Homeowners Associations (HOAs) and Condominium Associations play large role in maintaining order, managing common spaces, and preserving property values. These organizations are in most cases run by a board of directors made up of volunteers. The recent introduction of the Corporate Transparency Act (CTA) has added a new responsibility for those board members, as well as for community association management companies. In this blog post, we delve into the CTA and examine its potential implications on HOAs and condominium associations.
What is the CTA?
The CTA was enacted by Congress in December 2020, becoming effective on January 1, 2024.[1] It represents a notable shift in corporate accountability in the United States. The main objectives of the CTA are to combat money laundering, corruption, and other illicit financial activities by increasing transparency regarding the beneficial ownership of legal entities, such as corporations, limited liability companies (LLCs), and similar entities. HOAs and condominium associations are usually nonprofit corporations.
Entities that are in existence prior to January 1, 2024 have until January 1, 2025, to comply with the reporting requirements. Entities formed after January 1, 2024, will have 90 days after the notice of registration to file a report, which is an extension of the original 30-day period pursuant to the United States Financial Crimes Enforcement Network’s (FinCEN) final rule issued on November 30, 2023.[2] “Beneficial owners” for purposes of the CTA are individuals who, directly or indirectly, (1) control or own 25 percent of the company’s ownership interests or (2) exercise substantial control over the entity.[3]
The Impact on HOAs and Condominium Associations
Historically, HOAs and condominium associations have operated with a certain degree of privacy, especially concerning the identity of individual homeowners or unit owners. In Michigan, the names of the persons on the board of directors are public, but their addresses, if the association is managed by a management company, are usually not listed. The CTA requires entities, including HOAs and condominium associations, to disclose beneficial ownership information to FinCEN. Beneficial owners must report personally identifiable information such as full legal name, birth date, current residence address or business address of company applicants, and identifying number from an acceptable identification document, such as a driver’s license or passport, as well as a copy of the identifying document.[4] This information will be stored by FinCEN in a private database and will only be made available when requested from financial institutions for due diligence purposes, federal or state law enforcement, and certain federal agencies.
As stated above, one of the key aspects of the CTA is the obligation for covered entities to report information about their beneficial owners. This includes individuals who directly or indirectly exercise substantial control over the HOA or condominium association or have a significant ownership interest. While the Act aims to target larger entities with the potential for financial misconduct, HOAs and condominium associations, regardless of their size, are not exempt. There is little debate that board members are “beneficial owners” under the CTA. However, community association managers may also be “beneficial owners” under the CTA depending on whether they “exercise substantial control” over the HOA or condominium association. In the case of community association managers, it will be necessary to review the management agreements to see what level of control is granted to the managers to determine if the level reaches that of “substantial control” for purposes of the CTA.
Challenges and Concerns
The CTA raises certain challenges and concerns as it pertains to HOAs and condominium associations. Privacy concerns, for instance, may be voiced by individuals on the board of directors. Board members may question the need for such detailed disclosure and its potential impact on their personal information. Many HOAs and condominium associations already have issues finding owners willing to serve on the board of directors and this may make the situation more challenging. Also, the administrative burden of compliance with the CTA could pose challenges for smaller HOAs and condominium associations with limited resources. The process of gathering, verifying, and submitting beneficial ownership information may require additional manpower and resources, potentially resulting in increased operational costs for these associations.
Navigating the CTA Compliance Landscape
As HOAs and condominium associations struggle with the implications of the CTA, they must develop a comprehensive strategy for compliance. HOAs and condominium associations need to educate their members about the requirements of the CTA and communicate the importance of cooperation and compliance, including implementing new processes to collect and report beneficial ownership information to FinCEN.
Collaboration with Legal and Financial Professionals
Given the complexity of the CTA, community associations should consider seeking guidance from legal and financial professionals who have specific knowledge in community association law. These experts can provide valuable insights into the specific requirements of the CTA, ensuring that associations are well-prepared for compliance.
Conclusion
The CTA marks a considerable change in the area of corporate governance, impacting entities ranging from large corporations to HOAs and condominium Associations. Navigating the path forward requires collaboration with legal and financial professionals, as well and proactive communication with community members. The attorneys at Tilchin & Hall, P.C., can assist you and your HOA or condominium association with CTA compliance and your questions concerning it. If you would like to speak to one of our attorneys, please call (248) 249-6203 or email us through the form below.
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[1] 31 CFR 1010.380(a)(1)
[3] 31 USC 5336(a)(3) and 31 CFR 1010.380(d)(1) and (2)
[4] 31 USC 5336(b)(2)
