Treasury Department Geographic Targeting Order Extended and Expanded
In November of 2018, the Treasury Department expanded and extended the Geographic Targeting Order (“GTO”) that requires insurers and escrow companies handling transactions in Santa Clara, San Mateo, San Francisco, Los Angeles, and San Diego Counties to collect and report certain information on residential Covered Transactions.
While GTO’s have been in place since July of 2016, this new order significantly lowers the dollar threshold for what is a Covered Transaction. Previously, the dollar threshold was $2,000,000 and up. The new order lowers that dollar threshold to $300,000. Given home values in Santa Clara, San Mateo, and San Francisco Counties, there is undoubtedly only a small percentage of transactions that will not meet this dollar threshold.
The latest GTO does, however, retain most of the other prior criteria that determines whether a transaction is a Covered Transaction. The other criteria are that a purchase is (1) by a Legal Entity (which is defined as a corporation, limited liability company, partnership, or other similar business entity, whether formed under the laws of a state, or the United States, or a foreign jurisdiction); (2) the purchases is made without a bank loan or other similar form of external financing; and (3) the purchase is made, at least in part, using currency or a cashier’s check, a certified check, a traveler’s check, a personal check, a business check, a money order in any form, a funds transfer, or virtual currency. To be noted is the fact that the definition of a Legal Entity does not include a trust.
If the purchaser and transaction meet all of the above criteria, the title insurer and/or escrow company handling the transaction must collect and report (1) the identity of the individual primarily responsible for representing the Legal Entity that is purchasing the property; (2) a copy of this individuals driver’s license, passport, or other similar identifying documentation ; (3) the person on whose behalf the Legal Entity was conducting the transaction; (4) the identity of any Beneficial Owner (defined as one who owns a least 25% of the Legal Entity); (5) and the driver’s license, passport, or other similar identifying documentation on any such Beneficial Owner.
Historically, this information has been obtained through the preparation of an ALTA Information Collection Form (“ICF”). This form is typically completed by the escrow officer for submittal to the title company. The title company may thereafter have to collect additional information and documentation in order for the title insurer to insure the transaction and for escrow to close. The transaction will not close and title insurance will not be issued without the ICF and any additional requested information. The ICF is in addition to the statement of information form that title companies typically require.
The fact that the Treasury Department continues to extend and expand GTO’s indicates that this program is assisting the Government in detecting and tracing tax evaders and individuals who are attempting to launder money through the cash purchase of residential real estate through legal entities. Over the years that the GTO has been in place, I have not heard about any transaction that was significantly impacted or delayed because of the program. Given the reduced dollar threshold, that may change because of the percentage of transactions that will qualify as a Covered Transaction.
If you are involved in a transaction that meets any of the qualifying criteria, it is important to determine whether an offer that you are writing, or a pending transaction, is going to be subject to the program. Any questions regarding a transaction and whether it might qualify should be directed to the escrow officer and title company.
Buyers who are writing an offer should decide, prior to doing so, whether they have any objections to providing the necessary information in a timely manner, what delays (if any) this may cause regarding the transaction, whether there will be any additional costs charged by the title company for collecting and providing the information, and whether the seller will entertain a contingency for this information to be collected, provided, and reported by the title company. The buyer should also consider the impact that any of the foregoing may have on the close of escrow date that is proposed in the offer.
A seller who receives an offer that meets the criteria of a Covered Transaction needs to consider these same issues, whether they have been confronted by the buyer, and what delays (if any) this may have on the close of escrow. A seller should also consider the potential for a cancellation by the buyer if the buyer is not aware of or is not willing to comply with the reporting requirements or if there is a very short close of escrow that provides insufficient time for the information to be collected and reported by the title company .
Anticipating these issues and addressing them during the writing of an offer and through a counter-offer, if necessary, should assist in avoiding any surprises or delays during the transaction, as well as deposit disputes and/or claims for breach of contract in the event that they are not addressed.
The most recent GTO went into effect on November 17, 2018 and ends on May 15, 2019. Given the success of this program, there appears to be a high probability that it will be extended at that time. One of the problems with this program is that some of the GTO’s have been issued publicly, while others have been issued in confidential orders to title companies. An example of this was a prior order that expanded the program to include trusts. The inclusion of trusts in the qualifying criteria now seems to be eliminated. The point, however, is to realize that the government may still extend and/or expand this program using confidential orders. One way to determine if this is taking place is to ask your escrow officer or title company.