Most community association boards are composed of volunteers, and their responsibilities range from dealing with unit owner complaints, safety issues and parking problems to organizing social events. The community association board is also responsible, however, for planning for the condominium’s future. This article provides information and guidance on two emerging legal issues affecting community association management and the resulting responsibilities on association boards - the Corporate Transparency Act, and laws aimed at achieving zero carbon emissions in the United States through, among other methods, mandatory reporting of energy consumption and the repair and replacement of major building systems.
The law requires “reporting companies” to submit “beneficial ownership information” to the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”).
The Corporate Transparency Act
What Is The Corporate Transparency Act?
The Corporate Transparency Act (“CTA”) was enacted in 2021 as part of the Anti-Money Laundering Act of 2020. The purpose of the CTA is to stop the illegal movement of money in the United States and is intended to assist the federal government with monitoring corruption and financial crimes by knowing who owns or controls companies. More specifically, the CTA has been defined to “prevent and combat money laundering, terrorist financing, corruption, tax fraud, and other illicit activity.” The law requires “reporting companies” to submit “beneficial ownership information” to the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”).
Is My Association A “Reporting Company?”
For most associations, the answer for now is yes. The definition of a “reporting company” is very broad, and absent an exemption or further guidance from the Treasury Department, under the CTA any entity created by the filing of a document with a state secretary of state, state corporate commission, or similar state office is deemed a “reporting company.” There are 23 types of exempt entities under the CTA; however, community associations most likely do not qualify as exempt entities as defined in the CTA, which are generally already subject to substantial federal and state regulation under which their beneficial ownership may be known, and available to law enforcement.
What Information Is The Association Required to Report?
A “reporting company” must report details on the corporation and “beneficial owners” to FinCEN. Details related to the entity, i.e., the association, will generally not be an issue for associations to provide and include basic information such as the association’s name, address, state of formation, and its taxpayer identification number.
The “reporting company” must also provide information pertaining to each “beneficial owner.” A “beneficial owner” is defined as anyone who: (1) exercises “substantial control” over a “reporting company” or; (2) owns or controls at least 25% of the ownership interests. Who exercises “substantial control” over the association may vary by association and may, at times, include the property management company. For reporting purposes, an individual may exercise “substantial control” over the association through: (1) board representation; (2) ownership or control of a majority of the voting power or voting rights of the association; (3) right associated with any financing arrangement or interest in a company; (4) control over one or more intermediary entities that separately or collectively exercise substantial control over the association; (5) arrangements or financial or business relationships, whether formal or informal, with other individuals or entities acting as nominees; or (6) any other contract, arrangement, understanding, relationship or otherwise.
It is very likely that for the vast majority of associations, board members are “beneficial owners,” and the association will be required to report contact details and specific personally identifiable information on each “beneficial owner” including name, date of birth, address, an identifying number from a government issued identification (such as a driver’s license or passport) and an image of that identification. This may prove to be the most tedious aspect of complying with the CTA, especially if your association’s board members change each year.
When Do The Reporting Requirements Take Effect?
The effective date of the law is January 1, 2024; however, for existing associations first reports are due no later than January 1, 2025. For new associations incorporated after January 1, 2024, reports are due within 30 days of incorporation. After a community association provides its initial report to FinCen, the association must report any changes to its original report (and subsequent reports) within 30 days of the occurrence of the change. For example, if new board members are elected, and the board members are “beneficial owners,” the association must report the change within 30 days of the election.
Is There A Consequence For Failing To Report?
Knowingly failing to provide complete and/or accurate information, or providing fraudulent information, is punishable by civil penalties of up to $10,000 ($500/day) and criminal penalties of up to two years in prison.
What Should My Association Do Next?
Most community association boards are likely unaware of the CTA and the looming deadlines. Associations are well-advised to engage counsel to analyze the specific circumstances/organization of your association and to provide advice on your present reporting obligations. Your attorney may also advise you on proposed changes to your corporate structure and/or on policies and procedures that should be adopted related to collecting and storing personal information of “beneficial owners” and ensuring timely compliance with the association’s reporting obligations in the future and as changes triggering revised reports arise.
Climate Change And Condominiums
Climate change and the reduction of greenhouse gas emissions is the focus of attention at both the state and federal levels and includes, in many states and cities, the implementation of laws and regulations aimed at achieving zero carbon emissions. These laws, often referred to as net zero legislation, are intended to reduce greenhouse gas emissions from multiple sources including, as it relates to community associations, commercial and residential buildings, old and new. Depending on the size and location of your condominium, you may be facing the imposition of laws requiring compliance with strict reporting on energy consumption and/or the repair and replacement of major building components. Regardless of the form the law or regulation takes, compliance will be costly for condominium associations.
For example, a number of cities, including Boston, now require residential buildings of a certain size, including condominiums, to report on energy consumption and achieve zero net carbon emissions by a date certain. In 2013, the Boston City Council enacted the Building Energy Reporting Disclosure Ordinance (BERDO), which required all commercial and residential buildings measuring 35,000 square feet or with 35 units or more to report their energy and water use to the City of Boston every year. On September 22, 2021, the Boston City Council unanimously approved an amendment to the Building Energy Reporting Disclosure Ordinance, known as BERDO 2.0. Under BERDO 2.0, non-residential and residential buildings 20,000 square feet or over (or two or more building on the same parcel 20,000 square feet or over) or residential buildings greater than 15 residential units must report on energy and water use, and other building characteristics necessary to evaluate CO₂ emissions, but must also reduce their emissions over time, such that they achieve zero net carbon emissions by 2050. A significant number of condominiums in Boston are subject to BERDO 2.0.
Compliance with the reporting and emissions reduction requirements in BERDO 2.0, and other similar laws elsewhere, will be expensive and challenging for condominium associations. In Boston, condominiums that fall within BERDO 2.0, must have a “qualified energy professional” verify the accuracy of the data it submits. Of note is that even if units are separately metered, associations bear the burden of reporting, not individual unit owners. If the association fails to meet its reporting obligations in a timely fashion, it will face steep penalties: $300 per day for buildings with 35 units or more or more than 35,000 square feet, and $150 per day for building with 15 to 34 units or less than 35,000 square feet.
In light of the difficulty associations faced complying with the original May 15, 2022 reporting deadline, and in particular with identifying and retaining a “qualified energy professional,” the City of Boston has granted requests for extensions for third party verification.
The emissions reduction requirements under BERDO 2.0, and similar laws elsewhere, may prove to be extraordinarily difficult for condominium associations to comply with. Under the current law, buildings measuring 35,000 square feet or with 35 units or more must begin reducing their emissions in five-year increments in 2025, and buildings equal to or greater than 20,000 square feet or 15 units but less than 35,000 square feet or 35 units are not subject to the reduced emissions standards until 2031. Depending on the size of the association in Boston, reduced emission standards take effect in less than two years.
Undoubtedly, compliance with net zero legislation will require advanced strategic planning in consultation with professionals. Whether your condominium is located in a state or municipality that has passed a law requiring energy consumption reporting or benchmarks to reduce and/or eliminate carbon emissions, your association would be well-served to consult with an experienced condominium attorney to advise on the necessary steps to take to comply with existing laws and/or prepare for the implementation of similar laws in your area.