Bottom line: High-End Real Estate at present sales & price levels – and developers, investors, owners, and brokers — just got scoped for a regulator kill-shot after 30% of captured transactions since the inception of the FinCEN program were found to be “suspicious”.
This is a problem because bubbles need an ever-larger pool of fraud to maintain integrity, not less. And for context, with nearly 40% of all luxury purchases being of the “all-cash” variety – 50% in So Florida last year — this has turned into a big deal, as small leaks in large bubbles can turn into large rips very easily.
FinCEN’s updated targeting orders, which was EXPANDED AND EXTENDED to close the wire transfer loophole and add Honolulu, is big trouble for developers, owners, and brokers.
It’s no coincidence that as soon as this program went into place in early 2016 headlines of massive luxury real estate price haircuts in major metros began littering the real estate pages. In fact, this season of Million Dollar Listing New York had a completely different tenor – ‘sellers had to get realistic because it’s not the same market any longer’ – which was a major underlying feature of the show.
Most analysts thought the Trump Admin would kill this program. But, instead it was strengthened.
It’s important to note that not only does this program capture “suspicious” transactions, but it also removes a large percentage of potential buyers from the market all together out of fear. This is a huge problem for developers and investors who plan and build for years, based on demand and price metrics of the past, before they can sell and recoup their investment.
The math…if 40% of all high-end transactions are cash and this program tagged 30% of transactions as suspicious BEFORE the wire transfer overlay went into effect, the number of suspicious transactions could double overnight. Plus, it will knock out many more who planned to wire to circumvent the law.
The number of potential buyers who will now step aside and launder through another means in unknowable. But, my guess is in Q4’17 there will be 75% fewer people shopping for luxury real estate in the core markets under scrutiny than two years ago.
As such, I think an implosion at the high-end is now a strong possibility, which will put pressure on prices in all other price bands.
Luxury developers and owners are in a world of hurt if their clients can’t launder sums as small as $2M+ into US real estate any longer. Think for a minute about the dozens or hundreds of luxury apartment buildings under construction from coast to coast and all those $25M+ baller mansions in LA, San Fran and NYC.
The $69k question is, what asset will they start buying instead of real estate? With the crackdown in the EB5 visa program – buy-a-visa — which is riddled with fraud, I doubt money originally targeted for luxury real estate will go there either (note a lot of this was targeted at high-end real estate too!).
Region’s being tracked now are listed, as follows. The price triggers aren’t too high. Heck, $2M doesn’t even get you a premium quarter-acre dirt lot in Palo Alto.
- New York: Manhattan with a threshold at $3 million; Brooklyn, Queens, Bronx, and Staten Island at $1.5 million.
- Florida: Miami-Dade County, Broward County, and Palm Beach County, all at $1 million.
- California South: San Diego County and Los Angeles County;
- California North: San Francisco, San Mateo County, and Santa Clara County, all at $2 million.
- Texas: Bexar County (San Antonio area) with a threshold of $500,000.
- Honolulu County: at $2 million.
Red highlights are my emphasis…
FinCEN Targets Shell Companies Purchasing Luxury Properties in Seven Major Metropolitan Areas
August 22, 2017
FinCEN Also Publishes Advisory Highlighting Money Laundering Risks and Encouraging Real Estate Professionals to Report Suspicious Activity
WASHINGTON—The Financial Crimes Enforcement Network (FinCEN) today announced the issuance of revised Geographic Targeting Orders (GTOs) that require U.S. title insurance companies to identify the natural persons behind shell companies used to pay for high-end residential real estate in seven metropolitan areas. Following the recent enactment of the Countering America’s Adversaries through Sanctions Act, FinCEN is revising the GTOs to capture a broader range of transactions and include transactions involving wire transfers. FinCEN also expanded the GTOs to include transactions conducted in the City and County of Honolulu, Hawaii.
In addition, FinCEN today published an Advisory to provide financial institutions and the real estate industry with information on the money laundering risks associated with real estate transactions, including those involving luxury property purchased through shell companies, particularly when conducted without traditional financing. Such transactions are vulnerable to abuse by criminals seeking to launder illegal proceeds and mask their identities. The Advisory provides information on how to detect and report these transactions to FinCEN.
“Through this advisory and other outreach to the private sector, FinCEN, industry, and law enforcement will be better positioned to protect the real estate markets from serving as a vehicle to launder illicit proceeds,” said FinCEN Acting Director Jamal El-Hindi. “FinCEN also thanks Congress for its modification of the Geographic Targeting Order authority, the first use of which will enable FinCEN to collect further information to combat the potential misuse of shell companies to purchase luxury real estate.”
In January 2016, FinCEN issued GTOs to require U.S. title insurance companies to report beneficial ownership information on legal entities, including shell companies, used to purchase certain luxury residential real estate in Manhattan and Miami—specifically, luxury residential property purchased by a shell company without a bank loan and made at least in part using a cashier’s check or similar instrument. In July 2016 and February 2017, FinCEN reissued the original GTOs and extended coverage to all boroughs of New York City, two additional counties in the Miami metropolitan area, five counties in California (including Los Angeles, San Francisco, and San Diego), and the Texas county that includes San Antonio.
Within this narrow scope of real estate transactions covered by the GTOs, FinCEN data indicate that about 30 percent of reported transactions involve a beneficial owner or purchaser representative that was also the subject of a previous suspicious activity report. This corroborates FinCEN’s concerns about this small segment of the market in which shell companies are used to buy luxury real estate in “all-cash” transactions. In addition, feedback from law enforcement indicates that the reporting has advanced criminal investigations. The expanded GTOs will further help law enforcement and inform FinCEN’s future efforts to assess and combat the money laundering risks associated with luxury residential real estate purchases.
FinCEN appreciates the continued assistance and cooperation of the title insurance companies and the American Land Title Association in protecting the real estate markets from abuse by illicit actors.
Any questions about the Orders should be directed to the FinCEN Resource Center at 800-767-2825.
Frequently asked questions regarding these GTOs are available here.