The Corporate Transparency Act’s Impact on REITs
The government passed the Corporate Transparency Act (CTA) in 2021 as part of the National Defense Authorization Act in an effort to prevent nefarious actors from laundering money through the U.S. financial system. The legislation goes into effect on January 1st, 2024, and requires most businesses with under $5M in annual revenue and fewer than 21 or more full-time employees to share their beneficial owners’ identifying information with FinCEN. The information is filed in a “Beneficial Ownership Information” (BOI) report. Companies that are required to file a BOI report are called “reporting companies.” Since FinCEN is part of the Department of the Treasury, this law has the same impact as IRS actions and can be enforced accordingly. Failure to file a report can result in criminal penalties of up to a $10,000 fine and/or two years in prison.
Non-traded Real Estate Investment Trusts (REITs) are now considered reporting companies and directors must file reports that disclose some of their owners’ and all of their decision-makers’ information. The Corporate Transparency Act applies to REITs regardless of whether they’re structured as corporations, LLCs (limited liability companies), partnerships, or trusts (unless they’re large enough to be publicly traded, in which case they’ll likely qualify as a listed exemption).
Please see our full guide for more information regarding CTA BOI reporting, but keep reading for REIT-specific information.
Who should be included on a beneficial ownership information report?
REIT directors must understand who they need to list on BOI reports. Also, it would behoove them to start collecting this information from the appropriate individuals long before the deadline.
FinCEN requires REITs to include two types of individuals on in their BOI reports:
- decision makers who exert substantial control, and
- persons with 25% or more ownership interest in the reporting company.
The new law considers both types of people “beneficial owners” under the new law. If you’re a REIT director, you’ll most likely need to include yourself in the report as well. In short, you’ll need to report everyone who makes important decisions for the company or holds management positions, including shareholders. However, the requirement to have over 100 shareholders in a REIT means only the largest shareholders (those with 25% or more ownership) should be reported.
REITs must include directors, managers, investment strategists, and all officers in their Corporate Transparency Act BOI report. Generally speaking, anyone who exercises substantial control over the reporting company should be included.
To be exempt from reporting, income-producing real estate revenues from property activities must be over $5,000,000 USD, you must have 21 or more employees, and you must operate from a physical office.
What information do REIT directors need to collect?
If your REIT’s revenue and employee numbers don’t exclude you from reporting, you’ll need to gather the following BOI from each beneficial owner:
- Full legal name
- Date of birth
- Current residential address
- Number and expiration date of a U.S.-issued passport, driver’s license, or state ID card
- Image of the above mentioned identification document
Note: Foreign-issued ID documents are allowed ONLY if the beneficial owner doesn’t have a U.S. ID. This stipulation will generally apply to foreign reporting company owners living overseas.
Investors sometimes hold their ownership interests in limited liability companies. The BOI report must disclose these individual investors.
Additionally, any person who assists in forming the entity should be included on the BOI report. Good examples of these persons or entities would be law firms or online services that assist in structuring companies. However, they would be listed as “company applicants” rather than “beneficial owners.”
Penalties for REITS that Fail to File
Companies ultimately hold the liability if they fail to file a BOI report. In this case, the REIT must collect all beneficial owners’ identifying information. If they file false or incomplete information, the ensuing penalties will almost certainly impact their directors.
Also, remember that whenever important beneficial ownership information changes, you must file updates. Such changes include the following:
- A manager moves to a new address.
- The physical office relocates to a new address.
- A manager is replaced.
- A new investor comes on board with over 25% ownership.
- An investor with 25% ownership moves to a new address.
FinCEN estimates that complex entities like REITs will need to invest 20-plus hours to understand the law and the filing process, collect the required information, and file the report. Fortunately, BOI filing doesn’t have to be a source of worry. We use TurboCTA to streamline the CTA report process so you can get back to doing what you do best—finding and making investments. TurboCTA reduces costs and filing time by over 70% to make Corporate Transparency Act reporting easier. Additionally, they provide record-keeping services that help you build updated reports directly from your previous report.