Is Your Real Estate Company Ready for the CTA? Here’s a “Get Started” Checklist

In this episode, we explore the upcoming Corporate Transparency Act and what steps real estate companies can take to get ready for January 1.

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About the author:
Pamela Rothenberg (bio)

Transcript

Welcome to Womble Perspectives, where we explore a wide range of topics, from the latest legal updates to industry trends to the business of law. Our team of lawyers, professionals and occasional outside guests will take you through the most pressing issues facing businesses today and provide practical and actionable advice to help you navigate the ever changing legal landscape.

With a focus on innovation, collaboration and client service. We are committed to delivering exceptional value to our clients and to the communities we serve. And now our latest episode.

October is cybersecurity month, so at the start of each of this month's episodes, we’ll share some information on steps you can take to protect yourself and your data.

Hackers are getting more sophisticated and cyber attacks are becoming increasingly more common each day. One way to protect your data and security is by using a password management tool. We all have multiple and varied accounts – likely more than you can keep track of. Of course, the trouble comes when you try and remember any one of these many passwords, especially when you follow best practices in making them varied and complex. After all, who can really remember whether they used an underscore or a hyphen in their email password. A dollar sign or exclamation point in their online banking login?

On second thought, don’t use a dollar sign in your banking password. It’s a little on the nose.

Password management tools help you keep track of your passwords by storing them all in one place. You’re then able to access all this information using one master password, making it easier to find the right login information when you need it. Of course, you’ll want to use a complicated, hard to guess master password to ensure your data is secure. It also doesn’t hurt to set up multifactor authentication to further protect your data.

There are several password management tools out there and you should take some time to research which one is right for you.

Now, on to the episode.

Starting January 1st, 2024, certain U.S. and foreign entities defined as “reporting companies” will have to report detailed information about the individuals that beneficially own or substantially control them, also known as Beneficial Owners. These reports will be made to the U.S. Treasury Department's Financial Crimes Enforcement Network, or FinCEN, pursuant to the Corporate Transparency Act, that is, the CTA, and its implementing regulations.

The CTA will cover all entities that qualify as Reporting Companies, which are broadly defined to include U.S. corporations, limited liabilities companies and quote other similar entities that are created by a filing with a secretary of state’s office, or foreign entities that register to do business in the U.S. 

The CTA includes a number of exceptions to the Reporting Companies definition, including publicly traded corporations, certain tax exempt organizations, banks and “large operating companies.” The regulations go into more detail on these exceptions.

But take Note: Most privately held real estate companies will be considered Reporting Companies unless they satisfy one of the exceptions outlined in the Regulations.

So, who is a Beneficial Owner?

Under the CTA, a “Beneficial Owner” is any individual that directly or indirectly “substantially controls” the Reporting Company; or owns or controls no less than 25% of the ownership interests in the Reporting Company. The CTA and Regulations describe five exceptions to the definition of Beneficial Owner, including minor children, certain employees and creditors. 

An individual exercises “substantial control” over a Reporting Company if he or she is a senior officer (i.e., President, CFO, General Counsel, CEO and COO) or has authority or substantial influence over any significant Reporting Company matter or major decisions.

Additionally, an individual that has “any other form of substantial control” over the Reporting Company must be reported. 

From a practical standpoint, this catch-all provision requires Reporting Companies to disclose all individuals with any significant influence or authority over the Reporting Company’s activities or decisions.

The Regulations contain a broad and detailed definition of “ownership interests” including, among others, any equity, stock, joint venture interests, any capital or profit interests, instruments convertible into equity or other interests, and the catch-all “any other instrument, contract, arrangement, understanding, relationship or mechanism used to establish ownership”.

Per the Regulations, Reporting Companies must disclose specific information and documentation to FinCEN about themselves, their Beneficial Owners and their Company Applicants (i.e., those who directly file the document that creates the Reporting Company and who are primarily responsible for directing or controlling such filing).

This includes full legal names, trade or “doing business as” names, business and/or residential addresses, jurisdictions of formation, and unique identification numbers, or UINs, such as IRS Taxpayer Identification Numbers, U.S. passport or driver’s license numbers, with an image of the documents that contain those UINs.

If the Reporting Company was formed or registered if foreign before January 1st, 2024, information about the Company Applicant is not required to be reported.

For U.S. Reporting Companies formed before January 1st, 2024, the report must be submitted by January 1, 2025; and for those formed after January 1st, 2024, the report must be submitted within 30 days after the date of its formation.

Within 30 days after the Reporting Company becomes aware or has reason to know that submitted information was inaccurate or has changed, the Reporting Company must file an updated report.

The goal of the CTA is to authorize FinCEN to maintain this information in a national database and to disclose it to law enforcement, national security agencies, and others to combat crimes including money laundering, terrorism and human trafficking.

January 1st is fast approaching, so what can real estate companies do right now to prepare? We’ll provide a link in the show notes to more detailed information on our site but, broadly, preparation includes the following: 

• Develop a list of all existing entities that directly hold title to your portfolio assets and all indirect persons and entities that own them. 
• Confirm the accuracy of this information with organizational charts that were created for lenders and equity investors when the assets were acquired or recently refinanced.  
• Create a database (CTA Database) to organize, retain, supplement, and update this information.  
• For all Reporting Companies, input into the CTA Database those individuals that qualify as Beneficial Owners, including links to supporting documents.
• Communicate with equity investors to obtain needed Beneficial Ownership information for their entities holding interests in the Reporting Companies, and to coordinate with them about who is handling the CTA reporting requirements.
• Notify the Beneficial Owners for each Reporting Company that you are preparing records to comply with the CTA.
• Request that Beneficial Owners respond within a specified time period so that you have adequate time to pursue them if they are non-responsive.  
• Develop a cyber security plan (if you do not already have one) to protect the personal information you will be collecting.
• Draft provisions to be included in the governing documents of newly formed entities requiring their Beneficial Owners to comply with the CTA and the Regulations.
• Include default provisions, remedies and indemnities to protect Reporting Companies against a Beneficial Owner’s failure to comply or its provision of inaccurate information/documentation.
• Regularly update the CTA Database to include relevant information/documentation to be reported.
• Create a schedule to routinely check in with Beneficial Owners to identify changes that require CTA reporting updates.
• Develop a system for the formation of new entities after January 1st, 2024 and how the required information/documentation for Reporting Companies will be input into the CTA Database.

The CTA imposes a massive burden on property owners and their investors since real estate companies typically own their assets in separate limited liability companies or other tax flow through entities, most of which constitute Reporting Companies. Identifying all of your entities and gathering all of the information and needed documentation for Reporting Companies will take a lot of time and resources, so take action now to prepare for the CTA’s looming reporting deadlines.

Thank you for listening to Womble Perspectives. If you want to learn more about the topics discussed in this episode, please visit The Show Notes, where you can find links to related resources mentioned today. The Show Notes also have more information about our attorneys who provided today's insights, including ways to reach out to them.

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