“If everything seems under control, you are not going fast enough.”
By Keith Loria | Sep.Oct.16
CCIMs are increasingly working with foreign investor clients who are seeking stability and opportunities in the U.S. market.
It’s a big world out there, and more CCIMs are finding an increasing amount of business working with investor clients from Europe, Asia, the Middle East, and South America.
“There are those who see the investment in the U.S. as a savings account for future family generations,” says Kamil Homsi, CCIM, president of Global Realty in New York City. “Others are driven by local political and economic instability, and a third are seeking investment abroad due to the lack of opportunities and inventory in their respective local countries.”
Jack Chu, CCIM, CEO and principal broker at West Coast Real Estate Exchange, LLC, in Portland, Ore., says the majority of his international business comes from China, and reports that the country has poured more than $110 billion into the U.S. real estate market in the first half of the decade. That number is expected to rise to more than $218 billion between now and 2020.
“What is happening in your clients’ own country has a lot to do with their motivation,” Chu says. “For example, last year the southern (Chinese) city of Shenzhen’s property value went up 50 percent in a year, which makes it the highest per-year gain on the planet. So why would someone leave there to come here to buy properties giving them at most a 15-percent return? They like the stability of owning real estate here in the U.S. and are not as concerned with the return.”
Ernest L. Brown, IV, CCIM, with Rohde Ottmers Siegel Realty in San Antonio, Texas, says international clients view the clarity of law and U.S. treaties that establish the principles on conducting business in each other’s countries, providing a level of comfort not found in most other countries.
“Clients need to get to know you, the market, and the process we use,” Brown says. “Also, you need to get to know them, their tolerances, and the alternate investments they are considering and why.”
A Diverse Marketplace
While some areas remain attractive to international investors year after year – especially gateway cities such New York City, Washington, D.C., and San Francisco – the North American markets offer a tremendous inventory in various asset classes, different regions, and demographics that can yield a strong ROI.
Homsi notes that the majority of first-time investing foreign clients seem to prefer purchases of existing office buildings, hotels, and retail properties as they are income driven. More mature investors are willing to acquire senior housing, warehousing, self-storage, and even co-invest in developments.
“Foreign investors, who have a long-term perspective on commercial real estate investments, like to be involved in the decision making of major capital expenditure and disposition, and seek a return that ranges from 11- to 13-percent cash on cash for the first year and from 18- to 22-percent IRR depending on how many years they keep the investment,” Homsi says. “The compression of the cap rate in the coastal markets is opening a myriad of opportunities in secondary and tertiary markets for foreign investors to consider acquisition in larger portfolios of industrial assets, retail, and multifamily.”
Harold “Hal” Hanstein, CCIM, president of Cardinal Realty Group, Inc., in St. Louis has been selling single tenant pure NNN properties to foreign investors since 2010 and notes his global clients generally seek a quality of investment at a high cap rate, and he’s directed most to properties in southeastern U.S.
“They prefer fast food and quality casual dining because during the past recession this segment has continued to do well,” Hanstein says. “One of the primary factors we look for is the property’s sales ratio. And it must be a major franchise name that they recognize in their home country.”
For the most part, Chu says, Chinese buyers are focused on major cities on the East and West Coasts.
“As more investors come into this country, I’ve begun to see the pattern is changing,” Chu says. “Now they start looking at the overall return of the property.”
Eric R. Rutherford, CCIM, an investment broker with Wright Kingdom, in Boulder, Colo., keeps his focus on his home state. A former officer in the U.S. Marine Corps, he has been to all the countries that his international clients come from (mostly Venezuela and Iran), which makes it much easier to build a trusted connection.
“I use statistics I got from CCIM to show that the U.S. is the most popular country to invest in, nearly double that of Germany,” Rutherford says. “I describe the robustness of the Colorado state economy. Then I show that Boulder County is the most desirable place to invest in the state of Colorado.”
Brown regularly works with clients from Mexico, Europe, Japan, and China, looking for opportunities in the Texas markets. Most recently, he has focused on student housing, which he considers “recession proof,” and multi-tenant industrial properties with service-oriented tenants.
Rising to the Challenge
It’s not always easy to work with an international clientele because of cultural differences, language barriers, and different expectations.
“To gain the trust and confidence of the international investors, you must demonstrate a high level of professional and personal skills that can ease the uncertainty caused by distance, and the stereotype of the industry adviser who is solely interested in closing the deal versus building and cultivating a long-term relationship,” Homsi says. “Further, an adviser must possess the ability to speak the client’s language and develop a deep understanding of the client’s culture.”
There’s also the issue of logistics. Getting documents sent and delivered globally, and getting proper endorsements of signatures can be challenging for any deal. An acceptable notary can be done in a foreign country at a U.S. bank branch or U.S. Embassy.
The Power of CCIM
The savvy commercial real estate professional knows that to truly find success working in this realm, earning the CCIM designation and using the CCIM network is key.
As a CCIM since 1995, Chu is a “true believer” of the designation and the Institute.
“Due to my knowledge of the commercial real estate and the professionalism of my presentation, I was able to win a client in Shenzhen’s trust and turn this prospect into my client a few years ago,” Chu says. “Currently, I manage more than $6.5 million of his assets. I believe being a CCIM was the key to getting him as my client.”
Since 2010, Cardinal Realty Group has closed on more than $22 million in single-tenant pure NNN investment properties with foreign investors, and Hanstein has used CCIM Connect to reach out to other CCIMs, which improves his search for properties for his clients.
“Also, if I need help and referrals to deal with each individual state requirements and regulations for closing a sale, I first reach out to my network of CCIMs,” Hanstein says. “Through becoming a CCIM, I gained the ability to research a property to determine if it is a viable site with a long-term demand for the tenant that is occupying the space.”
As stability worldwide seems less certain, the stability of the U.S. commercial property markets bodes well for global clients.
PATH Act: Boon for Investors
by Mark Levine, PhD, LLM, CCIM
The Protecting Americans from Tax Hikes Act has had a huge impact on real estate investors — U.S. and international — since its enactment in December 2015. For example, PATH by making Code Section 179 permanent, provides for the possibility for an immediate write-off of qualified personal property employed in the trade or business, up to a maximum write-off in a given year of $500,000. Thus, as an example, if an individual acquired $200,000 of office equipment for the brokerage firm, assuming other Code Section elements were met, this individual could deduct the full $200,000 in the year the equipment was placed in service.
PATH is not limited to real estate investments and depreciation issues. Many credit and deduction provisions were extended under this Act. PATH also affects international investors and some global real estate interests.
PATH eased several burdens that have existed under FIRPTA, the Foreign Investors Real Property Tax Act. Under FIRPTA, prior to PATH, when global investors in the U.S. sold U.S. property, they faced larger tax and withholding burdens. International investors were often penalized with higher taxes when they purchased REIT interests.
Under the PATH Act changes to FIRPTA, however, these burdens have been substantially reduced. For example, under the changes to FIRPTA, an international investor can acquire an interest in a qualified REIT that is publicly traded and still avoid withholding under FIRPTA, if the investment is 10 percent or less of the REIT. The prior rules only allowed the exemption if the investment was 5 percent or less.
Not everything in PATH is good news for global investors. For example, the withholding under FIRPTA, for a sale of real estate in the U.S. by an international investor, not otherwise exempt, was at 10 percent on the sale. However, under PATH, the current rule, with some exceptions, is 15 percent withholding for those investors that do not qualify for an exemption.
Mark Levine, PhD, LLM, CCIM, specializes in U.S. and international real estate and tax law, and serves as a professor at the Daniels College of Business at the University of Denver in Denver. Contact him at firstname.lastname@example.org.
Top 5 Tips for Serving International Investors
by Sara S. Patterson
Since the early 1970s, CCIM Senior Instructor Carmela J. Ma, CCIM, CIPS, FRICS, has cultivated relationships with international clients buying U.S. properties. As the founder of CJM Associates in Beverly Hills, Calif., she specializes in real estate investment, consulting, and global transactions.
Ma identifies her top five tips for being successful in working with global investors.
No. 1: Qualify international clients. Knowing how to qualify global clients is key to successfully cultivating the relationship. For example, how serious are they about buying commercial real estate property, and what are they looking for? What are their U.S. assets? What are their reasons for acquiring U.S. property? What is their knowledge and experience of commercial real estate and of the U.S.? And will this relationship be a long-term or a one-time transaction?
No. 2: Build trust. This establishes the foundation for the relationship.
No. 3: Communicate value. For example, help the client convert their currency into U.S. dollars. Instead of referring to square footage, use metric measurements for properties in their currency.
No. 4: Know their culture. Conduct research about their culture online and through books with some skepticism. If something is culturally unclear, ask the clients. Overall, show them politeness and genuine respect first, and the rest will fall in place.
No. 5: Be savvy. Know and understand U.S. and international tax regulations, Visa programs, and the laws concerning cross-border transactions. Know the answers first, but still have the clients consult with legal and tax experts.
Overall, Ma recommends CCIMs who want to work with global clients to stay on top of international trends and be ready to act on them. Learn how money flows to have the expertise to prepare for changes that occur globally.
To learn more, Ma is presenting the CCIM Ward Center course “Global Commercial Real Estate Investment Bootcamp” on Oct. 6–7 in Chicago.
Sara S. Patterson is executive editor of Commercial Investment Real Estate.
Keith Loria is a business writer based in the Washington, D.C., metro area.
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