The following article discusses session two in the IR Global Virtual Series on ' Investment Incentives – Assessing international real estate programmes'
U.S – New York – ML The United States (US) EB-5
programme is a lot like other programmes that have existed throughout Europe.
It's a Visa programme where an individual invests a certain dollar amount in a
real estate project that creates a certain number of jobs in exchange for an
opportunity to make a monetary return on the investment and, the investor
obtaining a US Visa. The programme started in the 90s and wasn't particularly
popular until about 2010, right after the global economic crash. That’s when
the program began to be heavily marketed to the individuals looking for US
visas for their children to study in the US.
From 2010/11 through to 2015/16, many major real estate
development projects, in New York and other large US cities used this programme
and an alternative financing tool. Projects which required hundreds of millions
of dollars in capital have utilised the programme because the cost of EB-5
capital is low compared to the cost to bring in an equity investor.
Post 2015/16, there's been a slowdown in the use of EB-5 for
multiple reasons. One is the political climate here in the US and another is
because of how the visas are processed. Most of the investors were coming from
China and there was a backlog, because only a specific number of visas per
country per year are allowed to be issued. The government is in the process of
reforming the programme, including implementing higher investment thresholds
while trying to alleviate the Visa processing backlog. There continues to be
political debate over the reforms to be implemented to keep the program viable.
The projects that Rosenberg & Estis has worked on, range
from several hundred million US dollars to two billion dollars. We’ve done
several mixed-use buildings in Times Square in New York City, and we've also
done hotel, retail, rental and office buildings in New York City and in cities
outside of New York. I think the best use of the programme today is on a
smaller scale. Our firm is now doing fewer USD100 million – 300 million EB-5
loans, and has moved more towards USD20 – 40 million loans, on smaller
U.S – California – JO As Michael has illustrated, the
EB-5 programme was created in 1990 to stimulate the US economy through capital
investment by foreign investors. The programme is administered by United States
Citizenship and Immigration Services (USCIS). Through the EB-5 programme,
eligible investors may obtain permanent visas for themselves and their
immediate family members by investing funds into United States businesses and
creating jobs for American workers. The requirements for obtaining an EB-5 Visa
are as follows:
The investor must invest USD1,000,000 into a United States
business, with funds from a legitimate source. The entire amount of the
investment must be ‘at risk,’ meaning the investor must actually contribute
capital to a commercial enterprise. The investment must also result in the
creation or preservation of at least ten full time jobs.
There are various other ways to minimise capital gains taxes
associated with real estate investment. These include;
Section 1031 Like-Kind Exchange – If a taxpayer sells real
property held for investment (or productive use in a trade or business), he or
she can defer the associated capital gains tax by rolling the proceeds from the
sale into like-kind property within 180 days.
The Home Sale Exclusion – Unmarried individuals can exclude
up to USD250,000 in profit from the sale of their primary residence, and
married couples can exclude up to USD500,000.
Donation of Appreciated Real Property to Charitable
Organisation – A taxpayer may donate appreciated real property to a charitable
organisation to avoid paying capital gains taxes. Such taxpayer will also
benefit from an income tax deduction in the amount of the fair market value of
the donated real property.
Other schemes to consider include the New Market Tax Credit
Programme, which also attracts investment for real estate projects, community
facilities, and operating businesses through the grant of federal income tax
credits to private investors investing in low-income communities. Through the
programme, individual and corporate investors can receive tax credits against
their federal income tax in exchange for making equity investments in financial
intermediaries called Community Development Entities (CDEs).
A CDE is a domestic corporation or partnership that provides
loans, investments, and financial counselling to low-income communities. An
entity must be certified as a CDE to participate in the programme. The tax
credit received by CDE investors is equal to 39 per cent of their total
investment in the CDE. The credit is claimed over a seven-year period, in
instalments of 5 per cent of the investment for the first three years, and 6
per cent of the investment for the following four years.
Germany – PD Public loans occupy an important
position in the German funding system – at federal (KfW Group), federal state
(state development banks – e.g. the business development bank of the Federal
Land of Berlin) and EU (European Investment Bank) levels.
Long credit periods, attractive interest rates and
re-payment-free periods are the most important features of this funding
instrument. Small and medium-sized enterprises, in particular, are often
entitled to preferential conditions. A further advantage exists for investors
through the possibility of combining public loans with other forms of
incentives such as grants for investments, R&D projects or personnel.
One example is the KfW Entrepreneur Loan
(KfW-Unternehmerkredit), which is for self-employed professionals, enterprises
and leasing companies from Germany and other countries that have been in the
market for longer than five years and want to invest in Germany. These loans
have a maximum sum of EUR 25 million with a maximum term of 20 years, and are
meant for capital expenditure and working capital in and outside Germany.
The loans can be used to finance 100 per cent of the cost of
a project and have attractive interest rates fixed for up to 20 years, or for
the entire term of the loan. They have particularly favourable interest rates
for small and medium-sized enterprises and a repayment-free start-up period.
They can also be combined with other KfW programmemes and public promotional
KfW also promotes the construction of new energy-efficient
homes, the energy-efficient refurbishment of older residential buildings, the
expansion of renewable energies and the creation of barrier-free housing.
German real estate transfer tax (RETT) is generally
triggered if real estate located in Germany is sold or transferred by way of an
asset deal to a new owner. The transfer of shares/interest in companies owning
German real estate may also trigger RETT, if at least 95 per cent of the
shares/interest are (i) accumulated or (ii) transferred to new shareholder(s).
This rule often triggers RETT, once the so called 95 per cent threshold is
reached or exceeded.
RETT rates are currently between 3.5 per cent and 6.5 per
cent of the specific tax value of the real property, based on the location of
the real estate (each German Federal state is allowed to decide on the
applicable RETT rate itself).
RETT can be avoided if RETT blocker structures are
implemented as follows:
The purchase of shares in a property-owning corporation
using the two investors-model, whereby the main investor buys 94.9 per cent and
an (independent) minority investor buys 5.1 per cent.
The purchase of interest in a property-owning partnership,
whereby the investor buys 94.9 per cent, and the vendor retains 5.1 per cent.
After more than five years, the investor may buy the remaining 5.1 per cent
from the vendor, with the result that RETT is only triggered on 5.1 per cent of
the property value.
In case of refurbishment of certain historic buildings or
buildings in a formal urban renewal area in Germany, the taxpayer may deduct up
to 9 per cent of the costs of modernisation and reconstruction in the year of
completion and the following seven years. They may deduct up to 7 per cent in
the subsequent four years, instead of linear depreciation. The same may apply
to a taxpayer purchasing such a property from a developer. The refurbishment
has to be coordinated with certified by the relevant building administration.
DSC Legal actively supports the German Business Association
e.V. (Bundesverband mittelständische Wirtschaft, Unternehmerverband
Deutschlands e.V. – BVMW) in the implementation of its new SME initiative ‘Job
plus Dwelling’. The trigger for this initiative is the acute shortage of
housing and specialist staff, which is particularly noticeable in the major
German cities, where living space is becoming increasingly scarce and
expensive, and well-paid and qualified specialists often have no chance to rent
an affordable flat.
Mid-sized companies can participate in the construction of
employee housing through the regional grouping of companies in a cooperative
that builds and manages future employee housing. Each member company receives
the requested number of occupancy rights to apartments to be designated in
advance as part of the membership of the cooperative.
In addition to the capital contributions of the member
companies, financing will be provided, in particular, through loans from
cooperative members and credit institutions, as well as loans and grants from
public development banks (e.g. Investitionsbank Berlin – IBB).
New York – RS There is a programme in New York City
(NYC) that has existed for quite some time in order to address a few major
issues affecting new development in NYC – high taxes and the inability to
develop larger projects. These issues have become worse over time, and the city
has had to be very creative in order to ensure economic viability and to
promote development generally.
There's a real dynamic here at the moment, particularly with
residential products and rental residential products. NYC needs housing and
wants to promote its development, especially affordable housing, but
residential real estate is taxed at extremely high rates of real property
For the last 40 years there has not been a significant
residential rental building built in NYC that did not utilise one particular
benefit. It's called 421a, named as such since it derives from Section 421a of
the tax law.
A few years ago, the programme ceased to exist for almost
two years and its future was politically uncertain, but the politicians came
together and reinstituted the programme in a different manner which is now much
more complicated, but essentially has similar requirements and similar
In exchange for a developer building a certain number of
affordable units, they obtain an exemption from the payment of real estate
taxes for an extended period of time. There's a full exemption for the period
of construction (not to exceed 3 years) and – dependent upon certain facts and
limitations – 35 (and possible 40) years on the assessed value of improvements.
So, essentially, you're getting an extended significant benefit, and, in
exchange for that, you commit 30 per cent of the apartments in your building to
affordability restrictions. Affordable apartment created under the 421a
programme must remain affordable for the life of the benefits. At the time of
going to press, a new wide-ranging law was passed by the State of New York.
This puts in place rent restrictions on the entire development, rather than
just 30 per cent. We wait to see the full extent of its influence on 421a.
There are choices within the programme that involve making
the apartments available to various income bands of people who can live there
versus average median income in the area. It's quite complicated and there are
different windows of affordability for which the benefits vary slightly.
Essentially what you do, is make part of your building affordable and you get
an exemption in real estate taxes. Without the exemption, real estate taxes on
new residential development projects would be approximately 30-35 per cent of
gross income potential, often rendering the project uneconomic, certainly in
the early years.
The 421a programme does not apply to commercial buildings,
but there's something that NYC also does to promote the development of
commercial property – the Industrial and Commercial Abatement Programme (ICAP).
There is a similar abatement in taxes for investments in industrial and
commercial buildings, to modernise, expand and physically improve them. It is
not a complete abatement in the sense that the residential one is under 421a,
but it's an abatement to compensate you for your investment and improvement of
those industrial and commercial spaces. ICAP does not apply in all areas of the
city (e.g., it cannot be utilized in mid-town Manhattan), but it can be used in
many areas, including the presently hot, large-scale development areas in
Brooklyn and Queens.
In the case of 421a,
rental real estate would not continue to be built without these programmes.
Another programme – called ‘inclusionary housing’ – doesn’t create tax savings,
but rather creates the right to build additional floor area and thus, allows an
increase in the size of the building to be built. If you build affordable
housing in certain areas, you get what's called a zoning bonus of a certain
amount of square feet that you can either use in the building being
constructed, or transfer to another building within a certain geographic area.
Affordable apartments created under this programme must remain affordable in
This zoning bonus is a saleable asset, so it was often used
by affordable developers developing a site in a certain area. They would spin
off this inclusionary right and sell it for profit to high-end developers who
would buy the right and incorporate this into their building. They could then combine
that with the 421a to get a larger building with a significant abatement of
real property taxes.
In 2016, ‘mandatory inclusionary housing’ was instituted,
which requires developers to build affordable housing in certain areas in
building larger than 10 units or 12,500 square feet.
NYC can monitor the leasing of all affordable apartments,
and thus, the procedures for renting affordable apartments (which are highly
sought after and often conducted through a lottery process) is often done
through specialised companies.
Luxembourg – MT The taxation system in Luxembourg is
one of the main attractions for real estate investors. Real estate income is in
principle taxed as miscellaneous income.
A corporate income tax rate of 18 per cent applies to a
company when taxable income exceeds EUR 30,000. The rate falls to 15 per cent
if annual taxable income does not exceed EUR 25,000. A municipal business tax
also may be levied. Municipal business tax may be imposed at rates ranging from
6 per cent to 12 per cent, depending on where the undertaking is located.
Municipalities in Luxembourg impose a land tax of 0.7 per
cent to 1 per cent on the unitary value of real property, including industrial
plants. This is multiplied by coefficients fixed by each municipality and
varies according to the type of real property.
Corporate structures offer a multitude of opportunities to
optimise acquisition or investment. It is possible to leverage the investment
through a mixture of equity and debt. Capital gains derived from the sale of
Luxembourg real estate (including gains on the sale of land) will continue to
be taxed until 31 December 2018 at one-fourth of the overall tax rate.
Indeed, this measure, introduced initially as a temporary
incentive applicable during 18 months (from 1 July 2016 until 31 December
2017), has been extended to continue the efforts of the Luxembourg Government
to increase the real estate offer in Luxembourg.
Luxembourg companies may benefit via applicable double tax
treaties from tax exemption on income deriving from real estate locate abroad.
Dividends and capital from qualifying shareholdings in real estate property
companies are usually exempt from corporate income tax under the Luxembourg
domestic participation exemption.
There is normally no net worth tax due on directly held
foreign real estate or shareholdings in foreign companies as a result of tax
treaties and domestic law exemptions. There is also no capital duty, and the
annual property tax is low (generally a few hundred euros).
Michael E. Lefkowitz (ML) Rosenberg & Estis, P.C. – U.S
– New York www.irglobal.com/advisor/michael-e-lefkowitz
Marc Theisen (MT) Theisen & Marques Advocats a la Cour –
Jo Farr (JF) Barlow Robbins – England www.barlowrobbins.com/people/jo-farr
Richard Sussman (RS) Rosenberg & Estis, P.C. – U.S – New
Dr. Peter Diedrich (PD) DSC LEGAL Rechtsanwaltsgesellschaft
mbH – Germany www.irglobal.com/advisor/dr-peter-diedrich
Jordan Ondatje (JO) Blanchard, Krasner & French – U.S –
Robert Blanchard Blanchard, Krasner & French – U.S –