PE Firms, including REITs, investing in high-end residential real estate projects in New York City and Miami should be mindful of increased regulatory scrutiny of certain non-traditionally financed transactions involving purchasers using legal entities. Projects for the development of new luxury condominiums, which are frequently underwritten by investors, are increasingly marketing new units to individuals who are seeking to purchase high-end real-estate as a way to shelter assets anonymously rather than as a residence. The U.S. Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”) issued new administrative rules that became effective March 1, 2016, and that apply to real estate transactions exceeding $3 million in Manhattan and $1 million in Miami. The rules, known as Geographic Targeting Orders (“GTOs”), require title insurance companies to identify the natural person that directly or indirectly owns 25% or more of the legal entity purchasing the real estate, and applies to residential real estate purchases (a) exceeding $3 million in Manhattan and $1 million in Miami, (b) financed without bank loans or other “similar forms of external financing,” and (c) financed at least in part “using currency or a cashier’s check, a certified check, a traveler’s check, or a money order in any form.” Within 30 days of the closing of the transaction, the title insurance company must file a FinCEN Form 8300 identifying the beneficial owner and other relevant details about the transaction, such as the property address and purchase price. The GTOs expire in August of this year but can be extended by FinCEN, and it is expected that FinCEN will assess their efficacy as part of a broader regulatory effort to address money laundering through real estate transactions in which the beneficial owner’s identity is concealed. PE Firms in general should remain mindful that FinCEN is seeking to extend the application of rules requiring anti-money laundering compliance programs to more firms engaged in investment services.
For more information about the FinCEN GTOs or anti-money laundering issues, please contact Steven Tyrrell, Holly Loiseau or Adam Safwat in Weil’s White Collar Defense & Investigations Practice in Washington, D.C.