Impact of the Corporate Transparency act on REITs
To combat money laundering and the use of the U.S. financial system by malicious parties, the government passed the Corporate Transparency act in 2021 as part of the National Defense Authorization Act. This legislation becomes effective as of January 1st, 2024. It requires most businesses without $5M in annual revenue and 21 or more full-time employees to share beneficial ownership information of their owners with FinCEN on a “Beneficial Ownership Report”. Any company that is required to file a beneficial ownership report is considered a “reporting company” under the law. FinCEN is a part of the Dept. of the Treasury, giving this new law and its enforcement as much power as IRS actions. Failing to file a report includes criminal penalties of a $10,000 fine and up to 2 years in prison.
Directors of non traded REITs (Real Estate Investment Trusts) will now be required to file reports as reporting companies, disclosing the beneficial ownership information of some owners and all decision-makers for their entity. The Corporate Transparency Act will apply to REITs regardless of their structuring as Corporations, LLCs (limited liability companies), Partnerships, or Trusts unless they are so large as to be publicly traded REITs, in which case they will likely qualify for a listed exemption and not be a reporting company.
Full information regarding corporate transparency act cta reporting can be found in our full guide, but read on for REIT specific information.
Who should be included on a beneficial ownership information report
As a director of a REIT, it is critical to understand who must be documented on Beneficial Ownership Reports and begin collecting this information from these individuals before the deadline.
FinCEN requires REITs to include two types of individuals on in their beneficial ownership reporting – decision makers who can exert substantial control and those with 25% or more ownership interest in the reporting company. Both decision-makers and owners are considered “beneficial owners” under the new law. As a director of a REIT reading this article, you will likely need to include yourself in the report. All others who make important decisions on behalf of the company or hold management positions will also need to be reported. In addition, you will need to contact any shareholders with over 25% ownership and obtain their most up-to-date information for inclusion on the Beneficial Ownership Reports.
- Directors, managers, those who decide investment strategy, those who choose properties to purchase or sell, and all officers must be included in a Corporate Transparency Act Beneficial Ownership Report for a REIT. As a general rule, if an individual exercises substantial control over the reporting company, they should be included.
- The requirement to have over 100 shareholders in a REIT means that only your largest shareholders (those with 25% or more ownership) will likely be on the report.
- Income producing real estate revenues from property activities must be over $5,000,000 USD AND you must have 21 or more employees to be exempt from reporting as a REIT. You must also operate from a physical office.
What information will REIT directors need to collect?
If your REIT does not have the revenue and employee levels to be exempt from reporting, you will need to collect the following beneficial ownership information from each beneficial owner:
- Full legal name
- Date of birth
- Current residential address
- Number and expiration from a U.S. issued passport, driver’s license, or state ID card
- Image of the above identification document
Note: Foreign-issued identity documents are only allowed IF the beneficial owner does not possess a U.S. identity document. This will mostly only apply to foreign reporting company owners living overseas.
Sometimes investors hold their ownership interests in limited liability companies, in which case the individual investors that own the limited liability companies must be disclosed on the report.
Additionally, for reporting companies created after 2024, any party that assists with the formation of the entity will need to be included on the beneficial ownership information report. These can be law firms or online services that assist in structuring the company. These are no “beneficial owners,” but rather “company applicants.”
Corporate Transparency Act Penalties for REITS that fail to file
Liability for failure to file a report falls on the company itself. In the case of a REIT, the REIT must collect beneficial ownership information from all beneficial owners, and filing false or incomplete information will incur penalties likely impacting directors.
Additionally, updates are required whenever important beneficial ownership information changes such as the following:
- A manager moves to a new address.
- The office relocates to a new address.
- A manager is replaced.
- A new investor is added with over 25% ownership.
- An investor with 25% ownership has a new address
FinCEN estimates these reports will require 20+ hours of time to understand the law and filing process, collect the information, and file the report for a complicated entity such as a REIT. Fortunately, Beneficial Ownership filing doesn’t have to be a burden. We built TurboCTA to simplify corporate transparency act CTA reports and let you get back to finding your next investment. TurboCTA reduces costs and filing time by over 70% to make corporate transparency act reporting easy. Furthermore, we make updates easy by providing record-keeping services which allow you to build updated reports right from where your last report left off.
Although you cannot file on TurboCTA yet, we recommend joining our mailing list to stay up to date on these developments. Additionally, you can purchase our prep kit which will include your first year’s filing once the TurboCTA system is live!