In 2016, the Healthcare of Ontario Pension Plan committed significant capital to US real estate funds, partly because of the Foreign Investment in Real Property Tax Act of 1980, according to its 2016 annual report published last month.

HOOPP earmarked C$475 million ($356 million; €331 million) to real estate funds last year, with most going to US-focused property vehicles. By comparison, the C$70.4 billion pension allocated C$403 million, about 37 percent, of a total C$1.1 billion in real estate fund commitments to three US property vehicles in 2015.

Fund commitments accounted for approximately 31 percent of HOOPP’s total C$1.5 billion in real estate activity last year. The remainder was to new developments, including three large residential, industrial and mixed-use projects in the US.

Although HOOPP’s total 2016 real estate fund commitments were less than half of its 2015 capital outlay to property vehicles, the volume was still significantly larger than that of 2014, when the pension committed just C$175 million to real estate funds in Canada and the US.

HOOPP president and chief executive Jim Keohane told PERE that when the pension plan invests in US real estate funds, tax considerations must be taken into account.

“Because of our status as a foreign trust in the US, we fall under FIRPTA, so it can be more tax efficient to invest through funds rather than directly,” he said. “In addition, given the breadth of the US, funds have provided a good strategy to initially invest in new real estate markets, particularly when we do not have a direct presence within a given market. We may initially do funds and then move into partnerships or co-investments or direct ownerships.”

HOOPP has raised its allocation to US real estate from about 5 percent of its C$10.4 billion property portfolio in 2015 to 8 percent of its C$11.5 billion portfolio in 2016. The pension has made a number of direct real estate investments in the US and is looking to expand its direct portfolio in the country. However, “we will continue to invest in US funds, partly because of the tax issue,” said Keohane.

Although foreign investors can invest in US real estate through non-fund structures, some choose funds for administrative ease, said Willys Schneider, senior counsel at law firm Arnold & Porter Kaye Scholer.

Canadian pension funds that are active investors in US real estate primarily invest via joint ventures or co-investments. Such investors typically set up a ‘blocker’ vehicle to avoid being taxed on operating income, gains on exit and being subject to related tax filing requirements. However, others may prefer to invest through funds if “they haven’t done as much in US real estate,” said Schneider. “It’s just easier to go through the funds where [the blocker structure] is just set up for them.”

Under 2015 reforms to FIRPTA, a “qualified foreign pension fund” is no longer taxed on gains upon the exit of a US real estate investment. In light of these changes, qualified funds may not necessarily be required to be limited to a minority interest where REITS – one type of blocker structure – are used in order to avoid such exit tax, said Schneider. However, such an investor would still be required to invest through a blocker structure, whether a fund, joint venture or co-investment, in order to avoid direct US tax and tax filing requirements on operating income from the investment.

The impact of FIRPTA reforms on foreign capital flows into US real estate funds is difficult to assess, said Doug Weill, managing partner at New York-based real estate advisory firm Hodes Weill & Associates.

“Anecdotally, we are hearing more from offshore institutions regarding interest in US funds,” he said. “And we have heard from some that it took some time to assess whether they qualified for the changes to FIRPTA.”