Real Estate Developers, It’s Time to Get Personal with Your Investors

The reporting requirements of the new Corporate Transparency Act are in effect as of January 1, 2024. The Act presents a new administrative burden for most companies formed or doing business in the United States, and due to the common company structures of real estate developers, it may present a heavy hardship on them. The Act is subjective and complex – Here’s what you should know along with a plan to take action:

Overview of the Corporate Transparency Act

The Act is designed to improve the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN)’s capabilities in fighting money laundering and terrorism. It primarily targets “reporting companies,” which include a wide range of business entities. FinCen estimates upwards of 30 million such companies exist.

Who is Affected?

Reporting companies required to report on under the Act include:

Domestic corporations, limited liability companies, or other entities created by filing with a secretary of state’s office, other similar office or Indian tribe.
Foreign companies registered or registering to do business in a U.S. state or Indian tribe.

Who is Exempt?

The Act has 23 exemptions to the definition of “reporting company”, including for instance:

- Non-profits.
- Large operating companies that meet specific criteria: (a) Employing more than 20 full-time employees in the U.S.; (b) filing a federal tax return reporting more than $5 million in gross receipts or sales; and (c) maintaining an operational presence in the U.S.
Certain long-inactive companies meeting strict requirements may also be exempt. All exemptions are subject to conditions and qualifications which should be carefully reviewed to see if the category may apply.

The Challenge for Real Estate Developers

Real estate developers often control a host of special purpose entities, sometimes as many as one for each specific property owned or operated by it. Unless these companies meet the definition of large operating company as provided above, it’s unlikely that they will qualify for any exemption.

Key Reporting Requirements

Non-Exempt entities under the Act must report:

The company’s name, business address, state of formation, and IRS Tax Identification Number.
Information about each “beneficial owner and “company applicant”, including their legal name, birthdate and a copy of an acceptable identification document (such as a passport), along with its unique identification number and issuing jurisdiction.

A beneficial owner is anyone who, directly or indirectly, either exercises substantial control over the company or owns or controls at least 25% of the ownership interests. This could include, in addition to certain members and shareholders, officers and board members. A company applicant includes one who directly files a document registering the entity for formation or to do business in a U.S. State. It also includes one who is primarily responsible for directing or controlling the filing of the document. Keep in mind that the list of beneficial owners may change over time. Also, “substantial control” is broad and subjective. When in doubt, the beneficial owner and company applicant information should be reported.

Compliance Timeline

Entities formed or registered before January 1, 2024, must file their initial reports by January 1, 2025.
Entities formed or registered after January 1, 2024, have 90 days post-registration to file initial reports.
Reporting companies must also update their reports within 30 days of any changes and correct inaccuracies within 30 days.

The Beneficial Ownership Secure System (BOSS)

FinCEN has developed BOSS, a portal for filing beneficial ownership reports, which can be found by clicking this link: Beneficial Ownership Information Reporting | FinCEN.gov. The system stores information securely, accessible only under specific, authorized conditions.

Penalties for Non-Compliance

Non-compliance with the Act’s reporting requirements can lead to substantial penalties:

Civil penalties of up to $500 per day for ongoing violations.
Criminal penalties including fines up to $10,000 or imprisonment for up to two years.

Action Plan for Real Estate Developers

Assess Your Entities: Identify whether any of your entities are “reporting companies” under the Act.
Gather Necessary Information: Collect required details for your entities and their beneficial owners and company applicants.
Stay Informed: Keep up with updates regarding the BOSS portal and any legislative changes.
Implement Compliance Procedures: Establish systems for identifying beneficial owners and company applicants, maintaining records, and submitting timely reports.
Review Bylaws and Operating Agreements: Review company bylaws and operating agreements and consider amending the same to require beneficial owners and company applicants to comply with providing and updating information. Also consider adding indemnification provisions for their failure to do the same.
Consider Change of Structure: Consider changing the structure of holding companies to qualify them as large operating companies. For instance, perhaps move employees of a subsidiary to the holding company to meet the 20-employee threshold.
Seek Professional Advice: Consult with legal experts to navigate the Act’s complexities and ensure compliance.

Conclusion

The Corporate Transparency Act represents a significant shift in the regulatory environment for most companies doing business in the United States, especially real estate developers, emphasizing transparency and diligence in reporting corporate ownership.

While it introduces new challenges, it also presents an opportunity to reinforce the integrity of your business practices. Proactive engagement, thorough preparation, and expert consultation are key to navigating this new landscape successfully.