A publication of Winter issue 2015 sponsored by CRE Finance World Winter 2015 23 Exhibit 1 Ten Year Sovereign Debt Yields (December 2014) Source: Bloomberg Exhibit 2 Foreign Capital Invested in U.S. Real Estate (December 2014) Source: Real Capital Analytics As noted above, global investment in U.S. real estate is steadily on the rise and at record levels. In addition to traditional participants, new entrants are joining the landscape daily with immediate demands for U.S. allocation. Attribute #1 — Favorable Tax Treatment One of the challenges for foreign investors investing in U.S. commercial real estate equity is the Foreign Investment in Real Property Tax Act (FIRPTA) of 1980 which requires non-U.S. investors to pay a 10% withholding tax on the sale of U.S. property investments. Such a tax puts foreign buyers at a competitive disadvantage and diminishes their overall returns. While the White House has proposed a repeal of the FIRPTA tax, which, if enacted, could have a major impact on increased U.S. investment, no such repeal has been put into place. Until the time of repeal or diminution, if ever, CRE Debt in most forms (and CMBS, in particular) is exempt from such adverse taxation, giving it a competitive advantage against similarly priced equity, as illustrated below. Exhibit 3 Dilutive Effects of FIRPTA on Equity CMBS debt is exempt from FIRPTA and other U.S. taxation and qualifies for exemption from U.S. withholding under the “Portfolio Interest Exemption” as long as the investment is purchased (versus originated, thus making it part of “a U.S. trade or business”), remains in the form of a loan (versus being foreclosed upon or containing an equity participation), is “debt-for-tax,” and remains unleveraged. While there may be solutions that address certain of these exemptions, such as creating off-shore “blockers” in the case of a foreclosed asset, CMBS debt, plain and simple, is exempt from FIRPTA and other U.S. tax and thereby represents an advantaged way to access U.S. real estate. Attribute #2 — A Logical First Step Providing Visibility and Exposure to the U.S. Property Markets A compelling attribute of CMBS for off-shore investors is the visibility and exposure that CMBS provides into a variety of sponsors, asset classes and geographic regions at attachment points that are by definition senior to, and thereby more conservative than, the corresponding equity. Since CMBS bonds may be acquired in denominations as small as $1 million and up to as large as $500+ million, an investment of just $10 million could create exposure to as many as ten different CMBS trusts with financial reporting and performance visibility on as much as $15 billion of real property across the country. Such broad exposure could represent an ideal “first step” in approaching the property markets to gain valuable insights and perspectives about regions, economic trends, property types and sponsors. U.S. CMBS — Five Compelling Attributes for Foreign Investors
CREFW-Winter Edition
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