Have you ever wondered who is buying those ultra-high-end apartments that have been appearing on the New York City market in record numbers over the past several years? As it turns out, an alarming number of purchasers have turned out to be foreigners with criminal ties who figured out that one of the easiest ways to launder their money was in the U.S. real estate market through the use of single purpose “shell” limited liability companies. In fact, nearly half of the residential purchases in the U.S. of $5,000,000 or more are purchased using shell companies and that percentage is even higher in Manhattan. In many states, including New York, the identities of the beneficial owners of the companies do not need to be disclosed, making it very difficult to track who is associated with these purchases and where the money is coming from.
As a result of a series of 2015 New York Times articles exposing this trend 1, the U.S. Treasury has enacted a temporary program that requires that title insurance companies must disclose the identities of the individuals who are the beneficial owners or holders of 25% or more of the direct or indirect equity or beneficial interests in the purchasing entity, which will apply to entities in “all cash” (i.e., where no lenders are involved) deals of more than $3,000,000 in the County of Manhattan and more than $1,000,000 in Miami-Dade County, Florida. (This program expands on previous requirements enacted by New York City’s Finance Department, which, in 2015, began requiring all shell entities buying real estate in New York City to report their members to the city.) The reporting requirement is in effect from March 1, 2016 – August 27, 2016 and may thereafter be extended and expanded into other markets.2
You may be asking, “if I’m a law-abiding citizen, what does this have to do with me?” For now, perhaps nothing (unless you are involved in a transaction that falls into the aforementioned requirements); however, this has sparked a greater interest by the U.S. government in the use of shell companies to transact business. In February 2016, bills requiring greater transparency of shell companies were introduced in Congress, which would seek to expand on the efforts of the Treasury to hold not only buyers, but the professionals (e.g., bankers, accountants, lawyers and title insurance companies) behind U.S. real estate transactions to a higher accountability.3 Whether these bills will pass and the impact they may have on the real estate market remains to be seen. Stay tuned.