The Corporate Transparency Act (CTA), effective January 1, 2024, is set to profoundly reshape how businesses—especially real estate funds—administrate and report their ownership structures. 

As the clock ticks down to the compliance deadline, real estate funds cannot afford to delay in understanding and preparing for both the initial deadline and the ongoing compliance responsibilities. The CTA is not just a regulatory nuisance; it’s a game-changer that brings unprecedented scrutiny to how closely held businesses—like real estate funds—are structured and operated. 

Here we break down what real estate funds must know and why acting now is critical to avoid dire consequences. Also learn what measures, under new proposed legislation, are specifically required of real estate-owning entities and when these are likely to begin.

What is the Corporate Transparency Act?

Enacted in 2021 as part of the National Defense Authorization Act (NDAA), the CTA mandates that many businesses, including real estate funds, disclose their Beneficial Owners and Company Applicants to the Financial Crimes Enforcement Network (FinCEN). These disclosures will be stored in a non-public, secure database accessible to law enforcement and financial institutions.

The goal? To combat illicit activities like money laundering, terrorism financing, and other financial crimes that exploit corporate structures, particularly those of smaller, privately-held companies that often hide behind layers of complex ownership and management. The CTA aims to eliminate the anonymity that has long been a hallmark of shell companies, revealing who really controls U.S. businesses.

For real estate funds, for example, this means no more operating with full autonomy as previously possible through entity structures. The government wants transparency—and it will now require detailed disclosures about who owns, controls, or benefits from these entities.

The CTA’s Key Components: What Real Estate Funds Need to Know

Understanding the key components of the CTA is critical for real estate funds looking to avoid penalties and disruptions.

1. Who is a Reporting Company?

Under the CTA, Reporting Companies are any entities registered with the Secretary of State. This includes most LLCs, partnerships, corporations, and similar entities that real estate funds commonly use to structure investments. The CTA focuses on smaller entities (with fewer than 20 employees or less than $5 million in gross receipts) that have traditionally been more opaque. Larger companies and regulated financial institutions are generally exempt.

If your real estate fund is structured as an LLC, partnership, or corporation, it is almost certainly a Reporting Company under the CTA.

2. Who is a Beneficial Owner?

The definition of a Beneficial Owner under the CTA is broad and far-reaching. It includes anyone who:

• Owns or controls at least 25% of the entity, or
• Exerts substantial control over the entity, such as senior executives, board members, or other key decision-makers.

For real estate funds, this means that fund managers need to examine ownership structures closely. For instance, even if someone doesn’t own 25% directly, they might still be deemed a beneficial owner if they control the entity through other means, such as veto power over key decisions or a senior officer position.

3. Who are Company Applicants?

In addition to Beneficial Owners, the CTA also requires disclosure of Company Applicants—the individuals who help form the entity, such as attorneys, accountants, or other professionals who assist in creating the company. While this may seem like an additional burden, it’s essential for compliance. For real estate funds, understanding who qualifies as a Company Applicant can help prevent inadvertent violations.

4. Exemptions and Special Considerations

Some entities are exempt from reporting under the CTA, including:

• Large operating companies: Entities with more than 20 employees, over $5 million in gross receipts, and a physical office in the U.S. are generally exempt.
• Certain regulated entities: Financial institutions and entities subject to other forms of oversight are exempt.
• Inactive entities: Companies that haven’t been engaged in business activities since before January 1, 2020, and haven’t engaged in significant transactions over the last 12 months may also be exempt.

For real estate funds, it’s crucial to analyze whether the fund meets these exemption criteria, as missing out on an exemption could trigger unnecessary reporting obligations.

The CTA’s Compliance Deadlines: Don’t Wait Until It’s Too Late

Time is running out. Real estate funds must act quickly to ensure they comply with the CTA before the enforcement period begins. The deadlines are clear:

• Existing entities (those formed before January 1, 2024) have until January 1, 2025, to file their Beneficial Ownership Information (BOI) reports.
• New entities formed after January 1, 2024 but before December 31, 2024, must file their reports within 90 days of formation.
• New entities formed after January 1, 2025 must file their reports within 30 days of formation.
• Updated reports must be filed within 30 days of any changes to beneficial ownership or control.
• Corrected reports are also required within 30 days if a previously submitted report contains inaccuracies.

Failure to comply can result in severe penalties, including daily fines of up to $500 and potential criminal penalties of up to $10,000 and/or imprisonment for up to 2 years.

The time to act is now. Don’t wait for a regulatory audit or an enforcement action to kickstart your compliance process.

Preparing for Compliance: Steps Real Estate Funds Must Take

Real estate funds must take immediate action to comply with the CTA and avoid costly penalties.

1. Gather Critical Information

Real estate funds must compile key information about their ownership structures, including the names, addresses, and identifying information of all Beneficial Owners and Company Applicants. This includes sensitive details like dates of birth and government-issued IDs. Delays in gathering and verifying this information could lead to non-compliance or missed deadlines. Tips such as gathering the documentation that is the furthest from expiration can help you avoid otherwise unnecessary compliance updates.

2. Update Your Records Regularly

Once the initial reports are filed, ongoing monitoring and updates are crucial. Real estate funds must update their BOI reports within 30 days of any changes to ownership or control. This means tracking:

• Changes in ownership percentages.
• Shifts in decision-making power.
• Key personnel changes.
• Address or identification document updates.

Having a system in place for regular reviews of the fund’s ownership structure is essential to staying ahead of these requirements.

3. Secure FinCEN Identifiers

To streamline the reporting process, FinCEN Identifiers should be secured for all individuals involved in the reporting process. These unique identifiers can simplify filing and ensure that your fund’s information is accurately recorded in the FinCEN database. Applying for these identifiers now will save you time and effort later.

4. Consult Legal and Compliance Experts

Navigating the complexities of the CTA requires specialized knowledge. Real estate fund managers should seek guidance from legal and compliance professionals who understand the nuances of the law and can help ensure that all filings are accurate and timely.

The Dire Implications for Real Estate Funds

The CTA will likely have significant ramifications for real estate funds. These include:

1. Increased Scrutiny and Due Diligence: With more detailed ownership disclosures becoming available, real estate funds may face increased scrutiny from investors, lenders, and regulatory authorities. While this can help reduce illicit activities, it could also raise questions about transparency, which could potentially damage relationships with existing and prospective stakeholders.

2. Re-evaluating Fund Structures: The CTA’s broad definition of Beneficial Ownership may require real estate fund managers to reassess their organizational structures. If a key manager or investor holds substantial control or a 25% stake, they must be disclosed. This could lead to shifts in decision-making power or prompt the restructuring of ownership hierarchies.

3. Compliance Frameworks: The penalties for non-compliance are severe, and real estate funds must develop and maintain comprehensive compliance frameworks. This includes regular training for internal teams, and legal counsel, and the use of technology solutions to track ownership and reporting changes.

What’s Next for Real Estate Funds: The Future of Compliance

The CTA is just the beginning. As the regulatory landscape continues to evolve, real estate funds should remain vigilant for additional compliance requirements, particularly around real estate transactions and ownership structures.

1. Monitor Regulatory Shifts: The U.S. Treasury Department has hinted at future regulatory changes that could impact real estate transactions and investment structures. Staying on top of these changes is essential for real estate funds looking to navigate. More specifically, real estate owners are expected to have increased reporting in the future, according to proposed legislation, each time there is a shift in the title of a property. 

2. Adopt Best Practices for Transparency: While the CTA creates new compliance obligations, it also provides an opportunity for real estate funds to improve transparency and enhance their reputation. Implementing robust internal controls, conducting regular audits, and fostering open communication with stakeholders can help real estate funds not only meet regulatory standards but also build trust with investors and partners.

The Urgency of Compliance

The Corporate Transparency Act represents a significant shift in how real estate funds must be administered. With the compliance deadline fast approaching, fund managers cannot afford to wait. Proactive action is necessary to ensure compliance, avoid penalties, and safeguard your fund’s future.

The CTA may be complicated, but with the right planning, the right team, and the right technology, real estate funds can navigate this transition successfully. Engage legal and compliance experts, secure FinCEN identifiers, and get your records in order now. The clock is ticking—act now or risk falling behind.

Note, that while there is a possibility that a new administration could change the outlook for FinCen reporting altogether, we do not recommend any form of noncompliance given the dire nature of the penalties imposed.

Ensure Compliance Before It's Too Late

The Corporate Transparency Act introduces significant changes for real estate funds, making early compliance essential to avoid penalties and safeguard your fund’s stability.

If you need help, our experts can guide you through the process with comprehensive compliance services:

• $250 per-entity assessment: Determine if your entity has a reporting obligation or qualifies for an exemption, with insights into future trigger points.
• $450 per-entity filing: We’ll handle the entire filing process, securely collecting and submitting the required ownership documentation.

Total per-entity fee: $700 for full compliance.

Ready to get started? Book a call today to ensure your fund is fully prepared.