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Corporate Transparency Act Series: Calculating Ownership Percentages in Complex Real Estate Structures

2024 is here, and with it begins the Corporate Transparency Act (“CTA”) compliance requirements.  As a quick refresher (and as discussed in our previous article, FinCEN Corporate Transparency Act Update): every corporation, limited liability company, or other entity formed by filing with the secretary of state (such as, in California, a limited partnership) is a “Reporting Company.”  Each Reporting Company is required to file with FinCEN an initial report of its “Beneficial Owners”—both those individuals who hold 25% or more of the Reporting Company’s ownership interests, and those individuals who exercise “substantial control” over the Reporting Company.


In this installment, we focus on the “ownership interest” prong of beneficial ownership.  Accurate and complete reporting will in part require calculating ownership percentages for every reporting company to determine which, if any, individuals have a 25% or greater ownership interest in the company.  Any individual person who holds (directly or indirectly) an ownership interest in the amount of 25% or more must be reported as a beneficial owner for a Reporting Company.


Of course—this is only one half of the reporting requirements under the CTA; any reporting company must also report individuals with “substantial control” over the company.  However, this time we are focusing only on the ownership percentage reporting requirement.  We will discuss the “substantial control” prong in our next installment.


Reporting individuals based on ownership sounds simple enough—refer to the stock ledger, partnership agreement, or operating agreement for the Reporting Company, determine ownership percentages, report the names of individuals who qualify.  However, many real estate transactions and holdings are accomplished using complex structures, which often contain multiple layers of entities within the structure, as well as varying methods of holding ownership and ownership percentages within each entity in the structure.  Equity interests, preferred equity interests, profits interests, and options or other rights to acquire interests must be factored in the calculations.  Ownership interests held as community property must be taken into consideration as well.  Calculating ownership interests under these circumstances involves working through and cross-referencing ownership within each layer and within each entity to determine whether any individual ultimately owns 25% or more interest in the Reporting Company at the “top.”


For example: assume Entity A, a Reporting Company under the CTA, is a single-purpose entity created to hold title to Property A.  Entity A, a limited partnership, has one general partner, Entity B, which has a 50% ownership interest in Entity A, and two limited partners, Entity C and Entity D, each with 25% ownership interests.  Because the CTA requires any Reporting Company to report the actual individuals with beneficial ownership in the company, the analysis can’t stop here for Entity A.


Entity A cannot simply report Entities B, C, and D as the beneficial owners.  Rather, we must continue down to the next layer of ownership, until we find the real people at the bottom of Entities B, C, and D.  In many cases, this could mean moving through several more layers—Entities B, C, and D could each be wholly owned by more companies, and so on.  In other words, FinCEN requires a report of “where the bodies are buried” in each structure.


In addition, we must also separately perform the same analysis for each of the underlying entities—so, in this example, once we have gone through the analysis for Entity A, we must separately perform the analysis for Entity B, Entity C, and Entity D, as well as any entities at lower layers.  And, remember—we are only looking at the ownership interests.  In addition, Entity A (and each lower entity) must also analyze who is in control.  We will address this analysis in the next installment in our series.


To better illustrate calculating ownership interests, we are including some real world examples below, with explanations for our calculations.


For assistance with the CTA reporting requirements, or with any questions, please contact Sabrina Johnson at sjohnson@hechtsolberg.com or Mickey Maher at mmaher@hechtsolberg.com.

EXAMPLES OF OWNERSHIP INTEREST CALCULATIONS

Alpha Holdings, LLC
Jane must be reported as a Beneficial Owner.

  • Jane: 30% – Beneficial Owner based on ownership interest.
  • Miscellaneous Investors: None more than 5%. Not Beneficial Owners based on ownership interest.

Alpha Fund, LLC
Jane, Charlie, and Juliette must be reported as Beneficial Owners.

  • Jane: 25% – Beneficial Owner based on ownership interest.
  • Charlie: 38% – Beneficial Owner based on ownership interest.
  • Juliette: 37% – Beneficial Owner based on ownership interest.

Alpha Hotel, LLC
Jane Bravo must be reported as a Beneficial Owner.

  • Jane:
    • 30% of 70% = 21% (from Alpha Holdings, LLC)
    • 25% of 30% = 7.5% (from Alpha Fund, LLC)
    • While neither her ownership interest in Alpha Fund or Alpha Holdings alone meets the threshold, her combined ownership interest through Alpha Fund or Alpha Holdings total 28.5%.
    • Therefore: Beneficial Owner based on ownership interest.
  • Charlie: 38% of 30% = 11.4%. Not a Beneficial Owner based on ownership interest.
  • Juliette: 37% of 30% = 11.1%. Not a Beneficial Owner based on ownership interest.

Miscellaneous Investors: None more than 3.5%.  (5% of 70%).  None are beneficial owners based on ownership interest.

1. Alpha Apartments, L.P.
This calculation is the most complex, as it requires working up through every single branch below and calculating ownership percentages in reverse order.  Based on the below calculations, Sierra and Romeo must be reported as Beneficial Owners based on ownership interest.

  • Through Beta Partnership, L.P. (11.3636% General Partner):
    • Mike:
      • 34% of 10% of 25% of 11.3636% = 0.0965%
      • 100% of 1% of 75% of 11.3636% = 0.0852%
      • Total: 0.1817%
    • Lima:
      • 33% of 10% of 25% of 11.3636% = 0.0937%
      • Total: 0.0937%
    • Charlie:
      • 33% of 10% of 25% of 11.3636% = 0.0937%
      • Total: 0.0937%
    • Oscar:
      • 10% of 90% of 25% of 11.3636% = 0.256%
      • 10% of 99% of 75% of 11.3636% = 0.844%
      • Total: 1.1%
    • Romeo:
      • 45% of 90% of 25% of 11.3636% = 1.151%
      • 45% of 99% of 75% of 11.3636% = 3.797%
      • Total: 4.948%
    • Sierra:
      • 45% of 90% of 25% of 11.3636% = 1.151%
      • 45% of 99% of 75% of 11.3636% = 3.797%
      • Total: 4.948%
  • Through Theta Company, LLC: 11.3636% Limited Partner:
    • Mike: 33.34% of 11.3636%:
      • 3.789%
    • Lima: 33.33% of 11.3636%:
      • 3.787%
    • Charlie: 33.33% of 11.3636%:
      • 3.787%
  • Through Iota Investors, L.P.: 68.2614% Limited Partner:
    • Mike: 33.34% of 0.01% of 68.2614%
      • 0.007%
    • Lima: 33.33% of 0.01% of 68.2614%
      • 0.007%
    • Charlie: 33.33% of 0.01% of 68.2614%
      • 0.007%
    • Oscar: 19.99% of 68.2614%
      • 13.645%
    • Romeo: 40% of 68.2614%
      • 27.305%
    • Sierra: 40% of 68.2614%
      • 27.305%
  • Individuals Investors: 9.0114% Limited Partners:
    • As to each of these unidentified individuals: Each less than 9%; as such: Not Beneficial Owners.

TOTALS (Totaling all percentages from above calculations):

  • Mike: 3.9714%.
    • Not a Beneficial Owner.
  • Lima: 3.8877%. 
    • Not a Beneficial Owner.
  • Charlie: 3.8877%.
    • Not a Beneficial Owner.
  • Oscar: 14.745%.
    • Not a Beneficial Owner.
  • Romeo: 32.253%.
    • Beneficial Owner.
  • Sierra: 32.253%.
    • Beneficial Owner.

2. Beta Partnership, L.P.
Per the below calculations, Romeo and Sierra are Beneficial Owners based on ownership interest.

  • Mike:
    • 34% of 10% of 25%: 0.85%
    • 100% of 1% of 75%: 0.75%
    • Total: 1.6%.  Not a Beneficial Owner.
  • Lima:
    • 33% of 10% of 25%: 0.83%
    • Total: 0.83%.  Not a Beneficial Owner.
  • Charlie:
    • 33% of 10% of 25%: 0.83%
    • Total: 0.83%.  Not a Beneficial Owner.
  • Oscar:
    • 10% of 90% of 25%: 2.25%
    • 10% of 99% of 75%: 7.425%
    • Total: 9.675%.  Not a Beneficial Owner.
  • Romeo:
    • 45% of 90% of 25%: 10.125%
    • 45% of 99% of 75%: 33.413%
    • Total: 43.538%.  Beneficial Owner.
  • Sierra:
    • 45% of 90% of 25%: 10.125%
    • 45% of 99% of 75%: 33.413%
    • Total: 43.538%.  Beneficial Owner.

3. Gamma Company, LLC
Per the below calculations, Romeo and Sierra are Beneficial Owners based on ownership interest.

  • Mike:
    • 34% of 10%: 3.4%.  Not a Beneficial Owner.
  • Lima:
    • 33% of 10%: 3.3%.  Not a Beneficial Owner.
  • Charlie:
    • 33% of 10%: 3.3%.  Not a Beneficial Owner.
  • Oscar:
    • 10% of 90%: 9%.  Not a Beneficial Owner.
  • Romeo:
    • 45% of 90%: 40.5%.  Beneficial Owner.
  • Sierra:
    • 45% of 90%: 40.5%.  Beneficial Owner.

4. Delta Holdings, LLC
All three are Beneficial Owners based on ownership interest.

  • Mike: 34% Member.
  • Lima: 33% Member.
  • Charlie: 33% Member.

5. Epsilon Holdings, LP
Romeo and Sierra are Beneficial Owners based on ownership interest.

  • Oscar: 10% Limited Partner.
  • Romeo: 45% General Partner.
  • Sierra: 45% General Partner.

6. Zeta Residential, L.P.
Per on the below calculations, Romeo and Sierra are Beneficial Owners based on ownership interest.

  • Mike:
    • 100% of 1%: 1%
  • Oscar:
    • 10% of 99%: 9.9%
  • Romeo:
    • 45% of 99%: 44.55%
  • Sierra:
    • 45% of 99%: 44.55%

7. Easy Company, LLC
As the sole member, Mike is the Beneficial Owner based on ownership interest.

8. Theta Company, LLC
All three are Beneficial Owners based on ownership interest.

  • Mike: 33.34% Member.
  • Lima: 33.33% Member.
  • Charlie: 33.33% Member.

9. Iota Investors, L.P.
Romeo and Sierra are Beneficial Owners based on ownership interest.

  • Oscar: 19.99%.
  • Romeo: 40%.
  • Sierra: 40%.
  • Mike, Lima, Charlie: each less than 0.01%.

10. Kappa Investors, LLC
All three are Beneficial Owners based on ownership interest.

  • Mike: 33.34% Member.
  • Lima: 33.33% Member.
  • Charlie: 33.33% Member.
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