New Plans to Unmask Secret Buyers Rattle Real Estate Power Players

Super wealthy buyers in new condo buildings like One57, pictured here in October 2015, in New York may no longer be able to hide behind anonymous LLCs. Photo: Roberto Machado Noa / Getty Images.

During the heady years of Manhattan high-end real estate, one dirty little secret was that buying a condo in a pre-construction development was an easy way for buyers to avoid scrutiny.

A wealthy buyer who had cash knew that a new development had yet to form a condo board, which meant fewer questions about the buyer's identity and source of funds. It fell to developers to ask those questions, and to press lawyers to provide proof that the buyer wasn't using ill-gotten gains.

Amid a buying wave—like the one Manhattan saw over the past five years—not every developer was willing to rock the boat, despite potential liability. "It was a no-questions-asked" environment, one prominent high-end Manhattan broker recently said.

The new condo development loophole is just one way in which the real estate transaction system had become all too opaque. Wealthy buyers, both in the United States and abroad, have also widely used limited liability companies, or LLCs, to shield their identities, mostly for privacy reasons, but also to avoid scrutiny back home.

While the real estate community likes to say that the number of illicit transactions taking place is "minuscule," as one broker put it to me, how could we ever be sure without someone other than developers, title companies, and self-interested lawyers reviewing the process?

Last month the federal government decided it was time to shine more light on the situation. After an investigation by The New York Times last year revealed that real estate professionals often do not know much about buyers or how they made their money back home, especially those buying mega-expensive condo units in buildings like Time Warner Center, the Treasury department announced rules that will require title companies to disclose the true buyers of all-cash purchases of residences in Miami and Manhattan. Those cities have been the most popular U.S. real estate markets for wealthy international buyers in recent years. Sales of $3 million or more in New York and $1 million or more in Miami will be subject to Treasury review.

The Time Warner Center in New York City. Photo by Robert Cicchetti/Shutterstock.

The rules will go into effect on March 1 and last until August 27. The fact that the government would target two specific markets, and for such a short period of time, says the feds are likely casting for potential criminality—or they are simply trying to scare away some prospective buyers.

"This seems like a test," said Jeff Miller, a broker in Miami Beach with Brown Harris Stevens Zilbert. "Time will tell."

Nevertheless, some prominent brokers and at least one developer who deals with international and billionaire clients said the new rules have set off alarm bells in the real estate community.

"The minute this hit there was a lot of drama," said Leonard Steinberg, president of Compass and a former longtime broker with Douglas Elliman.

"When we first heard about it everybody thought, 'Oh my god, this is going to kill our market.'" said Emily Beare, a broker with CORE.

Raphael De Niro, an Elliman broker with a host of international clients, put it more bluntly. "There are people that for whatever reason probably won't buy apartments right now because of these new Treasury laws," he said. "I think there will be some lost business associated with this."

The new rules come at a time when the New York and Miami markets were already showing signs of a slowdown due to international conditions. With the collapse of Chinese demand, the fall in value of the Russian ruble and the Brazilian real, and the "visceral image" of 5,000 to 7,000 units coming on the market in Manhattan in the past two years, "I would think the big reaction would be a pause in activity," said Jonathan Miller, president of Miller Samuel, a property appraiser. "A wealthy individual isn't going to risk ending up on a list somewhere. They can wait six months."

The new towers, including 432 Park Avenue and One57, on New York's Billionaires' Row, as seen from Central Park in July 2015. Photo by Alexey Rotanov / Shutterstock.

Some New York developers along West 57th Street, or "Billionaires' Row"—where Extell, JDS Development, and Property Markets Group are building mega-towers near to the original billionaire's den, One57—expressed concern about how the rules could spook potential buyers.

"Additional regulation is the last thing that we need to hurt potential business that really creates jobs for American workers," said Gary Barnett, president of Extell. "This is another layer of difficulty that is going to potentially hurt further development."

Barnett disagreed with the premise that criminals were parking money in real estate, saying it was the "worst place" because law enforcement could easily seize properties. "They take art work, they take jewelry and diamonds, and gold, they put it in their pocket or they put it in their safe deposit box and we never see it," Barnett said. "You put it in real estate and it isn't going anywhere."

Among the collateral effects of the new rules could be an apprehension by buyers with multiple homes that a Treasury examination could bring scrutiny from the Internal Revenue Service, who could come after them for avoiding U.S. income tax. "A lot of people are afraid of being exposed by the IRS," De Niro said.

Some in the industry insist that developers have tightened up their internal policing of buyers in the past two years, in large part because of cases where foreign governments have sued developers over accepting allegedly dirty money. One such case, recently settled, involved developer Joseph Chetrit, who a city in Kazakhstan accused of helping launder money stolen from the central Asian nation by putting it in units at Flatotel and the Gramercy Square condos.

"When things like that happen you have the industry realizing that there is too much exposure and they can't afford that type of exposure," said Edward Mermelstein, managing partner of the law firm Rheem Bell & Mermelstein. "So they will take it on themselves to make sure something like that doesn't happen in the future."

Rendering of 220 Central Park South. By Neoscape.

In response, at newer developments, like 220 Central Park South, prospective buyers' lawyers cannot make appointments to see the sales center until they can document to developer Vornado where their clients got their money from, Mermelstein said. "The expectation is that if they can't google your client and find out how they made their money they are not going to let you in the door," he said. (Barnett called the policy a "wonderful marketing ploy" by Vornado.)

But getting to the bottom of who the real buyers are can stretch the investigative capabilities of most developers and brokers. Among the thorny issues the Times series addressed was the fact that buyers often used "straw buyers," or fronts, to act as the named buyers in the LLCs. Times writer Louise Story wrote that it took the better part of a year to penetrate LLCs at Time Warner Center to discover the true buyers of some units.

Developers "are not in the business in going abroad and doing a financial research to see if the beneficiary of the LLC is a real person," Miller, the appraiser, said. "The onus can't be on them because that is not what they do."

And yet, in the case of condos, the burden has fallen on developers to sort it out. Still, as Steinberg emphasized to me, there is a difference between "illegal" funds and potentially "illegitimate" funds—those that were derived through political machinations in other countries, but not necessarily through blatantly criminal activity.

"Legitimacy is one thing and legality is another thing," Steinberg said. "I think this is about legality and not legitimacy."

In the end, most people I spoke to welcomed more government scrutiny—so long as it doesn't scare away buyers. But if Treasury chooses to extend the rules beyond six months, as Barnett believes is likely, or to apply them more uniformly throughout the rest of the country, it could require forming another government department akin to the IRS to monitor the transactions.

"If you change the way real estate is transacted in the United States I can only imagine the madness," said Miller, the appraiser.
· Feds Will Now ID Anonymous Buyers of Manhattan Real Estate [Curbed]
· Scandal-Plagued Foreigners Park Millions in Midtown Condos [Curbed]
· Property Lines archives [Curbed]