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Early Fall-out From Treasury Department’s New Real Estate Disclosure Rules?

02/17/16  |  Tony Sargent

Thanks to today’s globalized economy, few blink an eye when real estate investors snap up properties around the globe...

New York Times report on LLC purchases spurs new rules on owner transparency - Photo: Tony Sargent NYC (C) 2016

Thanks to today’s globalized economy, few blink an eye when real estate investors snap up properties around the globe. Most of the time, buying a pied-a-terre here and a villa there is simply a particularly fabulous form of collecting or a portfolio management decision.

In 2014, the New York Times ran an investigative report on some not-so-scrupulous buying practices a few foreign buyers are engaging in. This article was followed up by others highlighting purchases by domestic and international buyers hidden from view.

Some foreign buyers had been using “shell companies” (which exist for the sole purpose of making specific financial transactions) to buy top-of-the-line property incognito. The problem? Some of the buyers hiding behind their faux companies were also under investigation by various international governments for alleged illegal activities, either as the heads of companies or as individuals, reported the Times. For many of my global High Net Worth Individuals (HNWI) or celebrity clients buying as an LLC makes sense, both from an estate planning standpoint and a privacy perspective. As agents, while we are privy to an extent of clients’ financials, it’s challenging to determine where funds are sourced even when “proof of funds” requirements are met for purchase verification.

Reacting to the article, New York City Mayor Bill de Blasio teamed up with the city’s finance chief, Jacques Jiha, and announced new rules requiring shell companies buying and selling property in the city to divulge the names of all the company’s members to the city. The rules, which went into effect in May 2015, sparked a healthy debate in the city’s real estate power broker circles. Just how necessary and effective would these rules actually be at curbing unsavory sales? The jury is still out.

In January 2016, the Treasury Department also announced new rules around LLC purchases as part of a test program in Manhattan and Miami. The program requires buyer names be divulged for any a) all-cash purchase at or in excess of $3 million b) bought as an LLC c) between March and August 2016. The new Treasury program rules put the brunt of discovery and disclosure on Title insurance companies vs. the agent community.

Many say the new rules (Source: The Real Deal) will result in more paperwork, both for above-the-board buyers and those determined to invest illicit assets in property. For legitimate buyers, privacy rights may be unduly and unfairly dispensed with, a leading real estate lobbyist told the Times. And for those who would have used ill-gotten gains to buy real estate anonymously before now have the option of simply creating another shell company to “own” the original shell company.

Another potential concern may arise for globetrotters with multiple residences around the world and fairly flexible schedules. These HNWI will need to better plan in advance how many days a year they will be in any given city or country as too many days in one location could potentially trigger what is called a “residency audit”. Buying through shell companies made it less likely for such a person to be subject to one. A residency audit happens when New York City investigates whether someone is trying to dodge city taxes based on the number of days a year they actually take up residence in their Central Park East penthouse. The audits are expensive and time-consuming, and can be a major headache for everyone involved. The new regulations may prick up the ears of auditors, who may now be given a bounty of specific names to investigate.

Bottom Line: In my view, there may be an interim impact at the top of the market in the short-term as these new rules cause uncertainty in the minds of buyers and they take time to determine their options with their financial and tax advisers. Legitimate buyers without a pressing need for an LLC purchase will adapt or their advisers will figure out the best purchasing method for them.


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