Private Equity Real Estate Fund Formation: Capital Raising,...

Presenting a live 90-minute webinar with interactive Q&A

Private Equity Real Estate Fund Formation: CapitalRaising, Regulatory Issues and Negotiating TrendsNavigating Capital Contributions, Allocation of Profits/Losses,Clawbacks, Return of Capital, Fees, Conflicts of Interest and More

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

TUESDAY, NOVEMBER 15, 2016

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Today’s faculty features:

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

Richard M. Morris, Partner, Herrick, Feinstein LLP, New York

Eamon Devlin, Managing Partner, MJ Hudson, London

Louis Tuchman, Partner, Herrick, Feinstein LLP, New York

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Private Equity Real Estate FundFormation: Capital Raising, Regulatory

Issues and Negotiating Trends

Private Equity Real Estate FundFormation: Capital Raising, Regulatory

Issues and Negotiating Trends

November 15, 2016

5

Meet the PresentersMeet the Presenters

6

Meet the Presenters

Richard (Rick) MorrisPartner

Herrick, Feinstein LLP

Louis TuchmanPartner


Eamon DevlinManaging Partner

MJ Hudson

7

Meet Richard (Rick) Morris

• More than 25 Years of TransactionalExperience

• Commercial and Regulatory Issues,Acquisitions, Financings and Exit Strategies,Public Company Offerings, Public andPrivate REITs

Expertise: Corporate Finance, Corporate RealEstate, Institutional Investment, M&A, Funds,Corporate Governance, Executive Employmentand Benefits

[email protected]

Tel 212-592-1432

http://www.herrick.com/


• More than 25 Years of TransactionalExperience

• Commercial and Regulatory Issues,Acquisitions, Financings and Exit Strategies,Public Company Offerings, Public andPrivate REITs

Expertise: Corporate Finance, Corporate RealEstate, Institutional Investment, M&A, Funds,Corporate Governance, Executive Employmentand Benefits



8

Meet Eamon DevlinMJ Hudson

[email protected]

Tel +44 20 3463 3207

http://www.mjhudson.com/

• More than 15 years of Investment FundsExperience

• Advises on Equity Investments andInvestment Funds, with Experience in M&A,Spin-outs, Secondaries, Co-investments,GP Restructurings and Formation ofInvestment Funds

Expertise: Corporate and M&A, Private Funds,Secondaries and Primary Closed-ended FundInvestments


MJ Hudson

• More than 15 years of Investment FundsExperience

• Advises on Equity Investments andInvestment Funds, with Experience in M&A,Spin-outs, Secondaries, Co-investments,GP Restructurings and Formation ofInvestment Funds

Expertise: Corporate and M&A, Private Funds,Secondaries and Primary Closed-ended FundInvestments

9

Meet Louis TuchmanHerrick, Feinstein LLP

• More than 30 Years of Tax TransactionalExperience

• Tax Implications of Investments, Financings,Restructurings, Tax Controversies andContracts, REITs, REMICs, Tax-freeExchanges and Transfer Taxes

Expertise: Tax, Private Equity, PrivateInvestment Funds, Real Estate Joint Venturesand Restructurings

[email protected]

Tel 212-592-1490

http://www.herrick.com/

• More than 30 Years of Tax TransactionalExperience

• Tax Implications of Investments, Financings,Restructurings, Tax Controversies andContracts, REITs, REMICs, Tax-freeExchanges and Transfer Taxes

Expertise: Tax, Private Equity, PrivateInvestment Funds, Real Estate Joint Venturesand Restructurings



10

Agenda

Introduction to Real Estate Funds Considerations of the RE Fund Stakeholders Key US Tax Issues Key UK / US Differences and Similarities Commercial and Capital Raising Issues Brexit Q&A

Introduction to Real Estate Funds Considerations of the RE Fund Stakeholders Key US Tax Issues Key UK / US Differences and Similarities Commercial and Capital Raising Issues Brexit Q&A

11

Introduction to Real Estate Funds

General (and alternative) structures of the privatefund Difference classes of real estate Mortgage or Equity Hybrid Structures “Blocker Corp” structure “Portfolio Interest” structure

General (and alternative) structures of the privatefund Difference classes of real estate Mortgage or Equity Hybrid Structures “Blocker Corp” structure “Portfolio Interest” structure

12

Considerations of the different stakeholders ina Real Estate Fund

Investors Types: US, taxable, tax exempt, ERISA, Non US Certain differences regarding tax aspect or profile ESG sensitive or focused only on returns Time line: availability of funds and required exit

Sponsors Active managers, investor relations or contributors of

assets Placement Agents

Investors Types: US, taxable, tax exempt, ERISA, Non US Certain differences regarding tax aspect or profile ESG sensitive or focused only on returns Time line: availability of funds and required exit

Sponsors Active managers, investor relations or contributors of

assets Placement Agents

13

Summary of Certain Material Tax Issues

With respect to each stakeholder Certain “typical” structures Blocker Corp as a feeder Portfolio Interest Exemption REIT

With respect to each stakeholder Certain “typical” structures Blocker Corp as a feeder Portfolio Interest Exemption REIT

14

Overview of UK and EU to US Issues

Regulatory aspect or profile Permanence and Stability of Capital Time line for investment and returns

Scope of fiduciary issues Ability to leverage assets and capital commitments Forum and venue for resolution of disputes Expectations and typical access to records and

influence on valuation and fundamental decisionsthrough the Advisory Board or otherwise

Regulatory aspect or profile Permanence and Stability of Capital Time line for investment and returns

Scope of fiduciary issues Ability to leverage assets and capital commitments Forum and venue for resolution of disputes Expectations and typical access to records and

influence on valuation and fundamental decisionsthrough the Advisory Board or otherwise

15

Certain Initial Points - Planning Stage

Sponsors ID of sponsors including investment committee

members Regulatory aspect of sponsors Compensation and responsibilities Terms for "kick out" or termination of a Sponsor Responsibility of each Sponsor / member

Sponsors ID of sponsors including investment committee

members Regulatory aspect of sponsors Compensation and responsibilities Terms for "kick out" or termination of a Sponsor Responsibility of each Sponsor / member

16

Certain Initial Points - Planning Stagecont.

Raising capital Type of capital (institutional or retail) Location of capital (US or non US) Use of placement agents

Investment Strategy Certain considerations regarding mortgage, equity,

hybrid

Raising capital Type of capital (institutional or retail) Location of capital (US or non US) Use of placement agents

Investment Strategy Certain considerations regarding mortgage, equity,

hybrid

17

Certain Business Issues

Economic terms for the fund Management Fee Pref Rate Sponsor / investor split or "carried interest"

Minimum investment amount Capital Call and remedies for failure to fund Escrow of capital commitments or other

assurances

Economic terms for the fund Management Fee Pref Rate Sponsor / investor split or "carried interest"

Minimum investment amount Capital Call and remedies for failure to fund Escrow of capital commitments or other

assurances

18

Certain Business Issues cont.

Term of the investment period Term of the Fund Extension rights Fees

3rd parties such as leasing agent Co fee arrangements Management Agent Property managers Asset acquisitions and dispostions Outside of Scope fees (e.g., testimony)

Leverage restrictions or expectations Affiliate relationships Redemption or PE lock up

Term of the investment period Term of the Fund Extension rights Fees

3rd parties such as leasing agent Co fee arrangements Management Agent Property managers Asset acquisitions and dispostions Outside of Scope fees (e.g., testimony)

Leverage restrictions or expectations Affiliate relationships Redemption or PE lock up

19

Certain Legal Issues

Securities Laws Investment Company Act Exemptions under 3(c)(5)

Investment Adviser Act SEC registration

Form D State Filings Other Registration Exemptions

Securities Laws Investment Company Act Exemptions under 3(c)(5)

Investment Adviser Act SEC registration

Form D State Filings Other Registration Exemptions

20

Raising Capital in Europe: a Roadmap for USPrivate Equity Real Estate Funds

What is the Alternative Investment Fund ManagersDirective (AIFMD)

Relevance to US Fund Managers seeking to raisefunds in Europe

Alternatives for US Fund Managers raising Europeancapital

BREXIT: What are the implications for US Fundmanagers?

Key Takeaways

What is the Alternative Investment Fund ManagersDirective (AIFMD)

Relevance to US Fund Managers seeking to raisefunds in Europe

Alternatives for US Fund Managers raising Europeancapital

BREXIT: What are the implications for US Fundmanagers?

Key Takeaways

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What is AIFMD? Relevance to US FundManagers seeking to raise capital in Europe What is AIFMD?

AIFMD provides a framework for harmonising the managementand marketing of Alternative Investment Funds (AIFs) (ie, all“collective investment undertakings” other than EU UCITSfunds) in the European Union (EU)

Most US managers will be marketing non-European funds(such as Cayman Islands and Delaware) to European Investorsand AIFMD will impact such fundraising operations in the EEA(ie, the European Union, Iceland, Liechtenstein and Norway).Note - Switzerland which has its own rules is not an EEAcountry

AIFMD applies to managers of “alternative investment funds”(AIFS). It is not the fund that is regulated by AIFMD, only themanager of the fund (AIFM)

What is AIFMD? AIFMD provides a framework for harmonising the management

and marketing of Alternative Investment Funds (AIFs) (ie, all“collective investment undertakings” other than EU UCITSfunds) in the European Union (EU)

Most US managers will be marketing non-European funds(such as Cayman Islands and Delaware) to European Investorsand AIFMD will impact such fundraising operations in the EEA(ie, the European Union, Iceland, Liechtenstein and Norway).Note - Switzerland which has its own rules is not an EEAcountry

AIFMD applies to managers of “alternative investment funds”(AIFS). It is not the fund that is regulated by AIFMD, only themanager of the fund (AIFM)

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AIFMD – definition

AIFs are defined as any collective investmentundertaking which raises capital from a number of investors with a view to investing it in accordance with a defined

investment policy for the benefit of those investors is not already regulated under the UCITS Directive

Real estate structures qualifying as operativebusiness Developing and operating properties vs. only buying,

holding, selling Single investor structures

AIFs are defined as any collective investmentundertaking which raises capital from a number of investors with a view to investing it in accordance with a defined

investment policy for the benefit of those investors is not already regulated under the UCITS Directive

Real estate structures qualifying as operativebusiness Developing and operating properties vs. only buying,

holding, selling Single investor structures

23

AIFMD – definition

Explicit and implicit exemptions Holding companies Joint venture structures

Operational requirements Valuation of assets Risk management Outsourcing requirements

Transparency & reporting AIFM offering document Annual report Disclosure to regulator

Remuneration requirements

Explicit and implicit exemptions Holding companies Joint venture structures

Operational requirements Valuation of assets Risk management Outsourcing requirements

Transparency & reporting AIFM offering document Annual report Disclosure to regulator

Remuneration requirements

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Options for US Funds and Managers seekingto raise capital in Europe Alternative 1: Rely on “Reverse Solicitation” Alternative 2: Register country by country under the

national private placement rules (NPPRs) Alternative 3: Set up an EU AIF and an EU manager (or

use a 3rd party AIF and/or AIFM ‘platform’) in order toobtain a right to “passport” such funds in all 28 EUjurisdictions

Before looking at the above options it is worth briefly notingthat paradoxically, the marketing framework under AIFMD (apiece of legislation designed to harmonise/simplify themarketing regime throughout Europe) is now relativelycomplex.

Alternative 1: Rely on “Reverse Solicitation” Alternative 2: Register country by country under the

national private placement rules (NPPRs) Alternative 3: Set up an EU AIF and an EU manager (or

use a 3rd party AIF and/or AIFM ‘platform’) in order toobtain a right to “passport” such funds in all 28 EUjurisdictions

Before looking at the above options it is worth briefly notingthat paradoxically, the marketing framework under AIFMD (apiece of legislation designed to harmonise/simplify themarketing regime throughout Europe) is now relativelycomplex.

25

AIFMD – Reverse Solicitation – A PracticalStrategy?

“Marketing” means a direct or indirect offering orplacement at the initiative of the AIFM or on behalfof the AIFM…”

This Directive should not affect the current situation,whereby a professional investor established in theUnion may invest in AIFs on its own initiative...”

Ideal case: an investor, who has had no previouscontact with the manager/distributor approaches them– eg, investor or pension/other consultant has amandate and actively searches out managers withsuitable strategies/funds

“Marketing” means a direct or indirect offering orplacement at the initiative of the AIFM or on behalfof the AIFM…”

This Directive should not affect the current situation,whereby a professional investor established in theUnion may invest in AIFs on its own initiative...”

Ideal case: an investor, who has had no previouscontact with the manager/distributor approaches them– eg, investor or pension/other consultant has amandate and actively searches out managers withsuitable strategies/funds

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AIFMD – Reverse Solicitation

Interpretations vary across the EU: Clear guidance in only a few countries and generally restrictive Only possible for professional investors AIFM has the burden of proof (written confirmation) and getting it wrong is a

criminal offence/gives investors a ‘free put’ Some countries require the specific fund product (not ‘any product’ or the strategy

only) be mentioned by name by the investor (France, Holland, Austria) Some require a separate enquiry per transaction/investment (Belgium, Germany,

Netherlands & Norway) Complex to administer (record keeping, monitoring for each transaction, ensuring

you now exactly what your and your distributor(s) sales people are doing) Unlikely to work for smaller or “start-up” managers, and not in line with marketing

campaigns of larger asset managers Not to be used to circumvent the AIFMD Reverse solicitation is not a marketing strategy!

Interpretations vary across the EU: Clear guidance in only a few countries and generally restrictive Only possible for professional investors AIFM has the burden of proof (written confirmation) and getting it wrong is a

criminal offence/gives investors a ‘free put’ Some countries require the specific fund product (not ‘any product’ or the strategy

only) be mentioned by name by the investor (France, Holland, Austria) Some require a separate enquiry per transaction/investment (Belgium, Germany,

Netherlands & Norway) Complex to administer (record keeping, monitoring for each transaction, ensuring

you now exactly what your and your distributor(s) sales people are doing) Unlikely to work for smaller or “start-up” managers, and not in line with marketing

campaigns of larger asset managers Not to be used to circumvent the AIFMD Reverse solicitation is not a marketing strategy!

27

National Private Placement Rules – Whatexactly are they? AIFMD does not implement a harmonised regime for privately

placing AIFs in the EU Rather, each Member State is permitted to retain its own

domestic rules which means it is necessary to consider andtake advice country by country as to what forms and methods ofmarketing are permitted

AIFMD does impose an obligation, however, to register non-EUAIFs (for example US AIFs) marketed by both EU and non-EUAIFMs (for example US managers) to investors in each EUstate and to comply with various information and ongoingreporting obligations

AIFMs will be able to use NPPRs until at least 22 July 2018when it is envisaged they may be phased out. However, it isuncertain whether this will occur

AIFMD does not implement a harmonised regime for privatelyplacing AIFs in the EU

Rather, each Member State is permitted to retain its owndomestic rules which means it is necessary to consider andtake advice country by country as to what forms and methods ofmarketing are permitted

AIFMD does impose an obligation, however, to register non-EUAIFs (for example US AIFs) marketed by both EU and non-EUAIFMs (for example US managers) to investors in each EUstate and to comply with various information and ongoingreporting obligations

AIFMs will be able to use NPPRs until at least 22 July 2018when it is envisaged they may be phased out. However, it isuncertain whether this will occur

28

National Private Placement Rules – Whatexactly are they? “Sub-Threshold” AIFMs unable to register under NPPRs

in: Austria, Belgium, Finland, France, Ireland, Italy, Norway& Spain

Nor can any pre-marketing be conducted in thesecountries even for “above threshold AIFMs”. AlthoughFrance has recently introduced a relaxation of therestrictions on pre-marketing in certain circumstances

So this is effectively a “no-go area” except with a passportand even then there are problems in France, Spain andItaly

So potentially 10 major western EU countries areimpractical leaving: Luxembourg, Netherlands, Sweden,UK and Ireland

“Sub-Threshold” AIFMs unable to register under NPPRsin: Austria, Belgium, Finland, France, Ireland, Italy, Norway& Spain

Nor can any pre-marketing be conducted in thesecountries even for “above threshold AIFMs”. AlthoughFrance has recently introduced a relaxation of therestrictions on pre-marketing in certain circumstances

So this is effectively a “no-go area” except with a passportand even then there are problems in France, Spain andItaly

So potentially 10 major western EU countries areimpractical leaving: Luxembourg, Netherlands, Sweden,UK and Ireland

29

National Private Placement Rules – Are theyworking? Problems with the NPPRs:

“Pre-AIFMD Marketing” – Certain Member States regard anyinitial contact with a prospective investor as “AIFMDmarketing”, effectively precluding any contact until an offerdocument is available – this contradicts market practice

Other Member States (e.g., UK) only consider ”AIFMDmarketing" to take place only when a final offer (e.g.,subscription document) is presented and correspondinglypermit a certain degree of "pre-marketing”

BUT even UK considers “pre-marketing” as a regulated activity(“financial promotion” under UK FSMA); and most requiremarketing to be undertaken by a regulated entity

Problems with the NPPRs: “Pre-AIFMD Marketing” – Certain Member States regard any

initial contact with a prospective investor as “AIFMDmarketing”, effectively precluding any contact until an offerdocument is available – this contradicts market practice

Other Member States (e.g., UK) only consider ”AIFMDmarketing" to take place only when a final offer (e.g.,subscription document) is presented and correspondinglypermit a certain degree of "pre-marketing”

BUT even UK considers “pre-marketing” as a regulated activity(“financial promotion” under UK FSMA); and most requiremarketing to be undertaken by a regulated entity

30

Alternative 3: Going onshore – Becoming an authorisedEU manager or sign w/ a 3rd party platform provider

Subject to qualifying requirements, the AIFMDmarketing passport is available to EU managersmarketing an EU Fund. There are 2 alternativeoptions for US managers considering goingdown this route: Setting up a European Fund directly in Europe An authorised European AIFM will benefit from the

AIFMD marketing passport automatically in respectof the EU funds that it manages and wishes tomarket

Signing up with a Third Party Platform

Subject to qualifying requirements, the AIFMDmarketing passport is available to EU managersmarketing an EU Fund. There are 2 alternativeoptions for US managers considering goingdown this route: Setting up a European Fund directly in Europe An authorised European AIFM will benefit from the

AIFMD marketing passport automatically in respectof the EU funds that it manages and wishes tomarket

Signing up with a Third Party Platform

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Will the US be granted the Passport in its ownright? Why is the AIFMD marketing passport potentially attractive?

Currently both the manager and the fund must be established in an EUcountry to obtain AIFMD passporting rights

Other funds/managers must market under the NPPRs of each country The reason the passport is thought valuable is that complying with the NPPRs

can be expensive and complex involving delays and compliance with localrequirements, such as appointment of a depository and/or local paying agents.In practice, it is arguable that marketing under the NPPRs works seamlessly inonly five EU countries at present: Belgium, Holland, Ireland, Luxembourg andthe UK

BUT – the question remains: do US managers really want to subjectthemselves to EU type rules and regulations? These would include: remuneration rules; reporting obligations; leverage; and

asset stripping restrictions Arguably a strong case remains for private placement being the route of

choice for many seeking to raise capital in Europe!

Why is the AIFMD marketing passport potentially attractive? Currently both the manager and the fund must be established in an EU

country to obtain AIFMD passporting rights Other funds/managers must market under the NPPRs of each country The reason the passport is thought valuable is that complying with the NPPRs

can be expensive and complex involving delays and compliance with localrequirements, such as appointment of a depository and/or local paying agents.In practice, it is arguable that marketing under the NPPRs works seamlessly inonly five EU countries at present: Belgium, Holland, Ireland, Luxembourg andthe UK

BUT – the question remains: do US managers really want to subjectthemselves to EU type rules and regulations? These would include: remuneration rules; reporting obligations; leverage; and

asset stripping restrictions Arguably a strong case remains for private placement being the route of

choice for many seeking to raise capital in Europe!

32

BREXIT: Implications for US PE Real EstateFund Managers If the UK and EU do proceed to “divorce”, then there

are two basic alternative scenarios: Scenario 1 – The UK ceases to be a full member of the

EU, but becomes a member of the European EconomicArea (EEA) (like Iceland, Liechtenstein and Norway) ornegotiates a parallel arrangement (similar to thatenjoyed by Switzerland, which is neither in the EU orEEA but is part of the single market for certainpurposes) with reciprocal passporting type rights

Scenario 2 – The UK leaves the EU and does not jointhe EEA or succeed in negotiating similar passportingrights with the EU

If the UK and EU do proceed to “divorce”, then thereare two basic alternative scenarios: Scenario 1 – The UK ceases to be a full member of the

EU, but becomes a member of the European EconomicArea (EEA) (like Iceland, Liechtenstein and Norway) ornegotiates a parallel arrangement (similar to thatenjoyed by Switzerland, which is neither in the EU orEEA but is part of the single market for certainpurposes) with reciprocal passporting type rights

Scenario 2 – The UK leaves the EU and does not jointhe EEA or succeed in negotiating similar passportingrights with the EU

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Key Takeaways

US managers should carefully investigate and periodically review the availableoptions for raising funds in the EU. Changing environment

Where is my target investor base in Europe? Will I be raising funds across multiple jurisdictions or just a select few? What resources do I have at my disposal? What is my proposed timetable? Do I have any deadlines? Is reverse solicitation a viable option? Do I want to rely on the national private placement regimes? Have I checked the

private placement requirements in each target jurisdiction and whether or not theoffer or marketing needs to be registered prior to the fundraise?

Do I want to establish a permanent presence in Europe and set up an EUmanager and EU fund/ use a 3rd party EU Platform for full EU compliance and besubject to the AIFMD regime?

US managers should carefully investigate and periodically review the availableoptions for raising funds in the EU. Changing environment

Where is my target investor base in Europe? Will I be raising funds across multiple jurisdictions or just a select few? What resources do I have at my disposal? What is my proposed timetable? Do I have any deadlines? Is reverse solicitation a viable option? Do I want to rely on the national private placement regimes? Have I checked the

private placement requirements in each target jurisdiction and whether or not theoffer or marketing needs to be registered prior to the fundraise?

Do I want to establish a permanent presence in Europe and set up an EUmanager and EU fund/ use a 3rd party EU Platform for full EU compliance and besubject to the AIFMD regime?

34

Investment Strategy and Operations

Class of real estate Leverage Joint ventures or co-investments Development issues Differences of RE Fund and other

“typical” Private Funds

Class of real estate Leverage Joint ventures or co-investments Development issues Differences of RE Fund and other

“typical” Private Funds

35

Entity Structure

LP or LLC Would you ever use a corporation that is NOT a

REIT? Answer – yes in the Cayman Islands and yes as a

“blocker corp”

LP or LLC Would you ever use a corporation that is NOT a

REIT? Answer – yes in the Cayman Islands and yes as a

“blocker corp”

36

Basic Structure Issues

Most US taxpayers prefer investing through partnerships/LLCs (pass-throughs) Upside is that there is no entity level tax (in contrast to a corporate

vehicle) Pass-through of both income and losses

Downside is the requirement that investors file returns in alljurisdictions in which the entity does business.

Partnership pass-through rules do not apply to publicly tradedpartnerships (PTPs) Usually means that partnerships with more than100 partners are taxed as

corporations, not pass-throughs. Determination of number of owners entailslooking through entities that own interests in the fund.

Redemption plan? Exception for qualifying MLPs (master limited partnerships)

Qualifying assets – oil and gas, real estate

Most US taxpayers prefer investing through partnerships/LLCs (pass-throughs) Upside is that there is no entity level tax (in contrast to a corporate

vehicle) Pass-through of both income and losses

Downside is the requirement that investors file returns in alljurisdictions in which the entity does business.

Partnership pass-through rules do not apply to publicly tradedpartnerships (PTPs) Usually means that partnerships with more than100 partners are taxed as

corporations, not pass-throughs. Determination of number of owners entailslooking through entities that own interests in the fund.

Redemption plan? Exception for qualifying MLPs (master limited partnerships)

Qualifying assets – oil and gas, real estate

37

Basic Structure

Investors

InvestmentFund

38

Tax Rules for Foreign Investors

No tax on capital gains realized by non-U.S. sellers ifnot effectively connected to a U.S. trade or business (But see last bullet point)

“Effectively-connected income” (or “ECI”) is taxed atordinary rates Character as ECI passes through to an investor in a

partnership (or pass-through LLC)

So if foreign investors are ok filing in the U.S. andpaying U.S. taxes, they can invest directly in apartnership/pass-though like U.S. investors

No tax on capital gains realized by non-U.S. sellers ifnot effectively connected to a U.S. trade or business (But see last bullet point)

“Effectively-connected income” (or “ECI”) is taxed atordinary rates Character as ECI passes through to an investor in a

partnership (or pass-through LLC)

So if foreign investors are ok filing in the U.S. andpaying U.S. taxes, they can invest directly in apartnership/pass-though like U.S. investors

39


So foreign investors generally invest through corporateentities. However, Corporations do not benefit from capital gains rates

that are lower than ordinary income rates Foreign corporations owe branch profits taxes on their

ECI FIRPTA (Foreign Investment in Real Property Tax Act

of 1980) treats real estate gains as ECI, so notexempt under first rule above

So foreign investors generally invest through corporateentities. However, Corporations do not benefit from capital gains rates

that are lower than ordinary income rates Foreign corporations owe branch profits taxes on their

ECI FIRPTA (Foreign Investment in Real Property Tax Act

of 1980) treats real estate gains as ECI, so notexempt under first rule above

40


FIRPTA (Foreign Investment in Real Property Tax Act of 1980)treats real estate gains as ECI, so foreigners are subject to tax.

FIRPTA also applies to sales of the stock of U.S. corporationsthat own U.S. real estate (more that 50% of the assets are U.S.)and to sales of interests in partnerships that own U.S. realestate.

FIRPTA includes a withholding mechanism to ensure collectionfrom foreign investors. Any U.S. buyer can be required towithhold from the consideration due on the purchase. Partnerships must withhold with respect to gains/income that is

allocated to foreign investors

FIRPTA (Foreign Investment in Real Property Tax Act of 1980)treats real estate gains as ECI, so foreigners are subject to tax.

FIRPTA also applies to sales of the stock of U.S. corporationsthat own U.S. real estate (more that 50% of the assets are U.S.)and to sales of interests in partnerships that own U.S. realestate.

FIRPTA includes a withholding mechanism to ensure collectionfrom foreign investors. Any U.S. buyer can be required towithhold from the consideration due on the purchase. Partnerships must withhold with respect to gains/income that is

allocated to foreign investors

41

Foreign Investor Structure

U.S. Investors

U.S.Blocker

Corp

Foreign Investors

InvestmentFund

U.S.Blocker

Corp

42

Loan Funds

Investing in and holding loans does not constitute a tradeor business for U.S. income tax purposes.

Originating loans does constitute a trade or business forU.S. income tax purposes. Investors use “season and sell” mechanism to avoid origination –

they purchase loans from a third party who/that originates them Must avoid agency problem

Loans held by investors who do not own an equity interestin the borrower if properly structured, can be exempt fromwithholding (portfolio interest exemption)

Investing in and holding loans does not constitute a tradeor business for U.S. income tax purposes.

Originating loans does constitute a trade or business forU.S. income tax purposes. Investors use “season and sell” mechanism to avoid origination –

they purchase loans from a third party who/that originates them Must avoid agency problem

Loans held by investors who do not own an equity interestin the borrower if properly structured, can be exempt fromwithholding (portfolio interest exemption)

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MJ Hudson

[email protected]+1 212-592-1432

[email protected]+44 20 3463 3207

[email protected]+1 212-592-1490

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Private Equity Real Estate Fund Formation: Capital Raising,...

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