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Why it has become so easy to hide in the US housing market
WHEN Sean Hannity, the popular Fox News host, was revealed this month to be a property owner and landlord of considerable scale, it highlighted how opaque the housing market has become.
Owning real estate in limited liability companies, as The Guardian reported that Mr Hannity does, is a perfectly legal and increasingly popular practice. But the whiff of secrecy - and the umbrage Mr Hannity has taken after the secret got out - speaks to the growing role of LLCs in the nation's housing market.
LLCs shield property owners from personal liability while obscuring their identities. In some cases, so much anonymity also enables money laundering, and it can mean that tenants struggle to hold landlords accountable, that cities fail to fix blight and that researchers can't answer basic questions about the housing market.
As much as people may want to keep their financial dealings private, the housing market has long been an unusually transparent place.
"We basically have a property system where you're supposed to be able to look up who owns what property," said Dan Immergluck, a professor at Georgia State University. "Our English system of property recording doesn't really give you that privacy. People can look up what my property taxes are any time they want."
LLCs have eroded that expectation. There is little good national data tracking the rise of LLCs. But in 2015, according to the Rental Housing Finance Survey from the Census Bureau and the Department of Housing and Urban Development, about 15 percent of all rental properties were owned by LLCs, limited liability partnerships or limited partnerships. That represented one-third of all rental units, and that can include single-family houses or apartment buildings.
Put another way: 92 per cent of rental properties in the United States back in 1991 were held by individual owners whose names tenants could easily know. By 2015, that number had fallen to 74 per cent, driven largely by the growth of LLCs, although the market today includes other kinds of institutional investors as well.
In the single-family market, which includes investors who built rental empires after the housing crash and others who've used empty properties to store wealth, about 9 per cent of home sales last year were to LLCs, according to ATTOM Data Solutions, a real estate data company.
That's twice the share a decade ago. The rent-to-own company Vision Property Management, for example, has bought homes across 24 states through nearly two dozen LLCs.
In his own research, Prof Immergluck tried to identify the largest buyers of foreclosed properties in the Atlanta area. But because one unidentified buyer could be behind many LLCs, it's hard to know who is acquiring the most property, or which property owners are behind the most code violations or the most evictions.
That makes it impossible for city officials to aim scarce resources at the most problematic owners. And it makes it hard for researchers to know, for example, if property has become concentrated among fewer owners.
Because the stakes are so high and the spillovers significant, there has always been a public element to private property, said Susan Pace Hamill, a law professor at the University of Alabama who has written about LLCs since the late 1980s.
"Should tenants have a right to know who they're renting from?" she said. "Should cities have a right to know who owns the property? The answer is a resounding yes." LLCs today hide what should be public information, she argues.
"I am quite disturbed by that," she said. "Having participated in the evolution of LLCs from their early days, I feel like they're being abused." Wyoming passed the first LLC statute in 1977 at the prodding of oil and gas interests, creating an entity with the liability protections of a corporation without the tax responsibilities of one. Hardly anyone took advantage of the tool, and few states followed until the IRS blessed LLCs a decade later. They then quickly became the entity of choice for all kinds of businesses, and by the mid-1990s, all 50 states had LLC laws.
In Milwaukee, according to research by a Harvard doctoral student, Adam Travis, LLCs have grown to about a quarter of the rental market in the two decades since they became legal in the state.
The original idea was never specifically about real estate, and anonymity wasn't particularly the appeal. But over time, Prof Hamill said, state laws have made it easier to conceal who's behind LLCs. So they have simultaneously grown more common and less transparent.
LLCs are required to list a registered agent who can receive legal and government notifications, but they're often not required to name the people who financially benefit from the investments.
The downsides of all of this have become clear, at both high and low ends of the market. In expensive cities like New York and Miami, LLCs have helped foreign investors launder money through luxury condo purchases. In poorer cities like Memphis and Milwaukee, they have enabled investors to walk away from vacant properties and tax bills.
For renters, or tenants mired in rent-to-own contracts, these entities mean they often don't know whom they're dealing with - or who's evicting them.
These consequences worry even real estate lawyers who advise their clients to use LLCs.
"The lawyer in me that represents clients says 'privacy, secrecy, keep my people out of the papers,'" said William Callison, a lawyer in Denver who specialises in LLC and affordable housing law. "The policy guy in me says, 'Well, wait a second.'" Why? "Because good things happen in the light," he said, "and bad things happen in the dark." NYTIMES