The Implications of the Corporate Transparency Act on Real Estate: Your Essential Guide to Compliance

Under the looming enforcement of the Corporate Transparency Act (CTA), many American enterprises are preparing to submit information about their “beneficial owners” according to the guidelines laid down by the Financial Crimes Enforcement Network (FinCEN). This mandatory reporting kicks off on January 1, 2024, for businesses formed after that date and needs to be submitted within a month of their establishment. Existing entities are given until January 1, 2025, to comply with these reporting obligations. This federal directive aims to stymie money laundering, tax fraud, corruption, and various other illegal activities by enforcing businesses to share beneficial ownership information with FinCEN, an arm of the U.S. Treasury Department.

Real estate businesses, especially those with a broad portfolio of legal entities involved in property ownership and operations, may find the CTA requirements particularly burdensome. Even though the CTA isn’t solely aimed at the real estate sector, this article discusses its implications for the industry.

Under the CTA, a “reporting company” must share specific information with FinCEN. Reporting companies broadly include domestic entities like LLCs, LPs, or LLPs established via a filing with a secretary of state’s office, as well as foreign entities registered to do business in a state. If an entity is a product of a filing with a state or tribal authority, it might fall under the category of a reporting company. While the CTA has 23 exemptions for specific types of businesses, many of these will not apply to real estate LLCs and similar entities owning commercial properties.

The CTA mandates that reporting companies share three categories of information: details about the entity, beneficial ownership information (BOI), and data about the company applicant. Beneficial owners are defined as individuals who have substantial control over the entity or own at least 25% of the entity’s ownership interests. Additionally, the individual who files the document creating a reporting company or primarily manages such filing is identified as a “company applicant”.

Moreover, the reporting companies are obliged to update their BOI or any reported data if any changes occur. A 30-day period from the change is provided for the companies to report to FinCEN.

To simplify the reporting process for individuals who are beneficial owners of multiple entities, FinCEN will issue a unique identifier to individuals and reporting companies, reducing the need to report sensitive personal information repeatedly.

BOI will be electronically reported via the Beneficial Ownership Secure System (BOSS), developed by FinCEN to administer these reporting requirements under strict security and confidentiality guidelines.

It’s important to note that BOI can be disclosed to a list of entities authorized by the CTA for national security, law enforcement, or financial institution compliance purposes. The list includes federal agencies, state and local agencies, foreign law enforcement officials, financial institutions (with reporting company consent), and the Department of the Treasury.

Failure to report or intentionally providing false information to FinCEN carries significant penalties, including daily fines and potential imprisonment. However, a safe harbor provision exists for those who voluntarily correct inaccurate reports within 90 days.

Later this year, FinCEN is expected to publish a finalized version of the Proposed Rule concerning BOI access and security. It also plans to release a third rule to reconcile the CTA’s CDD requirements for financial institutions with the existing rule. This is anticipated to lessen the compliance load on financial institutions and their legal entity customers.

The implementation of the CTA has substantial implications for all businesses, including those in the real estate industry. It’s crucial that businesses understand the CTA and its reporting requirements to ensure compliance. Notably, certain exemptions to these reporting obligations may apply, and businesses should determine their applicability on a per-entity basis.

While this article provides an overview of the CTA’s key provisions, it is not exhaustive. If you have any questions about how this might impact your real estate investments or need assistance in understanding compliance requirements, you will want to consult with your attorney.