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Outbound Investment Series: Investing in the U.S.

2015 PwC Asia Pacific Real Estate Conference

www.pwc.com/jp/e/tax

R. Byron Carlock, Jr. Adam Handler Sulay Sinha

PwC

Agenda

Section I. U.S. Real Estate Market Update …………………..…….. 3

Section II. Types of Income for Japanese Investors …….…..…. 9

Section III. Foreign Investment in Real Property Tax Act …..… 14

Section IV. Potential Treaty Benefits ……………………….…….…… 17

Section V. U.S. Real Estate Investment Structures ………….…. 21

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December 8, 2015 2015 PwC Asia Pacific Real Estate Conference

PwC

Section I.

U.S. Real Estate Market Update

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Global Interest in US Real Estate By Country

$0

$5

$10

$15

$20

$25

$30

$35

$40

$45

US

$ B

illio

ns

Previous 3 Years Previous 12 Months

50%

64% 76%

54%

51% 42%

25% 23% 58% 58% 39%

Previous 12 Months as percentage of 3-year total


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December 8, 2015

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Closed-End Private Real Estate Dry Powder, 2007 - 2015

0

20

40

60

80

100

120

140

De

c-0

7

Jul-0

8

Feb

-09

Sep-0

9

Apr-

10

No

v-1

0

Jun-1

1

Jan-1

2

Aug-1

2

Ma

r-1

3

Oct-

13

Ma

y-1

4

De

c-1

4

Jul-1

5

Dry

Po

wd

er

($b

n)

North America

Europe

Asia

Rest of World

167 171 180

148

167 156

186 197

244

0

50

100

150

200

250

300

Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Sep-15

Dry

Po

wd

er

($b

n)


5

December 8, 2015

Source:

Preqin

By Primary Regional Focus

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2016 Emerging Trends in Real Estate 2007 - 2015


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December 8, 2015

Office: A Barometer of Change

18-Hour cities 2.0

Parking for change

Infrastructure: Network it! Brand it!

Food is getting bigger and closer

Consolidation breeds specialization

We raised the capital, now what do we do with it?

The return of the human touch

Next stop: The suburbs…what is a suburb?

A housing option for everyone

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What’s the attraction of US real estate to investors?

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

8.00%

Commercial Cap Rates

Global

US Gateway

18 -Hour


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December 8, 2015

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Inbound Real Estate Investment in US Cities

0

100

200

300

400

500

600

$0

$5

$10

$15

$20

$25

$30

$35

$40

$45

New YorkMetro

SanFrancisco

Metro

Los AngelesMetro

D.C. Metro Chicago Seattle Austin Portland Atlanta Dallas Charlotte Nashville

Total Volume (Billions of $) Total PropertiesData as of past 24 months Source: Real Capital Analytics as of 12/1/2015


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December 8, 2015

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Section II.

Types of Income for Japanese Investors

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• Fixed or Determinable Annual or Periodic

• Effectively Connected Income

• Foreign Investment in Real Property Tax Act

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Fixed or Determinable Annual or Periodic (“FDAP”)

• Fixed or determinable annual or periodical income (e.g. dividends, interest, certain rents).

• Gross income subject to 30% withholding tax (subject to double tax treaty relief/domestic exemptions (e.g. portfolio interest exemption).

- Under the Japan-United States treaty, withholding on interest may be reduced to 0% and dividends to 5% or 10% (depending on ownership) respectively.

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Effectively Connected Income (“ECI”)

• Effectively connected income with a U.S. trade or business.

• Net income taxed at applicable marginal rates (currently 35% for corporations, 39.6% for individuals).

• Potential branch profits tax (generally applicable at 30% subject to double tax treaty relief).

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Foreign Investment in Real Property Tax Act (“FIRPTA”)

• Generally, capital gains derived by Japanese investors are not taxed in the U.S.

• Exception to capital gains exclusion – FIRPTA (broadly, gains derived from U.S. real property interest).

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Section III.

Foreign Investment in Real Property Act (“FIRPTA”)

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U.S. Real Property Interest (USRPI)

• Direct interest in real property located in the United States.

• Interest in a corporation that is or was a U.S. Real Property Holding Corporation (“USRPHC”). Interest in a corporation (other than solely as a creditor) is presumed to be a USRPI unless established that the corporation is and has not been a USRPHC.

- 5-year taint for former USRPHC

• Interest in a partnership to the extent the value thereof is attributable to USRPIs.

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Exceptions to USRPI

• Interest held solely as a creditor.

• Participating note:

- Interest taxed as FDAP.

- Sale of note subject to FIRPTA.

• Interest in a publicly-traded corporations, unless investor holds more than 5% of the total FMV of the traded class of stock (other exceptions are also available for non-regularly traded interests).

• Domestically-Controlled REIT.

– More than 50% of the FMV of the outstanding stock directly or indirectly held by U.S. investors.

o Five-year testing period.

– Exception applies to sale of REIT shares only (distributions attributable to the sale of USRPIs by a REIT are still FIRPTA gains).

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Section IV.

Potential Treaty Benefits

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Treaty Rates

• Treaties may allow investors to reduce tax rate on FDAP and Branch Profits Tax (BPT).

- BPT applies to corporate owners of U.S. companies.

• Withholding agent must obtain investor representations related to treaty eligibility.

- Proper documentation must be obtained (W-8BEN, W-8IMY, W-8EXP, and withholding certificate).

Limitation on Benefits

• U.S. treaties restrict eligibility for foreign entities to qualify for treaty rates, often resulting in a requirement that the ultimate investors, be qualified residents of the country claiming treaty benefits depending on the way in which the tested entity is claiming treaty benefits.

Section 894

• Non-U.S. entity classification determines qualification for treaty rates.

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Potential Treaty Benefits***

19


Interest Dividends * Rental Income Branch Profits

Tax

Australia 10% 5% or 15% 30% 5%

China 10% 10% 30% 0%

Japan 0% 5% or 10% 30% 5%

Korea 12% 10% or 15% 30% 0%

Singapore ** 30% 30% 30% 30%

* Includes REIT ordinary dividend.

** There is currently no income tax treaty between the U.S. and Singapore.

*** There is also no treaty between the U.S. and the Cayman Island nor the U.S. and the British Virgin Islands.

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• A resident of Japan may be exempt from this tax if it meets the Qualified Resident Requirement.

• Please note that treaty benefits may only be available to the extent that the Japanese investor is treated as a resident under the respective tax treaty and provided the limitation of benefits article is satisfied and other certain documentation procedures are followed. The chart on the previous slide should simply provide guidance in regards to the potential to reduce certain taxes through treaty benefits.

• A foreign corporate person is taxed on its ECI at the normal graduated U.S. federal income tax rates applicable to domestic corporations (i.e., 35%), plus state taxes. In addition, a 30% branch profits tax may apply to any effectively connected earnings and profits deemed repatriated. The tax is based on earnings and profits, thus corporate income tax is in effect deductible from the branch profits tax (because this tax is in addition to the regular corporate income tax). This tax rate may be reduced if the dividends taxation rate is less under the bilateral U.S. income tax treaty (as seen on previous slide).

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Section V.

U.S. Real Estate Investment Structures

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U.S. Real Estate Investment Structures

• Leveraged Structure

• Portfolio Interest Exemption

• Liquidating C-Corp

• Domestically Controlled REIT

• Double REIT Structure

• Like-Kind Exchange

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U.S. Real Estate Investment Structures Leveraged Structure

• Interest Income to Japanese Investor:

– 30% Withholding: lower than corporate tax rate.

– Interest income paid to Japanese Investor may qualify for a reduced withholding rate if there is a treaty or if eligible for the portfolio interest exemption (“PIE”).

• Interest Expense deduction for U.S. Corporation:

– Note Terms: the note must have arms-length/market terms such as interest rate, repayment and securitization terms.

– Thin capitalization risk.

• Section 163(j) “interest stripping” limitations.

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Leveraged C-Corp Structure

Japanese

Investors

U.S.

Corporation

Loan Interest Income

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U.S. Real Estate Investment Structures Portfolio Interest Exemption (“PIE”)

• Note in registered form.

• No contingent interest.

• Interest recipient cannot own more than 10% of the equity of the issuer (beware of attribution rules).

• Certificate of foreign status of beneficial owner (e.g. Form W-8BEN).

• Can be used in combination with leveraged C corporation strategy.

• 0% withholding rate.

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Real Estate Portfolio LLC

Japanese

Investors

U.S. LLC

Real Estate

Unrelated under 10% owners of U.S. LLC

Debt

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U.S. Real Estate Investment Structures Liquidating C-Corp

• Should Japanese Investor be interested in selling its U.S. real estate investment, U.S. Corporation may “purge” the FIRPTA taint by selling its real estate holdings and liquidating.

• Liquidation proceeds can avoid U.S. dividend withholding tax.

• Strategy can be used in combination with other planning ideas (e.g. leveraged C corporation using notes which quality for PIE followed by sale and liquidation upon exit).

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Japanese

Investors

U.S.

Corporation

Liquidating C-Corp Structure

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U.S. Real Estate Investment Structures Domestically Controlled REIT Sale of REIT shares not subject to U.S. Federal Income Tax

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U.S. Real Properties

U.S. REIT

Japanese Investors

U.S. Investors

Own more than 50% of FMV of outstanding stock for last five years

U.S. LLC

Less than 50% ownership interest

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U.S. Real Estate Investment Structures Double REIT Structure

• Sub REITs are, more likely than not, considered as domestically controlled and their stock is not a FI asset.

• Head REIT can sell the stock of Sub REITs without FIRPTA implication.

• REIT dividends, other than FIRPTA gain dividends, to Japanese Investors are subject to withholding but can be reduced by applicable treaty.

- REIT dividends often not eligible for same treaty treatment as regular dividends.

• Head REIT and Sub REIT must have economic substance.

• Each REIT must meet complex U.S. requirements for REIT election.

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Double REIT Structure

Japanese

Investors

Head

REIT

Sub REIT

1

Sub REIT

2

Sub REIT

3

Asset 1 Asset 2 Asset 3

PwC

U.S. Real Estate Investment Structures Like-Kind Exchange

• Should Japanese Investor be interested in selling its U.S. real estate investment, can defer tax on gain by exchanging for another U.S. real estate investment.

• Like-kind exchanges:

- Exchanged property must be of a like-kind.

◦ Most real estate is of a like-kind to other real estate.

◦ Foreign real estate is not of a like-kind to U.S. real estate.

◦ Have 45 days to identify replacement property and 180 days to acquire replacement property

◦ Must “trade up” to defer all of the gain.

- Must be structured as an “exchange” and not a sale.

◦ A number of technical requirements must be met.

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PwC

Appendix 1

Continue the conversation…

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PwC

Presenter CVs

R. Byron Carlock, Jr.

Partner, U.S. Real Estate Practice Leader

TEL: +1 214 754 7580

E-mail: [email protected]

Byron currently serves as the U.S. Real Estate Practice Leader. Byron joined PwC after a distinguished career in the private sector of the real estate industry.

Prior to assuming his current role, Byron served as the CEO and President of CNL Lifestyle Properties, Inc. for seven years and served CNL as President of two other REITs over his twelve year career. His resume also includes three years as Executive Vice President and Chief Investment Officer of Post Properties and nine years as Managing Director for Crow Holdings International.

Byron brings extensive knowledge of the real estate industry across the real estate life cycle, including the capital markets, experience in developing and implementing a strategic vision and a strong commitment to a partnership culture.

Byron is a CPA, currently a governor of the Urban Land Institute (ULI), a member of Real Estate Roundtable, NAREIT, and AFIRE. He is also a board member of Harvard Club of Dallas and a board member emeritus of Harvard Business School.

Byron earned his BBA at Harding University. He also attended University of Hong Kong where he participated in the International Asian Studies Program and was a Rotary Scholar. Byron earned his MBA at Harvard Business School.

[Photo here]

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PwC

Presenter CVs

Adam Handler

Principal, National Tax Services

TEL: +1 213 356 6499


Adam Handler is a principal with PricewaterhouseCoopers’ National Tax Services and is located in the Los Angeles office. He is a member of the National Tax Services' Transactions Group where he is Real Estate and REIT Tax Technical Leader.

Adam Handler specializes in structuring complex business transactions, including partnerships and joint ventures, REITs, mergers and acquisitions, in-bound and out-bound investments and like-kind exchanges. While he specializes structuring transactions involving real estate and real estate companies, during his over 30 year career he has advised on a wide variety of transactions in different industries.

Prior to joining PwC, Adam was an Attorney-Advisor with the U.S. Treasury Department’s Office of Tax Policy. He is a past chair of the American Bar Association Tax Section’s Committee on Sales, Exchanges & Basis (and former vice-chair of the Committee and chair of its Subcommittee on Like-Kind Exchanges), a member of the Government Relations Committee of the National Association of Real Estate Investment Trusts and is a frequent speaker and writer on like-kind exchanges, partnerships and joint ventures, REITs and other tax topics.

[Photo here]

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PwC

Presenter CVs

Sulay Sinha

Partner, International Tax Services

TEL: +1 646 471 2584


Sulay is a Partner in the International Tax Services practice based out of New York. He specializes in structuring global investments and in cross border Mergers & Acquisitions and focuses on Real Estate, Hospitality and Infrastructure clients. Sulay leads the cross border tax consulting practice for PwC’s Real Estate clients both in New York and nationally. Sulay has also lived and worked extensively in Europe and in the emerging markets of Asia and the Middle East. While in London he was advising Fund managers and investors on tax issues relating to cross border investments and on developing deal structures whilst balancing the needs of a diverse pool of investors. Worked for the international Real Estate Development and Acquisition arm of a major financial holding company in the Middle East based out of Dubai and had global responsibility for the tax and risk management of the organization's investments. He has also worked with the Government of India on the design of their VAT system as part of the erstwhile Arthur Andersen’s team in New Delhi, India. Sulay has served as a member of the Global Advisory Board of NYU’s SHACK Institute of Real Estate and is also a guest lecturer for the graduate program on taxation of real estate transactions (US and International Tax). He is a regular speaker at international Real Estate conferences and frequently contributes towards technical publications.

[Photo here]

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