Atherton 2014: The Evolving Expectation of PrivacyJanuary 2, 2015
In October 2014, Forbes named Atherton, California (94027), the most expensive zip code in the country for the second year in a row. The local market has been experiencing incredible appreciation, which is directly attributable to both the vibrant local economy and the continuing investment of international buyers seeking premium tangible assets. Taken as a whole, home values in Atherton increased 34 percent over the past two years. However, as the attached table demonstrates, the main catalyst for this growth has been the appreciation of trophy estates on parcels of 30,000 square feet or more.
As of November 16, 2014, 95 transactions have closed this year in Atherton. The most expensive transaction reported to the Multiple Listing Service (MLS) was the $18,900,000 sale of 244 Polhemus Avenue. However, that sale was not the most expensive in town this year.
The MLS also reports the sale on February 21, 2014 of Bella Sera, a 2.5 acre estate on Atherton Avenue. While the property had been listed at $27,400,000, the selling price was not disclosed. The listing agent had paid a small fee to the MLS in order to withhold the selling price. Nevertheless, a simple search of the home address on the internet reveals that the selling price was $25,000,000.
While ultimately unsuccessful at hiding the price, this technique is indicative of a growing trend in Atherton: the desire for anonymity. As personal information becomes more and more accessible through publicly available title records, securities filings, and the media, many buyers of expensive properties seek to withdraw from public scrutiny to the maximum extent possible. Two strategies are actively being employed to stem the flow of information.1
A.THE USE OF LLCS
Limited Liability Companies (LLCs) are becoming the vehicle of choice to allow owners of real property to hide their identity. In 2014, more than fifty percent of Atherton real estate transactions involving properties valued at more than $5,000,000 were made by legal entities designed to shield the owners (16 LLCs, two limited companies, and one corporation). This number is higher than the national average. In 2012, the Wall Street Journal reported that 27percent of all purchases in this price range were by LLCs or trusts. (Alyssa Abkowitz, “Psst. Wanna Buy A House?,” Wall Street Journal, October 25, 2012). As the article noted, these legal entities are virtually untraceable when properly set up.
In California, the process for setting up an LLC is routine, but requires an agent for service of process and minimum filing fees of $800 per year. Frequently, the LLC is named for the property’s mailing address to simplify the tracking of correspondence. Indeed, such logic is consistent with the desire to keep personal connections to a minimum. The most unusual name for an LLC making an Atherton purchase last year was the $9,675,000 purchase of 73 Amador Avenue by the Tacotacotaco LLC.
A recent change in California law which eliminates a loophole many relied on to keep the amount of documentary transfer tax due (based on the sales price) out of the public eye will make the use of an LLC even more attractive to those who desire confidentiality. The Documentary Transfer Tax Act allows counties and cities to impose a tax on each deed, instrument, or writing by which any real estate is sold within the jurisdiction at the time the document is recorded.
While the Act required that the amount of tax be displayed on the face of a document, savvy agents and their clients regularly bypassed that requirement by requesting that the amount of tax be shown instead on a separate piece of paper to be attached to the document after recording and before the original was returned to the parties. If the amount of tax due was listed on a separate page that was not part of the public record, then the public could not glean the amount of tax imposed on the transaction or derive the property value from the recorded instrument. Assembly Bill No. 1888, effective January 1, 2015, prohibits county recorders from recording any deed, instrument, or writing subject to the documentary transfer tax unless a signed declaration of the amount of tax due appears on the face of the document for all to see.
Another major advantage of using an LLC is that routine expenses associated with operating a property may be treated as business expenses, including maintenance, homeowner-association fees, taxes and utilities. These should be paid from the LLC’s account. However, the responsible person for all such accounts should remain the LLC’s publicly disclosed agent. The inadvertent inclusion of an owner’s contact information on a utility bill or voter registration form may lead to an unintended loss of privacy.
The concept of an LLC is elegant in its simplicity and has been widely adopted. However, LLCs must be established and operated according to specific principles to be legally recognized. Real estate agents, attorneys, and tax accountants should all be consulted for the purchase and sale of California property through an LLC. 2
B. POCKET LISTINGS
Another possible option for sellers wanting to maintain their privacy is to market their property as a pocket listing, which is when a seller elects to engage a listing agent to market their home without putting it on the MLS. The reasons can be as varied as divorce, financial crisis, seasonal timing, or simple discretion. When a listing agent takes a pocket listing, they will contact top-producing agents in the area about the home’s availability. If one of these well-connected agents has a suitable client, the home may sell off market.
Private marketing efforts are usually successful, if at all, in the first 60 days of a campaign. However, there are real economic risks with this approach, and sellers need to be fully advised before proceeding. First, limited exposure means there is less likelihood of multiple offers. In 2014, direct competition led to many of the spectacular results that were achieved. Earlier this year, DeLeon Realty had a listing in Atherton that received ten offers and sold for 38 percent more than the list price after nine days on the market. Such opportunities are eliminated by use of the pocket listing.
Second, agents may be tempted to not broadcast their client’s home to other agents in an effort to earn commissions from representing both the seller and their own buyers. This practice is permitted under state regulations and most brokerages’ policies. However, the risks are significant enough that the California Association of Realtors created a form to be used in such circumstances: "Disclosure and Consent for Representation of More Than One Buyer or Seller" (C.A.R. Form DA, 11/06). One simple example of this second problem is the situation when an agent signs a listing agreement that includes listing the property on the MLS, but holds preliminary open houses while preparing a home for market. The practice is common and the economic cost to the sellers may be profound.
Quantifying the economic costs associated with such arrangements is difficult. However, DeLeon Realty advises sellers as follows:
The reason for the sliding scale is the sophistication of the market place. There is a direct correlation between the price of the property and the likelihood that potential buyers will be represented by a leading area agent. Thus, higher-end homes lose less by being off the MLS. Since the buyer of an ultra-high-end property probably desires the same level of privacy as the seller, everybody is well represented and prepared to undertake reasonable and reciprocal precautions.
In the new millennium, the unprecedented access to information has transformed our society. Instead of becoming obsolete, real estate agents learned to act as concierges, filtering the deluge of available information and gleaning only what is meaningful. The next step in that evolution is helping clients lessen their digital footprint to the greatest extent possible.
1 A third option to protecting a client’s privacy involves the use of Nondisclosure Agreements (NDAs). For a brief overview of these documents and their use, please check out the full version of this article on the DeLeon Realty website ( http://www.deleonrealty.com/why- deleon/articles).
2 For a concise introduction regarding the use of LLCs in California real estate, see Ken DeLeon and Michael Repka, "Owning Real Estate Through an LLC," Palo Alto Daily Post, November 15, 2013.atherton_2014_-_expectation_of_privacy_web.pdf