the management of the funds in any way or exercise control over the partnership or its underlying investments.
  • A certain interpretation of a de minimis exception available for investment funds controlled by U.S. registered investment advisers could nullify the exception’s application to many different types of private funds controlled by U.S. asset managers that invest in Florida real estate.
  • Clarification is needed about the definition of a “controlling interest” that impacts exceptions to the law based on an investor’s meaningful ownership or influence. (SB 264 text).

This week’s letter from Roundtable President and CEO Jeffrey DeBoer urged the Florida agency to consider the impact of their interpretation and implementation effort carefully, so that they do not inadvertently prohibit major U.S. investments that are safe from control by foreign countries of concern. Clear legal clarifications to SB 264 can continue to promote safe real estate investment that encourages economic growth without sacrificing the security or economic interests of Florida.

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Florida Proposes Positive Clarification to Law Impacting Foreign Investments in Real Estate

Yesterday, the Florida Department of Commerce proposed a positive clarification to a recently enacted law impacting foreign real estate investment, with implications for similar laws in several other states. The clarification responds to a Roundtable request on Sept. 5 urging the Florida Real Estate Commission to consider specific concerns before implementing the new state law, which could impair capital formation and hinder the important role that legitimate foreign investment plays in U.S. real estate, the broader economy and job growth. (Roundtable letter, Sept. 5 and Roundtable Weekly, Sept. 8)

Section 203

  • The proposed rule published on Sept. 21 addresses the implementation of Florida Senate Bill 264 (SB 264), Section 203, signed into law on May 8. The new law aims to limit and regulate the sale and purchase of certain Florida real property by “foreign principals” from “foreign countries of concern.” The Florida Real Estate Commission will implement the new law. (SB 264 text).
  • Section 203 of the bill prohibits investment in real property near military installations and critical infrastructure.  Importantly, the de minimis exemption has been re-drafted, which (1) fixes earlier drafting errors to the Registered Investment Advisor exemption, and (2) introduces a new category of de minimis interests that categorically exempts passive indirect investment. (See highlighted areas in the Notice of Proposed Rule)
  • The proposed rule clarification remains subject to change during a 21-day public comment period and may include a formal hearing.

Section 204

  • Broader prohibitions in another area of SB 264—Section 204—generally preclude Chinese investors from acquiring “any interest” in any Florida real property anywhere in the state. Since the de minimis language and relevant statutory text are almost identical across Sections 203 and 204, The Roundtable is hopeful that similar language will be adopted during the rulemaking process for Section 204. 
  • The Sept. 5 letter from Roundtable President and CEO Jeffrey DeBoer notes that approximately $1.5 trillion of U.S. commercial real estate debt will come due in the next three years. Foreign equity investments in U.S. assets are often an important source of capital as commercial real estate owners seek to restructure, refinance or sell their properties.

DeBoer urged the Commission to “carefully consider the impact of your agency’s interpretation and implementation efforts of this new law so that it does not prohibit major investments in the state, which are safe from control by foreign countries of concern and promote growth without sacrificing the security or economic interests of Florida.” (Roundtable letter, Sept. 5)

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Roundtable Urges Clarifications to Florida Law Restricting Certain Foreign Investments in Real Estate

On Sept. 5, The Real Estate Roundtable urged the Florida Real Estate Commission to clarify their implementation of a recently enacted law that could have negative consequences for foreign real estate investment in the state. Twenty states have enacted restrictions on foreign investors in real estate or agricultural land, eight states are considering similar measures, and other states are exploring the issue. (Roundtable letter)

Restrictions on Foreign Investment

  • Governor Ron DeSantis signed into law Florida Senate Bill 264 (SB 264) on May 8. The new law aims to limit and regulate the sale and purchase of certain Florida real property by “foreign principals” from “foreign countries of concern.” The Florida Real Estate Commission will implement the new law. (SB 264 text).
  • Foreign investment is a major source of capital funding for U.S. commercial real estate projects, leading to job creation and economic growth for communities nationwide. Real estate is a critical element of Florida’s economy, and the state is one of the most popular states for foreign investment. Property taxes contribute over 18% of Florida’s overall tax revenue.
  • The letter from Roundtable President and CEO Jeffrey DeBoer notes that approximately $1.5 trillion of U.S. commercial real estate debt will come due in the next three years. Foreign equity investments in U.S. assets are often an important source of capital as commercial real estate owners seek to restructure, refinance or sell their properties.

Roundtable Concerns

  • The Roundtable’s letter supports efforts to protect the nation’s economic, military, and civil security, as well as the integrity of commercial real estate investments. The letter also reflects Roundtable members’ concerns that the new law may have a chilling effect on foreign investment in Florida real property, hinder foreign investment in U.S. real estate by legitimate enterprises, and act as a barrier to capital formation by law-abiding entities.
  • The comments detail how SB 264 expands the scope of the law beyond its publicly stated intent, which could have negative repercussions for Florida real estate markets and capital formation. (Roundtable letter)
  • The Roundtable letter includes a request for clarification about the definition of a “controlling interest” that impact exceptions to the law based on an investor’s meaningful ownership or influence. (SB 264 text).

DeBoer requests the Florida Commission to “carefully consider the impact of your agency’s interpretation and implementation efforts of this new law so that it does not prohibit major investments in the state, which are safe from control by foreign countries of concern and promote growth without sacrificing the security or economic interests of Florida.”

Global Investors in US CRE Report Positive Outlook, Growing Influence of ESG

AFIRE 2022  investments graphic

Global investors plan to increase net investment this year in US commercial real estate, with a focus on multifamily, life science and industrial assets, according to the Association for International Real Estate Investors’ (AFIRE) 2022 Annual International Investor Survey Report. 

Positive Outlook 

  • AFIRE CEO Gunnar Branson said, “With the 2022 AFIRE International Investor Survey Report, we now have a clearer picture on the longer-term impact of the pandemic on real estate investment, with altered cultural attitudes and sustained strength in investment in secondary and tertiary US cities—led by Austin, Atlanta, Boston and Dallas.” 
  • The survey’s topline findings include:
     
    • Seventy-five percent of respondents expect their volume of investment activity and revenue growth to increase over the coming year.

    • Eighty-one percent of surveyed investors agree that the pandemic has now permanently altered cultural attitudes towards US consumption and live-work preferences.

    • Environmental change, housing, and market affordability are top social concerns for investors.

    • Austin, Atlanta, Boston, and Dallas rank top US cities for planned investment this year.

    • London is the only non-US city among the top five for global investment in 2022, followed by New York and Seattle

Market Sectors & ESG Influence 

AFIRE graphic on ESG

  • The AFIRE report shows 90% of survey respondents plan to increase investment in multifamily over the next three to five years, followed by life sciences (77%) and industrial (7 %).
  • The growing influence of Environmental, Social and Governance (ESG) criteria is also clear, with survey respondents reporting:

    • Carbon footprint reduction measures (90%) and actionable climate change strategies (89%) are rated as the most important ESG priorities for US real estate investments in the near future.

    • Diversity (74%) and talent attraction/ development (75%) follow environmental factors among ESG trends.

    • Almost nine in ten respondents recognize the future financial benefit of taking action now on ESG. Notably, more than half of respondents (55%) agree that they would accept a lower than-expected rate of return if it meant realizing other social or environmental benefits

The annual survey responses were collected in February from the AFIRE membership—which represents nearly 175 organizations from 23 countries, with approximately US$3 trillion assets under management—and the global institutional investor community.

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Panel Draws Attention to How IRS Guidance is Impeding Jobs, Foreign Investment in U.S. Real Estate and Infrastructure

FIRPTA panel -- The Future of Real Estate Policy

Leading industry experts convened on Oct. 30 at the National Press Club in Washington for an in-depth discussion on IRS Notice 2007-55, which levies discriminatory tax penalties on foreign investment in U.S. real estate and infrastructure.  The panel detailed how the Notice subjects foreign owners of domestically controlled real estate investment trusts (REITs) to the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) when the REIT liquidates, thereby suppressing capital investment and job creation in the real estate industry.

  • The 2007 tax guidance from the IRS overturned long-standing practice that treated liquidating distributions and redemptions of REITs as sales of stock.  Under Notice 2007-55, these transactions are now treated as taxable distributions and subject to a burdensome capital gains tax – affecting only foreign shareholders.  In the 12 years since Treasury issued the Notice, there have been no clarifying regulations, which has created uncertainty among potential investors and deterred foreign investment in U.S.-based real estate and infrastructure.
  • Panelists at the event, sponsored by Unibail-Rodamco-Westfield, included Ryan McCormick, Senior Vice President and Counsel for The Real Estate Roundtable (far right in photo above); John Jones, Vice President of Government Relations for Nareit; Kevin Klein, Director of Tax Policy for the Organization of International Investment (OFII); Darin Mellott, Director of Research, Americas at CBRE; and David Polster, Tax Partner at Skadden Arps.
  • McCormick emphasized that FIRPTA is a tax burden that does not apply to any other asset class and noted that FIRPTA hurts the ability of the United States to attract outside capital for infrastructure improvements.  Treasury could act on its own to remove much of the FIRPTA burden simply by withdrawing the IRS guidance. “Anything the Administration can be doing now to drive our economy forward and create jobs, they should,” said McCormick.
  • Outright repeal of the outdated FIRPTA law is The Roundtable’s ultimate policy goal.  In April 2019, Representatives John Larson (D-CT) and Kenny Marchant (R-TX) introduced the Invest in America Act (H.R. 2210), a bill to repeal FIRPTA altogether.  The Roundtable and 19 national trade organizations – representing every aspect of constructing, developing, financing, owning, and managing real estate and infrastructure in the United States – wrote to Ways and Means Committee Members and other key House lawmakers urging them to support the legislation.  (Comment Letter, March 28)
  • Both Republican and Democratic lawmakers agree on the negative impact that the Notice continues to exert on infrastructure investments.  In 2017, 32 bipartisan members of the House Ways and Means Committee wrote to Treasury Secretary Steven Mnuchin urging him to repeal the Notice.  The lawmakers pointed to billions of dollars’ worth of investment that flowed to small and mid-sized communities when 2015 legislation eased some of the tax burden for foreign investors.

A report by the Rosen Consulting Group (RCG) estimated that FIRPTA repeal would generate an initial increase of between $65 billion and $125 billion in international investment in U.S. commercial real estate. This new level of activity would lead to the creation of 147,000 to 284,000 jobs throughout the economy and increase taxpayers’ income by $8 billion to $16 billion.  (Unlocking Foreign Investment in U.S. Commercial Real Estate, July 2017) 

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