You should be able to know who your neighbors are. This may seem like a relatively obvious statement, but people and communities across the country are finding it harder to do this, in large part due to the increasing role of financialization in housing. Financialization refers to the increasing importance of finance in everyday life; in housing, it’s partially driven by financial firms that are increasingly intertwined with the ownership and operation of residential housing as landlords, lenders, and investors. Scholars who study financialization have found that large corporate investors can shape rental pricing increases, defer maintenance, decrease neighborhood stability, and increase vacancy and eviction rates. However, they do it at a distance, in an abstract and not transparent way.
[LEARN MORE: The Financialization of Housing—What Does It Mean?]
That is to say, when a large corporate investor is your landlord, or an investment vehicle forecloses on a home in your neighborhood, it’s often hard to know who or what owns the property due to the use of limited liability companies (LLCs). LLCs are a type of business structure that enable the owner to enjoy the limited liability benefits of a corporate structure while still receiving the tax benefits of a partnership. While the exact legal definition of LLCs varies slightly by state, this core definition is present nationwide. This makes LLCs an excellent option for business ventures that are owned by single individuals or small groups, as is often the case for investor-owned real estate. However, this business form, when extended to the ownership of real property, makes it hard to know who actually owns housing.
The same qualities that make LLCs attractive to smaller-scale owners make them an attractive vehicle for large corporate investors looking to buy hundreds of properties without attracting attention. When a private equity firm or large corporate landlord uses residential housing as collateral, often the formal owner of the property is an anonymous LLC, one per property. It’s difficult to accurately quantify and trace the scope of this phenomenon because there is no transparency. As these financial practices accelerate, the number of homes with untraceable or difficult-to-trace ownership proliferates. Regardless of investor size or type, LLC ownership of real property can create problems at the local level for tenants, neighbors, and municipalities.
The percentage of rental units owned by non-individual investors (in addition to LLCs, these also include corporate forms like limited partnerships and real estate investment trusts) rose from 17.3 percent in 2001 to 24.5 percent in 2015. In most states, LLCs are required to list a registered agent who can receive legal and government notifications, but not required to name the people who financially benefit from the investments (the “beneficial owner”). This anonymity has made it difficult for cities to direct their limited resources to address problematic owners—or even to identify crimes like money laundering.
In 2013, a Detroit newspaper attempted to run a series on speculative real estate purchases in the city, but found that accurate analysis of real estate ownership was nearly impossible, as doing so would require a large array of difficult-to-obtain public and private records, including corporate filings, overlapping memberships of corporate boards, business ties, and property records. Researchers ran into the same issue in Seattle, New York, and Memphis, where LLC ownership and the lack of transparency these entities provide made it difficult to uncover the actual owners of local real estate.
The difficulty in establishing property ownership can make it harder to hold LLC owners accountable when they do things that harm their tenants or the neighborhood. In Milwaukee, LLC ownership has been found to be correlated with numerous measures of housing disrepair. In addition, rental properties that transferred from unincorporated individual ownership to LLC ownership experienced an increased rate of deterioration when compared to those that remained in the former ownership status. Parcel surveys conducted in Memphis, Tennessee, show that the majority of the most blighted properties in the city belong to LLCs. And yet, in instances of property abandonment by LLCs, the city attempts to hold the property owner responsible, but has no one to contact—the legal owner of the property is listed as an LLC and though the LLC is required to register annually with the secretary of state, as well as list a registered agent to be contacted with legal notices, failure to do so does not result in property forfeiture, and the registered agents’ responsibilities expire along with the company’s registration. The city is legally obligated to contact the property owner about their court date and municipal violations before they can move forward with seizure, leaving these properties in an ownership limbo and negatively affecting the surrounding neighborhood. This problem is not limited to Memphis. Issues with LLC owner identification have prompted some states, like New York, to pass laws that make it easier to unmask owners.
[RELATED ARTICLE: How Hidden Property Owners and Bad Landlord Patterns are Revealed in NYC]
LLCs have also become the legal entity of choice for money laundering practices. Prior to 2016, residential real estate purchased entirely with cash was not traced by the federal government, presenting a massive loophole for money laundering. The U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) launched the Geographic Target Orders (GTOs) program in 2016, requiring title transfer insurers to identify the owner behind any legal entity acquiring residential real estate worth more than $300,000 in cash transactions. As of May 2019, the program tracked this information for certain counties within the metropolitan areas of Boston, Chicago, Dallas-Fort Worth, Honolulu, Las Vegas, Los Angeles, Miami, New York City, San Antonio, San Diego, San Francisco, and Seattle. However, the limited geographic scope of the GTO program limits its effectiveness in addressing the issue of money laundering nationwide.
A large portion of the national discussion on LLC transparency concerns money laundering practices, which typically occur in the luxury residential market as these purchases are larger and thus allow for larger-scale laundering. However, there are other reasons to increase transparency around LLC ownership, as more investors direct their money toward single-family rental properties, particularly in lower-income neighborhoods. This can present a direct challenge to the availability and quality of affordable housing in these neighborhoods, which are typically the only locations where low-income renters and homebuyers can afford to live.
Investors and Single-Family Rental Properties
Since 2007, the number of single-family homes owned by investors has skyrocketed. As homeowners began defaulting on their home loans in the wake of the 2008 financial crisis, formerly owner-occupied properties were foreclosed upon and were scooped up by private investors who turned them into rental properties. The rise in foreclosures, continuing income inequality, and changing markets for credit pushed a large number of households toward long-term rentership, driving up the demand for single-family rental housing. These two forces indicate a large shift in the ownership of single-family housing stock away from owner occupancy to investor ownership.
While investor ownership in single-family homes in the U.S. is not a new phenomenon, the types of owners in this market have changed. Traditionally, single-family investors were small, local investors. In the aftermath of the housing market collapse, a sizeable number of large real estate investors entered the single-family housing market. In contrast to the local investors who had traditionally dominated the market, this new group created massive portfolios of rental properties and securitized them through investments in public capital markets. This meant that investors were able to own single-family rental properties without ever personally buying, managing, or even seeing them.
Housing researcher Alan Mallach identified four subgroups of real estate investors in distressed markets, which he referred to as rehabbers, flippers, milkers, and holders. Rehabbers and holders tend to focus their investments in areas where market prices for distressed properties are low, but still high enough to discourage scavengers. In order for a rehabber to make a profit, the market price of a fixed-up house in the area must be greater than the sum of its acquisition and rehab costs. The same profit-seeking strategy is true for holders who justify holding and maintaining a property in the long term due to the expectation that the property will at least maintain its value over time. In contrast, milkers and flippers are attracted to markets that allow them to recoup their investment quickly by renting or selling at a relatively high price and spending very little on maintenance. While flippers are concerned with short-term resale, milkers are likely to abandon their property after making a quick profit from rent, leaving it in a worse condition than when they bought it. In addition to Mallach’s four profit strategies, many financial firms value single-family rentals because they serve as collateral and can be borrowed against at favorable interest rates.
The milker group that Mallach described is perhaps the most troubling investor type that is empowered to act maliciously by using limited liability companies and the protections they afford. Abandoned property is an incredibly visible and widespread issue, particularly in distressed urban neighborhoods. Public officials working for the city of Memphis, Tennessee, for example, have repeatedly run into the issue of LLC owners effectively abandoning their properties. Community members repeatedly voice their frustrations with these abandoned properties, but the city has no effective option to address the issue in a timely manner. The city can levy fines against neglectful property owners, and the continued failure to pay these fines may be used to justify the eventual title transfer of the property to an appropriate public agency via a court order, but the obscurity that LLCs enable prolong this process. Cities need to be able to take the owners of abandoned properties to court, but without the ability to identify the owner, there is no one for the city to hold legally accountable, forcing the city to wait out several notice periods before additional legal remedies can be initiated. In addition to allowing property abandonment, LLCs can be used by investors who act as slumlords to avoid legal prosecution and fines for leaving rental properties in disrepair. The increase in the number of investors participating in these distressed markets and the anonymity that LLCs provide them has worsened the issue.
While a variety of steps can be taken to combat the overall problem of financialization of housing, one key tactic is creating a rental registry to clarify the ownership of residential properties. We advocate for two actions:
- Create a national rental housing registry. The Treasury Department gathers data on the beneficial owners of residential real estate purchased with cash in 12 major metropolitan areas nationwide. While this dataset can only be used as part of law enforcement actions, Treasury should make that dataset available to other government agencies like the DOJ and FTC interested in evaluating the relationship between rental increases and market concentration, to link with data on code violations, evictions, and to evaluate disparate impact on communities of color.
The federal govt should also create a public rental registries at national levels. Similar to the GTO order, the federal government could order the collection of data on the beneficial owners of real estate through a national rental housing registry, and fund and maintain a national database, and support the analysis of residential housing ownership, maintenance, rental increases, and eviction practices nationwide.
- Support local rental housing ordinances. We recommend the passage of rental housing ordinances, and the creation of public rental registries at the municipal level with support from the state and federal governments. Minneapolis’ rental licensing process is one example of what this can look like at the local level. Rental properties owned by LLCs in Minneapolis are required to disclose “an associated natural person… and a copy of the Articles of Organization listing the shareholders of the LLC.” This information is then made public via an open data portal.
Federal and state governments can take actions to support municipal rental ordinances such as drafting a standard ordinance which could be adopted by jurisdictions; providing funding for infrastructure, including web portals, database creation and maintenance, and community collaboration around data visualization and analysis; and funding the enforcement of rental registry ordinances.
These rental registries can help city officials to identify and target problematic property owners, and researchers can use rental registries to analyze market share within submarkets and determine whether there’s potential for anticompetitive practices.