The Corporate Transparency Act (“CTA”) was a bipartisan bill enacted by Congress in 2021. It is intended to enhance transparency in entity structures and ownership, including the real estate sector, by addressing money laundering, tax fraud and other illicit activities. The CTA is part of a larger initiative to prevent criminals from using business entities to move money and purchase assets anonymously. The U.S. Department of Treasury’s Financial Crimes Enforcement Network (“FinCEN”) estimates that the CTA will affect over 32 million entities and will largely impact smaller and unregulated companies.
The CTA went into effect January 1, 2024, and requires certain U.S. and foreign entities defined as “reporting companies” to report certain identifying information about the company, its beneficial owners, and company applicants to FinCEN within a prescribed time period. A reporting company refers to any LLC, corporation, or other entity that was formed by filing paperwork with the Secretary of State or similar office. Foreign companies registered to do business in any U.S. State are also required to report.
Entities that fall into any of 23 categories are exempt from reporting to FinCEN. These generally apply to large, publicly traded companies that are already required to report this type of information. Owners of non-exempt companies are required to report necessary identifying information to FinCEN. For reporting companies formed prior to January 1, 2024, these reports require information about the company and its beneficial owners. Reporting companies formed prior to 2024 will have until January 1, 2025, to file an initial report. For reporting companies formed on or after January 1, 2024, reports will require information about the company and its beneficial owners, as well as its company applicants. A company applicant is both (i) the individual who directly files the document that creates or registers the company (i.e., often a paralegal or attorney), and (ii) the individual who is primarily responsible for directing or controlling the filing of the relevant document by another. Entities formed after January 1, 2024, and before January 1, 2025, have 90 days after their date of formation to report, and any entities formed on or after January 1, 2025, will have only 30 days to report. Whenever information submitted to FinCEN changes, a reporting company must submit an updated report within 30 days.
The CTA marks a significant shift in the regulatory landscape, particularly in the area of real estate. The reporting requirements directly impact the real estate sector in several ways. The primary impact of the CTA on real estate transactions is the reduction of anonymity.
A common practice in real estate transactions is to form special purpose entities (“SPE”) to acquire, develop, lease, and finance real property. Oftentimes, an SPE will hold title to property to limit liability, and ownership of the SPE is often structured through a chain of additional entities. It is also common for ownership percentages and roles in the company to shift throughout a project’s life cycle as key partners take on more debt or exit the deal. All of these entities may be considered reporting companies subject to the CTA’s requirements unless they qualify as an exemption. Thus, continuous monitoring of changes in the ownership structure to account for changes in beneficial ownership and ownership percentages is required to ensure compliance with the CTA.
The CTA also adds another layer of risk for lenders in real estate transactions. Compliance with the CTA will be considered as part of the loan underwriting process as well as covenants and obligations of the borrowers. Lenders will need to ensure that Anti-Money Laundering (“AML”) protocols are aligned with the CTA requirements to ensure reporting is done correctly and timely.
Real estate professionals, including agents, brokers and attorneys, will also need to be more vigilant and ensure that transactions involving corporate entities are in line with the CTA. Compliance will require additional due diligence, potentially slowing down transaction times and increasing costs. Additionally, managing and protecting sensitive client data is critical, given privacy concerns.
The CTA may affect some homeowners too. The average homeowner who holds title to real estate in their individual name will not be impacted. However, some real estate investors or homeowners form an LLC to purchase property. LLCs are often used to hold title to rental properties to limit liability and for privacy reasons. Individuals who form LLCs to hold title to real estate will be required to report under the CTA. Often, homeowners hold title to real estate in their revocable trusts. Trusts are not “reporting companies” because they are not formed by filing a document with a Secretary of State. However, if an estate or trust holds an interest in a reporting company, an executor, a trustee, settlor, and/or beneficiary may be considered a beneficial owner of that reporting company. Settlors and trustees should review current trust holdings and consult with legal and tax professionals to determine what individuals will be subject to the CTA reporting requirements.
The CTA raises other considerations as well. In addition to the CTA, some states are enacting laws with similar reporting requirements as the CTA (e.g., New York). Real estate professionals should be aware of any applicable state laws. Additionally, there are legal and ethical considerations. Undoubtedly, there will be debates over the balance between the need for transparency and the right to privacy. Although the CTA may increase transparency in the real estate market and make it easier for authorities to identify financial criminals, the increase in regulations will inevitably impact the broader real estate industry.
You can find additional information and resources on the CTA by visiting the McLane Middleton CTA Resources page here.