CBRE Analysis Backs President’s FIRPTA Proposal


Back in March, President Barack Obama proposed changes to the Foreign Investment in Real Property Tax Act, suggesting (to the delight of much of the commercial real estate industry) that easing its barriers would increase foreign cash flow into the U.S., leading to job creation for the middle class.

Obama speaks about the sequester in WashingtonA new report from CBRE backs the president’s claims, arguing that the proposed changes could increase foreign investment in a number of major U.S. cities, particularly those with historically lower rates of return on investments, and trickle through the economy.

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“He was talking about the day-to-day workers,” said Jim Costello, Head of Americas Investment Consulting and Strategy at CBRE who, along with Jeffrey Kottmeier, CBRE’s Director of Research & Analysis, authored the report Foreign Investment in Real Property Tax Act (FIRPTA): Proposed Changes Could Reallocate Foreign Investment in U.S.

The report focuses on a change that, if it makes its way through congress, would exempt foreign pension funds from a 10 percent property sale withholding, freeing up capital for immediate reinvestment. The cash would ultimately make its way through the economy, translating into “high-paying, middle-class jobs” in construction and related industries, Mr. Costello said.

“Fundamentally, anytime you remove some of the barriers to the free flow of capital, it will be healthy in terms of getting into the areas that need it,” he said. “It’s helpful not just in terms of the investment market, but also on the real side of the economy.”

Currently under FIRPTA, foreign investors selling real estate in the U.S. must withhold 10 percent of a property’s sale price to ensure payment of taxes owed. While beneficial across the board, the report argues that cities with historically lower rates of return on investments could benefit the most, where the value of the 10 percent withholding can in some cases exceed the entire capital gain realized by a sale.

In Chicago, for instance, stable ongoing yield is more of a draw than the high appreciation seen in cities like New York, where, “when values go up, they go up quite a lot,” Mr. Costello said.

“In Chicago you still have a lot of development in the loop,” he said, “And that level of ongoing construction has put a bit of a cap on rent growth.”

Foreign investment comprised slightly less than 10 percent, or $26.9 billion, of total U.S. commercial real estate transaction volume in 2012, according to data cited from Real Capital Analytics. While the authors of the report declined to estimate how much those numbers could change, they suggested that it would be considerable.

The CBRE report also notes that the FIRPTA changes could also increase clarity and transparency for investors by replacing the current barriers with a single, clearly defined tax scheme, saving time and minimizing market distortions.

“If money wants to get into an investment in a particular area it will eventually get there, but if you ease the path it will happen faster and with more direct benefits,” Mr. Costello said.