The foreign investor market was a hot topic of conversation in the last few years, and specifically targeting the Chinese investors. In fact, we first drafted this post in early 2014 when the buzz was still in the air. Though it’s fizzled a bit since (albeit still making headlines), there’s been a slew of new regulations hatching their way into the real estate market in efforts to heed “dirty” money being utilized in real estate purchases.
It’s crucial for a foreign investor purchasing or selling real estate in NYC (or and adviser to one) to understand what these nuances may be, the type of transaction to pursue, how to finance the deal and general tax implications arising from owning property in the United States.
According to NBC, Business Insider and The Real Deal, Chinese buyers comprised of the largest community of foreign buyers of New York Real Estate—both in volume and sales. Contributing to their surge in purchases was the willingness of Chinese buyers to purchase real property without conducting an in-person viewing. Sites like Juwai.com allow potential investors to connect with international real estate agents, and became increasingly popular with foreign buyers. Business Insider reported that Juwai.com referred $1.1 billion worth of potential real estate transactions in July to December 2013. Rising reliance upon the Internet pushed Chinese investment to record heights with their total investment in overseas properties reaching $13.5 billion in 2014. As of October 2015, the Wall Street Journal reported that Chinese buyers “have started to pull back, scared off by China’s stock-market selloff, slowing economic growth, currency devaluation and tightened restrictions on capital outflows.” Still, Chinese buyers spent billions of dollars last year in NYC real estate alone.
IDEAL TRANSACTIONS FOR FOREIGNERS
In Manhattan, the landscape is roughly 75% cooperative apartments and approximately 25% condominiums. Because cooperative boards are generally more restrictive on transfers of shares, foreigners should narrow their real estate search to condominium units or townhouses, which have less stringent restrictions on transfer of ownership. Regardless, foreign purchasers should still be ready to divulge much of their financial information when buying into a condominium as most condominium boards will require a board application nonetheless.
FINANCING THE TRANSACTION
As a foreign investor, you’re likely pursuing all cash transactions because financing is harder to obtain due to stricter underwriting requirements, a smaller investor pool and the added difficulty of verifying the borrower’s proof of funds and financial history. However financing, believe it or not, is NOT impossible. There are several portfolio and correspondent lenders that offer loan products to foreign investors, though most are with a lower loan-to-value ratio (say 50% to 60% of the property value) compared to the typical 80% on a traditional loan. One of the largest hurdles on the financing side is the investor’s own country’s regulations or currency controls. Many lenders will want to see the cash equity that an investor is putting down in the borrower’s account for at least 60 days. With China’s currency control regulations (which currently imposes a $50,000 cap upon transfers out of the country per year, per person) and the recent crackdown on the Chinese purchasing insurance policies to circumvent such restrictions, these transactions can get flagged over concern of corrupt money and may not be as easy for the investor to pool their money into the States without significant delay.
New York City closing costs on a purchase are exactly the same for foreigners as they are for U.S. persons. If the purchase price is over $1,000,000, then there is a NYS 1% Mansion Tax collected. There is a 1.8% mortgage tax when mortgaging under $500,000 and a 1.925% mortgage tax when mortgaging over $500,000. When selling any property in the United States, there is a Foreign Investment in Real Property Tax Act (FIRPTA) withholding, which is 15% for foreign individuals (as of February 17, 2016) and is the liability of the purchaser or purchaser’s representatives to withhold and remit. Be sure to consult your CPA for more information.
Under the Immigration and Nationality Act, foreigners who invest at least $1,000,000 in creating a new U.S. business or expanding an existing one are eligible for a conditional green card. The business must employ at least 10 U.S. full-time employees, produce a service or product, and benefit the U.S. economy. The foreign investor must be actively engaged in the company. There is an exception to the $1,000,000 minimum investment if one invests at least $500,000 in a Targeted Employment Area, that is, a high-unemployment or rural area. Several regional centers exist to serve investors in facilitating and meeting these requirements. It should be noted that the EB-5 investor’s primary focus is on obtaining a visa/green card, and not a return on investment. Be sure to consult an immigration attorney for more information.
ESTATE TAX CONSIDERATIONS
Perhaps the one of the most discerning considerations for a foreign investor are the tax implications upon death. When a foreigner owns a property in the United States, and the owner has passed, then any tangible or personal property located in the U.S. valued over $60,000 requires the filing of a New York estate return. New York State estate taxes can be as high as 16% of the value of the property. For example, if the value of said property were $2,000,000, then the New York estate tax would be $320,000.00. The additional federal estate tax varies depending upon the value of the estate.
A revocable living trust can also be set up to hedge against the estate tax liability for a foreigner, which could be as high as 40% of the asset value. This strategy can be especially useful if a large portion of the estate consists of real estate or a closely held business and one would want to ensure that one’s family would not be forced to sell those assets in order to pay all of the estate taxes.
The bottom line is that a solid team of professionals is crucial to establishing the proper real estate investment strategy for a foreign client and any client, for that matter. Contact us today to discuss structures around your next acquisition.