Foreign investment in U.S. multifamily continues to heat up, despite a 25-year-old tax law that imposes stiff penalties on cross-border investors.

Foreign investors have spent more than $2 billion on U.S. multifamily since January, up from $1.13 billion for all of 2010, according to New York-based market research firm Real Capital Analytics. 

“Because of the financial crisis, there’s a perception among foreign investors that there are some deals to be found here,” says Jim Fetgatter, CEO of Washington, D.C.-based Association of Foreign Investors in Real Estate (AFIRE). “Traditionally, they’ve been largely office investors, but their preference, right now, is multifamily—they realize that the multifamily industry is growing, and that offices have not been filling up.”

Canucks and Germans
Much of this year’s activity, about $806 million, is coming from our neighbors to the north, as Canadian investors grow increasingly bullish on U.S. multifamily. The Canada Pension Plan Investment Board (CPPIB) has been particularly active this year, marking its first direct entry into the U.S. multifamily sector with a big splash. The pension plan invested $284 million in five separate multifamily transactions in August alone.

CPPIB invested $92 million for a 45 percent interest on a new 569-unit development being constructed by Palo Alto, Calif.-based Essex Property Trust in San Jose, Calif. It’s also partnering with Washington, D.C.-based Multi-Employer Property Trust on a new 24-story high-rise complex in downtown Seattle called Sixth and Lenora.

The pension plan also struck a joint venture with Denver-based Archstone in August, a three-year engagement focused on new development. At the same time, CPPIB invested $108 million in two Archstone properties, taking a 40 percent interest in both a 426-unit property in Cambridge, Mass., and a 392-unit property in Hendon, Va.

The joint venture with Archstone includes another foreign entity—German financial services titan Allianz, which also spent $108 million in taking a 40 percent stake in the Cambridge and Hendon deals. In fact, led by Allianz, German investors have been the second-biggest spenders in U.S. multifamily, pumping in $323 million so far this year.

The FIRPTA Road Block
Yet many argue that foreign investment in commercial real estate here could be so much more significant. The biggest roadblock is called the Foreign Investment in Real Property Tax Act (FIRPTA). Basically, foreign investors have to pay a 35 percent FIRPTA tax, on top of state and local taxes, on any capital gain from commercial real estate.  
Last year, the House of Representatives passed a slight modification of FIRPTA, allowing a foreign entity to own 10 percent of a U.S. REIT, up from 5 percent previously. A year later, the Senate has not taken up the legislation, though industry groups such as AFIRE, the Real Estate Roundtable, and NAREIT continue to lobby for its passage.

“The bad news is, nothing concrete has really happened, there’s been no change at all in FIRPTA,” Fetgatter says. “The good news is, we’re talking about it. I’ve been doing this job for 20 years, and this is really the first time I’ve heard so much talk about FIRPTA, and that can only be good.”

When the law was passed in 1986, the United States had little competition for foreign capital. But many international avenues have opened since then, and investors are now increasingly eyeing countries such as China, Great Britain, Brazil, Canada, Eastern Europe, India, and Japan.

“Repealing FIRPTA would basically put us on par with the U.K. and Singapore, which have modern capital transfer laws,” says Dan Fasulo, managing director of Real Capital Analytics. “It could’ve been an easy way to recapitalize all of these bad loans, and bad banks for that matter. We preach that other countries should open up their markets to our capital, and then we don’t do it in return.”