The Official Voice of the Foreign Real Estate Industry Fall 2015 INSIDE 2 Welcome New Members 9 2016 AFIRE Executive Committee 10 2016 AFIRE Board of Directors 11 Accessing International Equity: A Primer on Private REITs in the Hotel Industry 14 2015 Annual Membership Meeting Photos 16 Global: Most Active Markets of H1’15 17 London & New York Grab Market Share 18 Calendar of Events 19 2016 Winter Conference Program 21 2016 Winter Conference Registration Respecting the Laws of Supply and Demand oston welcomed AFIRE’s 27th Annual Membership meeting with glorious weather, and not a trace of last year’s snow. In the shadow of some of the most prestigious universities in America, members exchanged enough information about the international property market to have earned continuing education credits. In the absence of hysteria, hyperbole, froth and threat, the urban city emerged as the unheralded star of the meeting, and Boston’s new Seaport development illustrated just how it’s done. In his lunchtime speech, Chuck Hagel, former Secretary of Defense, said: “The world depends on strong American leadership. We must lead not by dictating and imposing ourselves, but by reaching out and forming alliances. “But, he cautioned, “we don’t want our kids to inherit a world where the US doesn’t lead. No other country would be as judicious. We should do what the leaders FIRE is pleased to announce that David M. Walker will address the membership at the 2016 Winter Conference in New York. Mr. Walker served as the seventh Comptroller General of the United States and head of the US Government Accountability Office (GAO). He received Presidential appointments with unanimous Senate consent from Presidents Reagan, Bush (41) and Clinton. No challenge is greater for America than facing – and fixing – our nation’s fiscal imbalances. And no one has devoted more time and energy to this critical issue. David M. Walker A B Continued on page 6 Continued on page 8 The Unsustainable Fiscal Outlook for the US 2016 WINTER CONFERENCE Mandarin Oriental • New York, NY • February 10–11, 2016 See program on page 19 and registration form on page 21. By Kathryn Hamilton, Hamilton Ink
Transcript
The Official Voice of the Foreign Real Estate Industry
Fall 2015
INSIDE
2Welcome New Members
92016 AFIRE Executive
Committee
10 2016 AFIRE Board of
Directors
11Accessing International
Equity: A Primer on Private REITs in the Hotel Industry
142015 Annual
Membership Meeting Photos
16Global: Most Active Markets of H1’15
17London & New York Grab Market Share
18Calendar of Events
192016 Winter Conference
Program
212016 Winter Conference
Registration
Respecting the Laws of Supply and Demand
oston welcomed AFIRE’s 27th Annual Membership meeting with glorious weather,
and not a trace of last year’s snow. In the shadow of some of the most prestigious
universities in America, members exchanged enough information about the
international property market to have earned continuing education credits. In the absence
of hysteria, hyperbole, froth and threat, the urban city emerged as the unheralded star of the
meeting, and Boston’s new Seaport development illustrated just how it’s done.
In his lunchtime speech, Chuck Hagel, former Secretary of Defense, said: “The world depends
on strong American leadership. We must lead not by dictating and imposing ourselves, but by
reaching out and forming alliances. “But, he cautioned, “we don’t want our kids to inherit a world
where the US doesn’t lead. No other country would be as judicious. We should do what the leaders
FIRE is pleased to announce that David M. Walker will address
the membership at the 2016 Winter Conference in New York. Mr.
Walker served as the seventh Comptroller General of the United
States and head of the US Government Accountability Office (GAO). He
received Presidential appointments with unanimous Senate consent from
Presidents Reagan, Bush (41) and Clinton. No challenge is greater for
America than facing – and fixing – our nation’s fiscal imbalances. And no
one has devoted more time and energy to this critical issue.
David M. Walker
A
B
Continued on page 6
Continued on page 8
The Unsustainable Fiscal Outlook for the US
2016 WINTER CONFERENCEMandarin Oriental • New York, NY • February 10–11, 2016
See program on page 19 and registration form on page 21.
By Kathryn Hamilton, Hamilton Ink
Fall 2015
2
Volume 30 Number 4
Association of Foreign Investors in Real EstateRonald Reagan Building1300 Pennsylvania Avenue, NWWashington, DC 20004-3020
ChairmanFrancis P. Lively Executive Vice President Wafra Investment Advisory Group
Deputy Chairman Catherine L. Pfeiffenberger Senior Vice President Skanska USA Commercial Development Inc.
Chief ExecutiveJames A. FetgatterAFIRE
Treasurer Edward M. CasalChief Investment OfficerAviva Investors
Corporate Secretary Donald M. WisePresident and Chief Executive OfficerMetzler North America
Purpose AFIRE News provides its membership with information and news on legislation, issues and events impacting institutional real estate investment.
AFIRE News is published three to four times a year by the Association of Foreign Investors in Real Estate.
EditorLexie Miller
Editorial SubmissionsArticles and materials for inclusion in AFIRE News may be submitted to the AFIRE office via e-mail.
WelcomeNewMembersBerkshire Group Berkshire Group is a real estate investment management company distinguished by over four decades in the US real estate markets, an integrated investment and operating platform, an experienced team, and an opportunistic approach to finding value on behalf of institutional investment clients, including pension funds, endowments and foundations, in the US and around the world. Privately held, Berkshire manages over $6.2 billion in real estate assets on behalf of its institutional clients worldwide as of June 30, 2015. Since 1969, Berkshire has sponsored over 40 multifamily investment portfolios, including seven discretionary institutional multifamily equity funds (closed-end funds and separate accounts), six multifamily mortgage funds, two publicly-traded REITs, and multiple joint venture relationships with some of the most prominent real estate investors in the world. It has also sponsored one of the most prominent multifamily G.S.E. lenders in the United States. Berkshire has experience across the range of real estate disciplines, including capital raising, acquisitions, dispositions, development, debt investment, portfolio management, financing and property management. Additionally, Berkshire’s Multifamily Property Operations division, Berkshire Communities, has been recognized nationally for excellence in managing apartment communities. Berkshire’s leaders are experienced real estate and investment management professionals with the insight and perspective crucial for managing capital. The company’s team has worked with some of the most respected names in real estate, development and investment management. H
Global Logistic Properties LimitedGLP is the leading global provider of modern logistics facilities. The company develops, owns and manages a 42 million square meters (452 million square feet) portfolio of logistics facilities across China, Japan, Brazil and USA that caters to domestic consumption. GLP’s 4,000 customers include some of the world’s most dynamic manufacturers, retailers and third-party logistics companies. Fund management is an important and growing part of GLP’s business, providing significant capital to support sustainable long-term growth, while enhancing returns on GLP’s invested capital. As of June 30, 2015, the company’s total assets amounted to $29 billion. The group is listed on the Mainboard of Singapore Exchange Securities Trading Limited (SGX stock code: MC0.SI; Reuters ticker: GLPL.SI; Bloomberg ticker: GLP SP). H
Greystone Managed Investments, Inc.With offices in Regina, Winnipeg, Toronto and Hong Kong, Greystone Managed Investments, Inc. has served an expanding national clientele since 1988. The firm’s primary business is investment management with over $30 billion of assets under management entrusted to Greystone by its clients. Greystone is a private firm, majority-owned by employees – more than 80 percent of employees are shareholders.
Greystone serves institutional clients across Canada and offers a full range of investment services, with in-house teams covering fixed income, Canadian equities, US equities, international equities, infrastructure, and real estate and mortgages. Their expertise is available through both segregated and pooled fund accounts.
Greystone’s clients have responded to Greystone’s investment philosophy and service orientation by making them one of Canada’s largest institutional money managers (Top 40 Money Managers Report, Benefits Canada May 2015, based on Canadian pension assets as at Dec. 31, 2014). In addition, Greystone’s sense of service extends far into the communities in which they live and work. Each employee (and collectively as a firm) believes in reinvesting a portion of the benefits back into the community and has contributed to hundreds of thousands of dollars in support of a wide range of charitable organizations since inception. H
T H A N K Y O UAFIRE would like to thank Gerard de Gunzburg
and M3 Capital Partners LLC for playing an
instrumental role in Global Logistic Properties
Limited joining AFIRE.
T H A N K Y O UAFIRE would like to thank Brad Olsen
and Atlantic Partners for playing an instrumental
role in Greystone Managed Investments Inc.
joining AFIRE.
Fall 2015
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Hodes Weill & AssociatesHodes Weill & Associates is a real estate advisory boutique with a focus on the investment and funds management industry. The firm is headquartered in New York and has additional offices in Hong Kong and London. Founded in 2009, the firm provides institutional capital raising for funds, transactions, co-investments and separate accounts; M&A, strategic and restructuring advisory services; and fairness and valuation analyses. Clients include investment and fund managers, institutional investors, lenders, property owners and other participants in the global institutional real estate market. The partners of Hodes Weill have 150 years of institutional real estate experience across many disciplines, including institutional capital raising, investment banking, restructuring, advisory and principal investing. Hodes Weill is employee-owned and managed.
Since its establishment in July 2009, Hodes Weill has undertaken advisory assignments for property companies and fund managers involving approximately $49 billion of assets under management and completed private placements representing in excess of $6 billion, including capital raises for closed and open-end funds, separate accounts and joint ventures. The firm has 26 professionals and global coverage of over 1,500 institutional investors and consultants. In addition, Hodes Weill is co-sponsor of, and advisor to, Tunbridge Partners LLC, an asset management company focused on making minority equity investments in real estate- and real asset-focused investment managers.
All US regulated capital market and securities advisory services are provided by Hodes Weill Securities, LLC, a registered broker-dealer with the SEC and a member of FINRA and SIPC, and internationally by non-US Hodes Weill affiliates. All investment advisory services are provided by HW Capital Advisors, LLC, a registered investment advisor with the SEC. H
Delegates:Will Rowson; London, Great Britain; +44.203.427.3626; [email protected]
Matilde Attolico; London, Great Britain; +44.203.427.3628; [email protected]
LGT Capital PartnersLGT Capital Partners (“LGT CP”) is a global institutional asset management organization, wholly-owned by LGT Group Foundation. LGT CP grew out of LGT Group, which has been a principal investor in alternative assets since 1994 and has offered client programs in real estate since 1999. LGT CP currently manages approximately $50 billion of assets on behalf of the LGT Group Foundation and institutional investors globally. Headquartered in Pfaeffikon (near Zurich), Switzerland, LGT CP has 10 offices globally, including investment hubs in Europe, Asia and the US. LGT CP has a dedicated real estate team that invests in real estate globally via primary fund investments, co-investments and secondary transactions. H
Delegates:Thomas B. Brown; New York, NY; 212.336.0650; [email protected]
T H A N K Y O UAFIRE would like to thank Gerard de Gunzburg
and M3 Capital Partners LLC for playing
an instrumental role in LGT Capital Partners
joining AFIRE.
Fall 2015
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Squire Patton BoggsOne of the world’s strongest integrated law firms, Squire Patton Boggs has a multi-disciplinary team of over 1,500 lawyers in 44 offices across 21 countries representing some of the world’s most important sovereign wealth funds, institutional investors, governments and sponsors in US and global real estate matters involving multi-billion dollar investments and assets.
The Squire Patton Boggs Global Real Estate Practice has invaluable insight into cross-border strategies, with more than 200 lawyers providing comprehensive services to clients engaged in all aspects of real estate transactions, from structuring, acquisition, planning and construction through disposition and reinvestment of capital.
Recent US transactions include the joint venture acquisition of seven regional malls with a combined value of over $1 billion; a $2 billion, 1.6M square foot residential rental and condominium joint venture development in New York City; advising Samsung SRA on the $258 million recapitalization of a 500,000 square foot office building in Washington, DC; and the $380 million sale of a 49.5 percent interest in a Class A Manhattan office building.
Outside of the United States, the firm has acted for Targetfollow Group following its acquisition of the iconic Centre Point building in central London; advised Canadian investment fund Westmont-Westbridge in financing for the purchase of various hotels in Spain worth a400 million; and advised Developers Diversified Realty Corporation, the largest shopping center REIT in the United States, in a $300 million joint venture with a German ECE Projektmanagement International GmbH. H
Stroock & Stroock & Lavan LLPStroock, with more than 300 attorneys in New York, Los Angeles, Miami and Washington, DC, is a law firm providing transactional, regulatory and litigation guidance to leading financial institutions, multinational corporations, investment funds and entrepreneurs in the US and abroad. Its emphasis on excellence and innovation has enabled it to maintain long-term relationships with clients and made it one of the nation’s leading law firms for almost 140 years. Stroock is well-known in the real estate industry, and its attorneys have experience in virtually every aspect of commercial, industrial and multi-family property investment, including acquisitions and dispositions, joint ventures, leasing, financing, development, investment and property management, fund and REIT formation and operation, land use and zoning, government real estate, capital markets and structured transactions, and dispute-resolution relating to real estate. Stroock consistently ranks among the best firms in leading legal publications such as Chambers USA, Legal 500,
Law360, International Financial Law Review, Best Lawyers
in America and Super Lawyers.H
Delegate:Jeffrey R. Keitelman; Washington, DC; 202.739.2810; [email protected]
TranswesternFounded in 1978, Transwestern is a privately held real estate firm specializing in leasing and management, real estate investment management, development, research and capital markets. Based in Houston, TX, Transwestern currently has 34 US offices and assists clients through more than 180 offices in 37 countries as part of a strategic alliance with BNP Paribas Real Estate. The company manages over 220 million square feet of commercial space and the investment management group oversees a diversified portfolio valued at $2 billion. Transwestern also has active development projects exceeding $1 billion in office, industrial and multi-family property types. H
of World War II did build a coalition, interact with NATO
and the IMF, and look to the future. We should embrace
this time and work in peace.”
Before the conference was done, Nathaniel Fick, a cyber
security expert, raised all of our awareness at both the
personal and corporate levels, and political commentator
Charlie Cook promised us that Donald Trump would flame
out before he got the chance to run for president. Here are
some highlights.
Capital Flows
Despite global strategies aimed at risk mitigation,
diversification and yield, the US remains the first port of
call for both foreign and domestic investors. Domestically,
real estate is the fastest growing institutional allocation.
According to Real Capital Analytics, foreign investment in
US real estate during the second quarter of 2015 surpassed
all foreign investment in the US in 2014.
But, the market is disciplined: “There is no naiveté in the
market, and foreign investment is not necessarily pushing
prices,” said Michael Stark of The Blackstone Group. “But,
quality assets with yield and safety have competition. Cap
rate compression is out and fundamentals rule.” Added
Doug Weill of Hodes Weill & Associates, “those who
believe we are in the ‘seventh inning’ of the current cycle
are seeking product that can carry them for four-to-seven
years.”
For first-time foreign investors, “office in gateway
cities” remains the “box to check,” but today, the four top
options were defined as: assets (not necessarily trophy)
in permanent locations; cash deals with a better-than-
5-percent return; development deals; and mezzanine
financing. Foreign investment teams were described as
“very sophisticated, fully understanding risk better than
they did 20 years ago.” Permanent locations were defined
as: “a surrounding environment that provides permanent
protection.” Added Youguo Liang of ADIA: “student
housing on the Berkley Campus or multi-family around
a medical complex is as permanent as an office on Park
Avenue. It may not be urban core, but it is nonetheless a
special place.”
Investors are also looking beyond the six gateway cities
of Boston, Chicago, New York, San Francisco, Washington,
DC and Los Angeles. Bicoastal cities are not foreign
investors’ only option,” said Mark Gibson of HFF Inc.
“Today, the split is 65 percent coastal and 35 percent other
cities.
And let’s not write off the suburbs yet. Glenn Lowenstein
of Lionstone Investments says his company tracks 130
cities, 25 percent of them urban. “There are urban areas
in suburbs that are attracting human capital. Investors are
willing to sacrifice liquidity risk for higher cash flow, rather
than compete in bicoastal cities with a five IRR, half of
which comes from appreciation.
But money isn’t moving only in one direction as
institutions build global portfolios with the goals of
geographic and currency diversification. “The capital from
Asia is going to the US; US capital is seeking nonperforming
loans in Europe, and European money is going to Asia,” said
Doug Weill. “Middle-Eastern investors are attracted to US
cities they can fly directly into,” added Mr. Liang.
Investment Trends
Fund managers are contracting. It is estimated that “10 to
12 managers account for 50 percent of the capital today.”
Leverage is down; equity is up. Investors are moving away
from distressed investments with core-plus being the sweet
spot. Emerging markets have also fallen from favor. Blind
pools are out; asset-focused investing along with investment
themes (think “technology-oriented office space”) are in.
“Investors want a greater degree of discretion and
control,” said Mr. Stark. In this competitive environment, a
premium is placed on the ability to move quickly, conclude
a transaction and, when it’s necessary, call the players into
line. The trend is also away from allocator/operators in favor
of “more people going to direct investment and bringing in
an operator in who can execute the business plan and sell
the idea to the capital.”
Continued from page 1
Fall 2015
7
Boston and Today’s Global City
Since the start of the 21st century, we have been “clustering
in” rather than “spreading out.” According to urban
economist and author Edward Glaeser, PhD, we became an
“urban species” in 2007, when 50 percent of us took to living
in the city. It’s a global phenomenon and it may be good for
both our health and wallets. More urbanized cities have
incomes that are five times higher and mortality rates that
are three times lower.
“Successful cities have smart people, small firms and a
connection to the outside world,” he added. “As the share
of adults with advanced degrees go up 10 percent, other
incomes (irrespective of education) rise 8 percent. The
reason Seattle recovered after Boeing’s downsizing was
because of its highly educated workforce: 50 percent of
Seattleites have advanced degrees. At the city level, human
capital is destiny. It’s not just your skills, it’s your neighbors’
skills that make you smarter. Today’s successful city is a
cluster of geniuses.”
“Corporations are moving across state lines with the fastest
velocity in US history,” said one speaker.
Where the jobs are and where companies are going to find
talented people is what will define the American city over
the next five years. It’s not a monumental shift, but it’s
happening.”
This is fueling interest in new innovation hub cities
including Austin, Houston and Atlanta, and in Boston’s
Seaport District which has become the hottest location in
this hot, hot city, where overall vacancy is less than 9 percent
and which has become a market of real estate holders rather
than traders.
Boston’s Seaport is a mixed-use development aimed
directly at the “next-gen tech and media innovation
tenants” who require a 24/7 urban manufacturing
environment in which manufacturing, residential and
office are co-located to supply both source verification and
connections to the experiences they are having.
Eight million square feet of development primarily by
three developers: Boston Global Investors, JAMESTOWN
and Skanska, will continue through 2017. It is a mix
of residential, hotel, retail, headquarters, parks and
recreation. Ground zero is JAMESTOWN’s Innovation
and Design Building, a 1.8 million square-foot-building
housing Boston’s design center in 400,000 sq. ft. with the
rest dedicated to technology innovation. Once the largest
building in Boston, this low slung building dates to the
1800s. It was a former army supply terminal that hadn’t
been updated in more than 50 years. Today, with its series
of public spaces – loading dock, shipping containers, food
purveyors, home furnishings companies, and restaurants –
it is one of the hottest locations within the Seaport.
The China Factor
Within the real estate industry there is always something
to worry about. At this meeting, the ripple of concern
was whether or not China would pull the plug on cross-
border investment, with Mr. Weill describing the current
situation as “China’s 2008. Right now, everyone is putting
on a good face and saying they are going to move forward.
But if the government decides it has to restrict investment
internally, we can find ourselves with an investment gap and
potentially higher interest rates. The bright side is that this is
taking some of the froth out of the market.” H
Where the jobs are and where companies
are going to find talented people is what
will define the American city over the next
five years.
Kathryn B. Hamilton is a writer and marketing communications specialist living in Raleigh, NC. She specializes in real estate and the built environment.
Fall 2015
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Mr. Walker currently serves as the first senior strategic
advisor for the Global Public Sector Practice at
PricewaterhouseCoopers (PwC). He previously served
as a partner and global managing director with Arthur
Andersen LLP. Mr. Walker also served as the first
chairman of the United Nations Independent Audit
Advisory Committee for four years and currently
serves on a number of non-profit boards and advisory
committees. He is currently one of 400 global members
of the Trilateral Commission.
Mr. Walker is also a former assistant secretary of
Labor for Employee Benefits Security, a former head of
the Pension Benefit Guaranty Corporation (PBGC), and
a former public trustee of Social Security and Medicare.
He has authored three books, with the latest one,
titled Comeback America: Turning the Country Around
and Restoring Fiscal Responsibility (2010), achieving
national best-seller status. He is a frequent writer and
commentator, is a subject of the critically acclaimed
documentary I.O.U.S.A. and has appeared in several other
documentaries. H
The Unsustainable Fiscal Outlook for the USContinued from page 1
AFIRE News Articles Being Accepted
Do you have information to share with other AFIRE members? Want to see your
name and that of your organization in print? AFIRE relies on members for articles
that appear in the newsletter. If you are interested in writing an article, please
contact Lexie Miller at 202.312.1403, or by e-mail at [email protected]. Articles usually
run between 1,000 and 2,000 words and may include a brief description of your
company and the services you offer.
9
Fall 2015
2016 AFIRE Executive Committee
Front row (left to right): Corporate Secretary, Donald M. Wise, Metzler North America; Deputy Chairman, Catherine L. Pfeiffenberger, Skanska USA Commercial Development Inc.; Chairman, Francis P. Lively, Wafra Investment Advisory Group; Chief Executive, James A. Fetgatter, AFIRE
Second row (left to right): Prior Year Chairman, Thomas R. Arnold, ADIA; Director of Legal and Tax, R. Byron Carlock, PricewaterhouseCoopers LLP; Director of Membership, Stephen R. Collins, Jones Lang LaSalle; Member at Large, Glenn Grimaldi, HSBC Bank USA, NA
Not pictured: Treasurer, Edward M. Casal, Aviva Investors; Member at Large, Colin Loudon, Oxford Properties Group; General Counsel, Willys H. Schneider, Kaye Scholer LLP; Director of Programs, Tracy Stroh, GIC Real Estate, Inc.; Member at Large, Steven R. Wechsler, Tishman Speyer
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2016 AFIRE Board of Directors
Front row (left to right): R. Byron Carlock, PricewaterhouseCoopers LLP; Thomas R. Arnold, ADIA; Donald M. Wise, Metzler North America; Catherine L. Pfeiffenberger, Skanska USA Commercial Development Inc.; Francis P. Lively, Wafra Investment Advisory Group; James A. Fetgatter, AFIRE; Glenn Grimaldi, HSBC Bank USA, NA; Stephen R. Collins, Jones Lang LaSalle
Second row (left to right): Eric C. Wurtzebach, Macquarie Capital (USA) Inc.; Matt Bronfman, Jamestown US-Immobilien GmbH; Jason Kern, LaSalle Investment Management; Will Gibby, Hermes Real Estate Investment Manager Ltd.; Matthew Scholl, AFIAA Investment AG; Rainer Scherwey, Credit Suisse; Marwan Isbaih, National Bank of Kuwait
Third row (left to right): Naoshi Ogikubo, Mitsubishi Corporation (Americas); Sophie Pullan, Brookfield Property Group; Olivier Thoral, AXA Real Estate Investment Managers; Helena Olin, AP2 Second Swedish National Pension Fund; Stephen Taylor, Healthcare of Ontario Pension Plan (HOOPP)
Not pictured: Abdulaziz Al-Marzooq, KFH Capital Investment Company; Ali O. Alghannam, Oqyana Real Estate Company; Gitta Becker, Commerz Real AG; Martin Brühl, Union Investment Real Estate GmbH; Edward M. Casal, Aviva Investors; Raymond Chow, Hongkong Land; Ignacio Diego, Euramex Management Group, LLC; Thomas Garbutt, TH Real Estate; Goodwin Gaw, Gaw Capital Partners; Chaim Katzman, Gazit-Group USA; Colin Loudon, Oxford Properties Group; Christopher R. Ludeman, CBRE; Bow Tan Mah, Pacific Star Group; Robert Merck, MetLife Real Estate Investors; Michael Nielsen, ATP Real Estate; Leonard O’Donnell, USAA Real Estate Company; Thomas O’Shea, UBS AG; Gijs Plantinga, Bouwinvest REIM; Richard Price, CBRE Global Investors; El Rosenheim, Profimex Ltd.; Willys H. Schneider, Kaye Scholer LLP; David C. Sherwood, Alecta Real Estate Investment, LLC; Michael E. Shields, ING Real Estate Finance; Mark A. Stefanek, Westfield Corporation, Inc.; Tracy Stroh, GIC Real Estate, Inc.; Steven R. Wechsler, Tishman Speyer; John E. Westerfield, Mitsui Fudosan America, Inc.
Fall 2015
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Accessing International Equity: A Primer on Private REITs in the Hotel IndustryBy John Ratino and Steve Schneider, Goulston & Storrs PC
With international investors showing strong interest in making joint venture investments in US hotels, understanding their tax challenges and developing an efficient tax structure provides US hotel owners with a competitive advantage in accessing a large equity capital source over standard limited liability company or corporate structures. One efficient tax structure often used for an international joint venture investment in a US hotel is a private real estate investment trust (“Private REIT”) and a potentially even more efficient tax structure for such an investment is a “domestically controlled” Private REIT.1
Tax structuring is imperative for international investment in a US hotel. Although perhaps the most simple tax structure is to own the US hotel through a leveraged C corporation, that structure has the potential cost of two levels of tax on the hotel’s net profits.2 A Private REIT, by contrast, only has a single shareholder-level of ordinary dividend tax because the REIT itself receives a dividends paid deduction.3
The default shareholder dividend tax rate is 30 percent. Although treaties can reduce this rate, many treaty reductions are inapplicable to REIT dividends. Further, treaty reductions do not typically apply to capital gain dividends (so called “FIRPTA gain”), such as the gain that passes through when the Private REIT sells the underlying real estate. This capital gain tax is 35 percent for corporate investors and 20 percent4 for individuals, plus the potential for an additional 30 percent “branch profits tax” for corporate investors (often reduced to 5 percent under treaty).
In order to minimize these taxes to the extent possible, an international investor often will insist on owning less than 50 percent of the REIT, with most demanding further that the other owners be US persons so that the REIT is domestically controlled.5 All international investors avoid the significant FIRPTA gain tax on capital gains if they can sell stock in a domestically controlled REIT. Moreover, sovereign wealth funds, such as governmental
pension plans, may be able to also avoid US income tax on ordinary REIT dividends under a special governmental exception which only applies if the governmental entity does not have effective practical control of the REIT. Below is a chart showing how a domestically controlled Private REIT can be used as a REIT blocker.
Interestingly, a Private REIT cannot be used for investments in most operating companies because the income from such companies is considered “bad” income for a REIT. However, the Internal Revenue Code has a special rule that permits the use of a “master-lease” structure for a hotel to cleanse much of the income from its operations by converting it to rental income. This same rule is used by publicly traded US hotel REITs. Thus, the Private REIT structure provides a special tax advantage for a foreign investment in a US hotel and this advantage is even more powerful when the foreign investor holds a minority investment in a US hotel through a domestically
controlled Private REIT.
A Primer on Private REITs and Their Structure in the Hotel IndustryIn order to qualify as a REIT, a company must meet several specific IRS tests, including that 75 percent of its income must come from rents from real property, interest on real property, or the sale of real property.
Fall 2015
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Income from other sources is considered bad income for purposes of this test. Because room revenue and most other income from operations of a hotel is bad income for a REIT, a master-lease structure is generally used in which the Private REIT or a pass-through entity owned by the Private REIT leases the hotel to a similarly owned operating tenant. This is often referred to as the “Propco-Opco” structure. In this structure, the hotel and related land are owned by the Private REIT or a pass-through entity below the Private REIT. The operations side will be held directly or indirectly (through a pass-through entity) by a taxable entity (i.e., a “taxable REIT subsidiary” or “TRS”). The TRS is, in turn, owned by the Private REIT. The diagram below depicts an overview of a hotel Propco-Opco structure.
The Propco-Opco structure has its complications, many of which are required to deal with the tax rules. These can be broken down as follows:
Split of Assets between Propco and Opco. Operating accounts and licenses are held by the TRS. Franchise agreements are made by the TRS but usually require a guarantee by the Private REIT or Propco LLC. The hotel’s furniture, fixtures and equipment (“FF&E”) is usually owned by the Private REIT except to the extent the fair market value of the FF&E and other personal property at the hotel exceeds the portion that the IRS allows to not taint the treatment of rents as being real property rents. Generally, the IRS requires that no more than 15 percent of the rent payable by the operating tenant be attributable
to FF&E and other personal property leased by the Private REIT to the TRS. So, to the extent the fair market rental value of the FF&E and other property exceed this limit, it should be owned by the TRS (or leased by the TRS from someone other than the Private REIT).
Contracts between Private REIT and the TRS. The Private REIT or Propco LLC enters to an operating lease with the TRS using market lease terms. The rent is generally measured with a fixed base rent plus a percentage of gross revenues. The lease cannot have rent based on net income for tax reasons. The most common lease term is 3–5 years, although shorter terms can be subject to concerns that frequently resetting the lease rent in an attempt to minimize the TRS’ net income creates more risk that the rent is treated as based on the TRS’ net income.
Contracts between the TRS and Third Parties. The TRS then enters a hotel management agreement with an independent hotel operator to run the hotel. The TRS has all revenue and expenses from operations of the hotel and hopefully has enough income to achieve a reasonable arms length profit (or “leakage” as this amount is sometimes referred to in the industry).
Financing Structure. The Private REIT or Propco LLC would be the borrower on the third-party financing and would provide the mortgage. Lenders will typically want some indirect access to the assets on the TRS side, although a direct TRS guarantee of the mortgage debt generally should be avoided. One structure sometimes used is for the TRS to pledge its assets to the landlord under the master lease of the hotel to support the TRS’ obligations under the master lease, with the landlord further assigning both the pledge and the master lease to
its mortgage lender.
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Creating a Private REIT Structure for a HotelParties considering a Private REIT in the hotel industry will need to make decisions on several structural points, including limitations on how assets (such as FF&E) are held; whether subleases are allowed and if so, what amount of sublease rental income is allowable; terms of the master lease, rent amounts and termination fees. In addition, there are specific considerations with regard to whether a single owner entity and operating tenant may be used for multiple properties which may consolidate operating losses and thus create a more favorable tax situation.
Establishing and negotiating a hotel Private REIT that works for all parties involved is complicated. Interested parties should recruit a seasoned group of legal, tax, and financial advisors in order to achieve the desired outcome. Steps in the process include forming the Private REIT/operating tenant structure; purchasing and financing of the property; entering into a lease with the operating tenant; and structuring the management contract with an independent contractor.
Private REITs are attractive to foreign investors but they are not without downsides. Interested parties should be aware there is no Section 1031 deferral on gain on the sale of REIT stock; owners incur the possibility of a TRS tax on the income of the operating tenant and there are REIT compliance costs, including a requirement that the REIT have and maintain at least 100 shareholders,
which is generally satisfied through a private placement with a specialty company that organizes preferred REIT shareholders. If the REIT fails, there are also potential corporate taxes the owner will incur.
A Private REIT can be of great value in attracting international capital because of its attractive tax structure. However, it is not the only investment scenario available for hotel sponsors seeking to attract foreign capital. Interested hotel sponsors should work with their tax, legal and real estate advisors to determine the best avenues for attracting foreign investments. H
1. For more information on investing through domestically controlled REITs see AFIRE News, Grumbacher, Towsner, and Schneider, A Three-Part Primer on Using Private REITs for Institutional Co-Investment with Sovereign Wealth Funds in US Real Estate (March/April, May/June and July/August 2012 editions).2. See AFIRE News, Schneider, Grumbacher, and Towsner, Developing a Tax Strategy to Invest in US Real Estate (Summer 2013 edition). Note that treaties often greatly reduce the second level of dividend tax on non-capital gain “FIRPTA” dividends. Further, single-property blocker corporations can often avoid the second level of FIRPTA tax by having the C corporation first sell the underlying real property prior to liquidating the corporation. 3. Because a hotel REIT will need to sever the operations and property side of the business, the operations side will be subject to a corporate-level tax through a Taxable REIT Subsidiary (“TRS”). Also, because of the “captive REIT” tax in some states, additional state taxes may apply in certain cases.4. For many individuals over the income threshold, an additional 3.8 percent Medicare tax applies to net investment income. 5. A Private REIT would be considered to be domestically controlled if less than 50 percent of the fair market value of its outstanding stock is held by foreign persons during the IRS’ measurement period.
John Ratino, a director in Goulston & Storrs’ real estate group, focuses his practice on the commercial real estate and hospitality industries with regards to matters involving real estate capital markets, investment trusts, joint ventures, financings, development, acquisitions and dispositions, restructurings and workouts, in addition to traditional business transactions. Mr. Ratino is co-chair of the firm’s Hospitality & Recreation industry and is also an adjunct professor at Georgetown University Law Center. He received his B.S. from the University of Maryland and his J.D. from the Catholic University of America, Columbus School of Law. He can be reached at [email protected].
Steve Schneider, a director in the tax group at Goulston & Storrs, has significant experience in a wide variety of domestic and international transactions with particular experience in the taxation of pass-through entities such as partnerships, S corporations and REITs. Mr. Schneider is also an adjunct professor at Georgetown University Law Center, teaching a course on drafting partnership and LLC agreements. He received his B.S., summa cum laude, from the University of Missouri-Columbia, his J.D., Order of the Coif, from Washington University School of Law, and his LL.M., with Distinction, in taxation, from Georgetown University Law Center. He can be reached at [email protected].
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2015 Annual Membership Meeting
Julian Josephs, Georgetown University, and Matt Bronfman, JAMESTOWN
AFIRE Chairman Tom Arnold, ADIA, interviews Chuck Hagel, US Secretary of Defense (2013–2015)
Deep Diving in Boston Panel: Moderator Barry D. Green, Goulston & Storrs, P.C., not shown; Shawn Hurley, Skanska Commercial Development; John B. Hynes, III, Boston Global Investors, LLC; David Martel, Cushman & Wakefield; and Michael Phillips, JAMESTOWN
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Edward L. Glaeser, PhD, Harvard University Frank Lively, WAFRA; Catherine Pfeiffenberger, Skanska USA Commercial Development Inc.; Mark Gibson, HFF; Steve Collins, Jones Lang LaSalle; and Catherine Marcus, Prudential Real Estate Investors
Michael Chen, Madison International Realty, LLC; Gijs Plantinga, Bouwinvest REIM; and Elaine Wong, CIM Group
Jim Fetgatter presents departing chairman Tom Arnold with one of his gifts
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Fall 2015
Global: Most Active Markets of H1’15
• In the first half of 2015, the top 10 cities accounted for 37 percent of overall global transactional activity for income producing properties. The top 30 markets recorded 59 percent of activity. This is marginally up on full year 2014 levels when the top 30 markets accounted for 56 percent of activity. This suggests investors are continuing to favor the largest cities over smaller locations.
• The cities represented in the top five are unchanged from H1’14 or the 2014 results. Within the top five, Tokyo has moved from 3rd position, which it has held since 2011, to 5th. However, there is still some distance between it and 6th placed Chicago, which has 40 percent lower transaction volume.
• A number of US cities have moved up the rankings in recent years as the US investment market recovery has taken hold. The markets of South Florida (Miami), Chicago, Atlanta and Boston have all moved up a number of places since 2013.
• Another significant mover includes Amsterdam, a market that has seen notable volume growth driven by cross-border investment, moving from 27th to 18th. On the downside, Hong Kong has fallen from top 10 to 22nd in the first half of the year; and, following a strong 2014 driven by significant deal by CPPIB, Sydney has fallen back to its long-term average circa 17th.
—Real Capital Analytics’ Global Capital Trends, Mid-Year Review 2015
• Central London and Manhattan have taken the first half of 2015 to hit home their continued appeal as global markets. Both increased their share of global real estate transaction volumes while other major global markets have continued to lose share to smaller cities. Combined, these markets received 11 percent of H1’15 volume, while the next five global gateway markets account for 9 percent.
• This also means that the top seven global centres accounted for 20 percent of overall global volumes (excluding Chinese land sales), which is at a similar level to 2007. It peaked at the height of the global financial crisis at 28 percent of volume, as investors sought safe havens for their capital. That nervousness seems to have dissipated in recent years.
• Central London and Manhattan are seeing increased capital as investors from politically or economically challenged regions continue to view them favourably. They are also perceived by mainstream investors to be the most likely to deliver strong rental growth in the coming few years.
• Top quartile office yields (our best approximation for prime/class A buildings) have continued to decline over recent quarters. Central London, Manhattan and Tokyo are all priced similarly at circa 4 percent, while Singapore and Hong Kong are priced at 3.4 percent and 2.7 percent, respectively. Of the global gateway markets, Paris is the outlier, with prime office yields of 5.1 percent. Paris departed from the global market trend line in 2013 due to investors uncertainty over French policy and concerns about the direction of the Euro. Investors may well find value in the Paris market relative to other global markets.
• Paris also shows the highest spread to 10-year government bonds, at 420 basis points at end Q2’15. With the exception of Singapore, all global markets are showing higher positive spreads to local government bonds than they were in 2007, demonstrating the continued attractiveness of real estate to multi-asset investors.
London & New York Grab Market Share —Real Capital Analytics’ Global Capital Trends, Mid-Year Review 2015
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2016 WINTER CONFERENCE
New York, NY Mandarin Oriental, NY February 10–11, 2016
AFIRE BRUNCH AT MIPIM Cannes, France Hotel Majestic
March 17, 2016
EUROPEAN CONFERENCE Hamburg, Germany
Hotel Atlantic Kempinski June 15–16, 2016
ANNUAL MEMBERSHIP MEETING Washington, DC
Mandarin Oriental, Washington, DC September 14–16, 2016
AFIRE BOOTH AT EXPO REAL Munich, Germany October 4–6, 2016
AFIRE BRUNCH AT EXPO REAL Munich, Germany
Restaurant Seeblick October 5, 2016
2017 WINTER CONFERENCE
New York, NY Mandarin Oriental, NY
February 8–9, 2017
AFIRE BRUNCH AT MIPIM Cannes, France Hotel Majestic
March 2017
EUROPEAN CONFERENCE London, England
Claridge’s June 7–8, 2017
ANNUAL MEMBERSHIP MEETING San Francisco, CA
The Ritz-Carlton, San Francisco September 11–13, 2017
AFIRE BOOTH AT EXPO REAL Munich, Germany
October 2017
AFIRE BRUNCH AT EXPO REAL Munich, Germany
Restaurant Seeblick October 2017
AFIRE Calendar of Events
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DEAL MAKING IN TODAY’S ENVIRONMENTThe real estate market is accelerating up to pre-Great Recession levels. We
can see this in higher and higher pricing, onerous seller conditions and terms, and shorter due diligence, all of which are fueled by still attractive financing,
as the Federal Reserve continues to threaten to increase rates. Investors must be creative, nimble and quick as it is becoming increasingly harder to acquire
properties and close a deal. It often takes thinking out of the box to find acceptable properties, submit an acceptable offer, manage the ever tighter
due diligence periods and, ultimately, close the transaction. So, who is buying in today’s market, who is selling and how are they getting it done?
3:00pm–3:10pm ................... Winter Conference BeginsWelcome by Frank Lively, AFIRE Chairman, and Executive Vice President, Wafra Investment Advisory Group
3:10pm–3:45pm ................... AFIRE Investment Survey A presentation of the 24nd AFIRE Annual Foreign Investment Survey.
3:45pm–4:45pm .................. Who, What, When, Where and Why?A panel of investors talk about their recent activity and how that fits into their strategy for the US market.
5:00pm–6:00pm .................. Message from the MarketplaceA panel of sales and leasing brokers describe what deals are getting done today and at what price.
6:00pm–8:00pm .................. Cocktail ReceptionMandarin Oriental Hotel South — Salon
8:00pm–10:00pm ................. Young AFIRE Event: Location to be advised
2016 AFIRE WINTER CONFERENCEFebruary 10–11, 2016
Mandarin Oriental Hotel • 80 Columbus Circle • New York, NY
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THURSDAY, FEBRUARY 11
8:00am–9:00am ................... Registration and Breakfast
9:00am–9:45am ................... Real Estate Keynote
9:45am–10:30am.................. Deal Structures and Other Useful IdeasA panel of real estate lawyers describe what structures they have used to get deals done today other than raising the price.
11:00am–12:00pm................ Alternatives to Alternatives Bricks and mortar should not be the only route to an alternative investment strategy.
12:30pm–2:00pm ................. The Unsustainable Fiscal Outlook for the USDavid WalkerSenior Strategic Advisor, PricewaterhouseCoopers; former Comptroller of the Currency and head of the U.S. Government Accountability Office (GAO); appointed by Presidents Ronald Reagan, George H. W. Bush and William J. Clinton.
2016 AFIRE WINTER CONFERENCEFebruary 10–11, 2016
Mandarin Oriental Hotel • 80 Columbus Circle • New York, NY
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FEBRUARY 10–11, 2016 • MANDARIN ORIENTAL HOTEL • NEW YORK, NY
AFIRE 2016 Winter Conference
Hotel Information:
Mandarin Oriental Hotel 80 Columbus Circle at 60th Street New York, NY 10023 Tel: 212.805.8800
When making your reservation, request the AFIRE group rate — $595 per night. Reservations are dependent on availability and must be made by January 10, 2016. Just down the street from the Mandarin Oriental, there are additional rooms available at the JW Marriott Essex House New York at the AFIRE group rate — $334 per night. Reservations are dependent on availability and must be made by January 10, 2016. Tel: 212.247.0300
To Register: To be included on the participant list, your registration must be received by January 25, 2016.
Cancellation Policy:
Refunds will be given for cancellations received in writing on or before January 29, 2016. Substitutions can be made anytime. Please note that if you do not cancel and you do not attend, you are still responsible for payment. Questions:
Please contact the AFIRE office at 202.312.1400 or log into your AFIRE account at www.AFIRE.org.
If you are an AFIRE Delegate, please go to www.afire.org to register. If you are not an AFIRE Delegate and you are taking the place of a Delegate, print clearly the information below and e-mail this form to AFIRE at [email protected].
Mr./Ms./Mrs. Name:
Badge Name:
Title:
Company:
Mailing Address:
City, State, ZIP, Country:
Phone: Fax:
E-mail:
Special Meals or Needs:
REGISTRATION FEE & REGULATIONS
o First & Second Institutional Member Delegates ....... Complimentary
o Third Institutional Member Delegate ..................................$1,500
o Associate & Supporting Member Delegates ......................$1,500
o Institutional Young AFIRE Delegate ...................................... $750
o Non-Member Registration ....................................................$2,500
SPECIAL EVENTS (You must register to attend)
o Check here if you plan to attend the reception at the Mandarin Oriental on February 10, 2016.
Spouse/Guest fee for February 10th Reception: $350 Spouse/Guest Badge Name:
_______________________________________________
Institutional Members may send two delegates on a complimentary basis. A third delegate may attend for the member meeting registration fee. Institutional Young AFIRE delegates may attend for half the member meeting registration fee. Associate and Supporting Members may send up to two delegates who will each pay the member meeting registration fee. Academic Circle Members may send up to two attendees complimentary. Speakers attend complimentary and are not counted in the maximum number of delegates allowed to attend. Attendance at a meeting may not be split between delegates.
PAYMENT INFORMATION (All fees and payments are in US dollars.) Please print clearly.
o Check (payable to AFIRE) o Visa o MasterCard o American Express
