Economists have long been predicting commercial real estate could be the next day of reckoning for the financial markets, with a wave of defaults looming as billions of dollars in troubled loans come due in the coming months. But a little-noticed bill introduced in January could help bring a new source of desperately-needed liquidity to the sector: foreign investment. Introduced by Joseph Crowley, a six-term Democratic congressman representing parts of New York City’s Queens and Bronx boroughs, the Real Estate Revitalization Act of 2010 would eliminate certain taxes that were part of the Foreign Investment Real Estate Property Tax of 1980, or FIRPTA — which requires foreign investors to pay as much as a 55% tax on capital gains from the sale of US real estate or shares in real estate investment trusts and real estate operating companies. Repealing the tax, Crowley and the bill’s supporters say, would get rid of a major impediment to foreign investment in the sector — and could open the floodgates to new liquidity at a time when commercial real estate loan defaults pose a serious risk to the nation’s fragile economic recovery. The FIRPTA tax, the bill’s supporters say, penalizes foreign investors who want to put cash into US real estate because those same investors don’t face such taxes when they buy into other US assets, like Treasury securities, corporate equities or corporate bonds. If a British citizen buys stock in IBM and sells stock in IBM, for instance, that person is not subject to tax in the US and only pays UK-levied taxes. But if he buys and sells REIT shares, he will pay an additional tax on the sale of those shares. Foreign investors also don’t pay added taxes when they make real estate investments in other foreign markets. “London doesn’t have this FIRPTA layer of tax, so comparing a London building to a [Washington] DC building — it makes the London building more attractive, and that is enough to tilt the needle,” says Laine Kenan, Atlanta-based executive director of Arcapita, a Bahrain-based global private equity firm with a large real estate investment portfolio. Currently, only about $3bn of his firm’s $10bn in real estate exposure is in the US If the tax was lifted, “it would make a difference,” Kenan says.

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