A Brief Legal Guide to Investing in Real Estate in the US

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Contents

1. What makes the property market in the United States popular for investment? 1

2. What is the process for a foreign investor to purchase property in the United States? 1

3. When does a purchaser actually become the owner of the property? 2

4. What type of ownership should an investor expect from property in the United States? 2

5. In general, what is typically the most US tax efficient way for a non-US investor to invest in United States real estate? 2

6. How can a purchaser protect its right to purchase a prospective property before the actual transfer of title? 4

7. How can a purchaser protect his or her investment after the actual transfer of title? 4

8. Why are attorneys required for investing in the real property market of the United States? 4

9. What legal body governs the sale of property and the rights of the respective parties? 5

10. What risks does a purchaser of real property in the United States face with respect to chemicals found in soil or groundwater underneath the property? 5

11. What is required from a purchaser who seeks to develop and construct a new project in the United States? 5

12. What acquisition costs are involved in the purchase of real property and who must bear them? 7

13. What taxes are imposed against property in the United States? 7

14. What type of security interest must a borrower provide in order to receive financing? 8

15. How are non-US persons taxed on income earned from investing in US real estate? 8

16. What advantages can be derived from investing in a Real Estate Investment Trust (REIT) as opposed to direct investment? 9

17. How are the distributions from a REIT taxable to non-US investors from a US Federal income tax perspective? 9

18. What are the advantages that can be derived from use of a Real Estate Mortgage Investment Conduit (REMIC) to finance real property? 10

19. What benefits can be derived from leasing as a form of long-term financing of an investment in real property? 12

20. US Federal and State Regulatory Issues 12

Mayer Brown’s Real Estate Practice in the United States 13

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1. What makes the property market in the United States popular for investment?

The United States has an estimated population of 314 million people spread over 3.5 million square miles. The gross domestic product in 2011 exceeded USD 15 trillion with a per capita gross domestic product of USD 48,223. The United States real property market is enhanced by the states of New York, Illinois, California, Florida and Texas, which make up about 39% of the gross domestic product for the nation. These statistics, along with excellent infrastructure—such as the federal interstate highway system—make the United States a very attractive place for foreign investment.

In 2012, the favorite American cities for investment were New York City, San Francisco, Washington, DC, Houston, and Boston. Multi-family properties were the favorite form of investment in 2012, with indus-trial properties second, retail third, office fourth and hotels fifth.

2. What is the process for a foreign investor to purchase property in the United States?

Generally, a seller and a purchaser execute a pur-chase contract. The terms of the contract are freely negotiable, and often limit the seller’s responsibility after the sale for defects in the property’s size, quality and condition. Contracts generally require a down payment of 3%-5% of the purchase price at the time that the contract is executed by the parties to secure performance by the purchaser (although the down payment is usually greater than 5% for properties with a lower purchase price) and a portion of it may or may not be refundable at the end of the due diligence period described below. A purchase con-tract typically grants the buyer an investigation period during which it conducts its due diligence. Purchasers are expected to conduct their own investigation of the property in order to determine deficiencies before the sale is completed, although sellers may provide representations about title, encumbrances affecting the property, leases in place and matters affecting such leases. The scope of the representations as well as the time period for their survival are the subject of negotiation. After the

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The United States is a magnet for international real estate investors because of its high per capita GDP, land availability around major metropolitan areas, and developed infrastructure. This paper outlines some of the issues related to foreign investment in United States real estate.

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2 A Brief Legal Guide to Investing in Real Estate in the US

investigation period, the buyer has the right to terminate the contract or proceed to closing. If the buyer elects to close but then fails to pay the balance of the purchase price in accordance with the contract of sale, the buyer will forfeit the down payment as liquidated damages to the seller. Typically, the seller retains the down payment as its sole source of damages if the buyer breaches the contract.

Generally, the rule of caveat emptor applies to most real estate purchases; it is the buyer’s responsibility to satisfy itself regarding the real estate purchase.

In addition, since September 2001, the federal government has enacted laws that seek to identify terrorist groups and individuals in commercial transactions in the United States. Buyers may be required to provide disclosures under those laws.

3. When does a purchaser actually become the owner of the property?

The buyer becomes the owner of the property upon payment of the purchase price in exchange for title to the property. Representations by the seller regarding the status of title appear in the deed, the instrument conveying title, although it is customary for the seller’s title representations to be limited due to the popularity of title insurance (described below). The most used deed is a “special (or limited) warranty deed” in which the seller warrants that it has not done anything to impair title to the property but does not warrant title against actions by

its predecessors or other third parties. Less common is a “general warranty deed,” where the seller war-rants that nothing has ever been done by any party to impair the title. Also less common is a “quitclaim deed” in which the seller provides no representations whatsoever concerning the title to the property. Whatever the form of deed, it must be recorded in the proper recording office in order to provide constructive notice to all parties that the transfer of the property has been made. In many jurisdictions, state, county and local transfer taxes are imposed and payable at the time the deed is recorded. Some of these transfer taxes can be significant.

4. What type of ownership should an investor expect from property in the United States?

The most common form of ownership interest is “fee simple absolute,” which passes to the buyer the entire “bundle of rights” to possess and dispose of the land. Commercial transactions typically involve this form of ownership although acquisitions are sometimes structured as long as term ground leases. In these ground lease transactions, the buyer acquires fee title to the improvements for the term of the ground lease but only gets a possessory interest in the land through the term of the ground lease, usually for a period exceeding 50 years. The improvements revert to the owner of the real estate, the ground lessor, upon expiration or earlier termination of the ground lease. Other forms of ownership interests, more prevalent in the residential context, include “condo-minium ownership,” which allows fee ownership of a self-contained unit within a building with non-exclu-sive rights to common areas of the building with other condominium owners, and “cooperative ownership”. In a cooperative ownership, a not-for-profit corporation is established to hold title to the real property and the residents of the building own shares in the corporation (not the underlying real estate) and the corporation enters into a proprietary lease permitting possession of the applicable unit. If the shareholder/ owner wishes to dispose of the unit, the shares and the proprietary lease are assigned by the shareholder/owner to the purchaser of the shares and such purchaser assumes all obligations under the proprietary lease.

5. In general, what is typically the most US tax efficient way, from a US federal income tax perspective, for a non-US investor to invest in United States real estate?

Tax structuring for an investment in US real estate is highly fact specific and depends on many factors, including: the nature of the underlying real estate; the anticipated holding period for the real estate; the existence of tax treaties between the non-US investor’s home jurisdiction and the US; the tax

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treatment of income repatriated to the non-US investor’s home jurisdiction; the organizational structure of the non-US investor and such investor’s sensitivity to filing US tax returns; as well as US state tax considerations. A common structure for a non-US investor to hold US real estate, at least from a US federal income tax perspective, is through a US partnership or limited liability company (the “Flow-Through Entity”) that invests in a US entity that is treated as a real estate investment trust (a “REIT”) for US federal income tax purposes (which in turn owns the real estate). A REIT is a special type of entity for US federal income tax purposes that does not pay US federal income tax if it distributes all of its income to its shareholders and certain other requirements are met. A REIT is subject to a variety of rules regarding the type of income it can earn and the type of assets that it can own. Most US real estate assets can be owned by a REIT. However, a REIT cannot own development property and assets such as nursing homes and hotels have to be struc-tured carefully to comply with these rules.

Other types of structures may be used depending on the unique facts and circumstances of an investor. Note that REIT structures can also be beneficial in reducing state income taxes, at least in those state that follow the US federal tax treatment of REITs and that have not passed “captive REIT legislation” or similar limiting legislation.

6. How can a purchaser protect its right to purchase a prospective property before the actual transfer of title?

Although very rarely utilized, in most states, after signing the purchase contract, the purchaser is entitled to record such contract or a short-form memorandum of such contract. Without such record notice of the pending sale, it is possible for a seller to breach the contract and sell to another party that may be willing to pay a higher price. If that third party was not aware of the existing purchase con-tract, such third party may be classified as a “bona fide purchaser” that is protected against claims brought by the initial contract purchaser. Recording the contract, or a memorandum thereof, puts other

potential buyers on “constructive notice” that the property is under contract and that the initial contract purchaser has rights in the property and a subsequent purchaser would lose the “bona fide purchaser” protections. Sellers, however, generally prohibit the recordation of the contract and therefore it is not customary for US real estate contracts to be recorded.

7. How can a purchaser protect his or her investment after the actual transfer of title?

In the United States, it is customary to purchase title insurance, which is insurance against undisclosed encumbrances and defects in the chain of title of the particular parcel of property. The title insurer will conduct an independent title search and provide an insurance policy that insures the purchaser’s interest in the property subject only to the liens and encum-brances discovered by the title insurer during the title search. Generally, a title insurer will insure title conveyed by a special (or limited) warranty deed (as well as quit claim deed) mentioned above, thereby making it less critical for a purchaser to obtain a general warranty deed from the seller. While some states regulate the cost of title insurance and related endorsements (endorsements are special provisions that increase the coverage provided by a “base” title insurance policy), the cost of title insurance is not dependent on the type of deed delivered by the seller. Title insurers also insure the lien priority of a lender’s security interest in a property. As between a buyer and a seller, the costs paid for the title insurance, as well as the cost of any special endorsements to the insurance policy that increase such policy’s scope of coverage, generally follow a local market custom but are subject to negotiation between seller and buyer.

8. Why are attorneys required for investing in the real property market of the United States?

Commercial property transactions are often quite complex. In addition to negotiating the contract of sale, the attorney must examine title to the property to ensure conformity with the contract of sale,

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confirm compliance with applicable zoning laws, building codes, rent regulations and other legal requirements, review leases and negotiate financing documents. On the day that title is conveyed to the purchaser, multiple parties gather, including the seller, the purchaser, the title insurance company and the lenders. All parties are represented by counsel to protect their respective interests.

9. What legal body governs the sale of property and the rights of the respective parties?

Real estate transactions in the United States are governed in large part by the laws of the state and locality where the property is located, although certain federal laws (such as environmental laws) are applicable as well. Purchases of commercial real estate in most states are governed by the doctrine of caveat emptor, meaning that a purchaser acquires property at his or her own risk. Purchasers of residential property, however, are protected in many states by legislation imposing upon sellers the obligation to disclose certain information related to the property.

10. What risks does a purchaser of real property in the United States face with respect to chemicals found in soil or groundwater underneath the property?

Under US environmental laws, the owner or operator (for example, a ground lessee) of real property can be required to clean up hazardous chemicals found on or underneath the property. The owner or operator can be liable even if the chemicals were placed on the property before the owner acquired it (or operator began operating it). Therefore, potential purchasers of property customarily hire consultants to investi-gate for evidence of environmental conditions prior to acquisition. Continuing liability for environmental issues is a part of the negotiation between seller and buyers in purchase contracts and between ground lessors and ground lessees in ground leases.

11. What is required from a purchaser who seeks to develop and construct a new project in the United States?

There are two main categories of regulations that impact development—zoning codes and building codes.

Zoning Codes. Zoning codes regulate what uses are permitted in a particular zoning district: for instance, residential, office, retail or industrial uses. Zoning codes also include various bulk regulations that apply to development in a zoning district, such as restrictions on height, lot size, building size and landscaped areas. If a project requires a change in the zoning district or relief from a particular regula-tion that applies in a district, the developer must request such change or relief in a process involving public hearings before one or more boards or coun-cils of elected or appointed local officials. Such zoning review bodies have a great deal of discretion in deciding whether to approve the request. The hearing process can be time-consuming. For major projects, zoning hearings can take several months or even more than a year. Even if a development com-plies with zoning regulations, it must also comply with building codes.

Building Codes. Building codes are health and safety regulations that dictate construction details such as electrical and plumbing components and protections from fire, earthquake or other casualty events. Local authorities require that developers obtain building permits for all construction projects (even interior construction involving tenant build-out within an already completed building). The local authority will issue such building permit only if the construction plans comply with building codes. Building code reviews are typically done by a special-ist employee or consultant and are usually completed in a few months. The party conducting a building code review has much less discretion than the boards or councils involved in zoning review, though ques-tions of interpretation sometimes arise. Requests for relief from building code requirements or from decisions of building permit officials are handled by elected or appointed review boards, and such requests can add to the building permit time frame.


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12. What acquisition costs are involved in the purchase of real property and who must bear them?

Brokerage Fees. Generally, the owner of the prop-erty engages a broker who represents the seller in the sale of real property. Legally, as is the case in New York, brokers earn their fee when they produce a purchaser who is ready, willing and able to purchase the offered property. Customarily, the broker agree-ment provides that no commission is earned, however, until the property is actually conveyed. Brokerage commissions typically range from 2 to 6% of the sale price and are paid to the broker with whom the property is listed. Brokerage commissions may be shared with cooperating brokers.

Transfer Taxes. In many US localities, state, and in some cases, county and city transfer taxes are imposed upon transfers of real property or transfers of interests in entities that own real property. For example, prop-erty transfers (including transfers of interests in entities that own property and transfers of leasehold interests) in New York City, are subject to a city transfer tax ranging from 1.425% to 2.625% of the property purchase price and the tax is typically paid by the seller. Washington D.C. has both a transfer tax (1.45% of consideration) and a recordation tax (1.45% of consider-ation), for a total transfer/ recordation tax of 2.9% of the purchase price. Although subject to negotiation in Washington D.C., the payment obligation is customarily split evenly between the seller and the buyer. In many California counties, documentary transfer taxes of USD 1.10 per USD 1,000 of the purchase price are imposed. Certain California coun-ties in northern and southern California impose higher transfer taxes. For example, in Los Angeles, transfer taxes of USD 4.50 per USD 1,000 of the purchase price are imposed and in San Francisco, the documentary transfer tax rate is 2.5% of the paid consideration. California transfer taxes are a joint and several obliga-tion of buyer and seller customarily split 50/50 by the parties. In Chicago, the aggregate state, county and city transfer tax rate amounts to 1.2% of the consideration paid. The seller is obligated to pay 37.5% of the tax; the buyer is legally obligated to pay the remaining 62.5%. However, by custom and practice, the parties in Chicago typically split the transfer tax liability 50/50.

While tax payment obligations are often dictated by state and local law, many locations simply state that the parties are jointly and severally liable, which allows parties to either follow custom and practice (if any) or negotiate the transfer tax payment obliga-tion between the parties.

Mortgage Recordation Taxes. Finally, some states such as New York and Florida impose a tax upon the recording of a mortgage based upon the principal amount of the indebtedness being secured (the tax rate may be as much as 2.8%).

The costs of acquiring and financing US property can be significant and legal counsel should be consulted to help devise ways of minimizing acquisition costs.

13. What taxes are imposed against property in the United States?

Real Property Taxes. Real property taxes (or “ad valorem taxes”) are generally imposed in most US localities. Although real property tax schemes vary greatly from state to state and county to county, generally, real property taxes are calculated based upon the estimated fair market value of the property. Factors such as the size, age and location of the property; the improvements located on the property; the use of the property (e.g., residential versus commercial); and whether the property generates income, all impact the value of the property. In some cities, such as New York City, it is customary for the property taxes to be annually reassessed. In other parts of the United States, local governments may reassess every few years. In California, property is reassessed only upon transfer or new construction. Property taxes can be minimized through a compre-hensive tax management strategy. It is therefore very important to team with attorneys who are knowl-edgeable in the property tax appeal process.

Real Property Tax Lien/Foreclosure. In addition to a robust tax minimization program, it is critical to implement the proper practices to insure timely, annual payment. Property taxes are a prior and superior lien to most property liens and even prime valid, recorded mortgages. If not timely paid, hefty penalties can accrue, the delinquent taxes could be


sold, and title to the property could be lost (and existing mortgages extinguished) through the issu-ance of a tax deed. Such tax deeds are typically issued free and clear of all other liens and ownership claims.

14. What type of security interest must a borrower provide in order to receive financing?

Most property financings in the United States are done on a “non-recourse” basis, where the lender only has recourse to the property (not the borrower) if the loan is not repaid. Generally, lenders will secure loans by obtaining a lien on the real property. This is usually accomplished through the recordation of a mortgage (or a deed of trust) against the particu-lar property. The borrower still owns the property during the term of the loan but the borrower, through the mortgage (or deed of trust), grants the lender a security interest in its ownership interest in the property and typically agrees to restrictions on the borrower’s ability to transfer (or further lien) the property as well as on the borrower’s ability to lease the property, alter the property or even rebuild the property in the event of a fire or casualty. If the loan is not timely paid, the lender can take steps to foreclose the mortgage or deed of trust and acquire ownership of the property. Financing structures can be very complicated, especially if the debt is to be securitized, and take the form of one or more mort-gages on the property and mezzanine financing secured by a pledge of ownership interests in the title-holding entity.

15. How are non-US persons taxed for US Federal income tax purposes on income earned from investing in US real estate?

Effectively Connected Income. The United States taxes foreign persons in either of two ways. If a foreign person is “engaged in a US trade or business,” then the foreign person is subject to US federal income tax at rates applicable to US persons on income that is “effectively connected” with the conduct of that US trade or business (such income commonly being referred to as “ECI” or “effectively

connected income”). In the case of a foreign person that is organized under a treaty, there generally is an additional requirement that the foreign person will not be subject to tax on ECI unless the foreign person has a “permanent establishment” (a PE) in the United States and the income is attributable to that PE. If a foreign person is a partner in a partnership that has a PE in the United States, then the foreign person is treated as having a PE in the United States.

There is not a precise test to determine whether a foreign person is engaged in a US trade or business for US federal income tax purposes. Instead it is a question of fact based on the type of activities performed in the United States.

FIRPTA. However, a special set of rules applies to sales of real estate located in the United States. Gain from the sale of a “US real property interest” is automatically treated as ECI under a set of rules known as “FIRPTA” (so called because they were enacted in the Foreign Investment in Real Property Tax Act of 1980). FIRPTA does not apply to income from US real estate other than gain, so rental income must be tested under the normal US trade or busi-ness rules. In most cases the rental activities will give rise to ECI. A US real property interest not only includes direct (or indirect through a subsidiary) ownership of US real estate but also investments in certain US entities (including most real estate funds) that own US real estate.

US Federal Tax Rates. In the case of a foreign corporation, ECI (including FIRPTA income) is taxed at a maximum federal income tax rate of 35% regardless of whether such income is ordinary income or capital gain. In addition, foreign corpora-tions are subject to a “branch profits” tax equal to 30% of after-tax income that is not reinvested in the United States. The branch profits tax generally is reduced under tax treaties with the United States. A foreign corporation that is engaged in a US trade or business is required to file a US income tax return on IRS Form 1120F. Foreign individuals are taxed at a 39.6% maximum tax rate on ECI from rent but are taxed at a 20% (15% for individuals with incomes below certain levels) rate on long term capital gains.

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If a foreign person is not engaged in a US trade or business, then the foreign person will be subject to a 30% withholding tax on dividends, certain interest and other “fixed or determinable annual or periodi-cal income” (FDAP) from US sources. A foreign person whose only income is subject to US withhold-ing tax is not required to file a US income tax return. Depending on where the property is located, state income taxes also may be imposed.

Tax Structuring. As noted in Section 5, tax struc-turing is highly fact specific and is likely to change over time as investors and/or legal requirements change. How a foreign person is taxed will depend in large part on how the investment is structured. Investing directly or through partnership vehicles (including limited liability companies) will likely implicate the ECI rules. Investing through a US corporation can produce other results. Legal and accounting tax professional should be consulted on a regular basis to optimize the tax structure.

16. What advantages can be derived from investing in a Real Estate Investment Trust (REIT) as opposed to direct investment?

A REIT is an income tax classification (versus a legal classification) of an entity. REITs own and operate income producing real estate, such as apartment buildings, office buildings, shopping centers, hotels and the like. Some REITs invest in distressed property. REITs may be publicly traded (in which case they are subject to laws governing the offering and sale of securities) or privately held. REITs are required to distribute certain minimum amounts of their income and such distribution of their earnings is referred to as a dividend. For US federal income tax purposes (and for some state income tax pur-poses), REITs are permitted to deduct from their taxable income the dividends paid out to investors. So long as a REIT distributes out all of its taxable income, such REIT owes no US federal income tax. Rather, US federal income taxes are paid by the shareholders on the dividends received and on any capital gains made. The investor in a REIT enjoys the economic benefits of owning real estate while the ownership and operation of the property are with the

REIT managers. Foreign persons are subject to a 30% US federal withholding tax on ordinary divi-dends paid by a REIT (unless reduced by treaty) and capital gain dividends are treated as ECI unless the REIT invests in mortgages or, in some cases, the REIT is publicly traded. Some states have enacted “Captive REIT legislation” or “combined” or “unitary” reporting regimes which may limit the “dividends paid deduction” afforded REITs on a US federal income tax level.

17. How are the distributions from a REIT taxable to non-US investors from a US Federal income tax perspective?

A REIT will produce three sources of income— ordinary dividends, capital gain dividends and, if the REIT is sold or liquidated, gain from the sale of shares in the REIT. Such types of income are discussed below. For purposes herein, it is assumed that the Flow-Through Entity is a partnership for US federal income tax purposes. Special rules may also apply to non-US governmental investors that may reduce the US federal income tax rate to 0% with respect to REIT ordinary dividends and sales of REIT shares.

Ordinary Dividends Paid by a REIT and Other Income. Distributions made by a REIT that are (i) allocable to non- US investors and (ii) neither attributable to gain from sales or exchanges by a REIT of “US real property interests” (“USRPIs”) (as defined under the US Internal Revenue Code) nor designated by a REIT as capital gains dividends will be treated as dividends of ordinary income to the extent that they are made out of a REIT’s current or accumulated earnings and profits (“ordinary dividends”) and will not be treated as ECI. These distributions of ordinary dividends will be subject to US federal income tax on a gross basis at a rate of 30% or a lower rate as permitted under an appli-cable income tax treaty.

Distributions in excess of a REIT’s current and accumulated earnings and profits that do not exceed the adjusted basis of a REIT’s stock allocable to a non-US investor will reduce the Flow-Through


Entity’s adjusted basis in a REIT’s stock and will not be subject to US federal income tax. Distributions in excess of current and accumulated earnings and profits that do exceed the adjusted basis of a REIT’s stock will be treated as gain from the sale of such shares of stock, the tax treatment of which is described below.

REIT Distributions attributable to gain from sale of USRPIs (e.g., capital gain dividends paid by a REIT). Distributions that are attributable to gain from sales or exchanges by a REIT of USRPIs, whether or not designated as a capital gain dividend, will be treated as gain that is ECI. Non-US investors will be taxed on this gain at the same rates applicable to US holders, subject to a special alternative minimum tax in the case of nonresident alien individuals. Also, this gain may be subject to a 30% (or lower applicable treaty rate) branch profits tax in the hands of a non-US investor that is a corporation. Under US-German income tax treaty (the “US-German Treaty”), the branch profits tax rate is generally reduced to 5%.

The Flow-Through Entity will withhold and pay over to the US tax authorities a percentage of the pro-ceeds equal to the highest applicable US income tax rate (currently 35% for corporate non-US investors and 20%, 25%, 35% or 39.6% for non-corporate non-US investors depending on the character of the income) of each non-US investor’s allocable share of any distributions made by a REIT that are desig-nated as capital gain dividends. Distributions can be designated as capital gains to the extent of a REIT’s net capital gain for the taxable year of the distribu-tion. Any tax withheld by the Flow-Through Entity (which may exceed the actual tax liability) will be allowed as a credit against the amount of US federal income tax owed by the non-US investor. To the extent that a non-US investor receives any ECI, it will be required to file US federal income tax returns.

Taxation of Dispositions of an Interest in a REIT. If a non-US investor sells its interest in the Flow-Through Entity, and if a REIT is treated as a “domestically controlled qualified investment entity,” such non-US investor should generally not be treated as engaged in a US trade or business with respect to its interest in such REIT, in which case a non-US

investor should not be subject to US federal income tax on the portion of the sale proceeds of its interest in the Flow-Through Entity allocable to such REIT. However, to the extent a REIT is not treated as a domestically controlled qualified investment entity, a non-US investor would be subject to US federal income taxation and income tax reporting with respect to the portion of sale proceeds of its interest in the Flow-Through Entity allocable to such REIT, and a transferee of an interest in the Flow-Through Entity would be required to deduct and withhold a tax equal to 10% of the gross amount of such pro-ceeds. Any amount so withheld could be applied as a credit against the US federal income tax liability of the non-US investor and can be recovered as a refund to the extent such withholding results in an overpayment of taxes. As previously noted, any tax planning strategy should take into account the impact of state and local income taxes.

18. What are the advantages that can be derived from use of a Real Estate Mortgage Investment Conduit (REMIC) to finance real property?

Historically, REMICs have been the primary approach through which Collateralized Mortgage Backed Securities are formed. REMICs are not used to finance real estate directly, but rather to pool existing or newly originated real estate mortgage loans to create certificates which may be sold and traded in the secondary mortgage market. Certificates may be issued in public offerings or private placements (including United States Rule 144A offerings). A REMIC is not a vehicle, but rather a tax classification under the United States federal income tax code. A vehicle satisfying the REMIC requirements and electing REMIC classification is treated as a pass-through entity for United States federal income tax purposes and thus, not subject to entity level tax.

Thus, REMICs have been the preferred method of securitizing United States real estate mortgage loans.

Typically, mortgage loans would be pooled into a trust which would issue one or more tranches (or series) of certificates. If only one series of certificates

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is to be issued, the trust would typically be a simple pass-through trust which would not be subject to entity level tax and thus, would not typically be required to satisfy the REMIC requirements and elect REMIC status. Generally, if more than one series of certificates are to be issued, the trust would be structured to satisfy the REMIC requirements and elect REMIC status in order to avoid the trust being taxable for United States federal income tax purposes. If a transaction to which the REMIC requirements were applicable failed to satisfy those requirements, the entity (whatever its legal form) would be taxable for United States federal income tax purposes, thus incurring entity-level tax. By virtue of REMIC status, one class of certificates (the residual certificates issued by the REMIC) would be treated as the “equity” of the trust, and the other, more senior classes of certificates would be treated as debt for US federal income tax purposes.

From the perspective of a property owner, the existence of the secondary mortgage market has expanded the availability of real estate mortgage financing and the parties offering such financing. The commercial mortgage market in the United States has generally structured mortgage loans which would be acceptable for inclusion in a REMIC transaction, whether the loan originator is contem-plating such a REMIC transaction or not. As the origination and servicing of a mortgage loan held in a REMIC must satisfy the applicable tax require-ments for REMICs, counsel experienced in those requirements should be consulted to make sure that the terms of the mortgage loan will satisfy both the needs of the property owner and the REMIC rules. Foreign persons should not be taxed on income earned from owning a regular interest in a REMIC.

19. What benefits can be derived from leasing as a form of long-term financing of an investment in real property?

One method of financing real estate and facilities is through lease finance. This method of financing can be used for acquisition or construction financings

and for refinancings. A lease finance transaction in the United States can be structured as a long-term leveraged lease or as a shorter-term synthetic lease. A long-term lease financing typically has a base term of 15 to 25 years, and various extension options. It can provide the benefits of long-term, most often fixed-rate, financing of real property assets. Typically, such transactions are structured as “true leases” for US federal income tax purposes. Thus, the tax benefits of ownership of the asset are held by the equity investor, and the lessee has effectively realized a portion of the value of such tax benefits in the effective lease rate.

In a shorter-term synthetic lease financing, the transaction is commonly structured with short-term, floating rate debt, usually based upon LIBOR. The term of the financing is usually between five and ten years. In these transactions, the transaction is intended to satisfy US GAAP requirements to be treated as an operating (off- balance sheet) lease, while for US federal income tax purposes, the transaction would typically be treated as a financing, with the lessee retaining the tax benefits of ownership.

20. US Federal and State Regulatory Issues

Although beyond the scope of this investment guide, please note that there are various US federal as well as state laws and regulations that can be triggered by an investment in US real estate. Examples of such laws and regulations include the Bank Holding Company Act, the Dodd-Frank Wall Street Reform Act, the Volcker Rule, FATCA, the reporting require-ments of the Bureau of Economic Analysis as well as various state doing business laws.

The applicability of these laws and regulations is highly fact specific and advice regarding their applicability should be reviewed on a consistent basis, as not only can the laws and regulations change over time, but so too can an investor’s ownership structure and investment strategy (either globally or in the US), all of which can impact previously provided advice.

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Chambers USA remarked that the group is a “wonderful, responsive and technically strong” team that “always provides a high level of professionalism.”

Mayer Brown’s Real Estate Practice in the United States

With nearly 60 real estate attorneys in the United States and over 175 real estate attorneys in our offices around the world, Mayer Brown’s real estate practice is large, varied and international in its capability. In the United States, we routinely advise on transactions throughout the country and have real estate lawyers physically located in California, Illinois, New York, North Carolina, Texas and Washington DC.

We offer a broad and comprehensive range of services as part of our Real Estate practice including:

• Acquisitions and Dispositions (assets and debt)• Construction, Development and Land Use• Corporate Services• Cross Border Investment• Distressed Real Estate Restructuring

and Workouts• Economic Development Incentives• Financing• Leasing and Sale-Leaseback• Litigation• Regulatory and Licensing• Real Estate Equity Investments

and Joint Ventures• Real Estate Fund Formation and Capital Markets• Transfer Tax, Property Tax and Assessment• Zoning

We also have vast experience in the acquisition, disposition, financing, leasing and operation of a variety of asset classes.

Our Real Estate practice’s close cooperation with our real estate litigation, environmental, project finance, public sector, construction, federal and state income tax, real property tax, federal regulatory and other practice groups enables us to deliver comprehensive services for virtually every kind of real estate need a client might have.

For more information on our firm and our practice, please visit www.mayerbrown.com.

About Mayer Brown

Mayer Brown is a leading global law firm with offices in major cities across the Americas, Asia and Europe.

Our presence in the world’s leading markets enables us to offer clients access to local market knowledge combined with a global reach.

Mayer Brown serves clients from 19 offices across the US, Europe and Asia, and from two offices in Brazil through the firm’s association with Tauil & Chequer Advogados.


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About Mayer Brown Mayer Brown is a global legal services provider advising clients across the Americas, Asia and Europe. Our geographic strength means we can offer local market knowledge combined with global reach.

We are noted for our commitment to client service and our ability to assist clients with their most complex and demanding legal and business challenges worldwide. We serve many of the world’s largest companies, including a significant proportion of the Fortune 100, FTSE 100, DAX and Hang Seng Index companies and more than half of the world’s largest banks. We provide legal services in areas such as banking and finance; corporate and securities; litigation and dispute resolution; antitrust and competition; US Supreme Court and appellate matters; employment and benefits; environmental; financial services regulatory and enforcement; government and global trade; intellectual property; real estate; tax; restructuring, bankruptcy and insolvency; and wealth management.

Please visit www.mayerbrown.com for comprehensive contact information for all Mayer Brown offices.

This Mayer Brown publication provides information and comments on legal issues and developments of interest to our clients and friends. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

Mayer Brown is a global legal services provider comprising legal practices that are separate entities (the “Mayer Brown Practices”). The Mayer Brown Practices are: Mayer Brown LLP and Mayer Brown Europe-Brussels LLP, both limited liability partnerships established in Illinois USA; Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales (authorized and regulated by the Solicitors Regulation Authority and registered in England and Wales number OC 303359); Mayer Brown, a SELAS established in France; Mayer Brown JSM, a Hong Kong partnership and its associated legal practices in Asia; and Tauil & Chequer Advogados, a Brazilian law partnership with which Mayer Brown is associated. Mayer Brown Consulting (Singapore) Pte. Ltd and its subsidiary, which are affiliated with Mayer Brown, provide customs and trade advisory and consultancy services, not legal services.

“Mayer Brown” and the Mayer Brown logo are the trademarks of the Mayer Brown Practices in their respective jurisdictions.

© 2014 The Mayer Brown Practices. All rights reserved.

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A Brief Legal Guide to Investing in Real Estate in the US · PDF file2 A Brief Legal Guide to...

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