There has been a lot of talk about The Corporate Transparency Act ("CTA" or "Act") since the final rules implementing the CTA's beneficial ownership reporting requirements became effective on January 1, 2024. As Hanson Bridgett attorneys, Jonathan Storper and Morgan Gray, outlined in their December 4, 2023 article Understanding the Corporate Transparency Act (CTA Overview Article) the CTA is a sweeping new law that requires certain new and existing corporations, limited liability companies and similar entities to file Beneficial Ownership (BOI) reports with the U.S. Treasury's Financial Crimes Enforcement Network (FinCEN).

The primary purpose of the CTA is to combat significant crimes Congress believes are committed through business entities in the United States. The potential burden on law abiding real estate investment companies, however, is significant. This is because it is common for real estate investment companies and other sponsors of real estate investments (collectively, "Sponsors"), to be comprised of numerous affiliated business entities formed to hold title to, manage, finance, and allocate profits and losses to the stakeholders in their various investments. These entities may include joint ventures, funds, special purpose vehicles and other entities formed to capitalize, isolate liabilities and otherwise define the rights and obligations of the parties participating in the underlying investment (Investment Entities). Sponsors will also often have one or more additional entities, including the Sponsor entity itself, formed to manage or advise one or more of its Investment Entities (Sponsor Entities). It is not uncommon for an organization chart for a single investment to involve ten or more of these Investment Entities and Sponsor Entities, with larger investments and projects having many, many more. For real estate companies with numerous active investments this number increases exponentially and can easily result in a single Sponsor being responsible for the management or maintenance of fifty (50) or more entities, all of which are now potentially required to file BOI reports in accordance with the Act.

In this article, I discuss the applicability of the CTA to common Investment Entities and Sponsor Entities including potential exemptions available to Investment Entities and Sponsor Entities. I also include information regarding the reporting requirements for these entities if an applicable exemption cannot be identified. The CTA currently requires any nonexempt entity formed prior to January 1, 2024 to file the necessary BOI report with FinCEN no later than January 1, 2025; however, Sponsor's with a significant number of investment entities under its control should begin assessing their CTA obligations sooner rather than later. This assessment must be conducted on an entity-by-entity basis, and for those entities found to be subject to the BOI reporting requirements the Sponsor may be required to obtain information from the beneficial owners of several entities and discussions with investors and joint venture partners found to meet the definition of a "beneficial owners" may be required.

Applicability of CTA & BOI Reporting Requirements

The BOI reporting requirements of the CTA apply to any "reporting company" that is not expressly exempt under the provision of the Act. The definition of "reporting company" includes any corporation, limited liability company, or other similar entity created by the filing of a document with the secretary of state or similar office of any U.S. state or territory, or formed under the laws of a foreign country and registered to do business in the United States. While limited partnerships are not expressly included in the definition, they are created by the filing of a document with the Secretary of State in the state of formation (i.e., a Certificate of Limited Partnership).¹ Consequently, limited partnerships are deemed reporting companies for the purposes of the CTA and, like LLCs and corporations, will be subject to the BOI reporting requirements unless an express exemption under the Act applies.

Potential Exemptions Available to Sponsor Entities & Investment Entities

If an entity is within the "reporting company" definition, it can avoid submitting BOI reports if it comes within one of the 23 exempt categories outlined in the Act. Many of these exemptions apply to specified entities that are already subject to extensive federal oversight and reporting requirements and will not be helpful for the Sponsor Entities or Investment Entities utilized for private real estate investments (e.g., banks, credit unions, insurance companies, tax exempt entities, etc.). A few exemptions, however, may apply to certain Sponsor Entities and Investment Entities depending on their size and structure. The exemptions most likely applicable to Sponsor Entities and Investment Entities are discussed below.

1. SEC Registered Companies

   Public companies that are issuers of securities registered under section 12 of the Exchange Act of 1934 (Exchange Act) or that are required to file supplementary and periodic information under section 15(d) of the Exchange Act are exempt due to the extensive reporting already required under the Securities and Exchange Act. This exemption will benefit larger public real estate companies and REITS that can afford to raise their capital through SEC registered offerings. Many Sponsors, however, raise their capital through offerings expressly structured to be exempt from SEC registration to avoid the considerable cost associated with SEC registration and the ongoing reporting required under the Exchange Act. For these entities, BOI reporting will be required unless another exemption is available.

2. Registered Investment Advisors

   Entities that are registered with the SEC pursuant to the Investment Advisors Act of 1940 (Advisors Act) are exempt from the CTA's BOI reporting requirements. Sponsor Entities (including general partners and managers of Investment Entities) can, consciously or inadvertently, fall within the definition of an "investment advisor" under the Advisors Act and may elect, or be required to register with the SEC as an investment advisor. In that case, the Sponsor Entity would be exempt from the BOI reporting requirements (and may provide an exemption to one or more Investment Entities under the pooled investment vehicle exemption discussed below).

   Sponsors that raise capital through private Investment Entities, however, often do not act as "investment advisors" as defined in the Advisors Act or if they do, they utilize exemptions available under the Advisors Act to avoid SEC registration. Sponsor Entities that do not fall within the definition of an investment advisor under the Advisor's Act (because, for example, they are deemed to "advise" with respect to real estate assets rather than "securities") are not required to be, and generally are not investment advisers registered with the SEC or any state jurisdiction.

   If title to the real estate investment(s) is indirectly held through other entities and the Sponsor Entity is deemed to be advising with respect to "securities" that require registration, it may, nonetheless, be able to utilize one or more exemptions from registration available under the Advisors Act. The most common of these exceptions is the "exempt reporting advisor" exemption, available to advisors to "pooled investment vehicles" that meet the conditions of the exemption. While the exempt reporting advisor exemption does require the Sponsor Entity to file reports with the SEC that are similar to those of registered investment advisors, the investment advisor exemption from the BOI reporting requirements does not apply to unregistered investment advisors relying on the exempt reporting adviser exemption. Another issue for an unregistered Sponsor Entity deemed to be an investment adviser under the Advisors Act is that the Advisors Act itself may prohibit SEC registration and require the Sponsor Entity to register as an investment advisor by their applicable state regulator rather than the SEC. Sponsor Entities that are state-registered investment advisors are also not exempt under the investment advisor exemption of the CTA and will be subject to the BOI reporting requirements as non-SEC registered investment advisors unless another exemption applies.

3. Pooled Investment Vehicles

   Any pooled investment vehicle that is operated or advised by a bank, credit union, broker or dealer, registered investment company, registered investment adviser or venture capital fund adviser is exempt from the BOI reporting requirements. For purposes of this exemption, a "pooled investment vehicle" means any company that: (i) would be an investment company under the Investment Company Act but for the exemptions provided under Section 3(c)(l) or 3(c)(7) of the Investment Company Act; and (ii) is identified by the applicable investment adviser in its Form ADV (or will be so identified in its next update). For Sponsors of real estate investments and funds it is important to note that under this exception:

   • A pooled investment vehicle that is advised by an exempt reporting advisor or state-registered investment adviser (and that is not registered with the SEC under the Advisers Act) is not expressly exempt from the CTA and will be required to file, unless another exemption applies.
   • A pooled investment vehicle that relies on an exemption other than Section 3(c)(l) or 3(c)(7) of the Investment Company Act is not expressly exempt from BOI reporting, unless another exemption applies. This may be the case for Investment Entities that directly own their real estate investments or loans secured by real estate investments and rely on the exemption available to such entities under Section 3(c)(5) of the Investment Company Act rather than Sections 3(c)(1) or 3(c)(7).
   • A foreign pooled investment vehicle that is registered to do business in the United States (i.e., a foreign reporting company) is not exempt from the BOI reporting requirements, unless another exemption applies.

4. Subsidiaries of Certain Exempt Entities

   The "subsidiary" exemption from BOI reporting applies to certain entities whose ownership interests are "controlled or wholly owned", directly or indirectly, by one or more other exempt entities (excluding: money services business, pooled investment vehicles, entities assisting a tax-exempt entity, and inactive entities). The following should be taken into consideration when assessing the availability of the subsidiary exemption under the CTA.

   • While the final regulations issued by the CTA did not define "control" for this exemption, FinCEN has provided some guidance indicating that subsidiaries must be controlled "100 percent" or “in their entirety". Consequently, in this context, "control" of an entity is judged in the same way that an entity must be wholly "owned" by the upper tier exempt entity for the exemption to apply. Subsidiary entities jointly or partially controlled by a non-exempt entity will not qualify for this exemption.
   • The subsidiary exemption expressly excludes subsidiaries of pooled investment vehicles, so any subsidiary of a pooled investment vehicle, such as a special purpose vehicle to hold title to property, is not automatically exempt from BOI reporting because it is either controlled or wholly owned by an exempt pooled investment vehicle. Each such entity must therefore determine whether another exemption is available to that entity.
   • An entity may qualify for the subsidiary exemption if it is controlled or wholly owned by an entity that falls under other exemptions, such as the large operating company exemption (discussed below), securities reporting issuer exemption (i.e., a public company) or SEC-registered investment company exemption.

5. Large Operating Companies

   The large operating company exemption applies to an entity that: (i) employs more than 20 employees on a full-time basis, as calculated under federal law; (ii) filed its prior year federal income tax return demonstrating more than $5,000,000 in gross receipts or sales in the United States; and (iii) has an operating presence at a physical office within the United States. In general, “full-time employee” means, with respect to a calendar month, an employee who is employed an average of at least 30 hours of service per week or 130 hours per month with an employer. “Operating presence at a physical office within the United States” means that an entity regularly conducts its business at a physical location in the United States that the entity owns or leases and that is physically distinct from the place of business of any other unaffiliated entity. Investment Entities generally do not have their own employees and will, therefore, not be able to utilize the large operating company exemption. Some Sponsor Entities, however, may meet the various thresholds required. A large operating company exemption, like many of the other exemptions is not permanent. If a company loses employees falls below the 20 full-time employee threshold, it must start reporting. The converse, however, is also true and if a company previously did not qualify for the exemption but increases the number of employees to 20 or more it would become exempt.

Reporting Requirements and Deadlines for Existing and Future Non-exempt Investment Entities and Sponsor Entities

1. Required Information

   If a company is subject to the BOI reporting requirements, the report made to FinCEN must include the following information for the Reporting Company and its Beneficial Owners:

   • Full legal name;
   • Any trade name or "doing business as" name;
   • Complete current street address of principal place of business;
   • State, Tribal, or foreign jurisdiction of formation;
   • If foreign, the U.S. jurisdiction where the company first registers;
   • IRS Taxpayer Identification Number (i.e. an Employer Identification Number); and
   • Beneficial Owner information.

   A Reporting Company is also required to report its company applicants if it is either a domestic entity created on or after January 1, 2024 or a foreign entity first registered to do business in the U.S. on or after January 1, 2024.

2. Beneficial Owner Definition

   Beneficial Owners are defined broadly as individuals who, directly or indirectly, exercise substantial control over the Reporting Company or own at least 25% of its ownership interests. Ownership for purposes of the 25% test is determined by the outstanding ownership interests of the Reporting Company, the total combined voting power of all classes of stock for corporations, or the total combined value of the ownership capital, or profits interests. Beneficial Owner does not include: (i) minor children (provided the Reporting Company reports the information of parent or legal guardian); (ii) a nominee, intermediary, custodian, or agent; (iii) an employee (acting solely as an employee whose substantial control over or economic benefits are derived solely from his or her employment status) and that is not a senior officer; (iv) future interests through a right of inheritance; and (v) a creditor with no other incidents of control. Special rules for limited reporting also apply in certain cases, such as Beneficial Owners whose interests are held through entities exempt from the CTA and foreign pooled investment vehicles.

3. Substantial Control Determination

   The CTA provides four categories for determining if someone has substantial control over a Reporting Company: (i) the individual is a senior officer (i.e. President, CFO, GC, CEO, COO, or any other person, regardless of title, exercising authority of a similar function and not ministerial functions alone); (ii) the individual has authority to appoint or remove certain officers or a majority of directors of the Reporting Company; (iii) the individual is an important decision-maker; or (iv) the individual has any other form of substantial control over the Reporting Company. It is important to note that whether a particular member of a corporation's board of directors meets any of these criteria is a question that the Reporting Company must consider on a director-by-director or basis. To the extent limited partners of LPs, members of LLCs or members of any advisory board established for an LP or LLC must also be individually assessed.

4. Required Beneficial Owner Information

   All Beneficial Owners must report their: (i) full name; (ii) date of birth; (iii) current residential address; (iv) an identifying ID number along with; (v) a photo ID which may include: a valid U.S. driver's license, a valid U.S. passport, a non-expired identification document issued by a U.S. state or local government, or Indian Tribe, or if an individual does not have any of these documents, a foreign passport.

5. Deadlines for Filing BOI Reports

   The CTA and the BOI reporting requirements apply to both newly formed and existing entities to the extent they are deemed non-exempt Reporting Company under the Act. For entities formed after January 1, 2024, must be filed within ninety (90) days of formation. For entities formed prior to January 1, 2024, BOI reports must be submitted to FinCEN by January 1, 2025. The CTA Overview Article provides an excellent overview of the CTA requirements, including a matrix of all exemptions provided in the CTA and the information required in the BOI reports. The Reporting Company must certify that all information it reports is correct.

6. Ongoing Reporting Obligations

   Where a once-exempt entity is no longer exempt, it must file its initial report within 30 calendar days of the date it loses that status pursuant to the CTA, which is 180 days after revocation. Material changes to a Reporting Company, Beneficial Owner, or Company Applicant's information must be reported to FinCEN no later than 30 days after the change.

Post-2024 Entity Filing & Documentation

Sponsors should also be aware that BOI Reports for all non-exempt entities formed after January 1, 2024 must now be filed within 90 days of formation. Limited partnership agreements and LLC agreements for newly formed entities should, therefore, contemplate the possible reporting obligations of the Sponsor for the entity under the CTA including (1) requiring beneficial owners to provide the necessary information upon request; and (2) expressly authorizing the Sponsor to file applicable BOI Reports and otherwise take all actions necessary for CTA compliance.

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¹ General partnerships, on the other hand, do not require a state filing and seemingly do not come within the definition of "reporting company" under the CTA.  General partnerships, however, do not provide the limited liability protections for investors that apply to LLCs and LPs and are, therefore, not used extensively in connection with real estate investments.  To the extent utilized, however, the general partnership, itself, would not be subject to the CTA or the BOI Reporting Requirements.