59 th UIA CONGRESS Valencia / Spain October 28 November 1, 2015 REAL ESTATE LAW COMMISSION October 31, 2015 Acquisition of Property, Portfolio and Infrastructure The Acquisition of Real Property in the United States by Non-U.S. Citizens By Steven J. Shore, Sandra L. Jacobus and William A. Jaskola (Ganfer & Shore, LLP) 360 Lexington Avenue, New York, New York, United States Phone: (212) 922-9250 Fax (212) 922-9250 Email: sshore@ganfershore.com UIA 2015
OUTLINE FOR ARTICLE ON FOREIGN BASED BUYERS OF U.S. PROPERTY I. INTRODUCTION II. ACQUISITION OF REAL PROPERTY IN THE UNITED STATES 1. Does the United States Accept Direct Acquisition of Real Property by Foreign-Based Individuals or Corporations? [Yes] 2. Are There any Specific Requirements or Restrictions for Acquisition by Foreigners? Is it Usual to Have Foreigners Directly Acquire Property or Otherwise use a Local Vehicle? [Yes to both, including selling implications under FIRPTA] 3. How Does the Legal System Protect the Acquirer? Registries? Title Insurance? [Usual protections are available to foreign buyers] 4. What is the Usual Process for Acquiring Property in the United States? [sets forth usual methods followed for property transfers in NYC] a. Due Diligence. b. Contract of Sale. c. Financing. d. Transfer of Real Property. 5. Is Limitation of Liability on the Part of the Seller Permitted? [Sets forth the various ways a seller can limit its liability with respect to real estate transfers, including title search, title insurance, etc.] a. Liability for Clear Title. b. Potential Hidden Liabilities. c. Is it Possible to Exclude all Liabilities from Seller? 6. What is the Treatment of Representations and Warranties in the United States? [Sets forth usual representations and warranties associated with transfer of real property and whether there are any restrictions due to foreign based buyer] III. CONCLUSION a. Is it Usual to Include a Set of Representations and Warranties? b. If so, What is Their Treatment? 2
The Acquisition of Real Property in the United States by non-u.s. Citizens by Steven J. Shore Sandra L. Jacobus William A. Jaskola I. INTRODUCTION. This report will set forth the basic framework by which foreign nationals can acquire commercial and residential real property in the United States, including the legal framework for the transfer of such property. 1 Since New York City has become such a focal point of foreignbased acquisition in the United States, this report will mainly focus on that jurisdiction. Prospective purchasers are cautioned that each of the fifty states, not to mention local municipalities, will have their own rules and regulations that must be followed for acquiring real property in their jurisdictions, and as always, local practitioners should be consulted in the desired jurisdiction for their local expertise. II. ACQUISITION OF REAL PROPERTY IN THE UNITED STATES. Below you will find an introduction to the treatment of real property acquisition in the United States generally, and New York City specifically. 1. Does the United States Accept Direct Acquisition of Real Property by Foreign- Based Individuals or Corporations? Yes, foreign individuals and corporations are permitted to acquire both commercial and residential real property in the United States, although for tax purposes and other considerations it is common for such individuals to form entities such as limited liability companies ( LLCs ) 1 It should be noted that the mere act of acquiring real estate in the United States does not confer U.S. citizenship or other special status on the purchaser, and that foreign nationals will have to abide by applicable Federal laws, such as obtaining visitor visas or other sanctioned status, in order to ensure that their presence in the United States is lawful. 3
here in the United States and to conduct the purchase in the name of the entity rather than the individual. Such real property purchases by foreign nationals comprise a multi-billion dollar portion of the real estate market in the United States each year. According the National Association of Realtors, for the 12-month period ending with March 2012 international buyers invested $82.5 billion in U.S. residential real estate, just under 5% of total U.S. sales, and for the period through March 2014 such figure was $92.2 billion or roughly 7% of the U.S. market. 2 Foreign buyers are also quite active in the commercial real estate market in the United States, including buying or building office buildings, apartment complexes, condominiums and other investment properties. 3 The top-five international buyers were from the United Kingdom, India, Mexico, China and Canada, and the top five states for such acquisitions were New York, Florida, California, Arizona and Colorado. 4 State and local laws with respect to such purchases can vary considerably, including restrictions and reporting requirements. For example, some states limit the acreage a foreign entity can buy, or limit the purchase and control of a type of land such as for agricultural use. In New York City, the purchase of residential real estate usually occurs in one of three forms, cooperatives, condominiums or townhouses, most commonly the latter two since LLCs and other entities can be used to protect buyer anonymity, while the same is generally not true 2 National Association of Realtors, 2014 Profile of International Home Buying Activity, Yun, Smith and Cororaton, June 2014. 3 BloombergBusiness, Foreign Money is Pouring into U.S. Real Estate, and It s Not Just Houses, Sarah Mulholland, May 13, 2015. 4 IBV Advisory Group, An Overview for Foreigners Purchasing U.S. Real Estate, May 29, 2015. 4
for cooperative ownership. 5 Cooperatives often have strict rules that must be met by prospective purchasers, including requiring that the identity of the individual purchasers be revealed, requiring the presence of assets in the United States, vetting prospective purchasers by a board comprised of other residents of the cooperative, as well as other considerations such as more onerous equity requirements, occupancy requirements, subletting restrictions, promulgation of house rules, and other similar requirements. For these reasons, foreign buyers in New York City are much more likely to purchase a condominium or townhouse rather than shares in a cooperative. 6 2. Are There any Specific Requirements or Restrictions for Acquisition by Foreigners? Is it Usual to Have Foreigners Directly Acquire Property or Otherwise use a Local Vehicle? In general, there are few restrictions on foreign investment in the United States, including the acquisition of commercial or residential real property, save for specific industries which are heavily regulated such as radio and broadcast television, satellites and aviation, and energy. Restrictions under Federal law, applicable to all states and local municipalities, provide limitations only to buyers from countries with which the United States is at war, or who are subject to travel and/or trade restrictions. 7 It is also possible that the foreign buyer s home 5 Cooperative associations are privately held corporations in which shares are issued and each shareholder is designated a specific apartment in the cooperative s building, and real estate taxes and general upkeep of the building are shared by all shareholders proportionally through monthly assessments. Condominiums treat each apartment as its own parcel of land with each owner required to pay for the upkeep on the apartment and to pay property taxes assessed against such apartment. Condominium apartment owners also pay monthly charges for the upkeep of the common areas of the building and for building staff and other services and amenities. Townhouses are generally individually owned and all taxes and upkeep are the individual owners responsibility. 6 It also bears noting that newly built condominiums often have tax incentives associated with such purchases which greatly reduce the annual real estate tax obligations for purchasers, in some instances for as long as ten years after the initial purchase. For this and other reasons the condominium apartment has become the favored form of residential real property ownership for foreigners in New York City. 7 For example, the Office of Foreign Asset Control may become involved in a foreign party real estate transaction if the foreign party is flagged by such agency for some reason, or the foreign party may be subject to 5
country may have laws in place prohibiting the buyer s acquisition of real estate in the United States. As stated above, it is usual to have foreigners acquire property through LLCs or other specific use entities, both for privacy concerns as well as for tax purposes, estate planning purposes, and for other reasons. The LLCs are typically formed in the jurisdiction where the real property is located and in some instances the subsequent sale of the property can be accomplished by the owner selling their interest in the land-owning LLC rather than the LLC itself selling the property to a new purchaser. The land-owing LLC may be owned or controlled by other LLCs or corporations as well which may be foreign entities themselves. The use of LLCs as real property purchasing vehicles is also a common mechanism for foreigners seeking to ameliorate tax implications when it comes time to sell the U.S.-based property, such as capital gains taxes under the Foreign Investment in Real Estate Property Tax Act ( FIRPTA ). Foreign buyers should consult experienced international tax counsel so that all of the tax implications are known to aid the buyer in deciding how the specific purchasing vehicles should be set up. When a foreign national sells property in the United States, the United States Internal Revenue Service (the IRS ) must be paid capital gains taxes. The IRS will withhold 10% of the gross purchase price of the property and when a U.S. tax return is submitted by the foreign seller reporting the capital gains tax, any refund then due will be paid back to the seller. With respect to investment properties, such capital gains can be offset by the foreign seller using the sale proceeds to purchase other real estate in the United States, known as a 1031 Exchange under the applicable provision of the Internal Revenue Code. A foreign national should seek local tax other immigration or national security laws. See, National Association of Realtors REALTOR.org, The Basics of Representing Foreign Buyers in the U.S., by Neil Kalin, Esq., Fourth Quarter 2005. 6
advice in their home country as overall tax liability may depend upon local laws or tax treaties that may exist between the home country and the United States. Furthermore, the IRS requires foreign purchasers of U.S. property to elect to pay U.S. income taxes on any net income such as rental revenues derived from a rental property, failing which a penalty of 30% of gross rental revenue will be assessed, and the owner will not be able to deduct expenses such as depreciation, interest, property taxes, or common element charges. It should also be noted that some foreign buyers will prefer to set up a U.S.-based LLC to own the real estate as well as setting up a foreign-based corporation to own the LLC itself. This is done both for anonymity and to alleviate any issues that may arise under the U.S. estate taxation laws in the event the purchaser dies while owning the real estate. Foreign based purchasers of U.S. real estate will also need to obtain an Individual Taxpayer Identification Number ( ITIN ), a tax processing number assigned to foreign nationals. There are also potential estate tax issues that must be considered by prospective foreign purchasers of real property when setting up purchasing vehicles for such property including perhaps family trusts. As noted above, an experienced tax attorney should be consulted before the prospective purchaser makes any final decisions. 3. How Does the Legal System Protect the Acquirer? Registries? Title Insurance? Typically, a foreign based buyer will have the same protections as that of a U.S.-based purchaser, including the following general protections: purchases and sales of real property in the various jurisdictions of the United States are documented by written deeds which are part of the public record; title searches performed by title companies will show all liens and encumbrances against the property, including any mortgages, tax liens of the current owner, water and sewer charging liens if any, and similar encumbrances; title insurance will be obtained 7
by the purchaser through a title company, insuring the purchaser against any liens or claims made against the property that were not revealed by the title search; public records are available showing the annual taxes due on a parcel of real estate. The buyer is typically responsible for paying for the title search and insurance, as well as legal fees and recording fees. Prospective buyers should also familiarize themselves with the dispute resolution process as it exists in the jurisdiction in which they wish to purchase real property, as such procedures may vary wildly from their home country s processes. The first step to resolve any disputed issue is through negotiation between the parties. Failing that, the contract of sale or the law of the jurisdiction may require the parties to mediate a resolution through a third party mediator, either binding or non-binding, and if there is still no resolution the parties may be required to arbitrate or to submit their dispute to the local court system having jurisdiction over such disputes with each side retaining and paying their own counsel to represent them in such processes, which can be both time consuming and expensive. 4. What is the Usual Process for Acquiring Property in the United States? As with any purchase made in an unfamiliar market, the first order of business for the foreign buyer is to assemble a team familiar with the process in the desired location, including real estate agents, attorneys, mortgage brokers and accountants. Each state in the United States has its own set of rules regarding the purchase of real estate, including the type of purchase contract used, the method of closing the sale and the duties of the parties involved. Foreign buyers will also want to give consideration to such issues as currency exchange rates, international wire transfers, banking systems, multi-national taxation and accounting issues, estate tax implications and other similar considerations. a. Due Diligence. 8
Unlike in some foreign jurisdictions where a prospective purchaser would have to go from agent to agent in order to find a property, in the United States, real estate listing information is shared by agents using multiple listing services, and consumers can access that same information using real estate websites. In the United States, the buyer does not usually pay a fee to the agents who are scouting properties on their behalf. Instead, the sales commission is typically paid by the seller at closing. In addition, in the United States, real estate agents need licenses to conduct business, and the licensing laws will vary from state to state. Such licensing laws were designed to ensure real estate agents are qualified to guide consumers through the finding, evaluating and financing aspects of a real property purchase. Some agents who have taken additional coursework may also earn a Certified International Property Specialists Designation. In New York City, the largest real estate association is the Real Estate Board of New York (REBNY). Typically, sellers in New York City offer real property for sale through seller brokers who work in the seller s best interests. For that reason, there are usually two real estate brokers involved in a transaction, one representing the seller and one the buyer. The foreign buyer can rely on an experienced broker for their expertise with respect to researching the property, locating bankers if financing is required, recommending lawyers, accountants and other professionals, negotiating the details of the purchase, and in general making sure the buyer has sufficient information to make informed decisions with respect to the transaction. b. Contract of Sale. Each jurisdiction in the United States will have its own set of rules and regulations with respect to contracts of sale for real property. In the United States, contracts for the purchase and sale of real property must be in writing, and the sale recorded in an official registry by way of a deed or other similar recording instrument, unless the transfer is accomplished through the sale 9
of an LLC or other entity that actually owns the real property. If the buyer is financing the purchase, a mortgage is also filed against the property as well. Typically in New York City, the negotiation and drafting of a contract of sale is done by real estate transactional attorneys rather than by brokers, while in other jurisdictions the brokers themselves will utilize standardized forms promulgated by their professional associations for the purchase and sale of real property in those jurisdictions. c. Financing. Although many foreign buyers prefer to acquire real property in the United States through all cash transactions, foreign buyers can also obtain financing for such purchases, upon such terms and conditions as may be set by particular U.S.-based lenders. Such lenders would usually require at least 30 percent of the purchase price as a down payment, and in order to be approved for a loan the buyer would also be required to disclose information proving income and assets, net worth, debts and liabilities, and other personal financial information. As a first step to qualify for financing, a foreign based buyer typically must open a U.S.- based bank account and deposit the amount of the down payment into such account. As distinguished from an all-cash transaction, the foreign based buyer seeking to finance a portion of the purchase price will incur additional costs such as mortgage tax and interest charges which may run slightly higher for foreign based buyers than for U.S. citizens. There will also be a waiting period for the loan to be approved by the lender. The disclosure requirements and additional expenses associated with obtaining financing usually lead to the foreign based buyer preferring an all cash transaction rather than a partially financed one. d. Transfer of Real Property. The typical transaction concerning real estate in New York City will be accomplished according to the following steps: 10
buyer will locate a suitable property through a broker; the broker will make an offer through the seller s agent such offers are not legally binding for the buyer or the seller at this stage; if the offer is accepted outright, or if further negotiations result in an agreed upon price, the seller s attorney will prepare a contract of sale; the buyer s agents, usually the attorney, will perform due diligence on behalf of the buyer such as reviewing the building s financials and potential financial exposure; specific terms of the contract will be negotiated and finalized; buyer will sign the contract of sale and send it to the seller s agent along with a down payment, usually 10% of the purchase price; seller will counter-sign the contract of sale and return it to buyer s agent, thereby consummating a binding agreement between the parties; at this point, if the buyer is seeking financing, the buyer will take steps to secure a mortgage loan under such circumstances the contract of sale will likely include a mortgage contingency clause, conditioning the purchase on getting a loan; if the purchase is in a cooperative or a condominium, the prospective purchaser will likely be required to submit an application to the building s governing board for their review and approval as stated above, cooperative board approval is onerous and the disclosure requirements are extensive, while condominium board approval is usually little more than a formality; once board approval has been obtained, if necessary, a closing will be scheduled during which the parties will meet, including the buyer, seller, attorneys, brokers, bank, title company, management company and perhaps others, and the ownership of the property is formally transferred to the buyer, usually by signing a deed (or in the case of a cooperative by the issuance of shares to the buyer) which is the recorded by the title company note that a foreign buyer does not necessarily need to attend the closing but can appear by proxy through a power of attorney form instead. 5. Is Limitation of Liability on the Part of the Seller Permitted? Yes, limitation of liability is permitted in several respects. For example, if the real property is owned by an LLC or similar entity, any liability would be limited to the value of the property itself and any damages in excess of such amount would not be the obligation of the seller. In addition, sellers are protected from liability by way of title searches and title insurance 11
which protect the purchaser from any hidden liabilities, liens or encumbrances that might not be apparent from a title search. 6. What is the Treatment of Representations and Warranties in the United States? Some foreign purchasers may be unfamiliar with the concept of seller disclosure because their home countries operate on the basis commonly referred to as buyer beware. A buyer who is aware of seller disclosure laws in the targeted U.S. jurisdiction may confuse seller disclosure with seller warranty or seller guarantee. Foreign buyers should be educated about the disclosure requirements that may be provided for in the contract of sale or the local law and about the effect those requirements have on the buyer s due diligence. Many real estate sales in New York City can be termed as-is sales, meaning that the prospective purchaser is required to perform their due diligence with respect to investigating the property for any liens or encumbrances or to conduct a physical walk through or inspection of the premises, and too, as stated above, obtaining title insurance serves to offset some of the risks involved. Sellers in New York City are also required to make certain disclosures with respect to the condition of the premises including lead paint disclosures and other similar routine disclosures. III. CONCLUSION. Whether it be through a shell company or in their own name, whether it be shares in a cooperative or a deed to a condominium unit or townhouse, commercial and residential sales to foreign based buyers constitute an ever-growing segment of real property sales in New York City and throughout the United States with little in the way of restrictions and regulations inhibiting foreign investments in such property. 12
This article is meant only to provide a cursory overview of the many considerations that must be accounted for when a foreign national is seeking to purchase real estate in the United States in general or in New York City in particular. Such sales form a significant portion of the overall real estate market in the United States each year, and so long as prospective purchasers view the U.S. real estate market as a safe haven for their cash, such transactions will continue apace. 13