Why Scrutinize Foreign Buyers?

MIAMI—A flow of foreign money is entering the American real estate market every day, and especially gateway cities like Miami and New York. The New York Times recently published a series of investigative stories about the US government's moves to pinpoint the origins of wealth. The conclusion: Many foreign buyers are purchasing under LLCs to hide their shady, illegal and questionable activities.

That, however, isn't the case according to Ed Mermelstein, a founding partner of RheemBell & Mermelstein LLP, an international real estate law firm that represents high net-worth investors, developers and a broad range of financial institutions in private equity, commercial, and residential real estate transactions. GlobeSt.com caught up with Mermelstein to get his perspective.

GlobeSt.com: Why are foreign buyers purchasing homes under LLCs?

Mermelstein: The reason is twofold: Tax benefits and protection from liability. Typically, foreigners are purchasing today for investment purposes and to generate income. In order to get the full benefit from a subsequent sale or rental, a legal entity should be the owner of the property.

GlobeSt.com: Do foreign buyers go through the same protocols as local buyers when it comes to buying real estate in the U.S.?

Mermelstein: Not only do they go through the same process as a local buyer but there are additional requirements that are typically needed when foreign funds are used for a purchase. The United States has instituted tough sanctions against money laundering and bribing government officials in foreign nations.

The USA Patriot Act of 2001 included provisions to help prevent and detect international money laundering and terrorism financing and prosecute those responsible. The act requires financial institutions to monitor clients' accounts and report suspicious activity regarding the transfer of funds abroad, especially into countries where there has been a history of money laundering or terrorist activities.

GlobeSt.com: Why are foreign buyers often scrutinized?

Mermelstein: Transparency! In many countries outside of the United States, it is extremely difficult to prepare a verifiable credit report. Source of funds and income are simple to show as a US resident. Unfortunately, foreigners have this additional hurdle to overcome.