Special Rules for Foreign Investors
David Williams, Partner,
King & Spalding
Robert E. Banta, Managing Partner, Fragomen, Del Rey, Bernsen
& Loewy
Under US law, foreign investors face a
number of hurdles with respect to ownership of US real estate.
While some regulations restrict the type or amount of real
property that may be acquired, others are merely reporting
requirements that permit the US government to monitor foreign
investment activity. In many cases, these laws have been
the direct result of nationalistic reactions to world events
or economic conditions.
To illustrate, the first wave of restrictions
appeared in the 1880s and 1890s in response to depressed
agricultural conditions and the perceived dangers of absentee
land ownership. Anti-Chinese and Japanese sentiment in the
Western US in the early 1900s led to the enactment of many
alien land laws that prevented such immigrants from owning
property, particularly agricultural land. Another wave of
alien land laws were passed simultaneously with the outbreak
of World War II, again affecting Japanese landholding rights.
Only 25 percent of pre-war farmers of Japanese descent were
able to retain their property during their internment. Most
recently, in response to the terrorist attacks on September
11, 2001, more regulations have been passed and proposed,
which tighten the free flow of foreign investment money
into the US.
This chapter is designed to give foreign
nationals considering investments in US real estate a broad
overview of (i) visa and immigration options, and (ii) the
types of restrictions and reporting requirements that may
apply to their investments. It is not intended to cover
every possible contingency, nor does it cover every facet
of the requirements. This article is intended to serve merely
as a basis for understanding the issues involved in foreign
investments in US real estate and should not be used as
a substitute for specialized legal advice before any such
investment is made.
Visas and Other
Entry Requirements
The US immigration laws offer foreign investors in real
estate several options for entering the United States, from
short visits to permanent residence.
Temporary work visas allow stays in the
United States of several years. The applicant must usually
show active real estate operations, as opposed to passive
holdings, in the United States in order to be eligible for
a temporary work visa. The temporary visas most frequently
used by foreign investors in active US real estate operations
are the E-2 treaty investor visa and the L-1 intracompany
transferee visa.
A treaty between an investor’s country
of citizenship and the United States is required for E-2
visa eligibility. A citizen of a qualifying country may
qualify for an E-2 visa by making a “substantial”
investment in an active US enterprise that the investor
will develop and direct. The law stipulates no minimum amount
of capital necessary to qualify an investment as “substantial,”
offering instead a “sliding scale” approach
that compares an investment’s overall value and the
amount of capital actually invested. Typically, at least
$100,000 is required for E-2 visa eligibility.
Approximately seventy-five countries have
treaties with the United States qualifying their citizens
for E-2 visas. The E-2 visa can typically be renewed indefinitely
as long as the investor remains actively engaged in managing
a qualifying investment.
A foreign company that has a related entity
in the United States may transfer qualifying personnel utilizing
an L-1 intracompany transferee visa. Executives, managers
and employees with “specialized knowledge” may
qualify as long as they have worked for the foreign employer
for at least one year. L-1 executives and managers may remain
in the United States for up to seven years, while specialized
knowledge personnel are limited to five years.
Foreign investors wishing to live permanently
in the United States may qualify for a “green card.”
Investors who are managers or executives and who have transferred
to the United States from overseas to work in affiliated
US companies may qualify for “green cards” without
being subject to any minimum investment amount or labor
market test showing a need for their skills. Foreign investors
who have invested large amounts of capital (generally at
least $1 million, although $500,000 may be sufficient in
certain rural or high unemployment areas) in a business
that has created at least ten employment positions for US
workers may also qualify for “green cards.”
Under limited circumstances, investors who make particularly
large investments in US real estate projects may be excused
from the employment creation requirement.
Restrictions on
Foreign Ownership of United States Land
Regulation of land ownership is primarily an area of state
concern. Questions of title, ownership and descent of real
property are all typically regarded as the province of state
law. Each state may, and does, have its own unique rules
and regulations regarding foreign ownership of property
within its borders. Consequently, federal regulations concerning
foreign ownership of real property in the US are limited,
and primarily focused on federally owned public lands.
The US government has, for the most part,
maintained an “open door” policy with respect
to foreign investment in US real estate, realizing that
such investments can promote economic growth, create jobs
and foster healthy competition in the real estate market.
Nevertheless, the US government has imposed certain restrictions
on foreign investments.
Federal legislation restricting foreign
ownership of domestic land first emerged with the passage
of the Alien Land Act of 1887. That Act was passed as a
reaction to the purchase by European investors of large
tracts of land in newly opened territories. Under the Alien
Land Act, alien corporations and individuals not intending
to become naturalized citizens of the US were barred from
owning US territorial lands. This Act still has limited
applicability today, preventing aliens who have not declared
their intention to become citizens from purchasing real
property in US territories.
Most modern federal regulation of alien
land ownership focuses on the protection of US agricultural
and natural resources. Foreign investors who plan to invest
in US public land with the intention of developing energy
resources (such as coal, oil or natural gas) or mining for
minerals should be aware that various federal restrictions
apply to those areas and could prevent aliens from obtaining
the leases or licenses required to conduct such activities.
The granting of licenses or permits for the use or exploitation
of other natural resources, such as public grazing land,
hydroelectric power and geothermal steam, is similarly restricted
for aliens.
In order to protect national security, the US government
also restricts foreign investment in real estate connected
to certain “sensitive” industries. For example,
foreign ownership of power plants, both nuclear and otherwise,
uranium mines, defense materiel production facilities, radio
and television stations, and satellite communications facilities
is largely prohibited under federal law. Any foreign investor
from a country with which US relations are hostile should
also be aware that the Trading with the Enemy Act of 1917
may not only restrict future investments in US property
in order to protect national security, but could also divest
that investor of any current holdings. That Act is discussed
in more detail in the last section of this chapter.
Aside from federal laws directly regulating
foreign ownership of real estate in the US, investors should
be aware that other laws might indirectly restrict ownership
rights. One such law of particular importance is the 1988
Exon-Florio Amendment to the Defense Production Act of 1950.
Exon-Florio applies to acquisitions, mergers and takeovers
of US businesses by foreign investors, and gives the President
the power to disallow any such transaction if two conditions
are met. First, there must be credible evidence that the
foreign investment might threaten or impair national security.
Second, existing laws must fail to provide sufficient authority
to protect national security. Foreign investors using a
merger or acquisition strategy in order to acquire certain
real property should be aware that such a transaction could
be blocked if those two conditions apply in the eyes of
the US government. Other indirect federal controls on alien
ownership of US land include money laundering and divesture
laws, both of which are discussed in later sections of this
chapter.
Because federal regulation of alien real
property investments is limited and largely targeted at
particular industries, it is the more general state regulations
that serve as the primary source of restrictions on foreign
land ownership. A wide range of state regulatory schemes
has emerged. For example, some states specifically guarantee
that alien property owners within their borders shall enjoy
the same ownership rights as citizens. Other states restrict
the amount, type or time length of foreign real property
investments within their borders. Still other states limit
foreign ownership of land based on such concerns, as whether
the alien in question is from a “friendly” state,
or whether the alien’s home country grants reciprocal
property ownership rights to US citizens.
Because of the extensive variations in
state restrictions, there is a clear need for local counsel
advice before making investment decisions. It is also important
to remember that federal laws and treaties preempt state
laws, if there is a conflict. Thus, even though a particular
state law might provide that a foreign investor in that
state shall enjoy the same rights as a domestic investor,
which does not guarantee such equal treatment. If there
are federal foreign investment laws or treaties that apply
to his or her particular investment, then the alien investor
will be subject to those restrictions, regardless of state
law.
Periodic Reporting
Requirements
As mentioned before, few federal regulations in the area
of foreign real estate investment concentrate on outright
restrictions of ownership. Rather, most federal regulations
focus on reporting requirements. Many of those reporting
requirements originated in the 1970s, when a significant
increase in foreign ownership of real property attracted
the attention of the American public. That attention led
to growing concern among members of Congress that such investments
could be detrimental to the US over time. As a result, several
reporting programs were passed to monitor and obtain information
about foreign investments in US real estate.
The International Investment Survey Act
of 1976 (IISA), now known as the International Investment
and Trade in Services Survey Act following a name change
by Congress in 1984, is to date the most far-reaching of
the various disclosure laws addressing direct foreign investment
in US real estate. However, it is merely a reporting law
that contains no restrictions on foreign investments in
real estate and is not intended to restrain or deter such
investments. The primary requirement of IISA is that a report
must be filed with the Bureau of Economic Analysis of the
US Department of Commerce if any foreign person, entity
or affiliate acquires a direct or indirect financial or
voting interest of 10% or more in a US business enterprise
(which includes ownership of real estate). The initial report
must be filed within 45 days of the date on which the investment
occurs, and thereafter the foreign investor may be subject
to a continuing combination of quarterly and annual reports.
IISA reporting forms require disclosure
of the identity of the foreign and domestic parties involved
in the transfer, as well as their management and financial
structures. Though the reports are not available for public
inspection, there is a risk that identity information could
be made a part of the public record during court proceedings
or congressional hearings. Penalties for failure to file
the appropriate forms are significant and include civil
penalties of up to $10,000, injunctive relief, and imprisonment
of officers and directors for willful violations.
Exemptions from the initial reporting
requirements of IISA are available in limited circumstances.
An alien need not file an initial report if the total cost
of the acquisition is $1 million or less, and the acquisition
does not involve the purchase of 200 or more acres of US
real property. Under those circumstances, however, the investor
claiming exempt status will still be required to file an
exemption claim form. Exemption from IISA reporting is also
available for foreign investors whose investment is restricted
to being a limited partner in a US limited partnership.
Shortly after the passage of the IISA,
another reporting statute, the Agricultural Foreign Investment
Disclosure Act of 1978 (AFIDA) was passed into law. Like
IISA, AFIDA is not designed to create restrictions for foreigners
who wish to purchase US property. Its intent is simply to
gather information on foreign ownership of domestic agricultural
land to determine whether such alien landholding is an issue
of concern. AFIDA requires a foreign person who acquires
or transfers any interest (other than a security interest)
in US agricultural land to file a report of that ownership
interest with the Secretary of Agriculture within 90 days
of said acquisition or transfer. The definition of “foreign
person” includes not only foreign nationals and corporations,
but also US corporations with foreign shareholders, if any
individual foreign shareholder holds a 10% ownership interest
or if any combination of foreign persons holds a 50% ownership
interest, in the aggregate. Furthermore, if a person acquires
an interest in US agricultural property and then subsequently
becomes a “foreign person” under the definition,
a report must be filed within 90 days thereafter.
AFIDA reporting requirements are broad
and, to the discomfort of many foreign investors, are available
for public inspection. Each report requires public disclosure
of the identity of the transferor and transferee (owners
of foreign entities required to file must be revealed three
tiers up the ownership chain), the type of interest transferred,
the date of acquisition, the agricultural purpose for which
the foreign person intends to use the land, a legal description
of the property and the purchase price paid. These reporting
requirements apply to any land that has been used as agricultural
land in the last 5 years, regardless of its use at the time
of the purchase or transfer. Furthermore, if land becomes
“agricultural” subsequent to its acquisition
by a foreign investor, a report must be filed within 90
days thereafter.
Failures to file, false filings or late filings can result
in civil penalties of as high as 25% of the fair market
value of the property, though the Department of Agriculture
can and does consider mitigating factors in making penalty
assessments. Exemptions from AFIDA reporting requirements
are available if the tract of land acquired is less than
ten acres in size and the annual gross receipts from sales
of the produce are less than $1,000.
A third important reporting provision
under US law is the Foreign Investment in Real Property
Tax Act of 1980 (FIRPTA). Prior to the passage of that Act,
foreign investors in US real estate enjoyed more favorable
tax treatment than domestic investors. The purpose of FIRPTA
was to equalize that tax treatment. Foreign investors that
have held direct investments in US real property interests
exceeding $50,000 during the calendar year are required
to file an information return. The primary means of enforcing
FIRPTA after the Tax Reform Act of 1984 is its system of
withholding.
FIRPTA subjects all income from any disposition
of a real property interest located in the US to federal
taxation. If the US land transaction involves a domestic
purchaser and foreign seller, then (unless an exemption
is otherwise available) the purchaser is required to withhold
10% of the sale price payable to the foreign person and
deliver said amount to the IRS within 10 days after the
transfer. The full 10% must be withheld even if it exceeds
the amount of cash the foreign person is entitled to receive
at closing.
The last of the major reporting statutes
is the Tax Equity and Fiscal Responsibility Act of 1982
(TEFRA). Under TEFRA, all domestic and foreign corporations
“controlled by a foreign person” are required
to file annual information return with the IRS. “Control”
is defined as ownership of stock with 50% or more of the
voting power or 50% or more of the value of all shares.
Thus, the reporting requirement appears to be triggered
for any wholly owned US subsidiary of a foreign corporate
parent. Monetary penalties for failure to file the required
return are equal to $1,000 for every thirty-day period or
fraction thereof that the return is delinquent, up to $24,000.
In addition to the principal federal reporting
laws discussed above, there are also many other reporting
requirements not directly aimed at alien real estate investments
that may, nevertheless, indirectly affect foreign ownership
of US property. Three of the most pertinent statutes are
discussed below.
More indirect reporting requirements
for foreign investments in US real estate can be found in
the Internal Revenue Code. A nonresident alien who serves
as an officer or director of a corporation owning US real
estate must file personal income tax returns in the US if
the corporation is organized under US law, even if no compensation
is paid to said individual. Such persons must also file
a US tax return if they receive income for services rendered
in connection with a US trade or business, even if that
compensation is paid abroad. These filing requirements may
concern those foreign investors for whom anonymity is a
priority.
Finally, the USA Patriot Act, enacted
shortly after the terrorist attacks on September 11, 2001,
may impose reporting requirements on foreign investors in
US real estate. Title III of the Patriot Act, known as the
International Money Laundering Abatement and Anti-Terrorist
Financing Act of 2001, requires every “financial institution”
to put in place an anti-money laundering compliance program.
The definition of “financial institution” is
very broad, encompassing obvious institutions such as banks,
but also going much farther to include persons engaged in
real estate closings and settlements, and investment companies.
Should foreign investors fall into that definition, they
will be required to comply with a large number of reporting
and other regulations (some yet to be published) aimed at
detecting money laundering. Even if they do not fall into
the definition of a “financial institution”
themselves, foreign investors should be aware that others
that do meet the definition might be required to report
on their foreign investment activities.
In addition to the federal reporting statutes,
there are also state reporting requirements of which foreign
investors should be aware. The bulk of state reporting laws
concern agricultural land. As with the varied state restrictions
on foreign investments, the different reporting schemes
that exist from state to state demonstrate the clear need
for local counsel advice in this area. As with state ownership
restrictions, it must be remembered that federal treaties
and laws regarding reporting will preempt state laws on
the same issue, if there is a conflict between them.
Enemy Aliens—Restrictions
and Confiscation
This final section of the Chapter will examine the various
laws that restrict real estate investment rights of alien
citizens of countries which are recognized “enemies”
of the US Laws governing such situations date back almost
a century to the passage of the Trading with the Enemy Act
of 1917 (TEA). The TEA is intended to control property transactions
involving aliens and foreign governments that are either
hostile to the US or wartime enemies of the US.
Two types of regulations have been promulgated
under the TEA. First, the Alien Property Custodian Regulations
charge the US Attorney General with the responsibility of
managing property owned by enemy aliens during a war or
declared emergency, and govern the potential seizure and
handling of assets of enemy nationals. While temporary seizures
may be permitted under a number of “emergency”
situations, the TEA permits actual vesting of title to foreign-owned
assets in the US government only during a declared war.
If vesting is permitted, the assets may ultimately be expropriated.
Sixty years after the TEA, Congress passed
the International Economic Emergency Powers Act of 1977
(IEEPA), which strengthened US government power over foreign-owned
US real estate during a national emergency. Under IEEPA,
assets located in the US, but owned by foreign nationals
may be “frozen” or “blocked” if
the President declares a national emergency. If assets are
so frozen, individuals and firms subject to the jurisdiction
of the US, including domestic banks and corporations, are
prohibited from paying or otherwise transferring US assets
to their foreign owners. Such freezing doesn’t result
in confiscation, but it can prevent a foreign investor from
receiving the income from his US assets and from managing
those assets properly.
The strategy that has emerged among foreign
investors as a “defense” to asset freezing or
vesting under the TEA or IEEPA is the use of a “failsafe
trust,” though it is uncertain whether US courts will
uphold this structure against freezing or vesting in every
case. Failsafe trusts involve the transfer of US assets
(including real estate) held by a foreign investor to a
US trustee before freezing or vesting and expropriation
can occur. The trustee then holds the assets in trust until
the foreign investor can physically come to the US and obtain
a license to receive the trust assets. The failsafe trust
can also provide effective management of assets during a
freeze. A foreign national with US real estate holdings
who detects growing tension between his country and the
US might be wise to set up such a trust before tensions
escalate, and his assets become unreachable.
A trust set up to avoid vesting of title
to foreign-owned real property in the US government during
war time, as provided under the TEA, must include beneficiaries
who are unlikely to be characterized as “enemies”
under that Act. By making him or fellow foreign nationals
the beneficiaries, the alien investor runs the risk that
the US government will regard the trust entity as a sham
and proceed with the vesting of title to the property in
it. Thus, neutral beneficiaries must be designated and all
present interest in the trust assets must be given to those
beneficiaries during wartime.
Both sides often regard foreign investment
in US real property as a mutually beneficial relationship.
However, foreign investments are not without regulation,
and potential investors should be aware that restrictions
and reporting requirements exist in certain areas. However,
such requirements should not pose an impediment to most
commercial real estate investors.
David Williams is a partner in King &
Spalding’s Real Estate Practice Group. Mr. Williams
has extensive experience in a wide variety of complex real
estate transactions and related matters, including the acquisition,
sale and development of commercial property and real estate
portfolios; the representation of developers and lenders
in connection with secured loan transactions; and the structuring
of partnerships and limited liability companies to serve
as vehicles for the financing, development and management
of real estate assets.
Mr. Williams received his undergraduate
degree in French and German from New College, Oxford University
in 1982. He attended the University of Chicago Law School,
graduating in 1990. Mr. Williams is actively involved in
his local community and is a member of the British American
Business Group in Atlanta.
Robert E. Banta is the managing partner
of Banta Immigration Law Ltd. in Atlanta, Georgia. Mr. Banta
and his firm focus on immigration planning for corporate
employers and for international investors, businessmen and
employees.
Mr. Banta is listed in The Best Lawyers
in America, The International Who’s Who of Business
Lawyers and Atlanta magazine’s list of “The
Best Lawyers in Atlanta.” A past Chairman of the International
Law Section of the State Bar of Georgia, Mr. Banta is a
frequent speaker and writer on immigration law topics. Fluent
in French, Mr. Banta received the Chevalier de l’Ordre
National du Merite from the French Government in 2000.
A special thank you to Ashley
P. Frieden, an associate on the Real Estate team at King
& Spalding, LLP for all of her hard work and support
on this article.
