LLCs and Privacy: The end of the dance?

LLCs and Privacy: The end of the dance?

Limited liability companies—LLCs—are ubiquitous in New York real estate.  But a change last week is causing serious ripples in the use of LLCs: circumscribing and possibly eliminating their use as a privacy shield for real estate transactions.  This newsletter will outline the changes, potential strategies to address them and help your clients, and specific steps to comply.

While LLCs certainly have many benefits, including insulation from personal risk, increased ease of administration and potential tax benefits, many turn to LLCs for one primary reason: privacy.  This driving motivation has elevated the LLC to the most common vehicle for ownership of real property in New York after individual ownership, a fact highlighted in a series of New York Times articles last year.

But last Monday, May 18, 2015, serious cracks appeared in the blanket privacy protections.  With those changes, wealthy and high profile buyers, as well as their attorneys, lenders and other representatives, are facing a new landscape and important new considerations.

First, the facts:
Starting last week, the NYC-RPT (Real Property Transfer Tax Return) requires the names and social security numbers or employer identification numbers for each general partner or member of a multiple member LLC or partnership.  This is a significant change from the previous status quo in which an LLC only needed to provide the identity of a single member on the NYC-RPT (Real Property. Transfer Tax Return).  In practice, this meant that the property owners could remain anonymous while their attorney or other representative would be the one disclosed member.

If the social security number or employer identification number is not provided, New York City’s Department of Finance (DOF) requires an affidavit attesting to the reason the information is missing. (Click here for a step-by-step guide to NYC-RPT eTax and Cover Page creation under the new rules.)

Good news:
There is some good news.  First, the information on the NYC-RPT is not immediately accessible to the public.  Second, there is some indication that buyers may be able to preserve their privacy without disturbing the tax status by utilizing an LLC owned by members who, rather than being individuals, are corporations, trusts, or other types of entities.  An LLC could potentially be structured as a holding company with one or more single-member entities as members of the real estate LLC.  It’s unknown whether a list of members comprised of single-member LLCs will have to reveal the social security numbers of each member to the DOF, as well.

Uncertainty:
There is still significant uncertainty around how the Department of Finance will interpret the technical elements of the new rule.  For example: a) the likelihood that the identities of members of an LLC could be released through discovery or otherwise; b) how the NYC Department of Finance interprets the changes or what an affidavit might need to state in order to avoid providing a social security number; c) whether a member of an LLC can pay financial penalties (which may be preferable to revealing their identity) in exchange for not providing the information similar to the penalties for multiple grantors or grantees who did not sign the  previous version of the NYC-RPT; and d) whether the Department of Finance will force a look through to the ultimate natural person even if there is an intervening LLC between that person and the LLC that actually owns the real estate (see previous paragraph).  As these and other issues become clear, we will continue to share critical updates with our clients.

Additional detail on public access to LLC information:
As the New York Times documented, discovering the underlying owner of an LLC from public information is extremely difficult. The only information easily accessible on the New York Department of State (DOS) website is the entity name, entity number, date filed, jurisdiction, entity address, the name of the agent for service of process, and the agent’s address. In fact, the DOS does not require or maintain information regarding the names and addresses of members or managers of nonprofessional limited liability companies.

While professional limited liability companies must include the names and addresses of the original members, this information is not recorded and is only available by written request for the Certificate of Incorporation filed the New York State Department of State, Division of Corporations.  This higher level of privacy is one of the reasons so many pricey pieces of real estate are owned by entities like the “123 Park Avenue, LLC” rather than by “John Doe.”  One concern about individuals using LLCs to purchase condos in this manner is that, by concealing their identities, the sellers cannot easily know the source of the cash and whether it’s legitimate.

Furthermore, LLCs make it very difficult for curious people to unearth the amount a buyer paid for a penthouse condo or brownstone mansion unless they have the name of the buyer’s LLC or already know the buyer’s exact address since the interested person cannot simply search by name.  Also, buying under an LLC makes it nearly impossible to find out the buyer’s address by searching public property records by the buyer’s name.