Commercial Investment Real Estate is the magazine of the CCIM Institute, the leading provider of commercial real estate education. CIRE covers market trends, current developments, and business strategies within the commercial real estate field.
Issue link: http://cire.epubxp.com/i/897832
COMMERCIAL INVESTMENT REAL ESTATE 32 November | December 2017 In a move that greatly expands the investor base for this new asset class during 2017, however, China's central bank authorized the first sale of a quasi-REIT in the vast inter- bank bond market. As Chinese investors become more familiar with the REIT concept, Chinese investment in U.S. REITs may increase. Demand for expertise in investment management and integrated solutions from commercial real estate profes- sionals has increased. Chinese private enterprises have become more willing to work with a local management team to handle their international investments, with a high level of flexibility and diversity. Pursuant to the 2017 China Private Wealth Report, 63 percent of Chinese HNWIs have their investable assets managed by third-party profes- sionals, compared to 36 percent in 2009. Family offices have become a popular vehicle to protect families' assets for future generations. Growing numbers of wealthy Chinese families are turning to family offices to assist them with their investments. Risk management in their global investments has become the top priority for Chinese enterprises. Chinese investors are increasing their requests for comprehensive, thorough due diligence. These stepped-up requests are partly because Chinese investors are facing increased regulatory and macro-economic risks, which do not apply to U.S. investors. When advising Chinese investors, commercial real estate professionals need to consider certain variables that are critical to Chinese investors. Non-U.S. investors may acquire, hold, dispose of, and enforce their rights in U.S. real property, similar to U.S. investors. Understanding U.S. Regulations However, various U.S. laws impose restrictions, as well as disclosure and filing requirements, that only apply to international investors. It is crucial for Chinese investors to understand the potential legal risks and issues with the assistance of experienced commercial real estate profes- sionals and attorneys. Following is a brief illustration of some of the important restrictions and requirements. CFIUS: A branch of the U.S. Department of Treasury, the Committee on Foreign Investment reviews potential transactions that could result in control of a U.S. business by an international person or entity. CFIUS determines the effect of such transactions on U.S. national security. With the authority to force divestiture of a completed investment in U.S. business, CFIUS can determine if national security could be adversely affected by a transac- tion. CFIUS has a process for voluntary pre-clearance of potential transactions that provides assurance that a trans- action will not be unwound. Most commercial real estate transactions will not be deemed to be risks to national security. However, several recent cases show that CFIUS issues may be relevant to commercial real estate transactions. If a target property is close to U.S. government property, military sites, or to criti- cal infrastructure, such as airports, power plants, or bridges, a CFIUS review may be needed. International ownership of office buildings whose tenants include secure U.S. govern- ment facilities also will be scrutinized. BEA reporting requirements. Global investment in a U.S. business or commercial real estate that results in an international person or entity owning 10 percent or more of the voting securities of a U.S. business comes under the administration and requires regular reports to the Bureau of Economic Analysis of the U.S. Department of Com- merce. Also through periodic reporting, the BEA monitors an equivalent interest of an unincorporated U.S. business enterprise, including a branch or real estate. FIRPTA. Under the Foreign Investment in Real Prop- erty Tax Act of 1980, the disposition of a U.S. real property interest by an international individual, which is the trans- feror, is subject to income tax withholding. FIRPTA autho- rizes the U.S. to tax international persons on dispositions of U.S. real property interests. Disposition includes a sale, exchange, liquidation, redemp- tion, gift, or other transfers. Persons purchasing U.S. real property interests, which are transferees, from international persons, specific purchasers' agents, and settlement officers are required to withhold 15 percent of the amount realized on the disposition, absent a waiver or exemption. Some other restrictions. Some federal and state laws impose restrictions on international ownership of U.S. farmland for continued agricultural use. The Agricultural Foreign Investment Disclosure Act requires all global inves - tors who acquire, transfer, or hold an interest in U.S. agricul - tural land to report these holdings to the U.S. Secretary of Agriculture. Some states may require disclosure of interna- tional ownership when forming or qualifying entities in the state. Some state laws also prohibit international ownership or licensing of public lands or exploration and mineral rights. Overall, Chinese investment in the U.S. is undergoing a transformation. By understanding Chinese investors and embracing their culture, commercial real estate profes- sionals can close international transactions for diverse U.S. properties. The legal frame work for commercial real estate and gen- eral business dealings differ between the U.S. and China, which can affect the success of closing a transaction. Com- mercial real estate professionals need to understand these differences and structure transactions with these principles in mind. Ying Genève DuBois is a partner at DLA Piper in Miami. Contact her at geneve.dubois@dlapiper.com. Lin Pang is an attorney at DLA Piper in Washington, D.C. Contact her at lin.pang@dlapiper.com.