Corporate Transparency Act Imposes New Compliance Obligations on Real Estate Investors
The Corporate Transparency Act (the “Act”), enacted by Congress as part of the National Authorization Act for Fiscal Year 2021 on January 1, 2021, establishes federal legislation for the collection of beneficial ownership information of “Reporting Companies” (i.e., all corporations, limited liability companies, and “other similar entities” registered to do business in the United States). While the Act does not define “other similar entities,” it is believed that partnerships and trusts are included because an earlier version of the Act explicitly excluded them.
Real estate investors, in particular, may be susceptible to the reporting requirements under the Act. Given how real estate ownership is commonly structured, many ownership entities will not be able to take advantage of the Act’s exemptions, outlined below, and will be deemed Reporting Companies subject to the Act.
The Act requires Reporting Companies to disclose (by delivery of a beneficial owner statement) to the Financial Crimes Enforcement Network (“FinCEN”) certain information regarding the beneficial owners, including full legal name, current residential or business street address, date of birth, and an identification number (driver’s license or passport). A “beneficial owner” is any individual who directly or indirectly exercises substantial control (“substantial control” is not defined in the Act) over the Reporting Company or owns or controls 25% or more of the ownership interests of the Reporting Company. Excluded from the definition of “beneficial owner” are minor children, someone acting solely as nominee, custodian, intermediary, or agent of the Reporting Company, someone acting as an employee of the Reporting Company, someone whose only interest in the Reporting Company is through inheritance, and creditors of the Reporting Company.
The beneficial owner statement is required to be filed at the time the Reporting Company is formed or, if the Reporting Company was formed prior to passage of the Act, within two years after the effective date of the issuance of the Act’s final regulations (which will be no later than January 1, 2022). If there are any changes to the beneficial ownership of the Reporting Company, an updated beneficial ownership statement must be filed within one year of such change. While not explicitly stated, the Act seems to suggest that a change in the percentage ownership interests is not considered a change that would require an update; provided that the list of persons comprising the beneficial owners remains unchanged.
Exemptions from the Act’s reporting requirements include:
- entities that are already closely regulated (including, but not limited to, banks, insurance companies, and utility companies),
- publicly traded companies,
- dormant entities described in the Act,
- tax-exempt entities,
- any entity owned or controlled, directly or indirectly, by an entity that is otherwise exempt,
- additional entities that FinCEN may determine on an ongoing basis, and
- taxable entities that have:
- more than 20 full-time U.S. employees,
- a physical office in the U.S., and
- more than $5 million in gross receipts or sales.
A substantial portion of commercial real estate ownership entities will not fall within these exemptions, since real estate is commonly owned by non-public taxable entities without employees or a physical office; and many real estate investments will not reach the $5 million revenue threshold. In fact, real estate investments are typically owned by single purpose entities, with no employees (which has been customarily required in the mortgage lending market) and no assets unrelated to the real estate investment. Moreover, many real estate ownership entities have only one or a few owners. As such, most or all of the beneficial owners (i.e., those with an ownership interest of at least 25%) will be required to disclose their personal information in accordance with the Act.
The information collected pursuant to the Act will not be made available to the public, and the states will not generally have access to this information either. The information may only be used for (i) national security and law enforcement and (ii) confirming the beneficial ownership information provided to financial institutions to facilitate compliance of such institutions with anti-money laundering laws, provided the Reporting Company’s consent is obtained. The information will be held for five years after termination of the Reporting Company. FinCEN will issue a FinCEN identification number upon request It is not clear if the issuance of an identification number will act as confirmation of compliance under the Act.
Penalties for Noncompliance
If there is a willful failure to report information, the responsible party is subject to fines of up to $500 per day, up to an aggregate amount of $10,000, and a prison term for up to two years. Any party that unlawfully discloses beneficial owner information is subject to fines of up to $500 per day, up to an aggregate amount of $250,000, and a prison term for up to ten years. Negligent violations of the Act are not subject to any civil or criminal penalties. There is no indication that failure to follow the Act will vitiate the formation of the entity or prohibit it from conducting business. Safe harbor rules will apply for any person who submits inaccurate information if the person (i) had no knowledge of the inaccuracy, (ii) was not trying to evade the reporting requirement, and (iii) corrects the information no later than 90 days after the report was submitted.
Many aspects of the Act are unclear, and have been left for clarification through subsequent regulations to be promulgated by the Treasury Department; with the Act requiring the Treasury Department to promulgate final regulations by January 1, 2022. Until these regulations are issued, the extent of the compliance requirements under the Act on commercial real estate investments will not be fully-understood.
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