New York state has enacted new disclosure requirements that could apply to any limited liability company (LLC) that transfers or acquires certain residential real property in New York by deed, which could have a dramatic effect on all residential condo developers. Chapter 297 of the Laws of 2019. Absent any guidance to the contrary, if an LLC is the grantor or the grantee on any NYC residential condominium (or 1- to 4-family house) deed on or after Sept. 13, 2019, the LLC may have to attach to its NYC transfer tax return a list of all of the LLC's direct and indirect owners, going up an unlimited number of tiers until the disclosure of all indirect owners who are individuals, as well as all of the LLC's and its owners' managers, officers, and authorized persons, and sometimes their managers, officers, owners, and so on. N.Y.C. Admin. Code § 11-2105.h; New York City Department of Finance, Real Property Transfer Tax (RPTT).

Example: Kramerica Industries LLC converts and renovates a NYC apartment building into residential condominium units, which are then sold. Kramerica Industries LLC is owned 100% by Kramerica Industries Corp., the common stock of which is owned 95% by Pendant Publishing Inc. and 5% by Newman. Kramerica Industries LLC has an incentive fee payable to Cosmo Kramer. Mickey Abbott is a non-member manager of Kramerica Industries LLC, Kramer's lawyer Jackie Chiles is the President of Kramerica Industries Corp., and Mr. Lippman is the CEO of Pendant Publishing Inc. In addition, Japanese investors contributed several thousand yen to acquire Kramerica Industries Corp.'s preferred stock. The NYC transfer tax returns for each of the sold condominium units may have to disclose the name and business addresses of Kramerica Industries LLC, Kramerica Industries Corp, Pendant Publishing Inc. and its direct and indirect public shareholders, Newman, Mickey Abbott, Jackie Chiles, Mr. Lippman, and all of the Japanese investors.

The statute requires only the disclosure of the name and business address of each disclosed person, but the NYC Department of Taxation and Finance has added a further requirement to disclose each person's taxpayer identification number. There is some debate over whether the disclosed information is subject to Freedom of Information Law (FOIL, or FOIA) requests. See Silvia Varnham O'Regan, Sweeping LLC law surprised even legislators, The Real Deal (Oct. 15, 2019).

Although the LLC disclosure requirements apply only to a "deed" that transfers residential real property, the NYC transfer tax rules define "deed" broadly to include any document that grants, assigns, or cancels a leasehold interest, which may cause the LLC disclosure requirements to apply to certain residential lease transactions in NYC.

The same LLC disclosure requirements may apply to deeds of NYS properties for their NYS transfer tax returns. N.Y. Tax Law §1409(a). The NYS Department of Taxation and Finance initially in September had the same view as its NYC counterpart that the new law specifically applies to residential condos, but the department was promptly educated about the law and changed its description of the rule on Oct. 21, 2019 to refer to only "one- to four-family dwelling units," which is not defined under NYS law. New York State Department of Finance, Real estate transfer tax (updated Sept. 27, 2019 and again on Oct. 21, 2019). The law's drafters may be aware that the Internal Revenue Code has defined "dwelling units" to include residential condo units for several decades. See Internal Revenue Code §168(e)(2)(A) and §280A(f)(1).

Legislative History

It is possible that the NYS legislature had more limited disclosure in mind when its members enacted the legislation. Apparently some suburban Rockland County residents were suspecting that their neighbors were making illegal home conversions or subdivisions, and getting local authorities to enforce the rules was more difficult for a property owned by an LLC. Josh Barbanel, Secret Manhattan Condo Purchases Are Dead, Thanks to a Suburban Squabble, Wall Street Journal (Oct. 8, 2019). A NYS Senator and bill co-sponsor intended the disclosure to apply to abandoned homes with unclear owners in upstate New York towns like Ramapo, Newburgh, and Mount Vernon. Sylvia Varnham O'Regan, Owners of Some Residential Properties Can't Hide Behind LLCs Anymore, The Real Deal (Sept. 20, 2019).

There is an impression that the new law does not affect buyers of NYC properties, which the law's proponents claim are already subject to the same rules implemented in 2015. Id. NYS Senator and bill sponsor James Skoufis stated that the purpose or general idea of the bill is that the disclosure "has been successfully implemented in New York City as of 2015. This bill seeks to codify the practice in New York City and apply it on a statewide level." Senate Bill S1730. There are, however, some important differences between the new rules (applicable to both NYS and NYC) and the old NYC rules, such as the latter applying only to one level of upper-tier ownership and requiring just the disclosure of Kramerica Industries LLC and Kramerica Industries Corp. in the above example.

Taxpayer Responses

The disclosure requirements may generate some taxpayer responses, such as:

(1) The new law applies only if the grantor or the grantee is an LLC. Accordingly, some commentators have suggested that taxpayers acquire residential properties using limited partnerships, corporations, trusts, or other entities instead.  If the property is already owned by an LLC, however, any property transfer by deed from that existing LLC may be subject to the LLC disclosure requirements.

(2) The law applies only to deed transfers of residential real property, and not to transfers of interests in LLCs or other entities that own the real property.

(3) The law does not apply to residential cooperative apartment units. The New York legislature has historically given special treatment for coop units compared to other forms of real property ownership, such as a 2009 NYS income tax on certain real property that began to apply to coop units only in 2017. Chapter 57 of the Laws of 2009 (enacting N.Y. Tax Law 631(b)(1)(A)(1)); chapter 69 of the Laws of 2017 (amending N.Y. Tax Law 631(b)(1)(A)(1) to apply to cooperative units).

Example: George Costanza originally forms Vandelay Industries LLC in order to acquire a beach house in the Hamptons. Many competing buyers withdraw from the bidding process after the enactment of the new LLC disclosure requirements, and the property's purchase price undergoes shrinkage. George forms a wholly owned limited partnership, Vandelay Import-Export LP, with a 0% general partner (GP) interest owned by Vandelay Industries LLC. When Vandelay Import-Export LP acquires the beach house, the new law may not apply to require disclosure of its owners, managers, and authorized persons.

Conclusion

The new transfer tax LLC disclosure requirements could have a wide-ranging impact on the NY residential real estate industry, even though some legal commentators have opined that "it seems that the only parties who will be impacted, will be parties who are trying to hide their identities from the taxing authorities." Sylvia Varnham O'Regan, Owners of Some Residential Properties Can't Hide Behind LLCs Anymore, The Real Deal (Sept. 20, 2019). The disclosure rules are another strike on an industry that may have a less cheerful 2019 Festivus season, given the new rent control laws and substantially higher transfer taxes on NYC properties. See Libin Zhang, Transfer Tax and the City, NYLJ (June 21, 2019).

Although the NYS legislature drafted the new law with some precision, it is possible that it did not fully appreciate the consequences of the new LLC disclosure requirements, especially for the many LLCs commonly found in the structure charts of residential condominium property developers and home builders. Absent a statutory change or other guidance to the contrary, those developers may have to disclose all of their direct and indirect investors, and the investors' officers and managers, every time any one of the developer's LLCs transfers a residential condominium unit by deed.

Update: On Nov. 6, 2019, the NYC Department of Taxation and Finance updated its website analysis of the law to state that it applies to a transfer of "a building containing one- to four-family dwelling units" and to no longer require the taxpayer identification numbers of the disclosed persons.

Libin Zhang is a partner at Fried, Frank, Harris, Shriver & Jacobson in New York.