As we noted in a few of our posts, the commercial real estate market has shown positive signs that suggest it will be a banner year for investors. Demand for high level space is very active, and a number of projects (including the Rams’ new stadium) suggests that development near landmarks will be active for years to come.
Part of this new found demand for commercial space comes from foreign investment. And a move by Congress earlier this year sets the stage for more foreign money to come into Southern California’s real estate market.
Essentially, Congress relaxed the Foreign Investment in Real Property Tax Act. This law requires foreign investors to pay additional income taxes on their earnings when they sell a property in the United States. Initially passed in 1981, legislators were afraid of foreign investors purchasing large portions of commercial real estate, including farmland for future development.
The move was largely a defense against individual investors. However, more investment came foreign public pension funds which was viewed much more favorably. In fact, foreign pension funds have become the largest sources of foreign money used in commercial real estate projects, according to the Wall Street Journal.
To avoid the additional investment tax, foreign pensions previously purchased minority shares within real estate groups, since they were required to share ownership (and control) of such a property with other investors. But the new tax application may change this.
With this change, foreign investment in commercial real estate is expected to increase by $20-$30 billion per year. These new opportunities exemplify the need for experienced legal counsel with real estate projects.