Money-laundering rules could chill luxury real estate

Treasury to track secret buyers of high-end real estate
Treasury to track secret buyers of high-end real estate   

New federal rules aimed at combating money laundering could create another headwind for the luxury real estate market, which is already facing uncertainty over global growth concerns.

On Wednesday, the U.S. Treasury Department announced new requirements aimed at curbing all-cash purchases of high-end property through anonymous LLCs and shell companies. Under the rules, all-cash buyers of property priced at more than $3 million in Manhattan, or more than $1 million in Miami, will be required to provide the name of the true buyer or owner.

It will be up to title insurance companies to determine what the Treasury Department calls the "true beneficial owner" behind the LLC or shell company buying the property.

Real estate experts told CNBC that the sudden rule change could slow sales of luxury residences, especially in new towers that cater to overseas buyers.

"This adds uncertainty to the process of buying," said Jonathan Miller, of New York appraisal firm Miller Samuel. "When you add uncertainty to a process, it tends to slow it down."

About half of all real-estate purchases in Manhattan are all-cash, Miller said. And while overseas buyers only account for about 15 percent of total sales in Manhattan, they account for more than a third of the buyers in many new condo developments, particularly in Midtown.

Treasury's rules, which run from March to August, follow an investigation byThe New York Times about individuals using shell companies to buy luxury real estate to potentially hide ill-gotten gains.

A view of Manhattan Bridge, rear, and Brooklyn Bridge, as seen from the roof terrace of a luxury condo building in New York.
Ramin Talale | Bloomberg | Getty Images
A view of Manhattan Bridge, rear, and Brooklyn Bridge, as seen from the roof terrace of a luxury condo building in New York.

But Miller said the regulations may "overdramatize" the amount of criminal buying in luxury real estate. He said many celebrities, Wall Streeters and top executives often legitimately use LLCs to protect their privacy and give them legal protections.

What's more, title insurance companies may opt out of handling transactions in which they can't legally determine the true owner of an LLC, which can often be hidden by shell companies upon shell companies.

"The rules are a somewhat overzealous effort to go after a certain number of individuals but the whole space becomes tainted," he said.

Not all brokers and real estate companies said the rules will have a big impact.

"If maybe five or 10 bad guys are prevented from buying apartments in New York City, what's the big deal?" one real estate executive said. "It's not going to affect the market, which right now is very strong."

Although the luxury real estate market remained solid in the fourth quarter, analysts say falling stock markets and slowing growth overseas could put a chill on sales in 2016. Treasury's new rules also add a wrinkle of uncertainty.

"The market is strong right now," Miller said. "But these new rules can be unsettling."

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