Commercial Investment Real Estate November/December 2017 | Page 34
In a move that greatly expands the investor base for this
new asset class during 2017, however, China’s central bank
authorized the first sale of a quasi-REIT in the vast inter-
bank bond market. As Chinese investors become more
familiar with the REIT concept, Chinese investment in
U.S. REITs may increase.
Demand for expertise in investment management and
integrated solutions from commercial real estate profes-
sionals has increased. Chinese private enterprises have
become more willing to work with a local management
team to handle their international investments, with a high
level of flexibility and diversity. Pursuant to the 2017 China
Private Wealth Report, 63 percent of Chinese HNWIs
have their investable assets managed by third-party profes-
sionals, compared to 36 percent in 2009.
Family offices have become a popular vehicle to protect
families’ assets for future generations. Growing numbers
of wealthy Chinese families are turning to family offices
to assist them with their investments.
Risk management in their global investments has
become the top priority for Chinese enterprises. Chinese
investors are increasing their requests for comprehensive,
thorough due diligence. These stepped-up requests are partly
because Chinese investors are facing increased regulatory and
macro-economic risks, which do not apply to U.S. investors.
When advising Chinese investors, commercial real
estate professionals need to consider certain variables that
are critical to Chinese investors. Non-U.S. investors may
acquire, hold, dispose of, and enforce their rights in U.S.
real property, similar to U.S. investors.
Understanding U.S. Regulations
However, various U.S. laws impose restrictions, as well
as disclosure and filing requirements, that only apply to
international investors. It is crucial for Chinese investors
to understand the potential legal risks and issues with the
assistance of experienced commercial real estate profes-
sionals and attorneys. Following is a brief illustration of
some of the important restrictions and requirements.
CFIUS: A branch of the U.S. Department of Treasury,
the Committee on Foreign Investment reviews potential
transactions that could result in control of a U.S. business
by an international person or entity. CFIUS determines the
effect of such transactions on U.S. national security.
With the authority to force divestiture of a completed
investment in U.S. business, CFIUS can determine if
national security could be adversely affected by a transac-
tion. CFIUS has a process for voluntary pre-clearance of
potential transactions that provides assurance that a trans-
action will not be unwound.
Most commercial real estate transactions will not be
deemed to be risks to national security. However, several
recent cases show that CFIUS issues may be relevant to
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November | December 2017
commercial real estate transactions. If a target property is
close to U.S. government property, military sites, or to criti-
cal infrastructure, such as airports, power plants, or bridges,
a CFIUS review may be needed. International ownership of
office buildings whose tenants include secure U.S. govern-
ment facilities also will be scrutinized.
BEA reporting requirements. Global investment in a
U.S. business or commercial real estate that results in an
international person or entity owning 10 percent or more
of the voting securities of a U.S. business comes under the
administration and requires regular reports to the Bureau
of Economic Analysis of the U.S. Department of Com-
merce. Also through periodic reporting, the BEA monitors
an equivalent interest of an unincorporated U.S. business
enterprise, including a branch or real estate.
FIRPTA. Under the Foreign Investment in Real Prop-
erty Tax Act of 1980, the disposition of a U.S. real property
interest by an international individual, which is the trans-
feror, is subject to income tax withholding. FIRPTA autho-
rizes the U.S. to tax international persons on dispositions of
U.S. real property interests.
Disposition includes a sale, exchange, liquidation, redemp-
tion, gift, or other transfers. Persons purchasing U.S. real
property interests, which are transferees, from international
persons, specific purchasers’ agents, and settlement officers are
required to withhold 15 percent of the amount realized on the
disposition, absent a waiver or exemption.
Some other restrictions. Some federal and state laws
impose restrictions on international ownership of U.S.
farmland for continued agricultural use. The Agricultural
Foreign Investment Disclosure Act requires all global inves-
tors who acquire, transfer, or hold an interest in U.S. agricul-
tural land to report these holdings to the U.S. Secretary of
Agriculture. Some states may require disclosure of interna-
tional ownership when forming or qualifying entities in the
state. Some state laws also prohibit international ownership
or licensing of public lands or exploration and mineral rights.
Overall, Chinese investment in the U.S. is undergoing
a transformation. By understanding Chinese investors and
embracing their culture, commercial real estate profes-
sionals can close international transactions for diverse U.S.
properties.
The legal frame work for commercial real estate and gen-
eral business dealings differ between the U.S. and China,
which can affect the success of closing a transaction. Com-
mercial real estate professionals need to understand these
differences and structure transactions with these principles
in mind.
Ying Genève DuBois is a partner at DLA Piper in Miami.
Contact her at [email protected]. Lin Pang is an
attorney at DLA Piper in Washington, D.C. Contact her at
[email protected].
COMMERCIAL INVESTMENT REAL ESTATE