Residential real estate executives are assessing the impact of a new U.S. Treasury Department initiative to crack down on criminals and corrupt foreign officials who use luxury home purchases to launder money.
Treasury’s Financial Crimes Enforcement Network (FinCEN) announced plans in January to begin requiring title insurance companies in Miami and New York City to disclose the identities of buyers paying cash. If questionable deals are discovered, permanent reporting requirements would be developed across the country, Treasury officials say.
The new reporting requirements may dampen sales of luxury condominiums, which have fueled a massive development boom in Miami and New York City in recent years.
“The timing couldn’t be worse,” says Jonathan Miller, president of Miller Samuel, a New York City–based appraisal firm. “This brings a new wrinkle to the market.” In New York City, developers were marketing more than 5,000 new units in 2015, with another 7,000 expected this year, Miller says.
More than 50 percent of all residential sales last year in both Miami and New York were cash purchases, twice the national average, according to National Association of Realtors data. For condo sales, more than 65 percent were all cash, in part due to the activity of foreign buyers in both markets. For condo developer the Related Company, 80 percent of recent pre-construction sales in Miami were to foreign buyers, chairman Jorge Perez recently told an industry conference.
But sales in both Miami and Manhattan have started to slow in recent months, leading to concerns that a drop-off in cash sales could send ripples through the markets.
“The order by the feds is likely to make it that much harder for sellers and developers in Miami-Dade County to unload their luxury projects, given that cash is the preferred method of transacting deals,” says Peter Zalewski, founder of Cranespotters.com, which tracks the pre-construction condo market in south Florida. “This order, coupled with weakening demand due to a strong dollar and rising property prices, is likely to cause more developers to cancel their announced condo projects.” According Cranespotters’ data, more than 250 condo towers are either planned or under construction in Miami-Dade County, where international buyers are a significant segment of luxury condo sales.
Treasury is specifically targeting buyers who use limited liability companies (LLCs) to buy property. An investigation by the New York Times last year found that nearly half of the homes purchased nationwide last year for more than $5 million were acquired through shell companies. The practice is also growing more common. In 2008, 39 percent of the homes purchased in Manhattan for more than $5 million were bought through shell companies; in 2014, the figure rose to 54 percent, the Times reported.
“We are seeking to understand the risk that corrupt foreign officials, or transnational criminals, may be using premium U.S. real estate to secretly invest millions in dirty money,” FinCEN director Jennifer Shasky Calvery said in a statement.
The Treasury Department is asking title companies to provide information on cash transactions of more than $3 million in Manhattan and more than $1 million in Miami-Dade County. The measures are temporary: the six-month initiative starts March 1. Treasury hopes to “produce valuable data that will assist law enforcement and inform our broader efforts to combat money laundering in the real estate sector,” the department said in a statement.
LLCs and similar entities are often used to hide the identity of buyers—in many cases for legitimate reasons. Celebrities and public officials, for instance, may not want their name attached to the purchase of a luxury property for a variety of reasons. But several highly publicized prosecutions have focused on international drug lords buying luxury real estate in Miami: in a 2014 case, Spanish drug smuggler Álvaro López Tardón was convicted of laundering millions of dollars through Miami real estate.
“I think the effort to ask title companies to provide information is a long time in coming,” says Theresa Van Vliet, a former federal prosecutor who is now a partner in the Miami-based Genovese Joblove & Battista law firm. Treasury appears to be moving toward a general reporting requirement to close a “gaping loophole,” she says.
The luxury condo market is fueling projects around the country, though cash deals are not as prevalent in cities outside New York City and Miami.
San Francisco is experiencing “one of its biggest new-housing construction booms in history,” thanks largely to a new wave of luxury condominium construction, according to Paragon Real Estate, which tracks the market. More than 25,000 condo units are in development, including the 42-story, 656-unit Lumina, developed by Tishman Speyer with financing from China Vanke; it is under construction and offering units ranging from $1 million to $49 million.
“I don’t see a big impact on San Francisco,” if reporting regulations are expanded, says Patrick Carlisle, chief market analyst for Paragon. “Many [buyers] will find a way to outsmart [the regulations].”
But some industry observers believe the Treasury initiative will have a chilling effect, at least in the short term, even for legal buyers. If nothing else, the move adds a new level of uncertainty to a market that is already skittish, with the stock market sliding.
“Whenever buyers are uncertain, they wait and pause,” Miller says.
In the long term, the rules should be a positive for the industry, Zalewski says.
“A transparent market is what the professional brokers want, as it in theory eliminates the booms and busts, as well as the transactions at ‘are you crazy?’ prices,” he says.
But other actions at the federal level may offset some of this uncertainty. It was reported by The Wall Street Journal in December that Congress has modified various aspects of the Foreign Investment in Real Property Tax Act to allow foreign pension funds to sell property without having to pay taxes along the way. Non-U.S. investors will also be allowed to own as much as 10 percent of a publicly traded real-estate company before facing additional taxes, up from the 5 percent allowed under the prior law.
Video: Compass President Leonard Steinberg and Oppenheimer Funds CIO Krishna Memani discuss the luxury real estate market on Bloomberg.