Testimony suggested that “opaque ownership laws” and specifically LLC ownerships have turned “I’m going to let them foreclose” into a business tax strategy.
WASHINGTON – Opaque ownership laws that make it easier for property owners to avoid paying taxes are compounding a national housing crisis fueled by inflation and a shortage of low- and moderate-income homes.
Limited liability companies – or LLCs – are a common way for landlords to own the real estate on which they can charge rents. But LLCs often hide the identities of the people that stand behind them, allowing property owners to be shielded from legal consequences when they fail to pay their property taxes. Properties can then go into tax foreclosure and be effectively taken off the market in cities where housing is in short supply, further driving up prices and forcing renters to live far away from where they work.
Studies have “linked LLC ownership to property disinvestment, tax abandonment, even completely walking away from properties,” Princeton sociology professor Matthew Desmond told the Senate Banking, Housing and Urban Affairs Committee on Tuesday.
“One of the landlords I spent time with in Milwaukee, I asked her, ‘What happened to this house that I spent a lot of time with?’ And she said, ‘I just gave it back to the city.’ And what she meant was, she just stopped paying taxes on it and let it go into tax foreclosure,” Desmond said.
“Tax foreclosure should not be part of a business strategy, but for some landlords who use LLCs, it is,” he added.
A 2019 study by Harvard Joint Center for Housing Studies fellow Adam Travis linked disrepair and disinvestment in housing to LLCs, which became widely available to property owners during the 1990s.
“Over the past two decades, the advent and diffusion of the limited liability company (LLC) has reshaped the legal landscape of rental ownership,” the study found. “Increasingly, rental properties are owned by business organizations that limit investor liability, rather than by individual landlords who own property in their own names.”
The study found “that signs of housing disinvestment increase when properties transition from individual to LLC ownership.”
The share of rental properties owned by professional landlords is increasing across the country as rents and mortgage rates are driven higher by interest rate increases from the Federal Reserve.
Professional “investors made 28.1% of all single-family purchases in February, a record high,” a July report from real estate market data firm CoreLogic found. Since the onset of the pandemic in early 2020, the share of home purchases made by investors has doubled from 14% to around 28%, according to CoreLogic data.
Growing role of institutional investors
Lawmakers from both parties noted that the increased holdings of professional landlords are causing concern.
“It’s come up repeatedly from witnesses, and my colleagues have made the point about increasing percentage of single-family homes especially that are owned by private investors. And there’s a lot of people who are very concerned about that,” Sen. Pat Toomey (R-Pa.) said during Tuesday’s hearing.
Sen. Catherine Cortez Masto (D-Nev.) echoed Toomey, arguing, “I, too, am concerned about institutional investors and the impact this is having in Nevada, why we’re seeing all these properties being purchased.”
“I know in my state in 2021, 29% of the homes purchased in the Las Vegas metro area were bought by investors. And the challenge is, I can’t tell how many are institutional. I think it has everything to do with what I heard earlier, about too many LLCs and not enough transparency,” she continued.
Across the country, property values have been increasing rapidly in the wake of the coronavirus pandemic, which saw a dearth of new building projects, doubling the pace of inflation. The Case-Shiller national home price index increased almost 20% from May 2021 to May 2022, whereas consumer inflation was up 8.6% in the same period.
Home prices rose about 20% and rents increased about 12% from 2020 to 2021, according to a joint report on national housing conditions from Harvard’s Graduate School of Design and Kennedy School of Government.
As families are priced out of the market by investors, legal mechanisms like LLCs that are favorable to professional property owners are coming under scrutiny.
“There’s a theme out there: out-of-town investors hiding behind a cloak of anonymity,” Laura Brunner, the manager of a government-backed real estate development agency in Cincinnati, told the Senate Banking Committee on Tuesday.
“Last summer, we asked the city of Cincinnati for the names of the five worst landlords,” she said. “It took months of rigorous research to uncover that over 4,000 single-family homes in Hamilton County had been purchased by these five landlords. Tracking the acquisitions was an arduous task due to the high volume of LLCs used.”
LLCs and similar legal designations, like S corporations, were initially used to encourage entrepreneurship, so that people could undertake risky business ventures without the threat of going personally bankrupt. Today, LLCs are more often used as devices to preserve anonymity by wealthy property owners, real estate industry experts say.
“I represent the richest people in the world and some of the most famous people in the world, and they will not buy a property unless it’s in the name of an LLC, sometimes more than one LLC, and they do that in order to keep that anonymity, so people don’t know who’s buying the property,” New York real estate attorney Adam Leitman Bailey said in an interview.
“In nefarious ways, it allows people from various countries to buy property in another country, to buy property in America. Let’s say they’re trying to hide money. They can do so by using an LLC, and people won’t know who they are.”
Bailey said this practice was common in high-profile cities like New York.
“As a real estate attorney, New York is a phenomenal place. If you have money that you want to make sure is not taken away from you from another country where it could be taken away or seized, you could buy a condo in New York and use it as a safety deposit box, and simply purchase it in cash under an LLC, and only the attorney and the client will know who owns the LLC. They can hide money that way. Real estate moves very slowly, and no one asks any questions,” he said.
Housing issues have taken center stage in hearings in both chambers of Congress in recent weeks.
The Senate Finance Committee held a hearing in July about the role that tax incentives could play in building more affordable housing, and the House Ways and Means Committee recently held a hearing under the name of “Nowhere to Live: Profits, Disinvestment, and the American Housing Crisis.”
The Treasury Department announced new rules last week to finance more affordable housing loans through the American Rescue Plan, and the White House held a virtual summit on Tuesday on beefing up emergency rental assistance and working toward long-term eviction reforms.
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