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States try to ferret out unnamed landlords

Tim Henderson, Stateline.org on

Published in Business News

NEWBURGH, N.Y. -- This small Hudson Valley city features sweeping river and mountain views, charming rowhouses and Victorian homes that are drawing young professionals looking for a break from high housing costs downriver.

But the sight of abandoned or dilapidated houses next to renovated ones is a reminder that the city's revival still faces obstacles -- including landlords who can't be identified when it's time to make repairs.

Those landlords hide behind limited liability companies, or LLCs, which can be used to shield investors' other assets. When a property's owner is an LLC, the landlord can't be sued and their name may not even appear on deeds.

"When an LLC is involved there isn't a lot of good information about who the owner is and how the building can get repaired," said William Horton, an assistant fire chief in Newburgh who supervises the city's four building inspectors.

It's a nationwide problem that New York has addressed with a new law requiring LLCs to disclose all members and investors when buying or selling property.

Some other states also are moving to require more disclosure of LLC owners. Arizona's 2018 law requires a public record of every owner and member of an LLC, and Washington state has long required owners to disclose names and addresses.

In Connecticut, the city of New Haven is lobbying for something similar, as difficulty mounts with anonymous landlords.

Many cities, including Newburgh, have landlord registries requiring a point of contact for landlords, though many don't comply there, Horton said. The American Apartment Owners Association, representing landlords, has called some of the registries "intrusive."

The National Association of Secretaries of State, representing state officials who register LLCs and other corporate entities, has resisted efforts to standardize registration requirements that disclose more information than some states want to collect.

"States will be left to deal with a host of unworkable regulatory and compliance burdens" if they're required to collect more information about LLCs and corporations, the association said in a position paper supplied to Stateline.

The New York law applies to LLC owners of residential properties of up to four units. But some attorneys worry that because the law refers to "property containing one- to four-family dwelling units," it could be construed to mean any residential buildings as long as some units are one-family.

"Nobody knows what to do," said Stuart Saft, a Manhattan real estate attorney who is now suggesting his clients switch to other forms of companies like trusts or limited partnerships to avoid the law's "confusing draftsmanship."

The state bar association warned attorneys about the confusion, noting that disclosing all related parties could create a vast amount of information that would not fit on the current form used by counties to report real estate transactions to the state.

However, New York's county clerks, who are expected to record the new information, will interpret the law as intended, to apply only to LLC owners of fewer than five units, said Mark Lavigne, deputy director of the New York State Association of Counties.

"There won't really be a change in our process," LaVigne said.

And Saft said attorneys have no problems with the stated intent of the law, which replicates an existing New York City law.

"There should be a point of contact with the landlord, absolutely," Saft said. "The intent is to deal with the homes that went into default and getting them cleaned up. That's fine."

'One More Tool'

The New York law can "bring transparency to real estate transactions involving LLCs and remove a level of anonymity that allows owners to avoid liability," said Democratic state Sen. Alessandra Biaggi, a co-sponsor.

The bill passed the state Senate 42-20 with mostly Democratic support. All 20 "no" votes were Republicans, none of whom responded when contacted by Stateline.

The law was signed by Democratic Gov. Andrew Cuomo in September and took effect immediately.

It mimics a provision already in place for New York City since 2011 and followed a legislative investigation into housing complaints that concentrated on the state capital, Albany, and the Hudson Valley communities of Newburgh, Mount Vernon and Ramapo. Each struggles to handle thousands of building complaints every year, inspectors testified at a public hearing in May.

When LLCs own property, "many municipalities struggle to locate the responsible party, the individual to serve with a notice of violation or an order to comply," the investigation's report concluded. "This loophole must be addressed at the state level."

 

Robert Magee, Albany deputy corporation counsel, noted that LLCs can be owned by other LLCs, adding to the confusion.

"It's an uphill battle trying to pin down ownership of these LLCs and who's responsible," Magee told Stateline. "A lot of times it's an LLC owned by an LLC and you have to follow that all the way down. We need all the help we can get, and this helps."

Horton said the new law could help Newburgh's effort to bring back beautiful but run-down houses in the city. It also could help tenants such as the single mother and five children who were left homeless when the city condemned their rental house in March.

The owner, identified only by an LLC name with an address in Hartsdale, N.Y., did not show up in court to face code issues ranging from gas leaks to rotted floors. The deed to the property shows only the LLC name, an unintelligible doodle for a signature, and a different address in Mt. Vernon, N.Y., for a now-foreclosed house.

"This is one more tool we can use," Horton said. "We need to make sure a building is safe, and this inability to find the landlord delays it. It can take days and meantime maybe somebody has no heat."

Property Milking

LLCs were born in Wyoming in the 1970s to fund risky drilling operations without exposing investors to lawsuits.

Popularity skyrocketed in 1988 when the Internal Revenue Service ruled that they could be taxed like partnerships, meaning that owners would not be double-taxed, as corporations are, for both corporate and personal income.

Nationally, the rise of LLCs has helped enable "property milking" by landlords who no longer have to worry about personal reputation or lawsuits but can treat a rental home as a stream of cash, said Adam Travis, a Harvard University sociology doctoral student who published a paper on the subject in the American Sociological Review.

"A different kind of logic takes over, where you're extracting as much from the property as possible while putting as little as possible into it," Travis said.

Landlords were drawn by the limited liability, which prevents lawsuits against owners' other assets, as landlords were increasingly sued over conditions on their property, Travis said. LLCs came to be seen as a "firewall" to protect landlords from personal lawsuits.

According to U.S. Census Bureau figures cited by Travis, the proportion of rental properties owned by unincorporated individual landlords has declined from more than 90% in 1991 to around 75% in 2015, as LLCs became more popular. About 15% of rental properties are now owned by LLCs.

Travis studied building complaints in Milwaukee and found an association between conversion to LLC ownership and disrepair serious enough to generate complaints to the city. He compared the city's property database of more than 134,000 rental units with owner information by year to more than 2,000 complaints reported to the city's Neighborhood Services System between 2000 and 2015.

He said Newburgh and the Hudson Valley of New York are less subject to such abuse because prices are going up, so investors have more incentive to protect their investments and plan for a profitable resale. Many Newburgh residents said the city is on the upswing despite some remaining blight.

"You've got these people moving in who really care about the neighborhood and the conditions, but it's tough when you've got this degradation next door," said Ali Muhammad, a 31-year-old community activist and former Democratic Beacon City Council member who moved here several years ago and is running for mayor against Torrance Harvey.

New Haven has a law requiring landlords to provide owner contact information, but it hasn't been enforced, and the city would like the state to enact a law similar to New York's, said Frank D'Amore, the city's deputy director of neighborhood and property services.

"There's a mandate that you name a member or owner of the LLC, but sometimes the member is another LLC and it goes on and on, it's like this web of LLCs," D'Amore said. The city recently held a public hearing about a concentration of anonymous landlords in the affordable housing market.

Property milking may be behind a wave of LLC ownership in another Hudson Valley town, Ramapo, according to a retired emergency services chief, Gordon Wren, who testified in the state investigation.

"What these slumlords do is they have a different LLC for every property, then they rent a house to one person for $5,000 or $6,000 a month, and that person then breaks it up into illegal sleeping areas and charges $600 a month," Wren told Stateline. "Nobody knows who the owner is or how to get something repaired."

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