The Real Estate market for FOREIGN INVESTORS (Brazilians, among others) by Marcelo Castro Alves
For a foreign investor, the US real estate market is a tricky road. There are many factors to consider, including those that are not directly related to the investment itself. Among those factors, the tax consequences are one of the most important. Depending on the structure the investor uses he will be exposed to estate tax in the US (low limit exemption), annual tax filings, FIRPTA Withholding, high bracket income tax, double taxation in the US, or even triple taxation when taking local jurisdiction taxation rules in consideration, branch profits tax and so forth. As one can see, having the wrong structure can quickly turn a great opportunity in a bad investment.
The other very important consideration is risk. Entering into the real estate market, this investor (let’s call him the “gap investor”) enters in a joint venture with the developer and shares with him, the profits and losses from the project. Since the developer gets most of his funding from a Lender, the Lender receives the property as collateral to the loan so if anything happens to the project, the Lender is secure. Now, we cannot say the same about the gap investor in his position, because if the project does not goes well, his collateral is the developer’s “word” alone and sometimes not even that.
Liquidity and diversification are also important aspects that an investor needs be aware of. Participating in one or just a couple of projects is riskier than diversifying investments into several different projects. The same can be said about liquidity, if you are tied to one or a couple of projects you can only get your money back when those projects are liquidated.
Therefore, the Fund structure becomes the investor ultimate best solution, and here is why. It’s structure:
Minimizes income taxes;
Eliminates investor’s exposure to estate taxes;
Solves other taxation issues;
Shields the investors from filing obligations;
Secures the investment with the real estate assets acting as Lender and equity investor at the same time;
Diversification: Diversifies investment into a larger number of projects to reduce risk;
Has several investments in projects running in different stages, which provides liquidity more often if investors need it; and
Has more transparency about the asset’s value and reports on the projects to the investors.