In February 2015, many news outlets reported on the most expensive listing for an apartment in New York City--a triplex penthouse at the former Sony Building on Madison Avenue was listed for $150 million. The same month, the New York Times published a five-part expose investigating the anonymous purchase of luxury real estate by shell companies, some of which are beneficially owned by foreigners who have been targets of government inquiries.
In response, the de Blasio administration recently introduced new disclosure requirements to bring more transparency to the real estate market. Buyers of real estate in New York City file a form called Real Property Tax Return in connection with the real property transfer tax imposed by New York City. The form requires that a buyer disclose his or her name, address, and Social Security Number. Previously, the form required that single member LLCs disclose the identity of the sole member and the related Social Security Number or Employee Identification number. Under the new disclosure rules, multiple-member LLCs and partnerships are also required to reveal this information. While the revised disclosure requirements certainly bring more transparency to these transactions, individuals who wish to purchase U.S. real estate without revealing their identity may continue to do so. Most importantly, the new disclosure rules do not require the LLCs to reveal the beneficial owner; therefore those individuals who seek to remain private can hold their membership in the LLC that purchases the property through another entity.
Yet the revised requirements suggest that the administration is interested in curbing the use of LLCs to make anonymous purchases. The implication seems to be twofold. First, the disclosure requirement will allow for the New York City Finance Department to track those who may be avoiding U.S. taxation despite being U.S. residents. Under New York law, a person is considered a resident for tax purposes if he or she maintains a residence in the state that is suitable for year-round use for more than 11 months of the year and spends at least 184 days in New York.
Second, this change tackles authorities’ desire to screen international buyers of U.S. real estate in connection with money-laundering concerns. The Department of Treasury has been criticized for exemptions granted to real estate and escrow agents under the Patriot Act. The Patriot Act requires financial institutions to establish anti-money laundering programs; however, in 2002, the Department of Treasury granted an exemption from this requirement to those involved in real estate closings and settlements. A report published by a subcommittee of the Senate Committee on Homeland Security and Governmental Affairs recommended that the Department of Treasury repeal the exemption. More recently, Treasury Department’s Financial Crimes Enforcement Network (FinCEN) addressed concerns that U.S. real estate is being used for money laundering purposes. Steve Hudak, a spokesman for FinCEN, said in an email statement that illegal transactions in the real estate market were a “fundamental priority” for the agency.
As local, state and federal governmental agencies intensify their inquiries into shell company purchases of real estate, the cross-border legal issues surrounding money laundering, compliance and privacy concerns will become increasingly complex. Mishcon de Reya lawyers are well versed in these issues and can advise both buyers and sellers in these disputes.