Ten Major Variations Between Real Estate Investment In China And Real Estate Investment Within The U . s . States
Real estate is definitely an roughly USD$26 trillion (RMB 162 Trillion) global industry, The U . s . States has over 25% from the global real estate at almost USD$7 Trillion. (RMB 43.7 Trillion). It’s been believed that in 2014 the U . s . States are experiencing roughly USD$6-14 Billion (RMB 37.4 -87.4 Billion) of Chinese purchase of U.S. property, that is significantly greater than the USD$996 million (RMB 6.2 Trillion) invested its 2011 and 2012 combined.
Entities thinking about purchasing U.S. property have to face a substantial and sophisticated variety of condition, federal and local rules that may be challenging even going to probably the most sophisticated and experienced investor. Property could be the most highly controlled and taxed asset class within the U.S. and it is significantly more controlled and taxed compared to China. And investors from China come with an additional group of tax and regulatory complexities not faced by U.S. investors.
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Ten Major Differences Between
Real Estate Investing In China And Real
Estate Investing In The United States
By : Alan J. Pomerantz and Thomas M. Shoesmith
The failure of a Chinese investor to understand these
differences and address them correctly and at the proper time
can often lead to a failed deal or an unfortunate one. Ten of the
most important differences between investing in the U.S. and
the PRC are:
1. Negotiating in the United States is different from
negotiating in China.
In the United States, parties negotiate to make a deal. In China,
they negotiate to build a relationship. In the U.S. very little is
left to “later discussion” – all important points are expected to
be negotiated and agreed to before the deal is made. In China,
negotiations often continue after an agreement is reached. In
the U.S., going back over points that have been agreed to or
appear to have been agreed to is called “retrading,” something
U.S. businessmen try not to do, and consider it not dealing in
2. In the U.S., “business is business” – it’s not personal…
not so in China.
Don’t underestimate how different business people will
be in the U.S., and in ways you don’t expect. In the United
States, business is business, it is less political, personal and
interpersonal than in China. American business people can
often get right to the point, lay out their position, and try to cut
through the “noise” to see if a deal can get done. They expect
you to do the same. They often consider the process that is
employed in China a waste of time. They are not being rude,
they are just in a hurry to get the deal done and move on to
the next one.
Commercial real estate is an approximately USD$26
trillion (RMB 162 Trillion) global industry, The United
States has over 25% of the global commercial real
estate at almost USD$7 Trillion. (RMB 43.7 Trillion).
It has been estimated that in 2014 the United States
will experience approximately USD$6-14 Billion
(RMB 37.4 -87.4 Billion) of Chinese investment in
U.S. real estate, which is considerably more than the
USD$996 million (RMB 6.2 Trillion) invested for all of
2011 and 2012 combined.
Entities interested in investing in U.S. real estate are
faced with a significant and complex array of state,
local and federal regulations that can be challenging
even to the most sophisticated and experienced
investor. Real estate may be the most highly regulated
and taxed asset class in the U.S. and is considerably
more regulated and taxed than in China. And
investors from China have an additional set of tax and
regulatory complexities not faced by U.S. investors.
There is also a significant difference in the way deals
are done in the U.S. and in China. Transactions
fail more because of a difference in culture and
expectations, than because of a difference in language.
Pillsbury Winthrop Shaw Pittman LLP
3. American businessmen don’t usually socialize with their
Americans generally don’t socialize or have dinners with
their counter-parties or members of the other “team” while
negotiating a deal. Many American businessmen think
spending social time before the deal is made is not productive.
We often think we have “better things to do,” like trying to
make the next deal. We like to show everyone how busy (and
important) we are. Americans think the time for socializing is
when the deal is signed. It’s just the American way.
4. Transactions in the United States are fully documented.
In the United States, we expect the deal documents that
are signed to be complete and reflect every aspect of the
transaction. Accordingly, joint venture and partnership
documents are often voluminous and complex. U.S. lawyers
are trained to “think of everything.” In the United States, there
is no such thing as a standard deal.
5. Disputes in the U.S. are often solved by litigation,
America is a litigious society–that means people sue a lot, and
it is not uncommon for a party to sue its partner, or a lender
to sue its borrower. A U.S. partner will often take advantage
of any lack of clarity in the documentation, something we call
“wiggle room.” Relationships in the U.S. can be more adversarial
than relationships in China. Do not expect to find an agreeable
partner or cooperative lender if things go wrong or not exactly
as planned. And even when parties negotiate solutions to
problems, it is often done against the background of what can
be achieved in court. The U.S has a well developed body of
commercial law that often stretches back hundreds of years to
when the U.S. was a British colony. And the courts will start
with an examination of the documents.
6. Real Estate is heavily regulated.
There are 51 legal jurisdictions in the United States – 50 states
and the federal system. Each state has different regulations
that apply to real estate, and there are federal rules that pertain
to the environment, health/safety, handicap access, and lending.
A deal structure that works in one state may not work in
another. The complexity of the U.S. legal system is considerably
greater than in China. For example, each state has its own
set of rules regarding protection of “mechanics,” that is, the
people or businesses who work on the real estate to maintain,
repair or build it. Virtually every real estate asset is exposed to
mechanics. In some states mechanics have the right to place
a lien on real estate that will be superior in right and priority to
the rights of the owner and the lender regardless of when the
work was done. These rights do not exist in China.
7. Real estate is heavily taxed.
Real estate is the most heavily taxed asset in the U.S. and
the tax code is complex – thousands of pages – and difficult to
understand. While there exists a tax treaty between the U.S.
and China, it generally does not apply to profits taxes imposed
by states, cities and counties; nor to taxes imposed by state
and local authorities on the acquisition, ownership, disposition,
leasing, occupancy or financing of real estate assets. In
addition, there are special U.S. tax rules for foreign investments
in real estate (FIRPTA) that do not apply to U.S. investors.
Therefore, a tax structure that is advantageous to a U.S.
investor may be disadvantageous to a Chinese investor, and
may lead to double taxation on profits realized by the Chinese
investor. Tax planning before an investment is made is crucial.
8. The lender/borrower relationship in the U.S. is materially
different from China.
The cooperative and supportive relationship that generally
exists in China between lenders and borrowers does not exist
in the United States. Unlike in China, United States lenders are
generally prohibited from designating construction contractors,
property managers or most operational guidelines. United
States law has concepts that do not exist in China such as
“lender liability” and “equitable subordination” which could
cause a lender to be liable for acts of the borrower and lose its
lien priority. Lenders in the United States do not act as partners
with their borrowers.
9. The United States has a complex (and unexpected)
The United States has a bankruptcy code that generally favors
creditors over lenders and owners, and tenants over landlords.
The rights given to creditors and tenants do not exist in China.
The U.S. bankruptcy code permits certain parties to terminate
or “reject” contracts, reduce or wipe out equity positions,
eliminate or modify a lender’s lien, reduce the amount owed
to a lender, and basically re-shape the capital structure of an
enterprise. And certain agreements, even if made in good faith,
will not be enforced if there is a bankruptcy proceeding. Proper
understanding of the bankruptcy code and structuring of the
investment is essential to provide the maximum protection to a
partner or a lender.
10. Smart U.S. investors follow the “golden rule.”
The golden rule in U.S. investing is: if you control the gold, you
make the rules. The most protection an investor in, lender to,
or owner of real estate can have is to control the cash of the
project at every crucial phase. Achieving this goal is not done by
the documents alone (see item 9 regarding the U.S. bankruptcy
code), it is achieved by careful structuring the transaction. In the
Ten Major Differences Between
ATTORNEY ADVERTISING. Results depend on a number of factors unique to
each matter. Prior results do not guarantee a similar outcome.
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Abu Dhabi • Austin • Houston • London • Los Angeles • Nashville Operations • New York
Northern Virginia • Palm Beach • Sacramento • San Diego • San Diego North County
San Francisco • Shanghai • Silicon Valley • Tokyo • Washington, DC
United States, the party who controls the cash will generally
be in the strongest position if there is a dispute, litigation
Because investing in the U.S. is far more complex than
investing in China, it is crucial for Chinese investors to hire
independent professionals who know all aspects of the industry
to guide them through the process. Any real estate investment
or venture will usually involve brokers, underwriters, leasing
agents, asset and property managers, title agents, lawyers,
bankers, accountants, lenders, appraisers, environmentalists,
and engineers. Coordinating all of these professionals, and
making certain they work together to achieve the best result, is
a massive job that requires experienced professionals loyal only
to you. Get them on your team at the start of the process to
help you understand the system so together you can shape the
acquisition/investment to achieve the result you want.
Mr. Pomerantz is the Vice Chairman of Kimberlite Advisors, LLC
an advisory firm that works with U.S. and Chinese investors
in real estate projects. Mr. Pomerantz has over forty years of
experience in advising on U.S. real estate transactions. Mr.
Shoesmith is a partner in the law firm Pillsbury Winthrop Shaw
Pittman and is the head of its China practice and lived in China
for many years.
Thomas M. Shoesmith | Partner, Pillsbury
2550 Hanover St. | Palo Alto, CA 94304-1115
p: +1.650.233.4553 | f: +1.650.233.4545
firstname.lastname@example.org | www.pillsburylaw.com
Alan J. Pomerantz | Vice Chairman, Kimberlite Advisors, LLC
188 Minna Street, Suite 27A | San Francisco, CA 94105-4051
p: +1.212.389.9417 | c: +1.917.593.4218 | f: +1.415.615.0732
email@example.com | www.kimberlitegroupllc.com
Pillsbury Winthrop Shaw Pittman LLP
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