Foreign investors continue to circle around the multifamily industry, but it's another flock of capital that can’t seem to find a home.

Part of the problem is the dearth of quality assets on the block. Foreign investors are much more likely to purchase core assets, rather than distressed assets, and the Class A properties now being sold are attracting bidding wars.

But another more persistent problem is the Foreign Investment in Real Property Tax Act (FIRPTA), a 30-year-old law that heavily taxes foreign investments in U.S. real estate interests. The intent of the law is to make sure the government can tax the gains when a foreign entity sells a property or shares in real estate companies. But the law effectively blocks the flow of more foreign capital.

“FIRPTA is ridiculous and embarrassing for our country,” says Dan Fasulo, managing director of New York-based Real Capital Analytics. “Over the years, many foreign countries have loosened up rules of the game to allow for more foreign investment, and we’re stuck in the Stone Age.”

Government Steps In

A recent bill that seeks to ease some of the rules around foreign investment, the Real Estate Jobs and Investment Act, passed the House of Representatives in late July. The bill basically raised the amount that a foreign organization can invest in a REIT from the previous 5 percent to 10 percent, before hitting a “double taxation” threshold.

“Previously a foreign investor could not own more than 5 percent of a public REIT, or they were subject to FIRPTA on their income and their capital gains,” says Jim Fetgatter, CEO of Washington, D.C.-based Association of Foreign Investors in Real Estate (AFIRE). “So consequently, none of them ever did it.”

The House bill, introduced by Rep. Joseph Crowley (D-N.Y.), was originally much broader in scope, targeting direct investments in real estate as well. But the bill that was passed only addressed investments in REITs. “We’re happy with what we could get,” Fetgatter says. “But we would like to see much more.”

AFIRE and other industry groups such as the Real Estate Roundtable believe that a similar bill will soon be introduced and considered in the Senate.

Slowly Growing

Still, foreign investors are slowly growing more active as the year progresses, spending about $300 million on apartment acquisitions in the second quarter, accounting for about 7 percent of all transactions. That’s a jump up from the first quarter, when foreign firms accounted for about 4 percent of all deals.

But the activity is mostly flowing from just a few sources. About 70 percent of second-quarter foreign investment can be traced to Dutch pension fund PGGM’s partnership with Behringer Harvard, and Kuwait Finance House’s partnership with UDR, according to New York-based market-research firm Real Capital Analytics.

It’s difficult to measure the extent of foreign equity already at play, since many foreign sources invest in funds run by U.S. companies. For instance, China Investment Corp., and the Canada Pension Plan Investment Board, each invested in a $1.75 billion mortgage lending operation run by Cornerstone Real Estate Advisors. And Israel-based investment firm Profimex has a significant investment in Apollo Real Estate Advisors’ Opportunity Fund VI.

There may be one large transaction on the horizon. Abu Dhabi Investment Authority (ADIA) was mulling the purchase of a big apartment portfolio as of early August. The sovereign wealth fund has grown more active in the country of late: Last year, ADIA hired real estate veteran Tom Arnold, former managing director of Cerberus Capital Management, to find investment opportunities here.