“REITs can be an effective tool to bridge the infrastructure gap...
The Bottom Line
in Infrastructure Investing:
Is It Real Estate?
by John M. Ferguson and Mandee R. Silverman
Infrastructure projects are no longer exclusively the domain of the
government, and momentum is
building for private capital investment
in U.S. infrastructure projects. Unlike
government, however, private investors
will evaluate infrastructure investment
by the same metric as all other investments: after-tax cash returns. Ultimately,
this metric alone will determine whether private capital will be invested. The
key to the tax analysis is whether infrastructure constitutes “real estate” or “real
property” for various sections of the U.S.
Internal Revenue Code (IRC).
For those considering investing in the
burgeoning U.S. market (many of whom
are either established infrastructure
investors with experience in the more
well-developed private infrastructure
markets of Australia and Western Europe
or investors from within the United
States with backgrounds in real estate,
private equity, or fixed income), it is critical to understand that characterization
of investment assets under current law
and Internal Revenue Service (IRS) interpretations as real property can be both a
benefit and a burden. On the one hand,
if infrastructure assets are characterized as real estate, investors may enjoy
the substantial tax benefit of real estate
investment trusts (REITs). On the other,
such a characterization may subject
non-U.S. investors to the burden of
the Foreign Investment in Real Property Tax Act (FIRPTA).
REITS (Real Estate Giveth . . .)
REITs are tax-advantaged vehicles
that have successfully attracted wide
sources of capital to real estate. Subject
to compliance with a number of asset
and income requirements designed
to ensure an almost exclusive focus
on ownership and operation of real
estate, REITs have the benefit of being
treated as corporations under the IRC
without the corresponding burden of
paying entity-level U.S. federal income
taxes to the extent they dividend out
their net income. REITs have made
investing in institutional-quality real
estate in a diversified manner available to the public, and may also be
used to “block” certain U.S. tax-exempt
