The Corporate Transparency Act (“CTA”) seeks to limit the use of shell entities to hide illicit activities and to increase transparency in corporate ownership by collecting identification information of the individuals that organize and own entities. While the CTA is generally applicable to all industries, it has a disproportionate impact on the commercial real estate industry, because of the complex ownership structures that are frequently used to hold, develop, and operate real estate assets. These ownership structures often consist of numerous tiered entities, many of which will be subject to the reporting requirements of the CTA. Although the CTA will increase the administrative burden of forming new entities, there are still significant benefits to using various entity structures to own and operate real estate assets, including limiting liability and maximizing tax advantages.
What is required by the CTA?
The CTA requires reporting companies to report beneficial ownership information (“BOI”) to the Financial Crimes Enforcement Network (“FinCEN”). A reporting company is an entity that is created or registered to do business in the United States by filing a document with a secretary of state or similar office. This includes corporations, limited liability companies, and limited partnerships, all of which are frequently used to hold and operate real estate assets. The CTA identifies 23 exempt entity types, however, many of these exemptions are not applicable to real estate entities, and even the exemptions that may be applicable are narrowly applied. Reporting companies are required to file reports with FinCEN that include information about the reporting company, its beneficial owners, and its company applicants.
A beneficial owner is any individual who either (1) exercises substantial control over the entity or (2) owns or controls at least 25% of the beneficial ownership interests in the entity. An individual exercises substantial control if they (i) serve as a senior officer of the reporting company (e.g., a president, chief financial officer, chief operating officer, etc.), (ii) have authority over the appointment or removal of any senior officer or a majority of the board of directors, or (iii) direct, determine, or have substantial influence over important decisions made by the reporting company. A company applicant is anyone that files, or directs or controls the filing of, the document that creates or registers the reporting company.
Entities created before January 1, 2024 have until January 1, 2025 to submit their initial report. Entities created after January 1, 2024, but before January 1, 2025 have 90 days to submit their initial report, and entities created after January 1, 2025 will have 30 days to submit their initial report. In addition to filing an initial report, reporting companies need to update reports whenever information that was initially reported to FinCEN changes. This requirement poses additional difficulties for real estate entities because changes in ownership and control of entities are common throughout the life cycle of a project.
What are the next steps to comply with the CTA?
Real estate businesses and investors should create a plan for how they will stay in compliance with the CTA. Those in control of existing entities and those that intend to form new entities should consider whether reporting is required for these entities, how they will collect and maintain the information required for initial and updated BOI reports, how they will track and report changes to ownership and control of these entities, and how to reflect these considerations in the deal making process. In many ways the process is not dissimilar to what many real estate companies must provide to lenders in connection with obtaining loans.
During the negotiation and agreement drafting process, sponsors and investors in a real estate deal should consider who will be primarily responsible for filing reports for applicable entities, how they will establish the right to collect and report BOI, how they will create an obligation for beneficial owners to supply updated information as it changes, and how they will protect confidentiality, while protecting their right to report information that is required to comply with the CTA.
Complying with the newly imposed reporting obligations should be a priority for real estate businesses and professionals because reporting companies and individuals that cause entities to fail to report the complete and accurate information called for by the CTA, may be subject to criminal and civil penalties.