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GEOGRAPHIC TARGETING ORDERS: BACK AND BIGGER THAN EVER

August 12th, 2016 — 11:06am

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geotargetThe United States Treasury’s Financial Crimes Enforcement Network (“FinCEN”) will continue to track all-cash purchases of high-end real estate in an effort to combat money laundering. FinCEN’s method? Another Geographic Targeting Order.

As we wrote about previously in this space, in January 2016 FinCEN issued Geographic Targeting Orders covering all-cash deals over certain thresholds in Manhattan ($3,000,000) and Miami ($1,000,000). The first Geographic Targeting Order (“GTO”) was effective from March 1, 2016 through August 27, 2016. The new GTOs pick up right where the first ones left off, on August 28, and they will run through February 23, 2017. Continue reading »

For the most part, the requirements remain the same. FinCEN is still only interested in knowing about purchasers who utilize business entities, like LLCs or trusts, to purchase residential real estate. In order to be a “Covered Transaction” and therefore subject to FinCEN scrutiny, purchases must be of residential real property, for an amount exceeding a location-specific threshold (as discussed below), without financing, and must involve certain methods of payment. The onus remains on title companies to investigate and report to FinCEN the identity of the beneficial owner of the purchasing entity – be it a corporation, LLC, partnership or trust.

There are two major changes to the criteria for a “Covered Transaction” in the new GTO:

  1. The first and flashiest change is the addition of 12 new counties – or boroughs – across four states:

    • In New York, Brooklyn, Queens, Staten Island and the Bronx join Manhattan, albeit with a halved price threshold of $1,500,000.
    • In Florida, FinCEN deemed that Miami-Dade’s neighboring counties, Broward and Palm Beach, should also be included; their price thresholds are the same as Miami’s, at $1,000,000.
    • California enjoys its first appearance on the GTO list, with San Diego County, Los Angeles County, and three northern tech-bubble counties (San Francisco, San Mateo and Santa Clara); the threshold for all of the California purchases is $2,000,000.
    • Last, and least, for a change, is Texas, where all-cash purchasers of residential real estate in Bexar County (which encompasses San Antonio) for over $500,000 will be targeted by the new geographic orders.
  1. The second and more interesting (if also more subdued) change is the addition of two new methods of payment that will subject a transaction to the GTO if all the other requirements are met. Previously, in order to be the target of a GTO the purchase had to include any amount of any of the following: (a) currency (cash); (b) cashier’s check; (c) certified check; (d) traveler’s check or (e) a money order. FinCEN has added to the mix personal checks and business checks.

This second change is of most concern to buyers and sellers of real estate and their attorneys.

As we wrote in our previous post on the first iteration of the GTO, one can avoid bringing an otherwise geographically-targeted transaction within the purview of the GTO by wiring all of the sums to be paid in the transaction. This remains the case, but the rationale remains difficult to ascertain. Perhaps it is because wire transfers originate from and land at banks, or perhaps this was again overlooked in yet another striking example of governmental incompetence.

However, we also mentioned that because personal checks are currently not subject to scrutiny under the existing GTO, a purchaser can dispatch with unforeseen, last-minute, disputed or miscalculated sums at the closing table without subjecting the transaction to GTO compliance. This will no longer be the case as of August 28, 2016, and it occasions an absurd result: even a small personal check to pay a tiny adjustment to the purchase price will compel the title company to report the transaction to FinCEN.

Under the old GTO’s rules, a buyer and seller could theoretically have agreed to make and accept all payments in the form of personal checks or business checks. In New York, many of the standard form contracts used by real estate practitioners contain provisions requiring that all payments at closing over a certain sum be made by purchaser’s certified check or an official bank check. However, less scrupulous parties, such as buyers and sellers using real estate transactions to launder money, might have been tempted to forgo such assurances if it meant the transaction would not be reported to the U.S. Treasury. Now, under the new GTO, using a personal check to so much as credit the purchaser $20 for a new doorknob will place news of the transaction on FinCEN’s doorstep.

In sum, if a purchaser desires to avoid having their title company report their purchase in one of the covered jurisdictions to the U.S. Treasury, he or she better have everything hammered out to the penny and their wires keyed in before even taking a seat at the closing table.

By Patrick R. Doyle and Jerome J. Strelov

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1 comment » | Closings, FinCEN, Geographic Targeting Order, Going Private, GTO's, News

This GTO Is Not a Dream Vehicle: Another Blow to Privacy

July 9th, 2016 — 12:47pm

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punchOn January 13, 2016, the United States Treasury’s Financial Crimes Enforcement Network (“FinCEN”) issued a Geographic Targeting Order, or “GTO”, covering the Borough of Manhattan. The GTO was ostensibly issued in response to the media blitz around the use of shell companies to launder money via the purchase of real property. Continue reading »

The GTO applies to “Covered Transactions”, which are defined as transactions in which a purchaser buys Manhattan residential real property for more than $3,000,000.00 in an all-cash deal (i.e., one not involving a lender) using any of the following: (a) currency (cash), (b) a cashier’s check, (c) a certified check, (d) a traveler’s check or (e) a money order. There is no exception for low amounts when it comes to any of the above payment methods; so, strangely enough, a certified check for $1.00 will render the GTO applicable to the entire transaction if all other requirements are met. The order applies to all such Covered Transactions from March 1, 2016 through August 27, 2016.

The GTO requires title companies involved in Covered Transactions to file a report with FinCEN detailing, among other things, the identity of each “Beneficial Owner” of the purchaser entity – that is, each individual owning at least 25% of the equity interests in the entity. Title companies must conduct an investigation into the identities of all Beneficial Owners – and the officers, directors, employees and agents of the title companies that do not comply are faced with the prospect of civil or criminal penalties.

This means, in effect, that purchasers interested in the privacy afforded by the use of a trust or a limited liability company (LLC) when buying a home will have that privacy invaded, at least by their title company and the U.S. Treasury.

Unless, of course, a purchaser chooses to exploit one of the gaping loopholes the government left when creating this GTO.

Perhaps the most egregious error occasioned by the GTO is the omission of wire transfers from the methods of payment covered by the order. Seemingly, a purchaser wishing to circumvent the GTO and therefore maintain his or her anonymity simply needs to have the purchase price, all title company charges and any condominium or co-op fees wired. This requires some prior planning and a little patience at the closing table while the wires are processed, but it can easily be accomplished.

One might think this means that final adjustments or last-minute, power-play demands at the closing table would foil the would-be GTO-evader. However, this is not the case: uncertified personal checks also fall outside the umbrella of a Covered Transaction. It seems that the purchaser can wire the principal amounts required by the transaction and not be derailed when the seller holds out for that extra $121.53 in common charges his or her attorney insists is due at the table.

FinCEN even acknowledged these shortfalls in the Frequently Asked Questions addendum it published on February 1, 2016 in connection with the GTO: a “method of payment not specifically enumerated in [the GTO’s] Section II.A.2.v. (e.g., a wire transfer or an uncertified personal check) would not, in and of itself, qualify as a Covered Transaction.”

The recent release of the Panama Papers and the increased media focus on the use of shell companies for illicit purposes mean that FinCEN’s Manhattan real estate GTO is unlikely to be the last governmental attempt to monitor the use of LLCs and trusts in connection with real estate acquisition. But, given how this GTO was engineered, perhaps the biggest takeaway is that one should never underestimate a government’s ability to fall asleep at the wheel.

By Patrick R. Doyle

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Comment » | Closings, FinCEN, Geographic Targeting Order, Going Private, GTO's, News

Prepaid Condominium Rents: A Sucker’s Punch

January 30th, 2015 — 1:54pm

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moneyburn2

When WC Fields said “A sucker is born every minute” he was not talking about tenants prepaying a year of rent on their condominium but he may very well have been!

When a tenant prepays rent, they are setting themselves up for a serious headache. Continue reading »

Take the scenario where the lease is terminated because the apartment is destroyed or sold* and the tenant is no longer required to pay rent for the remainder of the term. Even though the landlord may be legally required to return part of the prepaid rent, the tenant may have to chase the landlord down and hope he does not abscond from his duties. This can be particularly difficult when the landlord lives in another state or county. In such a situation, money which belongs to the tenant could be held up for an unknown and potentially prolonged period of time.

Another pitfall is the loss of control over monthly rental payments. If the rent has been paid in advance, the tenant loses the ability to withhold rent due a breach of the warranty of habitability by the landlord. It will almost certainly be difficult to convince the landlord to return prepaid rent and such a situation may require legal action. Of course, if the rent has not been prepaid, the tenant is in control of his rental payment when a warranty of habitability issues arises.

Many leases include a provision stating that if certain services are lost (i.e. heat, water, air conditioning), then the tenant may receive an abatement of the rent due for the period of time that such services are missing. Again, if the tenant prepays the rent, it will be up to the tenant to go after the landlord and request a return of a portion of what was paid. Rather than maintaining control of what is paid to the landlord, the tenant will have to hope that they are dealing with an honest landlord.

Due to these and other potential risks involved with prepaying the rent, we suggest that the tenant pays rent on a monthly basis. Any inconvenience associated with this arrangement trumps the consequences which a tenant may face from prepaying the rent.

Having said all of the above, we recognize that sometimes the market dictates the terms and so, in an owner’s market, the tenant might just have to suck it up and take one for the team if he or she wants that apartment but if they do they should at least be aware of what they are getting into.

*Believe it or not, one of the common condominium lease forms include a provision in which the lease may be terminated if the owner decides to sell the apartment.

By Ryan V. Stearns and Jerome J. Strelov

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What Is So Good About a Good Guy Guaranty?

October 24th, 2014 — 2:43pm

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divorce1In a commercial lease, a “good guy” guaranty is often signed by one or more of the tenant’s principals. A “good guy” guaranty functions to ensure the payment of rent (and sometimes the performance of other obligations) under the lease through the date that the tenant surrenders possession of the premises. It is less onerous than a personal guaranty which would obligate the guarantor to all of the lease obligations during the entire term of the lease Continue reading »

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The typical scenario in which a “good guy” guaranty becomes operative is as follows: the tenant can no longer pay rent and would like to cancel the lease prior to the lease expiration date; the tenant gives the landlord notice that it would like to surrender the space; the tenant surrenders possession of the space on the agreed upon date; and the “good guy” guarantor is liable up until the date of surrender. Even though the guarantor will be released from liability on the surrender date, the named tenant will remain liable under the lease.

Although the “good guy” guarantee is more favorable to the tenant than an unlimited guaranty, there are some pitfalls. Among the concerns are: (i) the amount of notice that tenant must give the landlord prior to vacating the premises; and (ii) the scope of the guarantor’s liability.

Notice

The “good guy” guaranty provides that the tenant must give the landlord advance notice of the intent to surrender the premises before a guarantor will be released. The notice period reduces the likelihood that the space will be vacant by giving the landlord a sufficient amount of time to find a new tenant.

How much notice is required? Notice periods may range anywhere from one to three months or longer. The guarantor will be liable for certain agreed to lease obligations up until the space is surrendered with the proper notice.

Scope of Liability

The scope of liability under the “good guy” guaranty can vary widely. Some may state that the guarantors are only liable for monetary obligations, such as rent, additional rent, holdover charges and the security deposit.

Many current “good guy” guaranties, however, include the guaranty of performance of all other lease obligations, including the duty to repair the premises, remove any improvements and to indemnify the landlord in connection with personal injury actions which are not covered by insurance.

We have noticed that it is common for term sheets of commercial leases to simply provide for a “good guy” guaranty without describing what it is that the tenant’s principal will be guaranteeing and for how long. While brokers often say “you will only be liable for the rent”, this is rarely the case. More often than not, the tenant’s principal agrees to a guaranty without knowing what obligations they will ultimately be responsible for.

Since the liability that a “good guy” guarantor is exposed to can vary widely, we urge proposed tenants to work with their attorney to clarify the obligations they are willing to assume before agreeing to a “good guy” guaranty in the term sheet. Otherwise, it may be difficult to change the terms of the guaranty while negotiating the lease and the tenant’s principal may wind up with more exposure than he or she bargained for.

By: Jerome J. Strelov and Ryan V. Stearns

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Comment » | Commercial Corner, Commercial Leases, Good Guy Guarantees, News

BIDs Are Creeping Into Commercial Leases

October 9th, 2014 — 2:19pm

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bids

Business Improvement Districts (BIDs) have serious monetary implications to tenants of commercial buildings. NYC has 69 BIDs, the most of any city in the U.S., so commercial tenants should be aware of their existence and their potential monetary effect.

. Continue reading »

BIDs are creatures of a statute which allows for the formation of neighborhood economic development organizations. These organizations are designed to deliver certain additional services to the neighborhoods they represent, which may include capital improvements, sanitation, security and neighborhood amenities, such as Wi-Fi. The property owners pay a “BID assessment” to the applicable BID to finance those supplemental public services. For example, the East Midtown Partnership is a BID which covers a large area of the city spanning from Madison Avenue to 2nd Avenue and East 49th Street to 63rd Street, affecting approximately 818 retail businesses. The East Midtown Partnership provides, among other things, sanitation services, business promotional services and holiday lighting.

The amount of assessment paid by property owners is determined by a specific formula that each BID creates for its district. The East Midtown Partnership’s budget is capped by the City at $2.2 million, which sum is funded by building owners (or more likely, their commercial tenants) within the BID. According to Rob Byrnes, president of the East Midtown Partnership, the landlords or commercial tenants within his BID contribute roughly $.08 per square foot of commercial space. Residential buildings are assessed a nominal $1.00 per residential unit while any commercial tenants within the residential building are assessed pursuant to the standard formula.

BIDs have monetary implications for tenants of commercial leases, as the fees paid by the landlord will likely be passed down to the tenant. A lease for retail space which is part of the East Midtown Partnership, for example, will undoubtedly include a provision requiring the tenant of the space to pay the BID assessment.

It is our contention, however, that the BID assessment is effectively a tax imposed upon the landlord, similar to a property tax. As such, it should be treated as a tax for purposes of the lease and the tenant should only be required to pay the increases, if any, over a base BID assessment year. As this is often not the case, tenants should be on the lookout for lease provisions requiring them to pay their proportionate share of the BID assessment.

Ryan V. Stearns and Jerome J. Strelov

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Comment » | BID, Commercial Leases, News

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