Background
The Corporate Transparency Act (the “CTA”), a new federal law, went into effect on January 1, 2024. The CTA requires that certain entities file Beneficial Ownership Information Reports (“BOI Reports”) with the Financial Crimes Enforcement Network (“FinCEN”) of the U.S. Department of the Treasury. BOI Reports provide identifying information about the entity and its beneficial owners, including persons with “substantial control” (such as senior officers). The CTA is intended to aid the U.S. Government in preventing money laundering, fraud, and other illicit activities conducted through previously anonymous entities.
The CTA includes 23 exemptions from the reporting obligations, including, among others, exemptions for publicly traded companies, large operating companies, and subsidiaries of certain exempt entities. There is no blanket exemption from the CTA for real estate companies, including real estate investment trusts (“REITs”). As a result, REITs and their subsidiaries must be analyzed to determine whether reporting is required under the CTA or if one of the 23 exemptions applies.
Considerations for Private REITs
Privately held REITs and their subsidiaries must comply with the reporting requirements of the CTA, as summarized below, unless one of the CTA exemptions applies. One exemption that a privately held REIT may qualify for is the Large Operating Company Exemption. The Large Operating Company exemption applies to entities with (1) more than 20 full-time employees in the U.S., (2) an operating presence at a physical address in the U.S., and (3) more than $5 million of gross revenue (from the U.S.) on the consolidated tax return as to which the entity is treated as a “filer.” It is currently unclear whether disregarded entities (as distinguished from taxpayers within a consolidated group) can be treated as filers for this purpose (FinCEN has been asked to clarify this point). Note that employees cannot be aggregated across entities, meaning that if all of a company’s employees are at a subsidiary, only that subsidiary (and its wholly owned subsidiaries) could claim the Large Operating Company Exemption. However, a wholly owned subsidiary of a private REIT that is itself a Large Operating Company would qualify for the Subsidiary Exemption from the CTA reporting requirements (as described below).
Importantly, many private REITs are externally managed and advised by another entity (often referred to as the “manager”) pursuant to a management agreement. These private REITs typically do not have any employees; rather, certain personnel (who are typically employees of the manager or an affiliate of the manager) provide services to the REIT pursuant to the management agreement. Accordingly, these externally managed private REITs would not be able to rely on the Large Operating Company Exemption, as they would not have more than 20 full-time employees in the U.S. Additionally, the subsidiaries of these externally managed private REITs would also not be able to avail themselves of the Subsidiary Exemption.
Considerations for Public REITs
“Securities reporting issuers” are generally exempt from the CTA reporting requirements. A “securities reporting issuer” is any issuer of securities that is: (A) an issuer of a class of securities registered under Section 12 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or (B) required to file supplementary and periodic information under Section 15(d) of the Exchange Act. Accordingly, public, stock exchange-listed REITs and public non-traded REITs should be exempt from the CTA reporting requirements, as both types of REITs would have a class of securities registered under Section 12 of the Exchange Act.
However, even REITs that qualify for the Securities Reporting Issuer exemption need to review any non-wholly owned subsidiaries for possible CTA reporting requirements. One of the most significant exemptions from CTA reporting is the Subsidiary Exemption. Under the Subsidiary Exemption, entities that are “controlled or wholly owned” by one or more qualifying exempt entities are exempt from the CTA reporting requirements. On January 12, 2024, FinCEN issued guidance clarifying that, for a subsidiary to qualify for the Subsidiary Exemption, an exempt entity must own or control 100 percent of the subsidiary’s ownership interests. In other words, according to the FinCEN guidance, it is not sufficient for the exempt entity to control the subsidiary itself, as it is all of the ownership interests in the subsidiary that the exempt entity must control.
Many public REITs have an operating partnership subsidiary (typically referred to as the “OP”). The OP’s ownership interests (typically called “OP Units”) are often partially owned by third parties who contributed properties or services to the OP in exchange for OP Units and/or holders of equity awards in the form of long-term incentive plan units of the OP. In this case, while the public REIT may be the general partner of the OP and may own a substantial majority of the limited partnership interests in the OP, in FinCEN’s view the OP would not be entitled to claim the Subsidiary Exemption, because the REIT does not own 100% of the ownership interests in the OP. Accordingly, the OP and each of its subsidiaries would be required to file a BOI Report with FinCEN, unless they independently satisfy another CTA exemption.
Additional Considerations for REITs and Real Estate Companies
Joint Ventures: For years, REITs and other real estate companies have been turning to joint ventures (“JVs”) as a means to extend their balance sheets, moderate leverage, execute on strategic transactions, and earn fees to enhance returns. There is a general view, subject to further FinCEN guidance, that a JV entity should be exempt if its ownership interests are controlled or wholly owned by multiple exempt entities as to which the Subsidiary Exemption applies. However, if a JV entity has a beneficial owner that is not an exempt entity, the JV entity would need to file a BOI Report identifying its beneficial owners.
Real Estate Transactions Generally: Real estate transactions often involve the formation of one or more new entities to purchase, lease or develop a property. There is no blanket exemption for real estate companies, and therefore each entity in a real estate holding structure must be analyzed to determine whether reporting is required under the CTA or if an exemption applies. In addition, updated reporting may be required as the ownership of entities changes (for example, if there are 25%+ new beneficial owners of an entity, the entity would need to file an updated BOI Report).
Private Real Estate Fund Entities: Registered investment advisers and venture capital fund advisers under the Investment Advisers Act, as well as the “pooled investment vehicles” (“PIVs”) that they advise, are not subject to reporting. Otherwise, investment advisers not registered with the SEC and their PIVs are not exempt from reporting requirements unless they satisfy another CTA exemption. Subsidiaries of PIVs, including intermediate investment entities, Special Purpose Vehicles and portfolio companies, are excluded from using the Subsidiary Exemption based on their status as a subsidiary of an exempted PIV. Thus, these entities and their subsidiaries are generally subject to reporting obligations unless they independently satisfy another CTA exemption.
Emerging State Laws. In addition to the CTA, in late 2023 the governor of New York signed into law the New York LLC Transparency Act (the “NYTA”). The NYTA is generally modeled after the CTA and, after the NYTA takes effect on January 1, 2026, will impose its own set of disclosure requirements on limited liability companies formed or authorized to do business in New York. Companies in the real estate industry should be aware of and prepared to comply with the NYTA and any other similar state laws that may be enacted in the future.
Compliance with the CTA
To fulfill the requirements of the CTA, any non-exempt entity must file a report on FinCEN’s website reporting:
- The name of the entity;
- The entity’s address;
- The entity’s tax ID number (i.e., its EIN);
- The name, address, and government-issued ID number (e.g., driver license number) of each individual who is a “beneficial owner” of the entity* — i.e., (i) senior officers of the entity, (ii) individuals who beneficially own more than 25% of the entity’s equity interests, directly or indirectly, and (iii) any other individual who exercises “substantial control” over the entity such as directors with significant consent or decision making rights; and
- For entities formed after January 1, 2024, the name of each “Company Applicant” — (i) the individual who files the documents creating an entity and, if applicable, (ii) the individual who was primarily responsible for directing or controlling the filing that created the entity.
*Alternatively, the BOI Reports for individual beneficial owners, senior officers, and Company Applicants can list the FinCEN ID Number for such individuals, which can simplify the reporting process. A FinCEN ID Number is a unique identifying number issued to an individual by FinCEN. A FinCEN ID Number can be obtained at https://fincenid.fincen.gov/.
Entities formed during 2024 have 90 days to file their initial BOI Reports. Entities formed prior to January 1, 2024 have until January 1, 2025 to file their initial BOI Reports. Beginning in 2025, new entities must file initial BOI Reports within 30 days.
Challenges to the CTA
As we have previously reported (here), on March 1, 2024, a judge for the U.S. District Court for the Northern District of Alabama ruled the CTA unconstitutional with respect to those specifically referred to in the final memorandum opinion and judgment. That ruling has been appealed to the Eleventh Circuit. However, similar law suits challenging the constitutionality of the CTA have additionally been filed in the U.S. District Court for the District of Maine (William Boyle v. Yellen; filed March 15, 2024) and the U.S. District Court for the Western Dis
