INVESTMENT STRUCTURES FOR REAL ESTATE INVESTMENT FUNDS

Investment Structures for Real Estate Investment Funds kpmg.com Contents Investment Structures for Real Estate Investment Funds Who Are the Investors? In What Assets Will the Fund Invest? Will There Be Leverage? What Types of Investment Vehicles Are Available? What May Be the Appropriate Type of Entity for Each Type of Investor and Asset? Structuring to Accommodate Preferences of Different Types of Investors Conclusion 01 02 03 04 05 06 11 12 Bios 13 © 2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in the U.S.A. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. 26701NSS Investment Structures for Real Estate Investment Funds Investment Structures for Real Estate Investment Funds While the real estate market has yet to experience a real recovery, fund investment in real estate appears to be experiencing a cautious but marked rejuvenation, and fund managers are beginning to raise capital to form funds. Butgiven the experience of the economic downturn, investorswho venture into real estate investments nowadays do so with greater demands to accommodate their particular needs so as to maximize their potential return while minimizing their downside risk. One of these crucial demands is for investment structures that accommodate specific tax sensitivities, given that tax consequences can negatively impact an investor’s return, as well as the volatility of returns in today’s real estate markets. Consequently, in structuring real estate investment funds, it is critical to understand each prospective investor’s taxsensitivities. This summary and the chart below provide a general overview of some of the major factors that should be considered in structuring real estate funds that invest primarily in U.S. real property. The chart identifies the type of investment entity through which each type of investor may generally prefer to invest. As the chart illustrates, the mix of different types of investors, each with distinct tax considerations, can lead to divergent and often conflicting structuring preferences. This summary explains the investor preferences indicated in the chart and provides an overview of how alternative investment vehicles (AIVs) may be used to accommodate different types of investors within a real estate fund. Investment in U.S. Real Estate Structuring Summary Chart Investor Classification Taxable Rental Real Estate – Fractions Rule Compliant (all passive, no services, incidental personal property or personal property leased with the real property) o Rental Real Estate– Not Fractions Rule Compliant o Operating Real Estate Business (e.g.,Hotels) o Dealer Property Only o Super Tax-Exempt Tax-Exempt (qualified organizations) Tax-Exempt (all others) Foreign Foreign Governments (assuming blockers are not controlled commercial entities) o o o o o * ◊ * ◊ (w/TRS) * * ◊ * ◊ * ◊ (w/TRS) * * ◊ * ◊ * ◊ (w/TRS) * * ◊ * ◊ * ◊ (w/TRS) * Legend: * Blocker o Flow-through ◊ REIT (assuming domestically controlled) w/TRS With Taxable REIT Subsidiary Investment Structures for Real Estate Investment Funds Who Are the Investors? The typical investors in U.S. real estate funds include individuals and entities, both domestic and foreign. Foreigninvestors may include foreign governments and their sovereign wealth funds. Tax-exempt entities, including pension funds, educational institutions, and other large charitable organizations, also may invest in U.S.realestatefunds. Each of the various investor types is subject to distinct taxation regimes, as generally discussed below. • Taxable investors include high net-worth individuals, corporations and flow-through entities that have high net-worth individuals, and corporations as owners. • Tax-exempt organizations may include state-sponsored pension funds that often are treated for tax purposes as a division of a state and are generally thought to be tax-exempt based on their governmental status (i.e., “super tax-exempts”). Other tax-exempt investors include corporate pension funds, educational institutions, and charitable organizations that generally are taxable on their income from unrelated businesses and on income from debt-financed investment (known as unrelatedbusiness taxable income, or UBTI), subject to certain exceptions. • Foreign governments and their integral parts and controlled entities generally are not taxable on certain types of income, including U.S. investments in stocks or bonds or other securities, certain financial instruments, and interest on deposits in banks in the United States. Funds identified as sovereign wealth funds may be considered a foreign government, integral part thereof, or an eligible controlled entity; however, not all sovereign wealth funds are eligible for tax-exempt treatment. Foreign governments are taxable on income derived from commercial activities or received from controlled commercial entities (as generally explained below). Also, the exemption for foreign governments does not apply to certain investments in U.S. real property that are covered by the Foreign Investor Real Property Tax Act (FIRPTA). Notably, income or gain from real property that the foreign government holds directly or through a flow-through entity is not exemptfrom U.S. taxation. • Finally, foreign investors may include individuals and foreign entities that are taxable on a net basis on income that is effectively connected to a U.S. trade or business. These foreign taxpayers are subject to the FIRPTA regime, whichgenerally taxes foreign persons on the disposition of U.S. real property asthough they were engaged in a U.S.trade or business. ... - tailieumienphi.vn