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Section 899 Update

June 24, 2025

Real estate market participants and other industries with a global investor base are concerned about Section 899, a provision that would impose retaliatory income taxes on foreign investments and companies in the U.S.

• CREFC joined other real estate industry groups in raising concerns about the provision in the House-passed One Big Beautiful Bill (OBBB) to Senate leadership. In a letter to lawmakers, the groups suggested changes to exempt non-controlling foreign debt and equity investments from the retaliatory taxes. Click here for the letter.
• A CREFC fact sheet on the provision is available here.

Background: The House Version of OBBB contains a provision—Section 899—that would allow Treasury to impose annual income tax increases of 5% on any foreign individual, government, corporation, trust, foundation, and other similar entities in response to unfair tax treatment by a foreign country against the U.S.

• The provision responds to unfair taxes by increasing the rate of tax generally applicable to certain taxpayers connected to the foreign jurisdiction. The legislation describes a number of per se unfair taxes and also gives the U.S. Treasury Secretary authority to designate additional unfair taxes.
• The increased rate in the House version is capped at 20%, and the Senate is at 15%, which is in addition to any existing tax the entity pays. The effective tax rate could increase to 45% or 50% for foreign investors or companies.
• The Senate version would delay implementation of the tax until at least 2027.
• The Senate version includes an explicit 899 exemption for “portfolio interest,” which excludes many debt securities.
• The Senate version of the bill focuses the major retaliatory increases on countries with Undertaxed Profit Rules (UTPR). Countries with only discriminatory or other unfair taxes, like the digital service tax, would be subject to a super Base Erosion and Anti-Abuse Tax (BEAT).

Impact: The provision could chill investment in U.S. real estate debt and equity through a combination of increased costs and uncertainty as to whether the tax will apply to certain countries. 

• U.S. Real Estate: Potential chilling effect on cross-border capital flows into CRE, which includes $213 billion in the last five years and more than 10% in transaction volumes. Some estimates project foreign investors would need a 15% change in price to account for tax changes at the maximum rate.
• Foreign banks and other lenders: Additional tax on non-U.S. lenders providing financing to U.S. borrowers.
• Foreign investors in U.S. funds: Additional tax on non-U.S. investors in funds, including debt funds, providing financing and capital to U.S. borrowers.
• Securitized products: Investors in CMBS may be exempt from 899 under the portfolio interest exemption, but further analysis is being conducted on the scope of the exemption. There could be structures that exclude or include securitization products.
• U.S. Borrowers: CRE loans frequently include provisions in which the borrower contractually agrees to bear the risk of changes due to international tax law. For existing loans, any additional tax imposed under Section 899 would be the responsibility of the borrower, typically in the form of a gross-up payment to the foreign lender.

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CRE Securitized Debt Update

Private-Label CMBS and CRE CLOs

1. BX 2025-GW, a $1 billion SASB backed by a floating-rate, five-year loan (at full extension) for Blackstone to refinance the 846-room Grand Wailea Resort in Maui.
2. WHARF 2025-DC, an $875 million SASB backed by a fixed-rate, five-year loan for PSP Investments on the mixed-use Wharf development in Washington, D.C. The loan is part of a $1.025 billion fixed-rate mortgage, and the remaining A-notes are expected to be placed in future conduit transactions.
3. BMO 2025-5C11, a $698.1 million conduit backed by 37 five-year loans secured by 63 properties across 19 states from BMO, Starwood, SocGen, KeyBank, and Greystone.
4. PRM6 2025-PRM6, a $415 million SASB backed by a fixed-rate, three-year loan for Prime Group Holdings to refinance a portfolio of 33 self-storage properties.

By the numbers: Year-to-date private-label CMBS and CRE CLO issuance totaled $75 billion, representing a 71% increase from the $43.8 billion recorded for same-period 2024. 

Spreads Tighten

• Conduit AAA and A-S spreads were unchanged at +86 and +115. YTD, they are wider by 11 bps and 10 bps, respectively.
• Conduit AA and A spreads were tighter by 5 bps and 10 bps to +160 and +205. YTD, they are wider by 25 bps and 40 bps, respectively.
• Conduit BBB- spreads were tighter by 15 bps at +540. YTD, they are wider by 115 bps.
• SASB AAA spreads were tighter by 1 - 2 bps to a range of +113 to +142, depending on property type. YTD, they are wider by 8 - 25 bps. 
• CRE CLO AAA and BBB- spreads were unchanged at +145 and +390, respectively.

Agency CMBS

• Agency issuance totaled $3 billion last week, comprising $1.5 billion of Fannie DUS, $1.2 billion of Freddie K and Q transactions, and $251.8 million of Ginnie Mae transactions.
• Agency issuance for year-to-date totals $65.6 billion, 44% higher than the $45.6 billion for same-period 2024.

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Economy, The Fed and Rates

The Economy, the Fed, and Rates…

Economic Data & Inflation

• PCE and CPI Signals Mixed: May’s PCE is expected to tick up to 2.3% headline and 2.6% core. CPI came in at 2.4% YoY in May, slightly below forecasts. Tariff effects haven’t yet fully filtered into inflation. ING noted:

• Consumer and Housing Weakness: Recent data indicate a cooling economy. May retail sales declined 0.9%, and housing starts plunged 9.8%. Homebuilder sentiment has fallen, and inventories of unsold homes are rising. 

• Powell in Patience Mode: Chair Powell emphasized uncertainty and reaffirmed a wait-and-see approach:

• Political Pressure Mounts: Trump has publicly berated Powell and is advocating for cuts up to 3.5 percentage points.
• Futures Markets: Despite Trump's calls for immediate cuts, traders are pricing in two quarter-point cuts this year, beginning in October.

• Treasury Yields Remain High: 10-year Treasury yields remain elevated at ~4.4%, despite expectations for a Fed rate cut, reflecting skepticism in the bond market about fiscal sustainability.
• Bond Traders Hedging U.S. Default Risk: The bond market, not just the Fed, needs convincing on rate cuts. As Mike Sanders of Madison Investments noted:

• Options Market Bets: Despite concerns, some traders are positioning for a decline in long-term rates. Large trades have targeted a decrease in the 10-year Treasury yield to ~4.15% by the end of July, according to Bloomberg.

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