International Real Estate for Local Markets

1
International Real Estate for Local Markets
2
Overview

• Conducting business in global marketplace
• Examine different cultures needs and expectations
• Modify marketing and selling practices
• Attract and service ethnic, immigrant and
  international clients
• Develop/expand networking opportunities
• Create an inclusive business plan

Introduction
3
Introductions

• Name
• Local market
• International experience
• Diversity Experience Training
• Do you have a business plan

Introduction
4
Globalization

• Chapter 1

5
Objectives

• Identify causes of economic globalization
• List factors promoting globalization
• Recognize impact of globalization
• Identify effects of globalization on the practice
  of real estate

Globalization
6
Definition

• Economic globalization
  is the movement by countries, companies,
  organizations and people toward a
  single market environment

Globalization
7
Factors Promoting Globalization

• Unrestricted Boundaries
• Relaxed restrictions on importing and exporting
• Formation of global economic communities
• Relaxed restriction on capital flow across
  national boundaries
• Round-the-Clock Financial Markets
• Major stock exchanges trade 24 hours a day
• Ties financial markets closely together

Globalization
8
Factors Promoting Globalization

• New Alliances and Agreements
• Agreements between countries lead to
  interdependence of economies
• Promote facilitation of capital flow
• Agreements include
• Trade
• Sharing technologies and workforces
• Reduced barriers to provide incentives
• Equalize exposure of domestic and foreign
  investors

Globalization
9
Factors Promoting Globalization

• Economic Specialization
• Production and export of specific products and
  services
• Creates economic efficiencies and benefits
• Develops dependence on other countries
• Commodities not produced at home
• Oil exporting countries import
  manufactured products

Globalization
10
Factors Promoting Globalization

• Floating Currency Exchange Rates
• Global economic conditions influence currency
  exchange rates
• Ties economies of nations in determining
  international buying power
• World Band and International Monetary Fund
• Large role in promoting global economy
• Provide loans, drawing rights and funding

Globalization
11
Factors Promoting Globalization

• Increased demand
• Population growth
• Dependence on international trade to meet demands
• Spread of Free Market Philosophy
• Encouraged private ownership
• Facilitated integration of closed economies into
  Western economic system
• Promoted international investment

Globalization
12
Factors Promoting Globalization

• Natural Events
• Direct impact on availability and price
• Trade with or aid from other countries provides
  opportunities for international trade
• Dependence on Foreign Capital
• International sources to fund growth and
  development

Globalization
13
Factors Promoting Globalization

• Capital Accumulation
• Groups accumulating capital look beyond their
  borders for places to invest
• Emerging markets are primary targets
• Communication and Computer Technologies
• Advances have contributed significantly
• Communication is instantaneous
• Geographic distance is irrelevant

Globalization
14
Factors Promoting Globalization

• Non governmental Organization
• United Nations
• Problem solver
• Mediator
• Reduced ability of nations to act in vacuums
• Trade and professional organizations
• Look beyond own borders for
• Opportunities
• Ideas
• Partners and talent

Globalization
15
Impacts of Globalization

• Countries capitalize on their strengths
• Specialization in production and export
• Global interdependence
• Economic strength defined in
• Trade balances
• Currency exchange differentials
• Productivity
• Adapt or lose global competitiveness

Globalization
16
Effects on Real Estate Business

• Global investors
• Enter and leave various international markets
• Create business opportunities
• Seek investments
• Expect real estate professionals to have
  knowledge about
• World markets
• Economies
• International business transaction

Globalization
17
Key Point Review

• Major factors promoting globalization
• Unrestricted boundaries for capital flow
• Increased free market trade
• International economic factors have become part
  of our lives
• Continued population growth will influence and
  affect our lives
• Internationalization will increase real estate
  opportunities

Globalization
18
Review Question

• One key factor behind globalization is
• Reinstatement of the gold standard
• Huge increase of regulations on capital flow
• Development of round-the-clock financial markets
• Elimination of floating currency exchange rates

Globalization
19
Review Question
One effect of globalization on real estate
investment is

• Investors look for real estate investment in
  other countries
• Local banks have tighter liquidity requirements
• Constant increase in price of commercial
  properties
• Elimination of negative vacancy trends in major
  markets

Globalization
20
Discussion Questions

1. What implications of a global market are apparent
   in your real estate practice?
2. What innovations, technological or otherwise
   could keep real estate brokerage practices in
   step with globalization?

Globalization
21
Capital Flow

• Chapter 2

22
Objectives

• Describe historical precedents for the use of
  foreign capital
• Identify theories of capital flow
• Describe how capital flows in global market
• Identify influences on capital flow

Capital Flow
23
Historical Perspective

• Ancient Rome invested in regional economies
• Middle Ages banks developed long-term lending to
  finance widespread projects
• The New World was funded by British, French,
  Spanish and Dutch
• Europe still invests in American industries

Capital Flow
24
Historical Perspective

• World wars depleted capital and deterred foreign
  investment
• New international monetary system
• Since WWII
• Based on international agreements
• Promote growth of world trade
• Cooperation and loans
• Elimination of exchange controls
• Stabilization of exchange rates

Capital Flow
25
Capital Flow

• Fosters growth and development
• Developing countries use foreign investors
• Foreign investment increases revenue through
  taxes
• Increased revenue provides services and
  employment
• Cash flow to developed economies offer better
  interest rate and tax treatments

Capital Flow
26
Capital Flow

• What Flows?
• Why?
• When?
• Where?
• How Much?

Capital Flow
27
Theories of Capital Flow
Bargain Rate Theory
Capital Flow
Loss Avoidance Theory
Market Linkage Theory
28
Influences on Capital Flow State of The
Economy

• Interest rates
• Consumption
• Savings
• Liquidity
• Business cycles
• External debt

• Balance of payments
• GDP
• Political events
• Inflation rate
• Cost of living
• Currency value

Capital Flow
29
National Resources

• Economic specialization
• Specialized capabilities
• Export abundant resources/import scare ones
• Supply and demand
• Gap between domestic demand and foreign supply
• Labor supply
• Wages
• Availability
• Skill and education

Capital Flow
30
Opportunities to Invest

• Available avenues for investing
• Financial instruments
• Money market instruments
• Domestic real estate
• Foreign real estate
• Foreign Direct Investment opportunities
• More choices more opportunities

Capital Flow
31
Trade

• Export and import volume
• Balance of trade
• Determines flow of capital
• Restrictions and regulations
• Tariffs, taxes, quotas, prohibitions
• Restrict cash flow and investment
• Uniform standards
• Modern methods and quality control
• Ensure universal marketability

Capital Flow
32
Todays Global Market

• Markets and transactions are larger
• Changes occur rapidly and universally
• Information readily available
• Sophisticated financial instruments
• Tax treaties more prevalent
• Money managers diversify in international markets

Capital Flow
33
International Financial Markets
Capital Market Money Market
Products Government notes and bonds Corporate bonds Common stock Mortgages U.S. Treasury bills Federal Reserve deposits Negotiable certificates of deposit Commercial paper
Borrowers Businesses Investors Governments Governments Finance companies Commercial banks
Lenders Personal savings accounts Pension funds REITs Mutual funds Commercial banks Foreign banks Government Financial intermediaries
Capital Flow
34
Review Question

• The difference between capital markets and money
  markets is
• The type of collateral used
• Equity versus debt interest
• The length of maturity
• The level of risk involved

Capital Flow
35
Review Question

• International capital flow is
• A very recent phenomenon.
• An American banking practice.
• A market aspect since ancient times.
• The fiscal policy of liberal Western
  governments.

Capital Flow
36
Key Point Review

• Foreign capital necessary to growth and
  development of all countries
• Capital flows through exchange of financial
  instruments
• Three capital flow theories
• Bargain Rate
• Loss Avoidance
• Market Linkage
• Forces also influence real estate

Capital Flow
37
Discussion Questions

1. What are the possible dangers of relying on
   foreign capital to finance domestic real estate?
2. Do the benefits outweigh the risks?
3. Why is capital flow important to you as a real
   estate professional?

Capital Flow
38
Currency Issues

• Chapter 3

39
Objectives

• Define currency and factors affecting value
• Describe flow of money in an international real
  estate transaction
• Identify influences on exchange rates
• Economic
• Regulatory
• Describe exchange rate fluctuations on real
  estate transactions

Currency
40
What is Currency?

• Medium of exchange
• Symbol of buying power
• Physical measure of value

Currency
41
Currency Value Factors

• Gross Domestic Product (GDP)
• Gross National Product (GNP)
• Inflation
• Money Supply
• M1, M2, M3
• Monetary Policy
• Fiscal Policy

Currency
42
Exchange of Currency

• Bank Draft
• Bill of Exchange
• Wire Transfer

Currency
43
Rate Fluctuation Influences

• Balance of trade between countries
• Balance of payments between countries
• Exchange rate policies
• Government actions

Currency
44
Balance of Trade and Payments
Trade Balances
Exchange rates
Investment Rates
Currency
Balance of Payments
Economic Strength
Gross National Product
Inflation
45
When U.S. Pays in Dollars

• Bank Draft
• Decreases
• Supply of foreign currency in U.S. banks
• Banks may not meet foreign currency demand
• Takes more dollars to buy foreign currency

• Bill of Exchange
• Increases
• Supply of dollars in foreign banks
• Takes fewer units of foreign currency to purchase
  dollars

Currency
46
Exchange Rate Policies

• Stable Rate of Exchange
• Floating Rate of Exchange
• Floating Managed Exchange Rate

Currency
47
Government Actions

• Tariffs
• Duty or tax
• Non-tariff
• Subsidies
• Discriminatory standards
• Spending reductions
• Decrease in government spending abroad
• Monetary and fiscal policies

Currency
48
Effect of Exchange Rates

• Impact of exchange rates is significant
• Currency value is part of transaction value
• Value may appreciate relative to local market
• Value of domestic currency may depreciate
  relative to international exchange
• Appreciation and depreciation may negate one
  another

Currency
49
Timeline
Currency
50
Effects of Exchange Rate

• Expectations may be based on exchange rate
• Change at different points during transaction
• Effect long and short value of real estate
• May impact value of currency
• Weakening of economy
• Tightening of money supply
• Decline in value of currency itself

Currency
51
Effects of Exchange Rate

• Price
• Buyer may need more or less cash at closing
• Predicted and Actual Return
• Investor return may be eroded or enhanced
• Income
• Income and expenses may be higher or lower
• Taxes may vary due to exchange rate
• Financing costs may be higher

Currency
52
Converting Currency, Area, Price

• Information given in local measures
• Currency units per square meter per month
• Dollars per square foot per year
• Must convert between domestic and foreign
• Helps clients understand costs

Currency
53
C-A-T Formula

• Step 1 Convert the Currency
• Use most current exchange rate
• Xe.com real time exchange rate site

Currency
54
Convert the Area

• Convert square feet to square meters
• Convert square meters to square feet

10.7639
Currency
55
Convert the Time Period

• When price is quoted per month
• Multiply currency amount by 12 for price/year.
• When price is quoted annually
• Divide by 12 for price/month.

Currency
56
Key Point Review

• Value of currency is in buying power
• Exchange rates reflect currency strength
• May fluctuate over time
• Currency value, exchange rate, investment and
  capital flow are interrelated
• Currency trends should be monitored for threats
  and opportunities

Currency
57
Review Question

• When the U.S. imports foreign goods and pays for
  them in dollars, there is a tendency for the
  value of the dollar to fall because
• Foreign banks own more dollars than their own
  currency.
• The flow of foreign currency into the U.S.
  increases.
• U.S. banks have more dollars than before.
• U.S. banks have more foreign currency than
  before.

Currency
58
Review Question
Since investors typically want to conserve their
principal, and earn a predictable and reasonable
return, they do not like governments that
Currency

• Change often and experience ideological extremes.
• Promote free trade.
• Stimulate capital formation.
• Obstruct monopolistic practices.

59
Investment Trends

• Chapter 4

60
Objectives

• Explain principal foreign investment patterns in
  the USA
• Identify preferences of major investors in
  international real estate
• Identify major investment targets and economic
  conditions that attract investors

Investment Trends
61
Foreign Investment in USA

• 2005 foreign investment in USA
• 829.2 billion 768.2 billion in 2002
• Second largest on record
• Foreign acquisitions more than doubled from 2002
• Increased purchases of U.S. Treasury securities
• Major USA investors include UK, Netherlands,
  Germany, Japan, and Israel

Investment Trends
62
Areas Investing in USA
Total Investment Total Investment Real Estate Investment Real Estate Investment Total Investment Total Investment Real Estate Investment Total Investment Real Estate Investment
All figures are in millions of U.S. dollars All figures are in millions of U.S. dollars All figures are in millions of U.S. dollars All figures are in millions of U.S. dollars All figures are in millions of U.S. dollars All figures are in millions of U.S. dollars All figures are in millions of U.S. dollars All figures are in millions of U.S. dollars All figures are in millions of U.S. dollars All figures are in millions of U.S. dollars
2003 2003 2003 2003 2004 2004 2005 2005
All Countries All Countries 1,395,159 1,395,159 36,702.7 36,702.7 1,520,729 38,964 1,635,291 41,066
Canada Canada 95,707 95,707 3,153 3,153 125,503 2,859 144,033 2,818
Europe Europe 1,001,237 1,001,237 16,736 16,736 1,066,908 19,204 1,143,614 20,618
Latin America Latin America 84,134 84,134 6,120 6,120 87,259 6,254 82,530 6,194
Africa Africa 2,196 2,196 250 250 1,671 261 2,564 266
Middle East Middle East 7,117 7,117 1,049 1,049 7,888 1170 9.965 N/A
Asia/Pacific Asia/Pacific 204,708 204,708 9,394 9,394 231,500 9,216 252,584 N/A
Investment Trends
63
FDI Outlook

• Optimism based on
• Accelerated global GDP growth
• Low interest rates
• Increased domestic investment and industrial
  output
• Competition for FDI will increase
• Generous investment incentives
• Increased liberalization of financial requirements

Investment Trends
64
FDI Outlook

• Most attractive regions for FDI
• Asia, Central and Eastern Europe
• Primary sources of FDI
• USA, UK, France, Germany, Japan
• Overall positive trend counterbalanced by
• Oil price volatility, new protectionism,
  terrorism
• Positive factors outweigh negative factors
• FDI modest compared to 1999-2000

Investment Trends
65
Foreign investment in US Real
Estate

• Qualities attracting investors
• Political stability
• Economic stability
• Investment-grade properties
• No discrimination against foreign investment

Investment Trends
66
FDI in USA Real EstateIn Billions of U.S. Dollars
Investment Trends
67
Comparison of FDI in USA Real Estate Comparison of FDI in USA Real Estate Comparison of FDI in USA Real Estate
2003 2006
Canada 12 7
Germany 15 16
Netherlands 12 4
United Kingdom 13 11
Caribbean 9 7
Japan 30 13
Australia 9 13
Investment Trends
68
Foreign Buyer Preferences

• Long-term perspective
• High-equity positions
• Acceptable, predictable returns
• Quality products in desirable locations
• Detailed research
• Specialized advisors
• Familiar markets
• Greater risk

Investment Trends
69
Global Investment Outlook

• Weakened U.S. dollar
• Rising importance of China
• Oil prices
• Moderate growth for U.S. and Europe
• Deceleration of growth in Japan
• Growth tapered off in 2005
• Central banks are reducing or removing policies
  that fuel rapid growth

Investment Trends
70
FDI Potential

• Generate employment
• Raise productivity
• Transfer skills and technology
• Enhance exports
• Contribute to long-term development of developing
  countries

Investment Trends
71
Investment Climates
Investment Trends
72
United States of America

• Serious issues facing economy
• Higher interest rates expected
• Currency depreciation
• High energy costs
• Trade deficit
• Increasing national debt
• War in Iraq
• Investors may diversity into non-U.S. assets

Investment Trends
73
China

• Economy expected to slow only slightly
• Tighter credit controls
• Softer global markets
• Major player in global market
• Increased consumer demand
• Making enormous investments
• Third largest market for imports
• Economy is export-oriented

Investment Trends
74
Europe

• Expect modest growth
• Weak consumer spending
• Slowdown in exports
• Minimal job creation
• High unemployment
• Increased oil prices
• Euro appreciation against dollar
• Wages cut, hours increased, lower salary grid

Investment Trends
75
Japan and East Asia

• 2nd most technologically powerful economy
• 3rd largest economy in world
• Decline expected due to global slowdown
• Japan changing economic picture
• Multiple factors influencing forecast
• Development of overseas economies
• Demand for IT-related products
• Financial system issues

Investment Trends
76
Japan and East Asia

• Southeast Asia has economic challenges
• Widespread poverty
• 60 of 3.3 billion people live on less than USD2
  per day
• Difficult to build financial institutions
• High risks
• Limited resources
• Social and national problems
• Globalization and internal liberalization

Investment Trends
77
Japan and East Asia

• Economic issues
• Trade
• Competition policies
• Social issues
• Migrant workforce
• Remittance systems
• Natural events--Tsunami of 2004
• Loss of lives, untold devastation
• Take years to recover

Investment Trends
78
Australia

• Average economic growth is 3.3
• Financial services generated 8 of GDP
• Liberal foreign investment policy
• Stable and resilient economy
• Steady increase in FDI
• Regulatory system is transparent and efficient
• Taxes and restrictions are limited or non-existent

Investment Trends
79
Mexico and Latin America

• 5th largest producer of crude oil
• Oil-related earnings 35 government revenue
• Oil reserves exceed 12.49 billion bbl/day
• Committed to economic and financial reforms
• Projected growth 4.8 through 2006
• China key export target for Latin America
• Latin America investment target for China
• Long-term challenges for Latin America

Investment Trends
80
South America

• Expected solid pace of growth
• Good commodity prices and low interest rates
• Single digit inflation
• Investment and consumption have strengthened
  allowing for growth
• Energy producing countries will do well
• Energy importing countries will be challenged

Investment Trends
81
Africa

• Sub-Saharan Africa growing at 3-5
• Inflation decreasing in most countries
• Oil producing countries faring well
• Challenges to business include
• Lack of quality information
• Fluctuating currencies
• Bureaucratic red tape
• Nepotism, graft and corruption
• Monopolies

Investment Trends
82
Middle East

• GDP rose to 4.7 in 2004, expect 4 in 2006
• Oil prices
• Above 30/barrel accumulate large surpluses
• High incomes boost domestic demand
• Reforms needed in investment sector
• Economic structures
• Institution promoting balanced growth
• Higher employment
• Reduced poverty

Investment Trends
83
Middle East

• Political and social conditions
• Investors perceive high risks in region
• War in Iraq
• Stimulated demand for logistics and related
  functions
• Boosted economies in region
• Suez Canal revenues have skyrocketed
• Tourism in Egypt has increased 34

Investment Trends
84
Obtaining Current Information

• World Trade Centers Association
• U.S. Chamber of Commerce
• CIPS Network
• Membership directory
• Cooperating associations
• Face-to-face business at NAR Annual Convention
• Quarterly newsletters
• Customized research from NAR library

Investment Trends
85
Traits of Foreign Buyers
Investment Trends

• 1. Risk of overgeneralization
• 2. Investment patterns

86
Asian Buyers

• Prefer markets where minimal cultural differences
  intersect with economic opportunity
• Feel most at home with other Asians

Investment Trends
87
Japan

• Favor offshore real estate
• Need portfolio diversification
• Limited opportunities in Japan
• Very high land costs in Japan
• High short-term gains tax
• USA market viable investment
• Cheap land
• Relative liquidity of market
• Better tax incentives

Investment Trends
88
Hong Kong

• Reversion to China influenced investments
• Much investment is immigration-related
• Planning and holding horizons in 5 yr. range
• Offshore investment expected to flourish
• Assume more risk to realize higher gain
• Investment range is 1.5 to 5 million
• More amenable to absentee ownership

Investment Trends
89
European Buyers

• Diversification significant motivation
• Most European real estate is inherited
• High-quality properties, good locations
• Reliable returns not trophies
• Secondary markets and older properties
• Seek income first, then appreciation
• High equity positions

Investment Trends
90
United Kingdom

• Strong cash-position investors
• Heavy emphasis on exchange rate and return on
  capital
• Establish local representation
• Leases in England
• Rent levels reviewed and raised apart from
  contract
• Do not attach importance to letter of lease
• Look at financial strength of tenant

Investment Trends
91
France, Sweden, Norway

• France
• French now invest without involvement of French
  banking system
• Increased institutional investment

• Sweden Norway
• Foreign investment increasing
• Loosened regulations
• Heavy domestic tax rates

Investment Trends
92
Germany

• Open and close-ended funds
• Fewer opportunities in Germany
• Higher savings rate slows economy
• Cap rates of 5 to 6
• Seek higher returns outside the country
• Tax incentive to invest in East Germany has
  expired
• Investors look to new markets

Investment Trends
93
Future Global Investment Trends

• Globalization is a reality
• Capital flow depends on easing barriers and
  opening borders
• Europe presents a large market
• Measures to ease global business
• Single currency
• Uniform standards
• Comparable pricing
• Easier financing

Investment Trends
94
Future Global Investment Trends

• Asia will be a leader in size, GDP and purchasing
  power
• Asian economies starving for cash
• Looking for foreign investment
• Latin and South America have large industrial
  privatization measures
• Need FDI for infrastructures
• USA stability, easy access, favorable tax laws
  will continue to attract investment

Investment Trends
95
Key Point Review

• FDI significant source of real estate investment
  funds in United States
• Understand customs, business cycles and political
  events before making an investment
• Real estate professional should be familiar with
  traits and preferences of foreign investors

Investment Trends
96
Review Question

• Which of the following generalizations about
  Asian investors is most accurate?

• Most comfortable investing where there is a
  significant Asian presence.
• Invest in areas unexplored by other investors.
• Rigidly follow leadership of big Japanese
  corporations.
• Exhibit no general investment patterns at all.

Investment Trends
97
Review Question

• Global investment is facilitated by
• Open borders.
• Favorable tax laws.
• Interdependency of nations.
• All of the above.

Investment Trends
98
U.S. Regulations on Inbound Investments
U.S. Regulations

• Chapter 5

99
Objectives

• Identify federal non-tax laws, restrictions,
  ownership laws pertaining to U.S. real estate
• Explain how Patriot Act affects real estate
  professionals
• Explain resident status definitions
• Identify forms for U.S. tax purposes
• Comply with federal tax reporting and withholding
  responsibilitieis

U.S. Regulations
100
Philosophy of United States

• Open, free-market philosophy
• Federal regulation focuses on
• Reporting
• Registration
• Tax compliance
• Some state and local laws apply
• Open-market attractive to international clients

U.S. Regulations
101
Non-Tax Laws Regulations

• Restrictions relating to national security
• Federal lands
• U.S. territories
• Sensitive business sectors
• Investments by enemies or hostile countries
• Environment
• Flood control
• Environmental impact
• Wetlands preservation

U.S. Regulations
102
Ownership Laws

• Different types of legal structures
• Legal structures to hold U.S. real property
• Considerations on how to take title
• Limited ownership provides reduced liability
• Do not pay income tax at corporate level
• Shields members from direct liability

U.S. Regulations
103
Non-Tax Reporting Requirements

• Report acquisition to BEA within 45 days of
  closing
• Agricultural land
• Non-personal, non-agricultural land
• Bank Secrecy Act
• Amounts greater than 10,000
• Includes payments by travelers checks
• Reported no matter who is involved in transaction

U.S. Regulations
104
The Patriot Act

• Financial institution requirements
• Customer ID and anti-money laundering programs
• Enable verification and record maintenance
• Purpose Identify specially designated nationals
  or blocked persons
• Brokers should not service persons on list
• Property managers at risk if tenants on list

U.S. Regulations
105
Professional Liability

• Any professional whose practice involves
  transactions with foreigners or foreign
  properties should be aware of whom he or she is
  dealing with.

U.S. Regulations
David Lereah, NARs chief economist and senior
vice-president who oversees regulatory and
industry relations
106
Federal Tax Laws

• All transactions in U.S. real property are
  considered sourced in U.S.
• Primary consideration is whether person is a
  resident or nonresident alien
• Tax treatment is the same for
• U.S. citizens
• U.S. corporations
• Resident aliens
• Consult tax and legal experts for details

U.S. Regulations
107
Resident vs. Nonresident Status

• U.S. taxes citizens and residents on worldwide
  income

U.S. Citizen Taxed on worldwide income Credits for foreign taxes paid
Resident Alien Taxed on worldwide income Credits for foreign taxes paid
Nonresident Alien Taxed only on U.S.-sourced income
U.S. Regulations
108
Resident Status for U.S. Taxes

• Physical Presence Test
• Present in the U.S. for 183 days or more during
  calendar year
• Substantial Presence Test
• Present in U.S. for more than 30 but less than
  183 days in current calendar year
• Present for weighted average of 183 days over a 3
  year period
• Current year and two preceding years

U.S. Regulations
109
Tax on Nonresident Alien Income

• Tax imposed on all taxable income connected with
  trade or business
• Income not connected with U.S. trade or business
  is exempt in certain circumstances
• Passive income subject to withholding of 30 of
  gross income
• Withheld, reported and transmitted within 10 days
• Tax treaties affect tax rate
• Capital gains on sale of U.S. real property
  taxable regardless of time in U.S.

U.S. Regulations
110
FIRPTA

• Gains, profits and income from sale of U.S. real
  property are U.S. sourced income
• FIRPTA requires
• Withholding and remitting 10 of purchase price,
  not 10 of gain, to IRS
• Nonresident seller may apply for certificate
  authorizing lower withholding
• Reports filed by settlement agent

U.S. Regulations
111
Rules for Sale by Foreign Person

• Buyer of real estate from foreign person must
  file
• Form 8288 Withholding Tax Return
• Form 8288A Sellers receipt for withholding tax
• Both forms require an ITIN
• A nonresident alien Social Security number is
  their ITIN
• May apply for ITIN on IRS Form W-7

U.S. Regulations
112
Interstate Land Sales Full Disclosure Act

• Second home market opportunities
• Developers local, out of state or country
• State and federal second-home market laws

U.S. Regulations
113
State Laws

• Requirement to register
• Requirements apply to developers agents
• State laws vary
• Applies only to agent directly representing a
  developer for sale of multiple units
• Rationale Jurisdiction over developers marketing
  property in their state

U.S. Regulations
114
Registration Requirements

• Extensive
• Costly to developer
• May require annual renewal

U.S. Regulations
115
Right of Rescission

• If sale in violation of law
• Right can last for years after closing
• May require bonds be posted
• May include specific contract and escrow
  requirements

U.S. Regulations
116
Federal Laws

• Subdivisions developers must register with HUD
• Provide property report before contract is signed
• Less risk for real estate professionals
• Applies to offers of 100 or more lots
• State information to be published by NAR at
  www.Realtor.org by summer 2007

U.S. Regulations
117
Deficit Reduction Act (DEFRA)

• Withhold, report, transmit 10 of amount realized
  within 10 days of transfer
• Buyer directly responsible for withholding
• Withhold agent subject to civil penalties
• Exemptions include
• Purchase price does not exceed 300,000
• Property is a personal residence
• Affidavit certifying seller is not a foreign
  person

U.S. Regulations
118
Reporting and Withholding Responsibilities

• Withhold tax amount when property sold
• 10 of sales price withheld for gains tax
• Excess tax returned to seller
• Passive income has withholding rate of 30 of
  gross income
• Tax treaties may modify amount of tax
• Property managers must withhold tax on monthly
  payment received on rentals and forwarded to
  foreign property owner

U.S. Regulations
119
Tax Treaties

• Purpose prevent double taxation
• Treaties may provide tax reduction opportunities
• Treaties are always changing
• Refer to Appendix for list of treaties

U.S. Regulations
120
State and Local Regulations

• Some states restrict or regulate foreign land
  investment
• Many state have laws similar to FIRPTA
• Foreign owner may not be familiar with laws
• Refer to experts such as tax specialists
• Refer to Appendix for outline of restrictions

U.S. Regulations
121
Key Point Review

• U.S. is an open and unrestricted market
• Federal regulations relate to reporting
• Federal tax treatment depends on resident or
  nonresident status
• Income and gain received by nonresident aliens
  are subject to taxation and withholding tax
• Buyers responsible for paying withholding tax
• Closing agents withhold, report and transmit tax

U.S. Regulations
122
Review Question
For tax purposes, a foreign national who was
physically present in the U.S. for 183 days or
more during the year would be considered
U.S. Regulations

• A nonresident alien.
• A resident alien.
• A U.S. citizen.
• Completely tax-exempt.

123
Review Question
The withholding agent in a transaction involving
a foreign party

• Must be a Certified Public Accountant (CPA).
• Must be an attorney, liable for withholding.
• May be the real estate professional.
• Is only liable for civil penalties, never
  criminal penalties.

U.S. Regulations
124
Local Market Demographics

• Chapter 6

125
Objectives

• Research and interpret data to assess cultural
  attributes in local markets
• Identify opportunities to expand practice by
  finding local and international clients
• Identify and develop needed services for
  underserved populations in local markets
• Examine local demographic trends

Demographics
126
Demographics

• U.S. Census Bureau
• Hispanic community fastest growing
• Hispanic home ownership 46 in 2004
• By 2030, 25 of population will be Hispanic or
  Asian
• NAR research
• 1st time homebuyers
• Accounted for 4 out of ten home purchases
• More likely to speak a language other than English

Demographics
127
Expanding Immigrant Locations

• U.S. immigrants averaging 1 million/year
• 65 located in 10 metropolitan areas (90s)
• Immigration growth no longer regional
• Hispanic population increased 100 in Las Vegas
  in 10 years (1994-2004)
• Asian population increases since 1997
• Las Vegas93
• Atlanta70

Demographics
128
Analyzing Demographics

• Population and Households
• Income
• Age
• Occupation
• Ethnicity

• Housing
• Comparisons
• Local Economics
• Sources of Data
• Using Demographic Data

Demographics
129
Key Point Review

• National and local demographic data
• Provides a picture of housing and investing
  trends
• Help identify buyers/sellers in local markets
• Determine changes and opportunities
• Do NOT use to target specific groups

Demographics
130
Review Question

• According to Harvard Universitys housing
  projection research, what percentage of home
  owners will be immigrants in the coming decades
• Approximately 2/3
• Approximately 1/4
• Approximately 1/2
• Approximately 1/10

Demographics
131
Review Question

• Under the Fair Housing Act, it is unlawful to use
  demographic data to
• Set rental rates for apartment communities
• Identify local or regional economic trends
• Assess opportunities or threats to a local area
• Target specific groups for the purpose of
  discrimination

Demographics
132
Cultural Issues and Practices

• Chapter 7

133
Objectives

• Access and analyze information
• Explain importance of relationship-building
• Examine stereotypes, assumptions, biases
• Recognize how inclusion increases business and
  reduces risk
• Offer appropriate services
• Develop cultural sensitivity guidelines
• Recognize benefits of embracing diverse cultures

Cultural Issues
134
National Statistics
Cultural Issues
135
Cultural Variation Observations

• Self and space
• Time and time consciousness
• Relationships
• Mental process and learning
• Work habits and practices
• Communication and language
• Beliefs and values
• Living habits and practices

Cultural Issues
136
Cultural Summaries

• Asia
• Japan
• Europe
• North America
• Latin America
• Middle East and North Africa

Cultural Issues
137
Assumptions, Stereotypes, Biases

• Generalizations
• Assumptions, Stereotypes and Myths
• Not safe to say all or no
• Invites others to stereotype you
• Both parties make inappropriate assumptions
• Pay attention to the individual
• Biases
• Form preferences
• Biases can become negative and harmful

Cultural Issues
138
Cultural Stereotype Categories

• Self-Control
• Outlook on Life
• Racial Attitudes
• Honesty/Reliability
• Character
• Time Orientation

• Social Classes
• Religion
• Orientation to Nature
• Group Objectives
• Work Ethic
• Talents and Abilities

Cultural Issues
139
Buying and Selling Attitudes

• Colors
• Numbers
• Location and Orientation
• Offers and Contracts
• Negotiating Styles
• Marketing and Advertising

Cultural Issues
140
Mexican-Heritage Home Ownership

• Study in Los Angeles, Houston, Atlanta
• Hispanic population youngest ethnic minority in
  U.S.
• Mexicans are 67 of Hispanic population
• Obstacles to home ownership
• Live a cash-only existence
• Difficult to establish credit history
• Speak little English
• Poorly informed about home-buying process

Cultural Issues
141
Mexican-Heritage Home Ownership

• High level of trust in real estate professionals
• Job insecurity with long term debt
• Believe their stay in U.S. not permanent
• Many buy in neighborhood where they live
• Prefer neighborhoods with low crime rates, good
  schools, proximity to work and rising home values
• 3.6 million more Hispanic households in 2010

Cultural Issues
142
Asian-American Home Ownership

• Very diverse, underserved market
• Barriers of Asian-American homebuyers
• Language/cultural
• Lack of knowledge of buying process
• Unverifiable income
• Lack of credit
• Lack of trust

Cultural Issues
143
Cross-Cultural Listening Skills

1. Pay attention to person as well as message
2. Do not assume you know what they want
3. Emphasize and create rapport
4. Share meaning
5. Request information in a way that does not bias
   or inhibit the response

Cultural Issues
144
Business Norms and Etiquette

• Use good manners
• Project positive attitudes
• Adjust to high or low context communication
• Observe basic multicultural norms and etiquette

Cultural Issues
145
Behaviors to Avoid

• Hands in pockets
• First names
• Personal questions
• Asking about family
• Crossing legs

• Soles of feet/shoe
• Personal space
• Initiating physical contact
• Impatience

Cultural Issues
146
Nonverbal Red Flags

• ?Re-adjusting distance
• ?Averting eye contact
• ?Inappropriate laughing
• ?Covering face
• ?Silence
• ?Impatient

Cultural Issues
147
Key Point Review

• Common life activities vary among cultures
• Cultural understanding imperative in
  international business
• Culture and tradition influence buying and
  selling attitudes
• Active listening skills are essential
• Research cultures where you conduct business

Cultural Issues
148
Review Question

• Some culturally-based beliefs, traditions and
  practices that may influence buying attitudes
  include
• Citizenship, city or local development plans, and
  access to public housing.
• Amount of needed financing, size of building or
  home, and urban or rural location.
• Kitchen bathroom amenities, architectural
  style.
• Colors, numbers, and location and orientation of
  the site and/or building.

Cultural Issues
149
Review Question

• A behavior that may be offensive to others from
  different cultures is
• Clapping your hands.
• Showing the soles of your shoes or feet.
• Distributing business cards.
• Wearing a tie and business suit.

Cultural Issues
150
Cross-Cultural Relationships

• Chapter 8

151
Objectives

• Explain cultural and social elements that build
  relationships with clients
• Discuss high and low context cultures
• Identify key cultural areas influencing business
  and personal relationships
• Examine cultural behaviors
• Adapt business procedures to accommodate foreign
  clients

Cross-Cultural Relationships
152
Building Relationships

• Critical component of business opportunities
• Relationships are key to successful transactions
• No relationship, no business
• Understand and accept other cultures
• Recognize critical elements defining culture
• Deeply rooted stereotypes or prejudices

Cross-Cultural Relationships
153
Language

• Barrier and facilitator for interaction
• Beneficial to speak a second language
• Provides access to cultural undertones
• Colloquial speech may have different meaning
• Fluent speaker may edit documents
• Translation software has limitations

Cross-Cultural Relationships
154
Religion

• Fundamental role in creating cultural identity
  and behavioral norms
• Read about religion to facilitate interaction
  with social standards and behaviors
• Religious tradition prescribes certain behavior

Cross-Cultural Relationships
155
Social Structure

• Dictates respect, speech, modes of contact, roles
  and relationships
• May be fluid and change over time
• May be clear and fixed
• Status such as family origin, birthright or
  religion
• May be assigned a role without knowing it
• Inappropriate action may lose business

Cross-Cultural Relationships
156
Historical Predispositions

• Broadly influences everyday life
• Political, social, religious beliefs
• Decision-making
• Placing trust in others
• Disclosing information
• Eye contact

Cross-Cultural Relationships
157
Cultural Interaction Guidelines

• Preparation
• Communication
• Business Practices
• Role Behavior

Cross-Cultural Relationships
158
Key Point Review

• Cultural differences have huge impact on
  relationships and business practices
• Learning about and adapting to other cultures
  prerequisite to international opportunities
• Real estate professional must know how to develop
  a relationship before business is possible

Cross-Cultural Relationships
159
Review Question
One factor that makes international selling
practices different from domestic practices is

• In most countries, a transaction requires a prior
  relationship.
• International clients do not care about product
  benefits.
• Decisions tend to be made without negotiation.
• Foreign investors refuse to be qualified.

Cross-Cultural Relationships
160
Transaction Expectations

• Chapter 9

161
Objectives

• Identify parts of international transaction
  process that may differ from domestic
• List adaptations to facilitate transactions
• Clarify roles of professionals in an
  international transaction
• Identify client expectations and needs

Transaction Expectations
162
Client Expectations of Roles

• Broad spectrum of ways to complete transactions
• Professional roles may vary
• Experienced clients will have understanding and
  knowledge
• New clients approach investment in terms of
  cultural experiences and expectations

Transaction Expectations
163
Role Contrasts

• Who is the client?
• The Real Estate Professional
• Legal Counsel
• Professional Advisors
• Translators
• Title and Escrow Agents

Transaction Expectations
164
The Transaction Process

• Clearing title encumbrances
• Real property interests
• Use restrictions and loss of ownership
• Does it have to be in writing?
• And even if it is in writing

Transaction Expectations
165
The Client Knows Best

• Know when to talk and when to keep quiet
• Inform rather than persuade
• Clients want to make up their own minds
• Do not appear aggressive

Transaction Expectations
166
Decision-Making Styles

• Consensus, committee, levels of hierarchy
• Accept and adapt to clients practices
• Be sure decisions are understood
• Follow-up verbal exchange with written
  confirmation or summary
• Email may be acceptable
• Card or letter is better

Transaction Expectations
167
Negotiating Styles

• Vary as much as decision-making styles
• Some groups
• Seek favorable results for everyone involved
• Focus on personal objectives
• Experience, insight, good listening skills
• Do not state departure plans

Transaction Expectations
168
Funds and Tax Laws

• Where is clients money for transaction
• Be sure money arrives in time
• Banks and clients can be at fault for delays
• Identify money channels to ensure closing
• Get funds inside domestic borders before closing
  date
• Use international tax attorney for latest
  requirements and laws

Transaction Expectations
169
Key Point Review

• International business practices and customs vary
• Clients have different expectations
• Clients have different methods of selling,
  negotiating and decision-making
• Real estate professional must be informed
  regarding various methods
• Educate and inform clients

Transaction Expectations
170
Review Question
The U.S. real estate professional should be
prepared for some resistance on the part of an
overseas client regarding the use of
Transaction Expectations

• A counteroffer
• A notary
• An advisor
• An exclusive listing agreement

171
Review Question
One aspect of U.S. real estate law and practice,
which differs from the laws and practices of most
other countries is
Transaction Expectations

• The concept of down payments
• Title and escrow procedures
• Loan application fees
• Government disclosure requirements

172
Ethics and Equal Service

• Chapter 10

173
Objectives

• Identify discriminatory acts under federal fair
  housing laws
• Apply One America Principles and philosophy of
  inclusion
• Recognize illegal practices
• Apply Equal Professional Service Model

Ethics and Equal Service
174
Build on Fair Housing

• Initiate a diversity-oriented practice
• Fair housing laws establish minimal standards
• Understand fair housing laws
• Expected of all real estate licensees
• Embodied in Code of Ethics
• Fair housing laws provide full range of housing
  options
• Equal Professional Service Model is solid basis
  for keeping promise of these laws

Ethics and Equal Service
175
Discriminatory Acts

• Refusing to sell, rent, negotiate housing
• Discriminating in terms, conditions, privileges,
  services or facilities
• Falsely denying housing is available
• Failing to provide loan information
• Imposing different terms or conditions
• Discriminating the property appraisal

Ethics and Equal Service
176
Steering

• Steering is an illegal activity
• Making choices or assumptions for buyer
• Attempts to guide buyer in certain direction
• Editorializing about areas client should or
  should not consider
• Making housing unavailable because of race,
  color, national origin, religion, familial
  status, sex or handicap

Ethics and Equal Service
177
Advertising

• Advertising is subject to Fair Housing Act
• State laws may also apply
• Selective use of publications
• Human models
• Geographic advertisements
• Equal opportunity slogans and logos
• Use logo in all advertising, on business cards
• Incorporate in Office Policies

Ethics and Equal Service
178
Predatory Lending

• Practices or loan terms that
• Deliberately deceive borrowers
• Strip home ownership equity
• Induce repeated refinancing with higher points
  and fees
• NAR identifies predatory lending practices
• Diminished personal credit standing
• Violation of federal consumer protection statues
  and regulations

Ethics and Equal Service
179
Diverse Community
Opportunity
One America Principles
Embrace Shared Values
Celebrate Differences
Responsibility
180
Philosophy of Inclusion

• Part of One America Principles
• Accept individuals from diverse cultures
• Unconditional respect for all individuals
• Positive regard for all individuals
• Right to be different and appreciate differences
• Extends to all individuals
• Cross-cultural relationships, social and
  professional
• Celebrate differences without imperative to
  change

Ethics and Equal Service
181
NARs Code of Ethics

• REALTORS
• History of supporting letter and spirit of fair
  housing laws
• Pledge to conduct business in accordance with
  tenets and spirit of Code of Ethics
• Article 10 outlines commitment to equal
  opportunity in housing

Ethics and Equal Service
182
Equal Professional Service Model
4. Have I offered a variety of choices?
1. Do