Corporate Property Rights Bonanza (Newsletter #182)

As always, links surrounded by the ❇️ emoji indicate exclusive GEM Diamond content. If you would like to have access to all links, please consider GEM Diamond membership.

Celebrities have been buying homes under a corporate umbrella for generations, for privacy reasons. No snooping allowed. Meanwhile, real estate investors have been using LLCs--both for individual purchases and syndications--for decades for properties not intended as primary residences. Those types of buyers care about another benefit: asset protection. According to UpCounsel, “If you're ever sued in connection with homeownership, owning it under the LLC will protect” your assets. Two other big use cases for corporations are co-buying and ❇️ co-investment❇️ , both trends that will only accelerate as home prices continue to rise. 

Corporate ownership of real estate is not always fully beneficial. UpCounsel highlights that access to financing is the main drawback to acquiring property using an LLC. “FHA loans require a smaller down payment on a property, but they are only offered to individuals, not companies.” In fact, “most mortgage lenders won’t lend to a newly-formed LLC created solely to buy and own a primary residence,” according to CoBuy.

Other considerations UpCounsel calls out include the preferential interest rates individuals receive over LLCs—special tax breaks on a primary-residence mortgage are a big selling point (“including the fact that the mortgage is tax deductible on your personal income”). Then there’s the tax deduction of mortgage insurance on FHA loans. LLC owners give up both of these valuable tax breaks.  

One alternative to buying with an LLC is simply operating with one: purchase as an individual but the use of the home could be governed by an LLC, which dictates usage rights, sale conditions, and partnership amounts. A Tenants in Common (TIC) is one version of this “frequently used when at least one of the co-buyers will live in the home, but they are also suited to second homes and investment properties,” according to CoBuy

The mainstream-ization of corporate-owned real estate is happening, if ❇️ Pacaso has anything to say about it❇️ . Pacaso’s core USP is ❇️ a co-ownership model for real estate❇️ . NFT’s are another newer innovation that will ❇️ push the envelope toward corporations owning properties❇️ , masking the individual to some degree.

Michael Wurzer recently dove into the topic of owning real estate through corporations becoming the norm instead of the exception. We’re decades away from this being common, but what happens when people don’t have a “primary residence” and instead own shares of six or eight properties?

PUBLIC RECORDS IMPACT
Before we get to that, Wurzer explores the public records side of this trend:

The most interesting aspect of these approaches is that these transactions all occur without any change in the public real estate records. As far as the local county or other governmental entity tracking the real estate ownership is concerned, it’s the same LLC owning the property regardless of the change in share ownership of the LLC. Given this, it will be very interesting to see if states or other governmental entities try to address this or not. If they don’t, we could well see a day where you have to check a blockchain somewhere to figure out who owns a parcel of real estate.

If the government doesn’t know when (partial) sales are occurring, that presents two major problems. First, transactions are no longer public record--meaning they cannot be taxed. Second, on a related note, private sales prices force consumers to ask the companies controlling those homes for sales prices, giving those companies massive information asymmetry. You know, kind of like how you had to contact an agent to get recent sales prior to Zillow lifting the veil on public sales data in 2006. In non-disclosure states such as Texas and Louisiana, where transactions are private, agents and MLSs have had far more leverage since the MLS is the only body holding comparable sales.

What if an “MLS of co-ownership” were to exist? I can certainly see the appeal, though I also believe that were it to exist, it would only be a matter of time until those sales prices were forced into the public record.

RESISTANCE FROM THE NEIGHBORHOOD
We know what happens when corporations get too ingrained locally: neighbors cause a stink. Pacaso is already encountering this in Napa, as “homeowners fight to block real-estate companies from changing how homes in their neighborhoods are occupied or owned.” This is not a new sentiment, given that both homeowners and local governments have spent years fighting the spread of short-term rentals. “High demand during the pandemic for both vacation and primary residences has only intensified the conflicts,” according to WSJ reporting. A future where whole developments are built as Pacaso/STR/fractional homes using ❇️an HOA structure❇️ is not far-fetched.

While it may be illegal now, as corporations continue to gobble up housing stock, it’s only a matter of time before cities pass strict tax benefits for individuals to stymie corporations taking over neighborhoods. Property tax rates that differ based on ownership structure is inevitable.

MARS/MOON RIGHTS
How will property rights be navigated when created from scratch, with everything we know now? 

Property ownership is not currently allowed anywhere but planet Earth: The UN-sponsored 1967 Outer Space Treaty forbade claiming territory in outer space and the international Moon Treaty went further to prohibit private ownership of extraterrestrial real estate in 1979 (Wikipedia). But you can bet if individuals and corporations spend hundreds of millions or billions to colonize space, that these property rights treaties will be renegotiated. For instance, I doubt the ‘67 treaty contemplated private space travel. Outer space--and ❇️ the high seas for that matter❇️ --are a land grab for the wealthy. We still have years to resolve the eventual reality we will face, but that clock is ticking as Bezos, Musk, and others accelerate the space race at warp speed. Legitimate or not, Celestial Real Estate Agencies already exist to navigate aspiring owners through this new territory. Scientists’ 3D visualizations of interplanetary home comforts that include artificially-oxygenated gyms, thermal spas, and bespoke Martian rock furniture will only speed the process.

The real public/private conundrum: What if a space-entrepreneur ends up owning moon rights, colonizes it with full-blown structures and utilities, and people end up paying his company to live in his cities--versus government structured as we now know it?

[Thanks to Conor Curtis and Mike Price for feedback on this article.]