Cash may not be king when purchasing U.S. real estate

  • by Jimmy Sexton
  • May 3rd, 2016

cashCelebrity, power, fortune–sounds nice.

Many people strive to achieve these goals, not fully prepared that they come at a steep price—the loss of privacy, fear for the safety of self and family, and even a threat of frivolous lawsuits.  So what can someone like David Beckham, Brad Pitt, or Beyoncé do to protect themselves? How do they have a place to escape where they can remain anonymous?

Many of the “rich and famous”, as well as large corporations, have been able to maintain relative anonymity by purchasing properties through shell companies.  For example, years ago, Disney wanted to buy up property in Anaheim for Disneyland expansion.  They assumed the sellers would demand higher prices if they knew Disney was behind the purchases. To solve this problem, Disney employed the use of shell companies to shield Disney’s identity.   No one knew who was behind the purchases and everything was perfectly legal–it was simply good business practice.

Here’s the problem. In a recent change of policy, the Treasury Department announced it would “begin” identifying and tracking secret buyers of upscale properties. The department will initially focus on Manhattan and Miami looking specifically at all-cash purchases made by shell companies to shield the purchaser’s identity.  It may make you wonder why this business is suddenly on the Treasury Department’s radar.

This new crusade is apparently part of the Treasury’s effort to identify money launderers that use real estate as a vehicle to hide illegal funds.  The officials were inspired by an investigative series in The New York Times that examined foreign buyers using shell companies to hide money in the U.S.

On the heels of the Treasury’s new endeavor, comes the release of the Panama Papers; the data leak that revealed the hidden offshore holdings of thousands of wealthy individuals, including numerous world leaders.  Certainly this has and will lead to the discovery of some truly nefarious transactions, but not all, or even most, shell companies are sheltering ill-gotten gains.

As mentioned above, celebrities and large corporations often use shell companies for privacy reasons. Now the government will be taking a hard look at the “least transparent transactions”—those properties both paid for in all cash and by shell companies – like celebrities and big corporations often do.  The N.Y. Times report found that nearly half the homes nationwide that were worth $5 million or more were purchased using shell companies. Don’t be surprised if innocent people and companies have to spend a mint defending themselves against unwarranted government attacks because they had audacity to pay cash for real estate. Anonymity lost and reputation ruined in a witch hunt for illegal dealings.

Until now, the federal government placed no requirements on real estate companies to disclose names of cash buyers. Anyone could buy U.S. real estate, including shell companies whose owners can’t be identified. No one performed due diligence – not the realtors, title companies, escrow companies, etc. and they weren’t required to. Interestingly, this is a stark contrast to the rest of the modernized world that requires due diligence on the beneficial owner of the real estate investment and source of funds to verify they are clean.  And, ironically, the U.S. has been the one that directly and indirectly forced other countries to implement these rules.

Additionally, they are not just going to be looking at the shell companies.  They will also be focusing on the professionals who assist in what “could” be money laundering—the real estate agents, lawyers, bankers, and LLC formation agents.

Here are some of the details:

  • Title insurance companies will have to identify the actual buyers and submit the information to the Treasury
  • The information will be placed in a database for law enforcement
  • Billions of dollars in real estate transactions will be affected
  • In Manhattan, buyers of more than $3 million in real estate will be reported
  • In Miami-Dade County sales of more than $1 million will be reported
  • If enough investigations reveal suspicious money, the requirements for Manhattan and Miami will be implemented nationwide.

Many counties in many states have already begun placing reporting requirements on shell companies buying real estate.  But their rules have not been as far reaching as that of the Treasury. The FBI has created a new unit to focus on money laundering in real estate.  The Treasury and FBI are trying to find the actual owners of the properties and they won’t be easy to find because shell companies are often made up of layers of companies; formation papers use names of nominees instead of their actual name.

The real estate industry also has to be very nervous about the Treasury’s campaign.  The recent boom in real estate fueled by foreign buyers has allowed realtors to reap unbelievable profits. Until now, there has been almost no due diligence required for real estate deals in the U.S.

Title companies now have the responsibility to identify “beneficial owners”—those who own 25% or more of the equity interests” of the entity that bought the property. Good luck with that.  They then have to copy driver’s licenses or passports and send the names on to the Treasury Department or fact penalties.

The Patriot Act requires real estate companies to “scrutinize” real estate buyers, but lobbyists have stymied these rules.

What is noteworthy is they will only begin “identifying” and “tracking” secret buyers of upscale properties. There is no suggestion that they will stop them or require due diligence. If the U.S. really cared about stopping money laundering and tax evasion it wouldn’t identify and track, it would block the transactions. Perhaps the U.S. is going to let secret buyers buy up as much real estate as they want and then swoop in with their in rem forfeiture laws–lawsuits brought against property, not a particular person–and confiscate the real estate. Good business for the government, right? Let them invest and then take it!

The point is, if you want privacy, and want to own U.S. real estate, you may be better off taking out a mortgage and going into debt like the rest of America!!


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