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Cautious Optimism Regarding the Proposed TITLE Act and its Effects on Legitimate and Illegitimate Formation of LLCs to Acquire Property

Published onJul 17, 2017
Cautious Optimism Regarding the Proposed TITLE Act and its Effects on Legitimate and Illegitimate Formation of LLCs to Acquire Property

There are various reasons, both legitimate and illegitimate, why individuals buy properties through limited liability companies (“LLCs”). Property acquisitions via both legal and illegal methods affect real estate markets. Surely, we cannot sink into the naivety of believing that all individuals buying property through LLCs do so legitimately.  To what extent, however, are we willing to compromise the privacy of legitimate uses of LLCs that may inadvertently raise the market prices of real estate to expose illegitimate uses? Property transactions in the United States have historically been quasi-public in nature. The disclosures, evidenced via deeds and other public records, provide disclosure about the property’s history, value, and ownership. When a property is bought through an LLC, however, the owner of the LLC can remain “completely” anonymous. It is difficult to track the origins of an LLC because it requires research spanning multiple jurisdictions and the level of information available to the public varies widely.

Legislation called the True Incorporation Transparency for Law Enforcement (“TITLE Act”) is set to be introduced by Senator Sheldon Whitehouse in response to the recent uptick in shell companies buying President Trump’s properties. The TITLE Act would require states to identify the actual person or people who own the LLC which was formed to acquire property. There is skepticism surrounding the LLCs purchasing the President’s properties due to the alleged collusion with Russians. In relation to protecting the privacy of citizens acquiring real estate through an LLC, the proposal, insofar as Senator Whitehouse has stated publicly, does not seem to compromise anonymity; the owner would remain anonymous unless law enforcement officers present valid court-ordered subpoenas or search warrants to reveal the individual behind the LLC.

While seemingly protecting the privacy of legitimate LLC formation to acquire property, the TITLE Act will have broader market implications. For example, in Miami, foreign buyers have acquired $200,000 condos for $500,000 using illicit funds. When a foreign buyer, through an ambiguously organized LLC—or chain of LLCs—acquires properties for immensely higher than market value prices, the legitimate investor loses out. The upside of the proposed legislation is that it will curb the use of illicit funds that arbitrarily drive up the market price of real estate.

Using illicit funds, however, is perhaps not even the most prominent driving factor of real estate market price inflation. It is important to note that the globalization of real estate has introduced new players into markets that have different characteristics and investment philosophies than the traditional domestic players. The United States, on a global scale, is a relative haven of financial stability. International investors, especially those in Latin America, see the United States as a place where their wealth can be preserved through investing. In fact, 40% of the Latin American executives surveyed, cited wealth preservation as their primary wealth management goal.

The TITLE Act, while yet to be introduced, may, in theory, prove to be valuable in regards to seizing and prosecuting illicit funds and investors. Nevertheless, it is imperative that we not lose sight of the safeguards LLCs are meant to provide—specifically anonymity—to lawful investors, and it is equally imperative that we not meddle with the globalization of legal investment strategies.

Michael Johnson is a second year student at Wake Forest University School of Law. This summer he is working as a Summer Associate at South Street Partners, a private equity real estate investment firm headquartered in Charlotte, NC that is focused on acquiring and managing opportunistic and value added real estate investments.

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