(The Hill) – Opaque property laws that make it easier for property owners to avoid paying taxes have led to 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 real estate where they can charge rent. But LLCs often hide the identities of the people behind them, which allows property owners to be shielded from legal consequences when they fail to pay their property taxes.
Properties can then go into tax foreclosure and are effectively taken off the market in cities where housing is in short supply, driving up prices and forcing renters to live far from where they work.
Studies have “linked LLC ownership to property disinvestment, tax abandonment, even completely walking away from the property,” said Princeton sociology professor Matthew Desmond to the Senate Banking, Housing and Urban Affairs Committee on Tuesday.
“One of the landlords I spent time with in Milwaukee, I asked him, ‘What happened to this house that I spent time with?’ And he said, ‘I just gave it back to the city.’ And what that means is, he just stopped paying taxes and allowed tax foreclosures,” 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 the decline and disinvestment in housing to LLCs, which became widely available to property owners during the 1990s.
“Over the past two decades, the emergence and spread of limited liability companies (LLCs) have reshaped the legal landscape of rental ownership,” the study found. “Increasingly, rental properties are owned by business organizations that limit the liability of investors, rather than by individual landlords who own properties in their own names.”
The study found “that signs of real estate disinvestment increase when properties transition from individual ownership to LLC.”
The share of rental properties owned by professional landlords is increasing across the country as rents and mortgage rates are pushed higher by interest rate hikes from the Federal Reserve.
Professional “investors made 28.1 percent of all single-family purchases in February, a record high,” a July report from the real estate market data firm CoreLogic found.
Since the beginning of the pandemic in early 2020, the share of home purchases made by investors has doubled from 14 percent to about 28 percent, according to CoreLogic data.
Lawmakers from both parties noted that the increased holdings of professional landlords are a cause for concern.
“It came up many times from witnesses, and my colleagues talked about increasing the percentage of single-family homes in particular that are owned by private investors. And there are a lot of people who are very concerned about that,” said Sen. Pat Toomey (R-Pa.) when Tuesday hearing.
Senator Catherine Cortez Masto (D-Nev.) echoed Toomey, arguing, “I, too, I am concerned about institutional investors and the impact this is having in Nevada, why we’re seeing all these properties being bought.”
“I know in my state in 2021, 29 percent of the homes that are bought in the Las Vegas metro area are bought by investors. And the challenge is, I can’t tell how many are institutional. I think it has to do with what I heard before, about too many LLCs and not enough transparency,” he said.
Across the country, property values have increased rapidly following the coronavirus pandemic, which has seen a shortage of new building projects, doubling the rate of inflation. The Case-Shiller national home price index increased nearly 20 percent from May 2021 to May 2022, while consumer inflation rose 8.6 percent over the same period.
Home prices are up about 20 percent and rents are up about 12 percent from 2020 to 2021, according to a joint report on the state of national housing from Harvard’s Graduate School of Design and Kennedy School of Government.
As families are priced out of the market by investors, legal mechanisms such as LLCs that benefit professional property owners will be explored.
“There is a theme out there: out-of-town investors hiding behind a cloak of anonymity,” Laura Brunner, 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 to name the five worst landlords,” he said. “It took months of rigorous research to discover that more than 4,000 single-family homes in Hamilton County had been purchased by these five landlords. Tracking the acquisitions was a difficult task due to the high volume of LLCs used.
LLCs and similar legal designations, such as S corporations, were originally used to encourage entrepreneurship, so people could conduct risky business ventures without the threat of personal bankruptcy. Today, LLCs are more often used as a tool to maintain 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 won’t buy property except in the name of an LLC, sometimes more than one LLC, and they do it to maintain that anonymity, so people don’t know who bought the property,” New York real estate attorney Adam Leitman Bailey said in an interview.
“In an evil way, it allows people from various countries to buy property in other countries, to buy property in America. Let’s say they are trying to hide money. They can do it by using an LLC, and people will not know who they are.
Bailey said the practice is common in well-known cities like New York.
“As a real estate lawyer, New York is a phenomenal place. If you have money that you want to make sure is not taken from you from another country where it can be taken away or confiscated, you can buy a condo in New York and use it as a safety deposit box, and simply buy in cash in the LLC, and only the lawyer and the client will know who owns the LLC. They can hide money that way. Real estate moves very slowly, and no one asks,” 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 on the role that tax incentives can play in building more affordable housing, and the House Ways and Means Committee recently held a hearing called “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 providing emergency rental assistance and working on long-term eviction reform.