What Should We Make Of The New Federal Oversight Of Luxe Real Estate?
New federal oversight of luxury residential real estate transactions announced Tuesday has drawn a wide range of reactions across the industry.
The new oversight, announced Tuesday by the US Treasury’s Financial Crimes Enforcement Network (FinCEN) requires title insurance companies to report the true “beneficial owner” of units for $3M or more that are bought without mortgages. It’ll apply only to Manhattan and all of Miami-Dade County, and FinCEN says it will take effect March 1 and expire on Aug. 27.
It’s a practice that’s grown in recent years. According to The New York Times, among Manhattan luxury buildings that sold units to LLCs or other “shell companies” for $5M or more, 39% of those sales were to such entities in 2008. That number climbed to 54% by 2014.
“We are seeking to understand the risk that corrupt foreign officials, or transnational criminals, may be using premium US real estate to secretly invest millions in dirty money,” FinCEN director Jennifer Shasky Calvery said in a press release.
Exactly what kind of dirty money wasn’t spelled out in the release, and FinCEN didn’t immediately get back to us when we contacted them to ask. Whether the program will be renewed, expanded to different parts of the country, or eventually apply to commercial as well as residential property, isn’t yet clear.
“I understand you want to take down the ‘bad guys,’" says Samantha DeBianchi, the founder of Miami-based residential brokerage DeBianchi Real Estate. “But this is going to make things more difficult for high-end buyers and some people will be discouraged from buying at that level.”
Xinyuan Real Estate US managing director John Liang says there are already signs of a slowdown at the upper level of the condo market, where the new scrutiny is focused. The numbers suggest he’s onto something; 14% fewer units over $10M sold in Manhattan last year than in 2014.
Xinyuan closed on a $57.5M land acquisition in Manhattan’s Hell’s Kitchen this week—but John tells us it’ll only include one- and two-bedroom units, all priced well below the $3M minimum for the new regulations to affect. “This new oversight is just one more reason to stay out of that upper end of the market,” John says.
Jim Carolan is head of the real estate practice at Withers Bergman, a law firm that specializes in representing high-net-worth individuals. He says the new requirements can't be faulted for their stated purpose of stopping money laundering—to whatever extent it's going on in the luxe residential market, if at all. But, Jim says, it will also give a road map of what kinds of assets not to invest in for anyone who may want to hide money.
Could that mean a flow of dirty money into commercial real estate? "The government's pronouncement is unclear as to what 'residential' means," Jim explains. "It likely is limited to single family units, perhaps solely apartments, but the government should clarify the scope of this law. After all, it carries criminal penalties."
