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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, September 19, 2018

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QIA Eyes Investment in Chinese Lender Lufax

The Qatar Investment Authority (QIA) is in talks about a possible investment into Shanghai-based Lufax, one of China’s largest online lenders. The seller of the possible stake is China’s Ping An Insurance (Group) Co. Ltd. Lufax’s official name is Shanghai Lujiazui International Financial Asset Exchange Co. Ltd.

Wealth Funds Back Hotpot Giant

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Japanese Government Capital Provides Initial Life for Texas Bullet Train

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Dallas-based Texas Central Partners, LLC is the developer of a proposed high-speed rail system, dubbed the Texas Bullet Train, between Dallas and Houston. Project costs are estimated between US$ 12 billion to US$ 15 billion. The developer secured US$ 300 million in project loans from Japan Overseas Infrastructure Investment Corporation for Transport & Urban Development (JOIN) and the Japan Bank for International Cooperation (JBIC). [ Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view content. ]

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DOJ Investing Tesla Over Musk Comments

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The U.S. Department of Justice (DOJ) is conducting a fraud investigation over Tesla as its CEO Elon Musk made public statements on twitter. This is a criminal probe. In addition, earlier, SWFI reported the U.S. Securities and Exchange Commission (SEC) is conducting a civil inquiry into Elon Musk regarding his statements.

This all surrounds Musk tweeting in August that he was thinking of taking Tesla private and had “funding secured” for the transaction. Both government authorities are seeing if Musk misled investors and violated federal securities laws with his public statements.

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