A proposed New York state law that would require LLCs to disclose their members and addresses would likely have negligible impact on Manhattan luxury real estate as similar rules are already in place by federal and municipal governments, as well as many co-ops and condos in the city, experts say.
Last week, state Senator Brad Hoylman, a Manhattan Democrat, said he would introduce legislation to expose owners of LLCs doing business in New York in order to fight political corruption, money laundering and tax evasion.
“Such a bill is necessary to bring political and business transparency and accountability, so the public can have more confidence that LLCs operate in a way above the board,” Mr. Hoylman told Mansion Global.
“Sometimes beneficial owners of shell companies aren’t known by law enforcement; it’s hard to crack down money laundering or other illegal activities,” Mr. Hoylman said.
“And this issue even touches our own president,” he said, citing a Wall Street Journal report that about $300 million of income President Trump reported in 2016 was held through a web of limited liability companies.
Some real estate insiders agree that such a bill, or any laws advocating more transparency in real estate transactions, won’t adversely affect the industry in the long run. They say that the number of “rotten egg” buyers who hide behind LLCs is very few.
“I do agree with Hoylman’s reasonings for getting it passed in order to weed out and expose corruption on a grander scale,” said John Barbato, an agent with Manhattan-based Stribling & Associates. “It will be a very hard battle and a long shot but beneficial if it does go through.”
But some industry players did voice concerns the legislation will send an unfriendly signal to investors in New York real estate.
“The potential of the bill passing would be disastrous for the luxury real estate market,” said Edward Mermelstein, partner at Manhattan-based law firm Rheem Bell & Mermelstein, LLP.
Purchasers use LLCs in real estate deals to maintain anonymity, according to Mr. Mermelstein. “Investors are concerned primarily about liability, while those seeking anonymity typically have a legitimate concern for their safety,” he said.
While his bill would mandate that the state create an LLC public database, Mr. Hoylman said those with legitimate concerns can apply for waivers. “The bill’s impact will be minimal or non-existent to companies and individuals who operate within the law,” he said.
He is working out more details and gathering more support for the legislation before state lawmakers reconvene next January.
The office of governor Andrew Cuomo didn’t immediately respond to request for comment. The governor will sign a bill passed by both state houses into law or veto the bill.
Although there have been some high-profile LLC scandals in New York City—for example, a full-floor condo at One57 bought by Nigerian tycoon Kola Aluko, who was allegedly embroiled in money laundering—there are, theoretically, rules and laws already in place to filter such deals, experts say.
At the federal level, U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) began in March 2016 requiring title insurance companies to identify the principals behind shell companies used in all-cash purchases of homes priced at more than $3 million in Manhattan.
The pilot program, called Geographic Targeting Orders, was extended to the rest of New York City in July last year, applying to all-cash transactions valued at $1.5 million and above in Brooklyn, Bronx, Queens and Staten Island.
In August, the Treasury Department closed a loophole in the rules, subjecting deals that involve wire transfers to the LLC disclosures.
While these rules enable law enforcement to catch “rotten eggs,” they didn’t have a negative impact on the overall luxury housing market, according to Leonard Steinberg, president of real estate firm Compass in New York City.
“People continue to purchase in LLCs at all sorts of price points, especially celebrities and high-profile buyers who have legitimate privacy concerns,” he said in a previous interview.
Global interest in Manhattan real estate continues
Whether Mr. Hoylman’s proposed bill will come to fruition or not, New York real estate remains one of the most sought-after assets among wealthy buyers around the globe, Mr. Barbato said. “No legislation will ever stop the continuous flow of people interested in owning a home in one of the most amazing and desirable cities on earth,” he said.
Chloe Ren, an agent and founder of Chloe Ren Group concurred. The majority of her clients—wealthy Chinese buyers who pay in cash—haven’t budged since the implementation of FINCEN’s program.
“They are more focused on timing the market and moving funds out of China than complying with U.S. rules and regulations,” Ms. Ren said.
According to her, many Chinese buyers use LLCs because parents are buying Manhattan residences for their school-age or young adult children.
“It’s easy to transfer the property to their children later on, especially when the children are members of the limited liability companies,” she said, adding that it’s worthwhile to watch how this practice will be impacted by President Trump’s tax reform.
The president’s tax overhaul calls for elimination of the federal estate tax, a tax on property transferred after the owner’s death.
According to New York City Real Property Transfer Tax law, identification of beneficial owners of an LLC has to be disclosed when an LLC is the grantor or grantee of real property. They are required to file tax returns and issue K-1 forms to their beneficial owners so that information on these activities is already in the hands of the state and city tax departments.
Over time, Manhattan sellers, especially those in the few buildings that do allow purchasers using LLCs, are expected to set stricter rules to shield condos from negative repercussions caused by a bad deal, like what One57 is faced with now.
In fact, a condo building on the Upper West Side where Mr. Barbato has sold many apartments over the years, has already implemented “Disclosure Rules,” such as informing residents if a trust or an LLC is used in purchasing apartments and investigating those purchasers thoroughly, he said.
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