U.S. Real Estate Funds and “FIRPTA”

NON-U.S. INVESTORS IN U.S. REAL ESTATE FACE SUBSTANTIAL COMPLEXITIES AND COSTS RESULTING FROM THE FOREIGN INVESTMENT IN REAL PROPERTY TAX ACT OF 1980, OFTEN CALLED “FIRPTA.” THIS PAPER EXAMINES A VARIETY OF OPTIONS FOR MITIGATING COSTS AND OPTIMIZING NET RETURNS FOR INVESTMENTS SUBJECT TO FIRPTA’S REACH.

During the last decade interest surged in closed-end real estate funds. Opportunistic real estate funds (which made up nearly 90% of the money raised over the period in closed-end real estate funds) began to spread from the U.S., where the model first took root, to markets globally. However, turmoil in the financial markets did not bypass real estate and opportunity funds. Fundraising for closed-end real estate funds fell by over 70% in 2009 from the all time high of $105 billion in 2008 to $30 billion in 2009 as investors tightened their belts in the face of widespread losses across their portfolios. Fundraising activity in the first half of 2010 remained weak as well, though many investors are anticipating increased interest globally as the market hits a forecast low towards the end of 2010.