How to attract private capital to fund the new American Jobs Plan?
Thu 22 Apr 2021
On March 31, 2021, the Biden administration released The American Jobs Plan, which detailed, among other critical items, the need for infrastructure improvements to enhance America’s competitiveness and to create well-paid American jobs.
For this to be successful in attracting needed private capital, the existing regulations concerning Real Estate Investment Trusts (REIT) and Foreign Investment in Real Property Tax Act (FIRPTA) must be changed and liberalised.
Funding for the plan will be controversial, as Congress is likely to be reluctant to raise corporate taxes or increase the deficit by the approximately $2.65T required to fund the entire plan. Among the options to fund parts of the plan are raising private equity from Pension Funds or Sovereign Wealth Funds (SWF) as well as other foreign investors. As these types of investors are reluctant to invest directly in real estate infrastructure projects because of Unrelated Business Taxable Income (UBTI), ECI (Effectively Connected Income), and FIRPTA concerns, they would want to make these investments through a REIT blocker. For this to occur, Congress and or the Treasury Department would need to expand the definition of qualifying REIT gross assets, gross income and similarly would require the increase of exemptions from FIRPTA.
Real Estate Investment Trust (REIT) legislation was enacted in 1960 through the Cigar Excise Tax Extension Act, while the Foreign Investment in Real Property Tax Act (FIRPTA) became law in 1980. Since their enactment, each rule has been modified repeatedly. Most recently, Protecting Americans from Tax Hikes Act of 2015 (PATH) broadened the categories for FIRPTA exemptions.
While many of the changes since enactment have modernised and liberalised REIT and FIRPTA rules, there are still significant impediments to the raising of capital from the aforementioned investors. The rules around qualifying REITs remain quite stringent and REITs’ tax-exempt status are threatened in cases where certain assets and income from the ownership and operation of infrastructure projects may not qualify as “good” REIT assets and income. Further, the related party rent attribution rules may also limit what is considered “qualifying” rental income. Concerning FIRPTA, IRS Notice 2007-55, which holds that US tax is due on the sale of REIT assets even in liquidation, depresses foreign investment in REITs.
The good news is that there are efforts afoot to alleviate these obstacles to foster private capital investment in REITs related to infrastructure projects. These efforts include a multiple year regulation project from the Treasury Department to identify “good” REIT income from real property. Congress in its Retail Revitalization Act is drafting legislation to liberalise the related party rent rules, including the attribution rules which have made it difficult for REITs to determine whether their rental income is good REIT income. In addition, NAREIT and other professional real estate associations have formally requested that Notice 2007- 55 be revoked.
If some or all of these changes are made, REITs will likely be able to attract capital from the above-mentioned investors which will reduce the capital needed to be provided by the Government. This in turn will increase the likelihood that these programmes will go forward and their goals achieved.
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