The commercial real estate market is still reeling from the financial crisis that brought the entire housing market down over the past few years. Unlike residential property that has benefited from government programs attempting to save people's homes, commercial property does not seem to have anyone in its corner...yet.
Rep. Joseph Crowley, a Democrat from the Bronx, New York, has introduced legislation in the U.S. House of Representatives calling for the elimination of certain taxes that cost foreign investors a lot more than domestic investors. Specifically, the legislation would look to end the Foreign Investment Real Estate Property Tax that has been in place since 1980.
Crowley's proposed bill, titled the Real Estate Revitalization Act of 2010, seeks to eliminate a major hurdle foreign investors face when entering the commercial property market in the United States. The main goal of the legislation is to level the playing field in the United States, which has a relatively low amount of foreign investment. Other countries don't presently tax foreign investment nearly as much as the U.S. For example, Rep. Crowley and supporters cite the fact that nations such as the United Kingdom do not impose any tax on foreign investors, which comprise nearly half of overall capital flow in the U.K. Presently, foreign investments in the U.S. account for a mere 10% of all commercial real estate.
While there are currently no vocal opponents of the bill, Congress remains mired in bulkier legislation, particularly healthcare, jobs, and energy bills, so the chances of this passing and stimulating the commercial real estate market remain unclear. Experts believe the legislation would have a much easier time getting through if it were tacked onto another, more publicized piece of legislation.
Analysts argue that there is a formidable market for foreign investment in American commercial realty due to a surplus of foreign capital which has pent up in search of opportunity. Many believe removing current taxes would level the playing field for foreign investors, thereby encouraging them to participate in the commercial real estate market.
There is hope that passage of this or similar legislation could help turn the U.S.'s commercial real estate market around. If Rep. Crowley's bill were to pass, the biggest winners would arguably be U.S. REITs and real estate operating companies, who have recently found themselves in debt since their properties lost significant value in the past few years. Commercial real estate prices have fallen about 40% since their peak a few years ago, and experts predict that values on property will drop another 10-20% before the sector completely bottoms out. By encouraging foreign investors to help lighten the burden, American real estate operating companies could get back on their feet more easily.
Of course, there is an opposing argument that removing taxes of any sort - especially those on big commercial businesses - will detract from revenue the government desperately needs in the face of a significant deficit. The estimated cost of removing such taxes is $8.6 billion over ten years, but proponents of the bill argue that giving foreign investors a break will dramatically help to heal the commercial real estate market.
Still others argue that simply getting rid of an additional tax will not cause any great spur in foreign investment. People everywhere, especially those looking to invest significantly in real estate, are aware of the status of United States' real estate market and economy. Though things have improved over the past year, there is still uncertainty about the future of the market, and foreign investors may well be wary of entering it, even at a discount.
