WHERE'S THE BEEF IN REAL ESTATE IN 2013? Finding and Working with Foreign Investors
Post Date: 12/18/2012
BY: J. ROBERT ECKLEY
Real Estate and Construction Attorney
Eckley & Associates
October 1, 2012
©2012 ECKLEY & ASSOCIATES, P.C.
REPRINTED FROM "COUNSELOR'S CORNER", Ed. 61
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I. INTERNATIONAL span West:< the to Migration Mass in Weath>
A. Introduction: A World in Economic Chaos:
It is no secret that the world is in considerable political and, subsequently, economic flux right now. The daily cadence of crisis continues: Every day the news holds yet more headlines which underline global destabilization: Undeclared wars, drone executions from the sky, insurgencies, revolutions, the emergence of nuclear power in the hands of unstable governments, failed currencies, failed governments and fears, in some cases legitimate, of worldwide or at least regional collapse. It’s all there and it has all created one of the most skittish economic climates in recent memory.
Though most of us believe that the U.S. has not been exempt from this miasma and that economic paradigms here have also suffered immensely from both these external pressures and the internal regulatory failures and confusions in the financial world that have worsened the issues, we all must admit that—in comparison to the stricken sovereignties of the Persian gulf and North Africa, Greece, Ireland and Spain, at least the U.S. has been the least radically uprooted by it to date. Indeed, it is for these very twin reasons, world instability and relative U.S. strength that the U.S has at least moderately flourished in a rather muddled way while other sovereign economic systems have plunged or perished.
The fact is, the geopolitical expansions of Islamic Fundamentalism that have been the revolutionary mantras of “Arab Spring” and "Persian Spring" — coupled with the local and world-wide fear of having assets nationalized by post-revolutionary zealots and the even deeper panic about the failing Euro — has acted to flush vast sums of wealth and investment to the U.S., where it is likely to stay for some time. The royal families, the “court of the wealthy” that surrounds them and depends upon them and the progressively deposed Military/Dictator Establishments of Persia and the Middle East, generally, are fleeing to domesticate and protect their wealth (and very lives) outside of their conflict zones and it has been a huge zigzag for them even at that. First, over the last five years, due to strong Persian/Arabian historical connections with the continent, most of the money first “zigged” to Europe and into Euros. Second, it was not to stay long, as, now, with Euros seemingly on the cliff’s precipice, in the last six months even greater masses of wealth have fled by “zagging” finally to the U.S. as the “last refuge in the storm.”
This is why U.S. Treasuries continue to sell out with coupons paying so little that they are at least 3 points even under base U.S. inflation, netting zero in net real funds. The fleeing money reasons that this is better than having their money entirely expropriated. This is also why money markets have more cash than at any time in U.S. history even though they are paying so little.
This is also why international money is the biggest buyer of U.S. assets right now and so prepared to invest in entirely domestic assets. Yes, some of the smaller international money comes here to profit from the self-depressed asset values that U.S monetary policies have triggered. But by far the greatest percentage of the biggest cash hoard in history is all coming here to get parked well away from the terrorists, the revolutions, the nationalizations, takeovers and the wobbling Euro. Observing the eroding international conditions, it is very probable that foreign money will stay in the U.S. for a long time and in all likelihood even greater amounts will follow as sovereignties and currencies churn in turmoil at the abyss of collapse.
Just by way of recent example of this cash-strewn rush to the protection of the U.S. from 2010 to late 2011, it is estimated that worldwide $100 trillion depatriated from one sovereign venue to another, leaving their traditional orbit and origin for depositories elsewhere. Other than some recentralizing in the Asian spheres, the larger share of it has ventured north and west collectively from Persian Gulf and Arabic sovereignties, Israel, the EU, and South American resources! Even the liberal and more peaceful Islamic world is depatriating money, placing it with international entities, in some cases attracted more by those which observe the Sharia laws (for example those prohibiting the earning of “interest”, though they profit by other techniques).
The Eurozone reported that “private savers”— private citizens — have pulled $90.12 billion from Greek banks and corporate savers have pulled $207.94 billion in April, 2012, alone. All Spanish deposits across the board, personal, corporate, have dropped 6% since the end of 2011, about $1.624 trillion in flight, followed by yet another $3.1 billion removed just since May, 2012. And very little of it is now transmitted into other banks or depositaries backed by Euros, which have fallen into thorough distrust. Though earlier flights of money several years ago went to Euro-backed banks like Barclay’s and other London-based banks which have maintained access portals all across Europe and the Middle Eastern regions for hundreds of years, with the Euro-scare mounting daily and with even England-based banks wobbling due to their Euro-exposure, the money has recently fled even those. Most all of it headed to the U.S. as first destination. The second “refuge of choice” has been Dutch banks, such as ING, which are not Euro-based. Even super-economy Germany is being by-passed as a likely future Euro-based casualty as the rest of the EU continues to pile its debt woes at the doors of the Bund.
Effect for the U.S.:
disconcerting reality is that, for the world investors right now, other than
investing in emerging non-Euro-based Asian and Africa countries and the BRICs
(still risky monetary and fiscal lands of “manipulation, smoke and mirrors”) the
relatively more “transparently-managed” U.S. is the place of choice to deposit
and invest their vast fortunes. In real estate, that investment surge has
already been seen on a street level with, in some micro (local or state-level)
markets, 40% to 60% of the local product tiers being dominated by foreign
money.NAR predicts that 28% of all U.S. deals will be with foreign money or
parties in one way and direction or another in 2013 and increasing beyond. Most
foreign money or investors are resources that pay cash for investments with
little of the traditional delays or contingencies of domestic buyers.And it not
taking place in just the micro markets. It is nation-wide. It is foreign
mega-bucks capitalizing (directly or discretely) some of the largest real estate
asset acquisitions, take-overs and corporate capitalizations out there.
What that means is business for those who know the trends, the
rules and the access-points. Like (it is to be hoped),
C. But First, Again, One Needs to Know the Rules!:
All foreign investors and foreign money, whether going in or out of the country and in whatever form, are regulated by laws governing banking, securities, internal revenue, immigration, anti-money laundering and criminal. More than just that, the U.S. is not the only body that may have jurisdiction over these investors and their transactions. They are also governed by similar laws in their own countries and by the international laws and treaties of both the sources of the funds and all of the international, interlinking conduits they use or travel through to get here.
D. Due-diligence Disclosure to Foreign Investors
Real estate licensees in all states owe some level of duty to use due diligence to determine issues that might concern an investor, seller or buyer and they also have the duty to render (in writing in Arizona) an open and complete disclosure of such matters to the parties. For most of the local deals, this means information about the property. But when dealing with foreign investors or recourses, it means disclosure also about the relevant law and regulations that might govern that investor or the funds as noted, above. State licensure law does not permit a licensee to disclaim or ask a client or customer to hold the licensee harmless for acts or omissions which violate any laws of the state, the U.S., U.S. treaties and internal currency laws or even the laws of a foreign country. Such disclaimers are not only void as a matter of public policy, but are themselves a violation of licensure law and the public laws.
In working with foreigners or foreign capital sources, it even goes beyond reasonable due diligence attempts. If one does not know the rules, laws and applications at least well enough to know that they are bearing on the transaction and those who facilitate it and must be complied with (and how), one might find one’s self also committing a felony or aiding one, whether or not reasonable due diligence revealed the issues or duties. The law is dead serious about international transfers of money and movements of people and entities and it is heavily regulated, as noted, below. In some countries, a money-exporting offender can lose his hand to a scimitar.
E. The Most Common and Relevant Rules:
It would be impossible to cover all of those U.S. laws in this short piece and more than impossible to cover the foreign laws that also might apply, but the tax and commerce laws of every country can be found free starting at the website of the one of the world’s largest accountancies, kpmg.com and, if the country and “banking regulations” is “Googled,” one will find published regulations from almost every country which the US will permit business dealings with (yes, that’s right, some are unlawful per se to have business dealings with, either governmental or private, without specific U.S. State Department or Treasury Department permission—see some below). Another great general source for the laws governing investment in the 10 foreign countries which have a lot of U.S. dealings (coming in or going out) are listed and the rules can be found at the U.S. government site, http://www.gao.gov/new.items/d08320.pdf. It summarizes how to do it. The impressive site by the giant international accountancy KPMG (www.kpmg.com) accesses other KPMG international sites (there are many) and offers a free publication to foreign investors (you can get it on screen) which is truly authoritative and thorough. THE KPMG publications would work well as a disclosure to give or cite to foreign investors about how business is done in the U.S.
The KPMG site also has many articles specific to taxes and rules of the jurisdiction. See http://www.kpmg.com/global/en/issuesandinsights/Pages/default.aspx and use the search boxes there with the key words searched. Last, since this Accountancy is world-wide, its services may be engaged for some deals.
Remember that in doing business in the U.S., a lot more rules kick in than just the real estate transactional laws and rules. The duty, as noted, is to assure the foreign person or purveyor of foreign capital knows the applicable laws and the licensee, as are all entities and persons inclusive of mortgage companies, escrow companies, accountants and attorneys, are prohibited from aiding or abetting them to violate them. Every licensee owes the duty to see to it as far as the licensee can that none of the parties disobey the law. They surely owe the duty not to violate it or aid and abet a violation of it, themselves! Moreover on this point, errors and omissions insurance will not cover violations of law, whether domestic or foreign.
F. And Now the Last Piece for 2012-13 and Beyond – the “Fiscal Cliff” (It’s Real!)
In all honesty, there is a caveat to the rosy U.S. picture, above. Starting in 2013, it may not be that “rosy.” Congress in 2012 is squabbling over the controls while the economy hurtles towards disaster. Starting January 1, 2013, federal tax increases and spending cuts equivalent to about 5% of GDP will automatically come into force. That is the “fiscal cliff” and moreso when coupled with the rest of the bad news, below, which could very well knock enough points off the growth rate to drive the US into a recession, according to the Congressional Budget Office, a non-partisan body that analyses the economic effects of federal laws. The big mess exists because there are a number of other economic elements that are also changing exactly at the same time. The so-called “Bush tax cuts,” (extended for two years under Obama), will run out December 31, 2012. Also expiring at the same time will be the temporary payroll-tax reduction and extended unemployment benefits. And now for the Big One: The Alternative Minimum Tax (“AMT”), technically a “flat tax” of 28% of net income (after disregarding deductions that the normal tax would have reduced for such as local taxes), originally a tax-raising and disparity-leveling measure to get more taxes from the rich who receive their incomes from large passive investments, is set to hit what is estimated to be about 30 million middle-class Americans, 67% of whom were never taxed by AMT before. At the same time and on top of that, Medicare Part B is going up in cost to most all those on it as a patient and is going to reduce payments to the doctors. On January 15th, 2013, automatic federal spending cuts go into effect that will mandatorily reduce federal revenue-sharing and spending by a half trillion in U.S. Fiscal 2013 and more thereafter. These are the same funds that helped support local police, fire and social programs, meaning that local taxes will have to increase and that increase will not be recognized under AMT income tax calculations! The Tax Policy Center estimates middle class taxes to increase by an average of by $3,500 per household at the bottom of the middle class, rising steadily through the middle class to some considerably more on the top.
In total, then: The “fiscal squeeze” the U.S. is headed for in 2013 appears now to be about $600 billion in a single whack and about $6.1 trillion over ten years.
Some anecdotal results already: J.P. Morgan, an investment bank, reports that 61% of its American business clients say the fiscal cliff is affecting their hiring plans, meaning high unemployment. Durable-goods orders plunged 13.2% in August, partly because companies are too scared to invest their (presently huge) cash reserves to expand production. It is the uncertainly itself that is chilling and stalling investment and “commerce normalcies” and expansions, not the failure of economic underpinnings. See the following opinion poll taken recently in the independent business community identifying what is bothering it and where it thinks the source is:
This ambiguity, uncertainty, feeling of disenfranchisement and economic “perfect storm” may even drive “foreign investment” in reverse. See next section.
G. The Objectives of the Broker:
The big issues, then, in dealing with international clients and funds is:
Qualifying the funds as lawful in original sources both in the USA and abroad
Qualifying the funds as being lawfully transmitted and used in the transaction both in the USA and in the transmissions originations and intermediaries.
Qualifying the foreign party as lawfully able to engage in the transaction and transmission of funds both in the USA and abroad.
Establishing an agreement as to which licensure laws, general laws, jurisdictions, rights and remedies in any dispute will apply to the parties, funding and transaction—the objective is to domesticate all of it into the state and country of the broker’s licensure.
Establishing an appropriate co-broke agreement where commissions or fees are being shared between USA brokers and/or with brokers abroad.
Establishing a due diligence form and process for a much of the above as possible.
following presentation attempts to arm the reader with a good portion of the
above objectives, though it cannot be exhaustive. More information can be found at Eckley
& Associates, P.C.'s web site at www.eckleylaw.com. Perhaps the
best thing to be accomplished is to at least raise awareness that these issues
exist in deals involving foreign money, parties or both and encourage the reader
to do his or her own homework after that by visiting the other helpful e-sites
given below and thereafter to search out for
II. Investment Outside the U.S.
It’s not just about investing inside the U.S., but also suggesting to U.S. clients that they should invest outside the U.S, and have the lawful foreign connections to do that and make sometimes considerably more commissions for perhaps more favorable product or product returns for marketing externally rather than internally.
An example, for instance, of comparative returns on foreign investment property in 2011, the most recent reported:
What is driving this investment—a lot of it coming from the U.S.—has sometimes been the tax and non-transparency of setting up offshore entities, investments and banking. But a lot is the fact that the investment or location has substantial worldwide interest. Example: London and Dubai Remain Global Hot spots
From the International CCIM website, an article from 2011, recently published and still relevant, respecting the world health of retailing, the “flashpoint” for the consumer spending that now drives most modern economies—now a rounded average of 60% - 65% of the spending that sustains most free-world capitalistic markets:
“STARTING IN 2011, London and Dubai became the most attractive cities for international retailers according to the CB Richard Ellis report,
How Global is the Business of Retail? Of 323 international retailers surveyed for the report, 58 percent had a presence in the United Kingdom and 55 percent were in the United Arab Emirates. Overall, the top 10 markets for international retailers remained largely unchanged over previous years.
At 6 percent, the U.S. has the fewest number of international retailers who use the franchising model. Mature markets such as the U.S., United Kingdom, and Australia have lower levels of franchising due to increased market transparency and maturity. Countries with mandatory local ownership laws have the highest levels of foreign retail franchises. The United Arab Emirates and India, where 98 percent of international retailers use the franchise model, both have local ownership laws.
Other report findings include:
India attracted more new retailers than any other country in 2010, and Spanish cities attracted the most new retailers last year.
Turkey saw the largest increase in international retailers in 2010, and Brazil is expected to see the biggest increase in the coming years.
North and South American retailers are the most global, with 73 percent having international locations. Twenty-six percent of Asia Pacific retailers have international locations, making them the least global.
Sixty-three percent of American retailers have a presence in London, making it the Americas’ most popular destination.
International retailers have plenty of opportunities to expand, according to the report. Prime retail space is limited, however, and that is likely to moderate global expansion. Because of the space limitations, the report foresees more retailers reaching international markets online instead of having a physical presence.”
Author’s Note: The foreign counterparts to US trade are not new or uniformed at how to do deals. For example, there are more CCIMs in Dubai than in Arizona.
international real estate news see the CCIM International
A failure to assure legality exposes the broker and clients to legal troubles inside and outside of the USA, some of which can be extremely serious and most of which are criminal in nature. A failure to establish which laws apply risks having any disagreement being tried under foreign law and a failure to establish which jurisdiction disputes must be resolved in results in one facing a lawsuit in Belgium, Swaziland or in Beirut. It also results in an argument that one was doing business requiring licensure outside of the state of licensure, whether or not a deal was done and whether or not one left the office in Burbank, as that is irrelevant to the legal “doing business” tests. Obviously, there is some legal work to be done and currently there is not a form or a process out there to do it and yet there is also a duty to establish one as part of a due diligence practice required by all USA state licensure laws to verify facts and statuses.
The amount of due diligence required—how deeply it goes and how much it relies on self-serving statements—is yet to be established, but a good rule of thumb is that (1) some level has to be done, always; and, (2) the larger the deal, the more the due diligence is owed to the parties and to sovereign licensure duties and the less it can rely on self-disclosure and self-certification and the more it has to rely on second and third-party verification. For instance, some levels, if requested by a party, may require the production of documentary proofs, such as proofs of citizenship status in the forms of passports or EB-5 documents, proofs that funds have been declared such as international certificates of clearance or copies of FinCEN returns, etc.. All levels, of course must at the same time be reasonable and required for the information sought in order to avoid discrimination and fair housing violations. It is not lawful to demand a passport as a precondition of renting or selling a home, but it might be if it is for transactional cash coming from an offshore account under an exemption available only to US citizens. There are also third-party due diligence operatives out there who can for a fee conduct these examinations. Many times, they can also be obtained at no charge from a local bank or escrow who may be transmitting the funds or handling some part of the transaction.
To be restated: The above verifications are not just a matter of complying with general law, but also with licensure law which requires due diligence and full disclosure or all material matters to the parties. What could be more material than the legality of the parties, the funds and or the transaction, itself? And as has been said, the due diligence is only to the point reasonable for those and for the limits of a brokerage to do such things. These duties intensify and go to second and third levels based upon the parties and the deal and sometimes that takes them to levels that are best referred out to specialists. No broker wants to pass any legal opinions these issues such as “certifying” that the parties, funds or deal passes international muster. Most due diligence exercises will not likely go much beyond the completion of a questionnaire.
Few of the above processes will do anything to assure which laws are applicable and where the proper jurisdictions are for any disputes, though. For those, more work is required usually by the broker. The “rules governing the deal” and even those governing the first contact should be set out by the broker in writing. This can be done by using counsel to draft a document with those terms and to provide them on the brokerage website and as part of the first series of contacts with the foreign party.
By way of an example of a rudimentary due diligence form that tries to meet all of the above objectives, the author has drafted a combined applicable law, jurisdiction and due diligence questionnaire for the foreign deal, party or funds. That form can be had for free by making a request for it to email@example.com. If you obtain that form, note that part of it—the portion regarding laws and jurisdiction—is amenable to being put on a website, in an e-mail or in a contract. The declaration portion of the free form attempts to advise the foreign party or funding source of the required hurdles and has the responsible party certify that the deal; and the source, status and transmission means of funds are lawful. With self-certification on the latter point, this is “first tier” due diligence, quite clearly. But it is far and away from what is out there now to get to these primary issues which is, for the most part, “nothing.” The broker should always have his own counsel review legal and due diligence documents. This form is for educational discussion, only, and does not constitute legal advice by the author or by any of the copyright holders to the document.
III. Summary: Some “Ground Rules” in Working with Foreign Entities or Persons or Foreign Funds and Resources: