New York City
- Every day I am asked "how do we fix the commercial and residential real estate mess in New York?" This past year I perfected a concise reply: only time can solve these problems, while government stays out of the process.
But recently I stumbled on a novel idea that, lo and behold, came from a politician. U.S. Representative Joseph Crowley
(D-NY) has introduced RERA, the Real Estate Revitalization Act of 2010. If enacted, the proposed legislation would repeal FIRPTA (Foreign Investment in Real Property Tax Act), thus encouraging foreign equity investment in the U.S. real estate market, especially in Manhattan and the Hamptons.
FIRPTA, simply put, forces foreign buyers to deposit a percentage of their sales proceeds with the IRS until the resolution of their tax filings. For anyone wondering why FIRPTA is unfair, I would point out the fact that foreign residents do not face this added tax when they are purchasing corporate equities, bonds or U.S. treasuries.
New York, and specifically Manhattan and the Hamptons, has maintained a top-five position for foreign investor real estate dollars for the past several decades and would therefore be one of the biggest benefactors of the FIRPTA repeal.
According to a National Association of Realtors (NAR) study released in 2008, the typical foreign buyer purchased a residence, most likely intended for use as a vacation home. Over 40 percent of foreign buyers made the purchase in cash, compared to just seven percent of domestic homebuyers who do so. Foreigners who invest in U.S. real estate differ from their domestic counterparts in other ways as well. They tend to buy more expensive properties than domestic real estate investors - properties that cost an average of 36 percent more than domestic buyers, according to the NAR findings. A similar pattern has developed in the commercial market and we continue to see a trend of the aggressiveness of the foreign cash purchaser.
So with U.S. real estate investor sentiment turning around for the first time in almost three years, the question once again boils down to: how do we re-establish pricing momentum and get investors, both local and foreign to start buying again?
The simple answer is to start by repealing FIRPTA, and put the New York real estate market on a level playing field with other attractive cities like London and Paris. As foreign real estate investment makes up about 10 percent of U.S. commercial real estate acquisitions, this may just be the push that is needed to gain momentum not only in re-establishing the credit market that has been shut down for the past two years but also in invigorating the luxury residential markets in Manhattan and the Hamptons.