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FIRPTA Reform a Boon for Sovereign Wealth Funds

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The Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) has been an albatross on the neck for many international institutional investors such as sovereign funds and overseas pensions. The act has prevented more overseas capital to flow into the United States. From SWFI’s proprietary Sovereign Wealth Fund Transaction Database, for the calendar year 2015, US$ 14.49 billion has been directly invested by sovereign wealth funds into U.S. real estate versus US$ 18.84 ex-United States. These numbers reflect data from December 25, 2015 which is not fully calculated for the whole year as more data is being aggregated. These numbers do not include investments in private, commingled real estate funds. Non-U.S. institutional investors like Norway’s Government Pension Fund Global (GPFG) and the Abu Dhabi Investment Authority (ADIA) have had to structure purchases to make themselves minority investors, bypassing FIRPTA. Things are about to change. For example, will the Korea Investment Corporation (KIC), a sovereign investor in U.S. real estate investment trusts (REIT) boost exposure after the law change?

On December 18th, U.S. President Barack Obama signed the Protecting Americans From Tax Hikes (PATH) Act of 2015 into law. Inside the act were reforms to FIRPTA. Non-U.S. investors such as non-U.S. sovereign wealth funds can now hold up to 10% of a publicly-traded U.S. REIT without triggering FIRPTA upon sales of the REIT stock or upon receiving process from a REIT’s disposition of assets. Before the reform, the threshold for FIRPTA’s trigger was 5%.

Favorable Treatment for Non-U.S. Pensions

Furthermore, the law change permits non-U.S. pension and retirement funds investments in U.S. REITs and real estate property interests to receive equivalent tax treatment under FIRPTA as U.S. pension funds. However, this specific change on favorable treatment did not extend over to non-U.S. sovereign wealth funds and non-U.S. insurance companies.

Why is this important? Typically, foreign persons and entities are not subject to U.S. federal income tax on U.S.-sourced capital gain. There is an exception; if the capital gain is effectively connected with a trade or business in the United States or is realized by an individual who is present in the U.S. for at least 183 days during the taxable year. In this instance, capital gains from a disposition of U.S. real property interest, which includes shares in a U.S. real property holding entity would be treated as being effectively connected with a U.S. trade or business. Built-in capital gains, with certain exceptions, must be recognized upon a foreign corporation’s disposition of a U.S. real property interest to a shareholder.

SWFI First Read, January 19, 2018

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RDIF Portfolio Company PhosAgro Raises Bond Issue

PhosAgro is a portfolio company of the Russian Direct Investment Fund (RDIF). The company price out a US$ 500 million 5.25-year Eurobond issue that has a coupon of 3.949%.

Alison Swonnell Named Global Head of Institutional Marketing at Fidelity International

Alison Swonnell was hired on as Global Head of Institutional Marketing at Fidelity International. She will be based in London and report to Chuch McKenzie, the firm’s global head of institutional clients. Before Fidelity, Swonnell was Director of Fund Operations for LCM Partners, an alternative investment management firm.

NY Governor Cuomo Seeks to Treat Carried Interest as Ordinary Income for State Taxes

On January 18, 2018, New York Governor Andrew Cuomo revealed he had submitted a bill to the New York State Legislature that seeks to treat carried interest as ordinary income rather than capital gains in regard to state taxes. Governor Cuomo in his press release said that the federal carried interest tax provision costs New York roughly US$ 100 million per year.

William Bain – Bain Founder Passes Away

Dated January 18, 2018, William Bain Jr. passed away at his home in Naples, Florida at the age of 80. Bain started at the Boston Consulting Group and left in 1973 to form Boston-based Bain & Co. By 1984, Bain formed Bain Capital alongside a number of colleagues including former 2012 Republican presidential nominee Mitt Romney. In a statement to the Boston Globe, Romney said, ” It’s hard for me to imagine my life and career without Bill Bain’s mentoring.”

Prostar Capital Gets Controlling Stake in Socar Aurora Fujairah Terminal

Prostar Capital now has a 90% control stake in Socar Aurora Fujairah Terminal FZC by purchasing 100% of the shares of Socar Aurora Terminals S.A. The Prostar Capital entities investing in the asset are Prostar Asia-Pacific Energy Infrastructure Fund and a co-investment fund managed by Prostar Capital for a large U.S. state pension plan. The storage terminals acquired in the Port of Fujairah in the United Arab Emirates.

Socar Aurora Fujairah Terminal FZC is a joint venture between State Oil Company of Azerbaijan Republic (SOCAR), Swiss-based commodity trader AURORA Progress, and the Government of Fujairah.

Prostar Capital started buying the terminal back in 2013 at 18.6%. The private equity firm eventually moved its ownership up to 40% on August 14, 2015.

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ISIF Plans to Back 20 Solar Farms in Ireland

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The Ireland Strategic Investment Fund (ISIF) and Hamburg-based Capital Stage, a solar and wind park operator, are financially backing the development of 20 solar farms in Ireland which has an estimated cost at €140 million. ISIF is funding 25% of the costs, with Capital Stage providing 75% of the costs.

The generation capacity is estimated at 140 MW, with each farm ranging between 5 MW to 25 MW. The majority of the solar farms will be located along the east and south-west coasts of Ireland. Power Capital, a Dublin-based energy company formed by Peter Duff and Justin Brown in 2011, is overseeing the developments.

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PNB to Buy Stake from Malaysian Developers in Battersea Power Station Project

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Malaysia-based Permodalan Nasional Bhd (PNB) inked plans to acquire a stake in the Battersea Power Station from Malaysian developers Sime Darby Property and SP Setia, which between them own 80 percent of the site located on the south bank of the Thames. [ Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view content. ]

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