Hiding the Hands Behind Housing Financialization

Financialization Housing

            Marble Falls      Financialization of housing was the main target of ACORN Canada’s biggest action in Montreal at its summer convention.  The issue in a nutshell is the gobbling up of homes and rentals by private equity and big real estate companies in the process of monopolizing housing markets to drive up prices and rents.  This is not a Canadian issue, but a global concern, and, if anything, a bigger issue in the USA than elsewhere.

A recent piece in Shelterforce framed the issue well:

The same qualities that make LLCs attractive to smaller-scale owners make them an attractive vehicle for large corporate investors looking to buy hundreds of properties without attracting attention. When a private equity firm or large corporate landlord uses residential housing as collateral, often the formal owner of the property is an anonymous LLC, one per property. It’s difficult to accurately quantify and trace the scope of this phenomenon because there is no transparency. As these financial practices accelerate, the number of homes with untraceable or difficult-to-trace ownership proliferates. Regardless of investor size or type, LLC ownership of real property can create problems at the local level for tenants, neighbors, and municipalities.

The percentage of rental units owned by non-individual investors (in addition to LLCs, these also include corporate forms like limited partnerships and real estate investment trusts) rose from 17.3 percent in 2001 to 24.5 percent in 2015. In most states, LLCs are required to list a registered agent who can receive legal and government notifications, but not required to name the people who financially benefit from the investments (the “beneficial owner”). This anonymity has made it difficult for cities to direct their limited resources to address problematic owners—or even to identify crimes like money laundering.

But, reading the article, I thought, “Hey, wasn’t there a new law passed that required more transparency now for LLCs in the US?”  Am I making this up?  We were waiting for it to go into effect when the ACORN Tenants’ Union was organizing in Atlanta and trying to puzzle out ownership.

Well, the answer to my question and the problem posed in Shelterforce is both “yes” and “no”, along with a footnote to the power of the big boys to block transparency.

As an article in Forbes explained,

The disclosure requirements will apply only to certain smaller entities, not just limited liability companies, of types that Congress thought created maximum potential for use in money-laundering and other illegal activities. The inclusions and exclusions are intricate and extensive. They mean that many ordinary limited liability companies formed for real estate investments will need to report their ownership.  Once a company is subject to the new reporting requirements, it must disclose its “beneficial owners.” That includes anyone who exercises “substantial control” over the company, or owns or controls more than 25% of its equity. The law requires a tracing of ownership up to actual people, not just more companies. Those actual people will have to disclose their name, date of birth, address, and a government-issued identification number – driver’s license, passport, or a new identifier for this purpose.

So, the new Corporate Transparency Act (CTA) is a good thing and should solve the problem we’ve all been having and that that Shelterforce explained, even if it’s more about money laundering by Russians and Saudis, we might say?  Unfortunately, there’s a huge glaring exemption among many:

… one exemption of note is what the CTA refers to as “large operating companies.” These are companies that employ more than 20 full-time employees, have filed tax returns demonstrating more than $5,000,000 in gross receipts or sales and have an operating presence at a physical office within the U.S. A full-time.

In short, the really big boys in private equity and some of their operations might be able to wiggle out, but only if they are buying in their own names, rather than just a corporate LLC ownership shell, which has been standard operating procedure.  Their LLCs will have to follow the CTA, so if they want to hide their hands while throwing these rocks, they’ll have to come up front and say their own names, rather than nestling down under the LLCs.

Maye that’s enough to fix this problem, but we would all have to be able to check their filings to know if they are playing by the book or not.  Darned if there isn’t another huge loophole when it comes to all of us really seeing what is supposed to be transparent now.

Financial Crimes Enforcement Network (FinCEN) will not be part of any publicly accessible database. The beneficial ownership information reported to the U.S. Department of the Treasury.

Once again, we’re fighting big corporate lobbyists and lawyers when it comes to trying to stop financialization of housing.  We have some tools, but they won’t be easy to use, and we’re being asked to trust that the CTA will be followed, after their representatives have made it Swiss cheese.  It won’t be easy, but somehow, we have to this job done.