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Category: The Buyers World


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

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

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

Lien on Me/Lien on You

February 17th, 2014 — 12:28pm

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freedom1When you finance the purchase of a cooperative unit, the loan you receive from the bank is not a mortgage, as the lay-person may believe.  Rather, the loan is secured by a security agreement giving the lender a security interest in the stock certificate and proprietary lease.  In order to “perfect” the security instrument, the lender files a UCC financing statement which becomes public information putting the world on notice that a lien exists on the apartment. Continue reading »

The UCC is analogous to recording a mortgage on a condominium unit with the county clerk.  After the mortgage has been paid off, a satisfaction of mortgage is recorded.  With a cooperative apartment, after the loan is paid off, the lender is required to file a UCC termination statement.

As those who have been involved in the purchase or sale of a cooperative apartment know, UCC financing statements are a constant source of trouble and delay for two reasons.  The first is that the lender will often want to file a UCC before the loan is ever made.  When the loan fails to never materialize, it is not uncommon for the lender to fail to terminate the erroneously filed UCC.

The second stems from the fact that many attorneys (specifically lender’s attorneys) are not following the “best practice” of terminating a UCC after a loan is paid off.  This tends to happen when a borrower refinances their current loan and the lender fails to terminate the prior UCC representing the now paid off or consolidated loan.

As a result, there are countless inactive UCC financing statements out there falsely telling the world that a security interest exists on with respect to a cooperative apartment even though the loan has been paid off, or even worse, never originated.  This becomes a source of delay and additional costs when a person is gearing up to buy or sell or refinance their loan because the new lender will want the property to be “free and clear of all liens.”

The lender’s oversight places a financial burden on sellers and borrowers in terms of attorneys’ fees and filing fees.  In our experience, it has always taken at least a few phone calls and emails to track down the initial filer of a UCC on behalf of a client in preparation for their impending transaction.  While we have been able to have the erroneous UCC terminated without a hitch, the situation has the dire potential to cost the client a substantial amount of money.  For example, if the company or attorney who filed the initial financing statement goes out of business, we may have to spend more time and money tracking down the lender to receive authorization to terminate the financing statement. Or worse, if we cannot contact the filer in a timely manner, the closing may have to be adjourned, costing the client real money in terms of additional interest paid, adjournment fees or attorneys’ fees.

Why are the parties entrusted with perfecting a lien in accordance with the Uniform Commercial Code so careless and irresponsible when it comes to filing the termination statements?  You do not see this magnitude of recklessness when it comes to recording satisfactions of mortgages.  While the recording of both of these instruments has a similar effect, to put the world on notice that a lien no longer exists, they seem to be treated unequally in how they are administered and processed by the lenders.

In light of the lender’s indolence and ineptitude with regard to the administration of UCC financing statements, we suggest penalizing the lender who fails to correctly file a termination statement. A fine of at least $500.00 would seem adequate to get the lender’s attention.  By invoking a financial consequence on lenders, the burden and cost associated with terminating erroneous UCC financing statements would be shifted from the individual borrower to the lender, where it belongs.

By Jerome J. Strelov and Ryan V. Stearns

 

Comment » | Liens, Liens, News

Buying With or Without a Mortgage – A Balancing Act

January 27th, 2014 — 3:46pm

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balance2In today’s fast-paced market, an all-cash buyer is very attractive to sellers of cooperative units.  As banks are increasingly sluggish in giving out mortgages, they are creating undesirable delays in the process of buying and selling property.  To avoid the inevitable setbacks associated with obtaining a mortgage to purchase a cooperative unit, if feasible, it may be advisable to purchase the unit with cash and obtain a mortgage after the closing. Continue reading »

Obtaining a Mortgage Pre-Closing

The typical scenario for purchasing a cooperative unit with a mortgage is as follows: a mortgage contingency or non-contingency clause is drafted in the contract.  Most cooperative boards require a copy of the mortgage commitment letter as part of the purchase application so the purchaser cannot submit the application until they have obtained the commitment letter.  The purchaser then typically may have 30 days to obtain the commitment letter after signing the contract followed by a few business days after receipt of the letter to submit the application to the board.

The practical result of purchasing the unit with a mortgage is that the purchase application will be delayed until a mortgage commitment is obtained.  This is very unattractive for the seller who needs to know if the buyer will pass the board’s muster as swiftly as possible.

Obtaining a Mortgage Post-Closing

If it is feasible, the purchaser may want to consider buying without a mortgage and obtaining a mortgage after the closing.

However, this has several pitfalls.  First, under IRS Publication 936, the purchaser will not be able to deduct the interest from the financing unless the mortgage is obtained within 90 days of the closing date.  This time constraint could be an issue on multiple fronts.  First, the new shareholder will be required to obtain the cooperative board’s consent prior to being allowed to get the mortgage.  As such, there is the risk that the cooperative board may not approve of the shareholder’s decision to obtain financing.  Second, even if the cooperative board is amenable to the mortgage, they may be unhurried in approving the same.  Consequently, the board’s approval process puts the shareholder at risk of not meeting the 90 day deadline mandated by the IRS.

Another disadvantage of obtaining the mortgage post-closing is that the interest rates available to the borrower may not be as favorable.

However, this may be worth the risk to the buyer who really wants to trump the competition.

By Ryan V. Stearns and Jerome J. Strelov

Comment » | Board Packages, Funding Contingency, Mortgage Contingency, News, The Buyers World

Sleeping With The Enemy

December 29th, 2011 — 1:29pm

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 A simple way to check if you might be sleeping with bedbugs in the apartment you’re thinking of buying is to check the bedbug registry.

At first, the site is tricky since for some addresses it requires “East” or “West” and for others you need to use “E” or “W” instead. Further, for NYC, you need to go to the City Maps section, click on New York and then insert the address.This is a site where people can post reports of bedbug sightings and what happened. The site also allow for disputes to be posted. As of December 27, 2011, there were 4,490 postings in New York City.

So you have to tool around a bit to find the building you are searching.

However, once you get beyond the oddities of the address searching, the site is quite informative. For example, a recent search revealed that a building had a full blown thermal remediation in April only to find several reports of bedbugs again a month later. The site also provides a terrifying little map which shows bedbug sightings in the neighborhood you are searching. Mercifully, if the building you are searching has no reports, it will advise you that there are no bedbug sightings posted. Continue reading »

Some suggestions for this otherwise great site: (1) Make the maps interactive so you can click on the “Red Button” indicating infestation and get the address: and (2) fix the address searching tools so that you can type in “East” or “E”, etc., and still find the building.

Take heed that this is not the end all solution. I have to believe that many people who have seen bedbugs do not post on the site and there are probably many who post sightings which are inaccurate. However, it is a good double check that can either calm or alarm you.

This site is not only for buyers. My suggestion is for sellers to also check the site to make sure they can address any bedbug problem in the building or which references their apartment before they bring the unit to market. By the same token, management companies and co-op and condo boards should routinely check the registry to make sure they can dispute false postings or their remediation efforts of accurate sightings.

By the way, you can also check hotels on the site.

Next up, movie theaters, coat check rooms?

Comment » | Bedbugs, Bedbugs, News

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