Raising capital for real estate investments can be a challenge—especially when seeking funding from outside the United States. However, with the right strategy, real estate sponsors—and the developers they often partner with—can access a broader pool of global investors and significantly improve tax efficiency.

This unique approach combines a C-corporation structure with portfolio interest exempt notes—debt instruments that allow U.S. borrowers to pay interest to foreign investors without triggering U.S. withholding tax. To qualify, the notes must be in registered form and cannot be held by a 10% or greater shareholder of the issuing entity, in addition to certain other conditions being met.

When structured properly, this method helps position U.S. real estate as a more financially viable and attractive opportunity for foreign capital. This article explores how this structure works, the advantages it offers, and why it’s becoming a powerful tool for real estate sponsors looking to expand their capital base and close more deals.

Benefits of Portfolio Interest Exempt Notes

• Tax Efficiency: The primary advantage is the exemption from the 30% U.S. withholding tax on interest payments, making it an attractive option for foreign investors.
• Attracting Global Investors: By eliminating the U.S. withholding tax, U.S. real estate projects become more appealing to international investors seeking tax-efficient investment opportunities.
• Simplified Compliance: These notes require less regulatory compliance compared to other investment vehicles, streamlining the process for both issuers and investors.

Utilizing a C-Corporation Structure to Increase Tax Efficiency

A C-corporation can be used to provide additional tax planning benefits.

• Interest Deductibility: A portion or all of the interest paid on the portfolio interest exempt notes issued through a C-corporation will generally be deductible by the corporation, thereby reducing taxable income and enhancing tax efficiency.
• Flexibility in Earnings Distribution: Subject to certain tax rules on excess accumulated earnings, the corporation can manage the timing of dividends and repay principal on the portfolio interest exempt notes (tax free) to optimize tax outcomes for both the corporation and investors.

Sponsor Control of Structure Using Voting and Nonvoting Stock

Often, whether due to experience in the real estate industry, strategic vision or another reason, it is beneficial for the real estate sponsor to maintain control of the structure. To do so, the structure can include issuing voting stock to the sponsor and nonvoting stock to investors.

Nonvoting shares provide equity participation without granting voting rights. This structure is particularly beneficial when raising capital from foreign investors who are interested in financial returns rather than control over the company. Overall, issuing voting and nonvoting stock allows the sponsor and the foreign investors to generally mimic the GP/LP relationship that exists for funds structured as limited partnerships (the typical funds structure) even though a C-corporation is being utilized.

Control and Flexibility

• Preserving Control: Issuing voting stock to the real estate sponsor ensures that they retain decision-making authority, while investors hold nonvoting stock and have no decision-making authority.
• Flexible Capital Structure: Combining debt (through notes) and equity (nonvoting shares) allows for a balanced capital structure which places foreign investors pari passu with most other potential creditors, optimizing financial leverage and risk management.
• Enhanced Marketability: Offering a combination of debt and equity can attract a broader range of investors, catering to those seeking different risk and return profiles.

Strategic Benefits for Real Estate Investments

• Increased Capital Access: This dual approach opens up new avenues for funding, enabling real estate sponsors and developers to access a larger pool of international capital.
• Risk Mitigation: By diversifying the investor base and capital structure, real estate projects can better withstand market fluctuations and economic uncertainties.
• Competitive Advantage: Projects financed through this method can offer more competitive terms to investors, enhancing their attractiveness in the global market.

Conclusion

Utilizing portfolio interest exempt notes within a C-corporation structure—combined with strategic stock issuance—offers a compelling strategy for raising capital from non-U.S. investors. This approach provides tax efficiency, preserves sponsor control, and supports sustainable growth in the real estate sector. By leveraging these tools, real estate sponsors and developers can unlock new sources of capital and better position their projects for long-term success.

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