We have a due diligence budget and team for a commercial real estate investment. We have invested in healthcare in the United States, but this is our first real estate investment.
A big portion of the due diligence unique to foreign investors are the potential tax consequences of investing in real estate by a foreign investor. If you don't structure the ownership of the property correctly, there can be major tax consequences in the future.
Due diligence should consist of a comprehensive review of the deal in order to identify and mitigate any risks. While a foreign investor may need to obtain a better understanding of United States security and tax laws, the agreement would also need to contain a disclosure regarding the Patriot Act and Office of Foreign Asset and Control (OFAC), which addresses terrorism, narcotics and other "disreputable" activities. Any risks may be managed and mitigated with proper planning and thorough negotiation of the underlying agreement(s).
The most important factor for a foreign investor to consider when looking at US real estate is the tax regime in the home jurisdiction and how to best structure the investment entity to comply with the tax laws of the investor's jurisdiction and the US. Sometimes, investments are made using equity and debt. Other times, investments are made through intermediary jurisdictions, depending on whether the US has a tax treaty with the investor's jurisdiction. There may be different treatment of ordinary income as well as capital payments from refinancing or sales. I always like to look at an exit strategy as well, so I have an idea of the taxes a client could owe on the sale of the property and how to structure the sale. There are a couple of other potential issues to be aware of: You may have read about the requirements of CIFIUS, the Committee on Foreign Investment in the United States. It is an interagency committee of the US government that reviews the national security implications of foreign investment in US companies. As a general matter, CIFIUS does not apply to acquisitions of real estate. However, a Korean client buying a building in Washington DC had to get clearance from CIFIUS since the tenant was in the defense industry. When I represent foreign investors, I also look at any regulatory restrictions in their home jurisdiction. For clients from the People's Republic of China, I look at monetary controls and approvals. I will also explain what US financial institutions, possible venture partners and others will look for as "KYC," know your customer information. Institutions in the US don't go as deep as Singapore--where I have been asked about whether anyone in the investor's company is an official in the Communist party--but they will look for the identity of all levels of ownership. I will explain about certain issues under NY law, and go over the transfer and mortgage recording taxes, which are higher than in most other states. If you are interested in developing or redeveloping a property, I would introduce you to different experts depending on the type of investment and whether there is historic or landmark significance. Depending on the type of healthcare investment you are interested in, I would educate you on the types of approvals and licenses you will need. If you want to hire an operator, we will check the operator's bona fides and financial position. I am looking at a nursing home acquisition now. The operator will deal with Medicare and Medicaid, but I have learned that political connections are often required to get licenses and those connections should be examined carefully. From your question, it sounds like you have people experienced in real estate investments and that is so important. My job is to educate you and to provide a "translation" of US customs to familiarize you with the differences here. I am happy to provide any additional information you may need. You can contact me directly via my profile.
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