United States: West Coast Real Estate Update: Jan. 19, 2016

Karl J. Lott, Susan Jennifer Booth and Douglas A. "Doug" Praw are Partners and Paul J. Park and Ashley K. Jason are Associates all in our Los Angeles office and Stacie Andra Goeddel is a Partner in our San Francisco office.

California Senate Proposes $2 Billion on Housing for Homeless

California state senators put forth a proposal on Jan. 4, 2016, to spend $2 billion to build or rehabilitate permanent housing for homeless people, specifically those with mental illnesses. Senators also proposed spending $200 million over four years to provide temporary rent subsidies to bridge the gap until the permanent housing can be built.

If enacted, these funds – when combined with federal and local monies – could spur a construction boom in the state, with the construction of between 10,000 and 14,000 new affordable housing units. California has approximately 116,000 homeless people, with more than 60 percent living outdoors, so even with this construction, the need for housing will remain. Nonetheless, the proposal is one of the most sweeping in years and reflects a growing sense of urgency to deal with the homeless problem in California.

The City of Los Angeles recently estimated that it would need to spend more than $1.85 billion over 10 years to address the homeless needs in the city alone.

The State Senate proposal comes amid a flurry of studies and proposals at county and city levels for funding to build permanent housing for the homeless. Even if all of the proposals are not enacted, it appears that the issue has reached a tipping point, and we can expect that significant funding will be made available for affordable housing construction in California over the next several years.

PATH Act Changes Rules for FIRPTA and REITs

President Obama signed into law the Protecting Americans from Tax Hikes Act of 2015 (PATH Act) on Dec. 18, 2015. In addition to extending or making permanent a number of temporary tax provisions that were set to expire, the PATH Act made some significant changes to the Internal Revenue Code relating to the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA), as well as with respect to real estate investment trusts (REITs).


Under FIRPTA, non-U.S. investors are subject to U.S. taxation on gains from the disposition of real estate in the United States. Prior to the PATH Act, FIRPTA required the withholding of 10 percent of the gross proceeds of a sale of real estate, regardless of whether the actual amount of tax due was more or less than 10 percent. The PATH Act increased the withhold rate from 10 percent to 15 percent, effective on sales occurring at least 60 days after Dec. 18, 2015. However, the 10 percent rate still applies when the purchaser acquires a personal residence and also for sales in which the purchase price does not exceed $1 million.


The PATH Act significantly restricted the ability of non-REIT companies to spin off REIT subsidiaries on a tax-free basis. The Act also increased from 5 percent to 10 percent the stock in a REIT that a non-U.S. investor may hold without being subject to FIRPTA taxation, as well as clarified the rules relating to foreign ownership of stock in REITs. Certain qualified foreign pension funds were made exempt from FIRPTA tax. The PATH Act also reduced from 25 percent to 20 percent the value of a REIT's assets that can be in the form of stock rather than real estate. The safe harbor rules relating to prohibited transactions were expanded, the preferential dividend rule was repealed for publicly offered REITs and a number of additional changes to the tax treatment of REITS were made.

Overall, the PATH Act's changes were investor-friendly, with certain exceptions, and should have a positive effect on non-U.S. investment in the U.S. real estate market.

EB-5 Program Extended Without Modifications

After months of uncertainty in Congress relating to the EB-5 immigrant visa financing program, during which numerous proposals to amend the program were advanced, Congress voted last month simply to extend the existing program through Sept. 30, 2016, without any modification. The EB-5 program provides foreign nationals the ability to obtain U.S. green cards by investing a minimum of $500,000 in projects that create at least 10 permanent jobs in the United States.

The Congressional vote ended, or at least postponed, speculation that Congress might make a number of significant changes to the EB-5 program. Some of the major changes that Congress had been contemplating included increasing the minimum required investment from $500,000 to $800,000 and changing the rules on how to qualify a project for EB-5 purposes. Instead of adopting such changes, Congress included a simple extension of the EB-5 program in last month's $1.15 trillion omnibus spending package, rejecting all attempts to amend the program.

Members of Holland & Knight's Public Policy & Regulation Practice Group were active in advocating the extension of the EB-5 program without modification, helping to build a bipartisan coalition in Congress to extend the program without change. This extension is positive news for lenders and developers who have increasingly seen the benefits of using EB-5 financing.

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