506(b) Foreign Investor

[Jay Chang]

Let's say I'm creating a 506(b) to syndicate a deal to buy apartments. Is it practical to open it up to foreign investors? Assuming I have just (1) one investor from Canada. What's the additional cost for just one (1) additional country, roughly speaking? Would love to hear about your experience.

Thanks in advance!

[Dan Handford]

@Jay Chang Their are a few issues with accepting foreign investors. 

1) Their is more IRS scrutiny as it will be your responsibility to make sure your foreign investors pay their US taxes for their interest in your US entity. If your foreign investors do not pay their portion of US taxes then the IRS is allowed to come after your entity to pay for those taxes. This is why most will hold back 30-40% of the foreign investors distributions and profits to account for this issue. This always causes more accounting and escrow risk for those withheld funds. 

2) The department of Homeland Security also gets involved when you have investors from potentially high terrorist countries. You should always run a background check and make sure their name does not show up on any terror watch lists from the US. 

3) The safest thing for your foreign investors to do is to register for a US LLC. This will allow them to open a US bank account for ACH distributions. This also allows you to make distributions without withholding funds since the entity is a US entity and has a legal federal EIN for paying their own taxes.

Again, as @Greg Dickerson and @Danny Randazzo have stated, always consult an SEC attorney to make sure you are following the rules properly. 

Feel free to PM me if you'd like a recommendation of a solid SEC attorney that our group uses.