Real Estate Investors and the Corporate Transparency Act

The Corporate Transparency Act (CTA) became effective on Jan. 1, 2024 and its requirements cover over 32 million small businesses. Pursuant to the CTA most small businesses must file information disclosing information and identities of owners of those small businesses with the Financial Crimes Enforcement Network (“FinCEN”). Real estate investors, in particular, may be vulnerable to the reporting requirements under the Act, particularly in light of how real estate ownership is regularly structured.

Many real estate ownership entities will not be able to take advantage of the Act’s exemptions and will be deemed reporting companies and therefore subject to the Act. Real estate is commonly owned by single purpose entities (SPEs) without employees, as is typically required by third party mortgage lenders, and are without a physical office. Further, many real estate investments will not reach the $5 million revenue threshold since they do not include other assets that are unrelated to the real estate. Even if an SPE owns income producing property that reaches the $5 million revenue threshold, it is unlikely to have 20 full-time employees. Those SPEs that do not fall within the exemptions will be deemed reporting companies, and beneficial owner information will likely need to be reported.

It is not uncommon for real estate SPEs to have only a few owners or even one sole owner. Therefore, most or all of the beneficial owners (i.e., those with an ownership interest of at least 25% and/or other control rights) will have to provide their beneficial owner information. For those real estate entities that have only a few owners or control parties, putting aside privacy concerns, the information may not be terribly burdensome to gather and report, but for real estate investments that are put together by sponsors, the individual owners may be passive investors who are not commonly involved in the day-to-day, and often will not know each other. Sponsors may know the name, address, and tax identification number of each individual investor, but if the investor is an entity, particularly trusts, they may not have that information for its beneficiaries, and are unlikely to have copies of the required identification documentation.

There is also the issue of changes in ownership and update requirements for reporting. As a real estate fund is marketed, the beneficial ownership of early investors will likely (and frequently) change. Early investors may initially be 25% owners of the entity until they bring on additional investors, and new sales of units may require updates to the FINCEN report within 30 days of the

change.

For new real estate investors, gather the beneficial owner information during the initial questionnaire and investment process, or, better yet, require each investor to obtain their own FINCEN identifier number and provide it to the company, which may help to reduce privacy concerns and minimize data breach risk, by shifting the reporting burden to the individual. As new investments are offered, include these requirements in subscription agreements, offering materials, and entity documents and require the investors to keep the information updated. Be sure to include authorizations to provide the required information to FINCEN, in accordance with the Act, and update privacy protocols.

The experienced team of business attorneys at Fiffik Law Group are here to help you understand how the Corporate Transparency Act impact your business. We will help you comply with the Act and establish policies so that your business can remain in compliance.