Implemented to combat the use of shell corporations and other entities to facilitate illicit activities, the Corporate Transparency Act (CTA) has created new and unprecedented reporting obligations. Beginning January 1, 2024, domestic and foreign โreporting companiesโ will be required to report certain identifying information about their beneficial owners to the Treasury Department's Financial Crimes Enforcement Network (FinCEN). The CTA will likely impose a substantial compliance burden on the real estate industry, which often uses complex structures composed of numerous legal entities that own and operate real estate across many asset classes. Some considerations for those operating in real estate are provided below, and a more complete summary of the CTA can be found. here.
What is a reporting company?
An entity-by-entity evaluation is required to determine whether such entity is a โreporting company.โ A โreporting companyโ is a domestic or foreign corporation, limited liability company or similar entity that is formed or registered to do business in any state or jurisdiction by filing a document with a secretary of state or other similar office and that not qualify for an exemption (Reporting Company). Due to the various facts and circumstances relating to each entity within a tiered structure, not all entities may qualify for an exemption and information may be required for only a portion of the entities within a tiered structure. While exemptions generally apply to companies with increased reporting obligations, such as publicly traded companies and most financial services institutions, any entity that meets all of the following criteria will also qualify for an exemption: (i ) the entity has more than 20 part-time employees, (ii) the entity reports more than US$5 million in annual revenue to the Internal Revenue Service, and (iii) the entity operates from an office physically located within the United States. Additionally, 100%-owned subsidiaries of an exempt entity will qualify for an exemption. However, these exemptions may not apply to many entities formed to own and operate real estate. For example, an ascending parent may qualify for an exemption (for example, if it were a public real estate investment trust); However, the exemption would not apply to a lower-tier subsidiary that was not 100% owned if such subsidiary did not employ workers directly, but instead hired outside managers (or affiliates), as is common practice.
What information should be reported?
A reporting company must disclose the person's full legal name, full current address, date of birth, and an identification number from an acceptable form of identification (such as a passport or driver's license number) for each beneficial owner. . A โbeneficial ownerโ generally is a person who, directly or indirectly, (1) exercises substantial control over the entity, or (2) owns or controls not less than 25% of the ownership interests in the entity.
What can affect a reporting company's ability to comply?
To comply with the CTA, processes and systems will need to be implemented to analyze whether reporting is required, continuously track beneficial owners, and collect and store required identifying information. Any negotiation should consider the legal right to receive and provide beneficial ownership identification information to FinCEN on an ongoing basis, as well as obligations to update any upstream ownership changes.
How does the CTA apply to parties who have interests in real estate?
The common practice in real estate transactions is to form special purpose entities (SPEs) to acquire, develop, lease and finance real estate. Often, an SPE will hold ownership to limit liability and additional SPEs can be inserted into the structure to create a preference for debt and certain shareholders. To comply with the CTA, at the time of formation of each SPE, a separate analysis will be required to determine whether an exemption applies or whether the SPE is a Subject Company. The โlarge operating companyโ exemption may be available to many real estate companies and requires that an entity (a) have an operating presence in a physical office within the United States; (b) employs more than 20 full-time employees in the United States; and (c) filed federal income tax or information returns in the United States for the preceding year showing more than $5 million in gross receipts or sales from U.S. sources.
Additionally, ownership percentages often change substantially over the life cycle of a real estate asset. For example, during development, the developer may be the sole owner of the property; However, once the project is completed, limited partners may be introduced to capture the returns from the operation. Therefore, continuous monitoring of changes in ownership structure is necessary to account for changes in beneficial owners and ownership percentages to ensure compliance.
What should real estate lenders (mortgage and mezzanine) consider?
For mortgage and mezzanine lenders, failure to comply with the CTA adds another layer of risk and should be considered as part of the loan underwriting, as well as borrowers' covenants and obligations. Lenders will need to ensure that anti-money laundering protocols are aligned with CTA requirements to ensure reporting is done correctly and in a timely manner.
When must a reporting company declare the beneficial owner?
For reporting companies formed before January 1, 2024, beneficial ownership information (BOI) must be submitted to FinCEN by January 1, 2025. Reporting companies formed or registered on or after January 1, 2024 and before January 1, 2025 must report the BOI to FinCEN within 90 days of accepting the company's incorporation or filing for registration, and reporting companies that are formed or registered on or after January 1 2025 must report the BOI to FinCEN within 30 days of accepting the company's incorporation. or registration presentation. A change in beneficial ownership or a change in exemption status would also require a filing within 30 days of such change.
Reporting obligations and eligibility for exemption depend on the specific facts and circumstances surrounding each entity. For further guidance, please contact a member of our real estate team.
