Real Estate

FinCEN’s proposed reporting rule targets residential real estate cash closings

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On February 7, the U.S. Department of Treasury’s Financial Crimes Enforcement Network (FinCEN) issued a Notice of Proposed Rulemaking for the stated purpose of combatting money laundering in residential real estate transactions. You can review the proposed rule and a related fact sheet here.

The proposed rule would require certain professionals, including attorneys, involved in real estate closings to report information to FinCEN about cash transfers of residential real estate to legal entities and trusts. The agency’s press release indicates the proposal is tailored to target transfers that are high-risk for money laundering. No reporting would be required for transfers to individuals.

The information to be reported would include:

  • Beneficial ownership information for the legal entity or trust receiving the property;
  • Information about individuals representing the transferee legal entity or transferee trust;
  • Information about the business filing the report;
  • Information about the real property being sold or transferred;
  • Information about the seller; and
  • Information about any payments made.

A Geographic Targeting Order program has been in place for several years requiring this type of reporting in certain high-priced locations. The new rule would replace the Geographic Targeting Order with nationwide reporting.

FinCEN recognizes that the beneficial ownership information required under this proposed rule is also collected under the new Corporate Transparency Act, but states that the information will serve two different purposes.

The proposed rule would require reporting on single-family houses, townhouses, condominiums and buildings designed for occupancy by one to four families. It would also require reporting on transfers on unimproved land that is zoned or permitted for occupancy by one to four families.

Transfers would be reportable regardless of price. Gifts and other transactions where no consideration is exchanged are reportable. Exempted transactions include easements, transfers resulting from the death of the property owner, transfers resulting from divorce, and transfers made to a bankruptcy estate.

The agency encourages written comments in response to the proposed rule for 60 days. Closing lawyers, I encourage you to read the information at the links above and to make comments.    

Updates on Florida condominium legislation

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This blog has previously discussed Florida’s legislation that requires regular building inspections for condominium projects of three stores and higher and requires homeowners’ associations to maintain reserves. The act was unanimously passed by both houses, and Governor DeSantis signed the bill into law on June 9, 2023.

Under the new law, inspections are required when a condominium building reaches 30 years of age and every ten years thereafter. For buildings within three miles of the coast, the first inspection is required at 25 years of age.

In addition, mandatory structural integrity reserve studies are required every ten years under the new law, and reserves are required to be maintained based on the studies. The reserves must be fully funded. The power of the HOA to waive reserves will be removed, effective December 31, 2024.

New Jersey has passed similar legislation. These laws apparently attempt to exchange some short-term pain in maintaining reserves for long-term stability.

These laws will require higher assessments in most cases, and that will likely mean lower prices for sellers. Buyers will have to become more discerning as to the long-term financial implications. I’ve also seen the argument made that with the great number of condominium projects in Florida, there may be too few professionals available to accomplish the inspections and repair estimates.

The main downside of such legislation is that it will make condominium living more expensive and may price some retirees and lower-income individuals out of the market entirely. Insurance costs are also increasing.

But, logically, the cost of maintenance should be factored into every residential property purchase. The ability of an owners’ association to waive reserves and thereby kick the maintenance can down the road is a dangerous proposition.

Perhaps older condominium projects will be terminated, and developers will seek to take advantage of financial distress by seeking to develop new condominium projects. New construction will certainly be favored under the new laws.

Should we pass similar legislation in South Carolina? Let me know what you think.

Court of Appeals decides interesting conservation easement case

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The South Carolina Court of Appeals issued an opinion* on January 17 that interpreted a conservation easement as it affected two heirs of the original grantor.

In 2004, Benjamin Franklin Knott executed a will granting each of his daughters, Susan and Betsy, approximately one-half of a 371-acre parcel near Huger in Berkeley County. The property was subject to a conservation easement Mr. Knott had previously granted to Wetlands America Trust, Inc., a non-profit organization affiliated with Ducks Unlimited, Inc.

Conservation easements are creatures of statute in South Carolina and elsewhere. Such easements are defined as nonpossessory interests for the purposes of protecting natural, scenic, and open-space areas, ensuring the availability of property for agricultural, forest, recreation, educational or open-space use, protecting natural resources, maintaining air or water quality, and preserving historical, architectural, archeological or cultural aspects of real property. The grantor of a conservation easement receives a tax benefit.

Mr. Knott died in 2009, and his daughters received deeds of distribution to their respective parcels. The only direct road frontage was Cainhoy Road, adjacent to Betsy’s parcel. There was originally indirect access to Susan’s parcel from Charity Church Road via an easement retained when Susan sold an adjacent parcel, but Susan terminated her easement in 2015.

Three years later, Susan asked Betsy if she could use Betsy’s parcel to access Susan’s parcel. According to Susan, Betsy rejected this request. Susan brought this declaratory judgment action arguing that she had an express access easement under the terms of the conservation easement. The Circuit Court granted a partial summary judgment to Susan. Betsy appealed.

The Circuit Court had concluded that under the terms of the conservation easement, Susan, as owner of approximately half of the property, had the right to use the roads crossing over Betsy’s property to access Susan’s property for all activities permitted under the conservation easement.

Among other rights reserved in the conservation easement was the right to maintain and replace existing roads and to construct new roads.

The Court of Appeals agreed with Betsy that the reservations in the conservation easement did not create rights for Susan to access her property via roads on Betsy’s property. The easement rights granted to the Ducks Unlimited entity did not translate to easement rights in favor of Susan as against Betsy. The Court reasoned that if Susan has the rights to use the roads on Betsy’s property, it logically follows that she must have all the other owner’s rights reserved for the grantor as to Betsy’s parcel.

The Court of Appeals concluded that Susan has no rights in Betsy’s property, and the conservation easement’s language does not convey any new rights to any person who is not the owner of the property over which the conversation easement lies.

The Court of Appeals reversed the partial summary judgment and remanded the case for further action by the Circuit Court.

*Floyd v. Dross, South Carolina Court of Appeals Opinion 6044 (January 17, 2024)

Professor Whitman provides update on legislative restrictions on foreign ownership of real estate

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This blog has discussed legislation limiting the purchase of real estate by some foreigners twice. Remember the Chinese surveillance balloon the United States shot down off the coast of the Palmetto State last February?

That incident and other rising tensions between our government and China over several issues (the war in Ukraine, recognition of Taiwan, to name only two) have resulted in politicians proposing to broaden state law bans on foreign ownership of real estate.

Professor Whitman of the DIRT listserv has provided a New Year’s update on the legislation across the country. He said one of the most significant developments of 2023 in the real estate arena was the noticeable increase in restrictions on foreign acquisitions of US property.

Chicago Title published an Underwriting Memorandum on April 5 entitled “Foreign Ownership of Property in South Carolina” to advise agents of the pending legislation in our state.

For your information, here is a link to Professor Whitman’s email. He gives credit for some of the list to Womble Bond Dixon. And I, as always, recommend and give credit to the listserv. Professor Whitman and his colleagues attempt to keep all of us up to speed on real estate law and trends across the country.

If you encounter potential foreign purchasers in your transactions, consult your friendly and intelligent underwriting counsel.

Reminder: Corporate Transparency Act is effective January 1, 2024

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This blog has discussed the new Corporate Transparency Act three times recently. This is a reminder that the CTA goes into effect on January 1, 2024.

For reporting companies formed prior to the effective date, beneficial owner information will need to be reported to FinCEN prior to January 1, 2025.

For companies formed or registered after January 1 2024 and before January 1,2025, reporting is required within 90 days of the acceptance of the company’s formation or registration filing. FOR NEW COMPANIES, YOU HAVE ONLY 90 DAYS TO REPORT!

If you missed the discussion of the Small Entity Compliance Guide FinCEN issued in September, here is the link.

On September 28, FinCEN issued a Notice  to extend the deadline for filing beneficial ownership information reports. You can read the notice here.

Please refer to the excellent September 2023 article in SC Lawyer entitled, “The Basic Ins and Outs of the Corporate Transparency Act” by Matthew B. Edwards and D. Parker Baker III.

This article provides an analysis of the basics of the Act, which is intended to help prevent money laundering, terrorist financing, corruption, tax fraud and other illicit activities. Many entities will be required to report information concerning beneficial owners to the Department of Treasury’s Financial Crimes Enforcement Network (FinCEN), identifying their beneficial owners and providing certain information about them.

The act may apply to virtually every commercial real estate transaction because of the use of multi-tier entity structures to achieve business objectives. Lawyers will need to review clients’ organizational structure charts to determine entity by entity whether an exemption is applicable. If not, organizational documents, stockholder agreements, operating agreements will have to be reviewed to determine beneficial ownership.

Reporting information will include the name, address, state of jurisdiction and taxpayer identification number of every beneficial owner. Other information may be required, such as passports and driver’s licenses. Penalties for failure to comply will include civil penalties of no more than $500 per day, fines of no more than $10,000 and imprisonment for no more than two years. A safe harbor is included for voluntarily and promptly correcting an inaccurate report within 90 days.

Everyone will get through this together, and it’s likely that experts will emerge to help. This blog will keep you posted on new developments.

Conforming loan limit to increase in 2024

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The Federal Housing Finance Agency (FHFA) issued a press release on November 28 announcing the conforming loan limit values for Fannie Mae and Freddie Mac mortgages in 2024 will increase.

For most locations, the new loan limit will be $766,550, an increase of $40,350 from 2023. The press release indicates that average home prices increased 5.56% between the third quarters of 2022 and 2023, and the conforming loan limit will increase by the same percentage.

In some areas with high housing values, the applicable loan limit will be doubled ($1,149,825). In addition, special statutory provisions require that the limit in Alaska, Hawaii, Guam, and the U.S. Virgin Islands must be set at 150% of the limit in other areas. That limit will be the same as in the high housing value areas ($1,149,825).

This is a map showing the 2024 conforming loan limits across the United States. And this is a list of FAQs the agency has answered.

Western District of Missouri approves commission settlement

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This update furthers my effort to keep South Carolina dirt lawyers up to speed on the real estate agent commission cases that are proceeding through courts across the country. HousingWire is reporting that a judge in the Western District of Missouri has preliminarily approved a settlement with two corporate broker firms, RE/MAX and Anywhere Real Estate.

According to the article dated November 21, RE/MAX will pay $55 million, and Anywhere Real Estate will pay $83.5 million.

Settlement agreement provisions include no longer requiring agents to be members of the National Association of Realtors and that the brokerage firms will require or encourage agents to make it clear that commissions are negotiable. Agents will also have the flexibility to set or negotiate commissions as they see fit.

The parties are required to contact the court to schedule a final approval hearing before December 22.

Last week’s blog spoke to Housingwire’s November 10 article that Sauntell Burten has filed a lawsuit in the U.S. District Court for South Carolina alleging that the National Association of Realtors and Keller Williams colluded to artificially inflate agent commission rates.

The plaintiff is seeking class action status for all home sellers in South Carolina who have sold a home on the MLS with a Keller Williams agent since November of 2019. The 107-page complaint states that NAR’s “clear cooperation” policy leads to the commission problem because that policy requires agents to provide a blanket offer of compensation to the buyer’s agent to list a property on the MLS.

Real estate lawyers, let me know if you hear local updates on this situation.

SC joins states where real estate commissions are being litigated

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This blog recently discussed the Missouri class action by residential real estate sellers against the National Association of Realtors (NAR), a real estate agent trade association, and several real estate agent entities, which resulted in a judgment of $1.8 billion. The plaintiffs argued that commissions are rarely negotiable and that the seller is required to pay commissions for both sides of transactions

A South Carolina lawyer posted on a listserv I read on the subject that litigation like this wouldn’t happen in South Carolina because standard residential contracts leave a blank for the percentage of the buyer’s agent’s commission. This poster was, sadly, wrong.

Housingwire reported on November 10 that Shauntell Burton has filed a lawsuit in the U.S. District Court for South Carolina alleging that the NAR and Keller Williams colluded to artificially inflate agent commission rates. You can read the story here.

The plaintiff is seeking class action status for all home sellers in South Carolina who have sold a home on the MLS with a Keller Williams agent since November of 2019. The 107-page complaint states that NAR’s “clear cooperation” policy leads to the commission problem because that policy requires agents to provide a blanket offer of compensation to the buyer’s agent to list a property on the MLS.

Apparently, similar suits are being brought in multiple states.

Dirt lawyers, what do you think about this? Is Keller Williams the only broker involved in the practice, or will other brokers be named in the future? Is it your experience that commissions paid by sellers to buyers’ agents are negotiated, as the poster mentioned above suggested? I’d love to hear your thoughts and learn from your experience.

Real estate agents’ commissions could be at issue nationwide

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Missouri jury delivers a $1.8 billion judgment

Halloween brought a scary judgment in a Missouri class action by residential real estate sellers against the National Association of Realtors (NAR), a real estate agent trade association, and several real estate agent entities. The judgment of $1.8 billion will surely be appealed all the way to the Supreme Court. Appeals may take several years to be completed.

The sellers argued that commissions are rarely negotiable, and that the seller is required to pay commissions for both sides of transactions. I heard a seller interviewed by Lester Holt on NBC Nightly News on November 1. He said that he must pay commission to a real estate agent he never met, will never meet and who did no work for him.

The plaintiffs also argued that this commission structure keeps home prices artificially high.

At least two real estate agent entities settled for large sums prior to the judgment. And similar lawsuits are pending in other jurisdictions.

Dirt lawyers, how do you project this suit may ultimately affect our industry? I wonder if any type of injunction will be put into place pending appeal. I wonder whether the Department of Justice will see the necessity to become involved. I wonder whether commissions will ultimately become negotiable and whether buyers will be required to pay their agents up front or at closing. If that happens, I can imagine extensive negotiations with sellers to pay more of their buyer’s closing costs than customary. I even wonder whether buyer agents may become obsolete.

Let me know what you think!

News on MV Realty

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This blog has previously discussed MV Realty PBC, LLC. South Carolina title examiners report they are discovering “Homeowner Benefit Agreements”, or “Exclusive Listing Agreements” filed in the public records as mortgages or memoranda of agreement. The duration of the agreements purports to be forty years, and a quick search revealed hundreds of these unusual documents filed in several South Carolina counties. The documents indicate that they create liens against the real estate in question.

The company behind these documents is MV Realty PBC, LLC which appears to be doing business in the Palmetto State as MV Realty of South Carolina, LLC. The company’s website indicates the company will pay a homeowner between $300 and $5,000 in connection with its Homeowner Benefit Program. In return for the payment, the homeowner agrees to use the company’s services as listing agent if the decision is made to sell the property during the term of the agreement. The agreements typically provide that the homeowner may elect to pay an early termination fee to avoid listing the property in question with MV Realty.

In response to numerous underwriting questions on the topic, Chicago Title sent an underwriting memorandum last year to its agents entitled “Exclusive Listing Agreements”. Chicago Title’s position on the topic was set out in its memorandum as follows: “Pending further guidance, Chicago Title requires that you treat recordings of this kind like any other lien or mortgage. You should obtain a release or satisfaction of the recording as part of the closing or take an exception to the recorded document in your commitments and final policies.”

Several states have sued this company or passed legislation making the contracts unenforceable. South Carolina is not one of those states. On September 6, United States Senators Casey, Brown and Wyden (Chairmen of Special Committee on Aging, Committee on Banking, Housing, and Urban Affairs and Committee on Finance, respectively) wrote a comprehensive letter setting out the legal concerns and seeking information. You can read the letter in its entirety here.

Now, MV Realty of South Carolina has filed for Chapter 11 Bankruptcy reporting assets of $1 – $10 million and debts of $1-$50 million.

Dirt lawyers, pay attention to this situation. We will certainly see updates. If you see these contracts in your chains of title in the meantime, contact your underwriting counsel for guidance.