Legal Briefs

Act Accordingly

Property owners and managers should understand how to comply with the U.S.A. Patriot Act.

By James R. Janz, JD |

Whether we like it or not, the fear of terrorism continues to impact the way Americans live, travel, and work. To help protect U.S. citizens against future attacks, the government currently is modifying and extending specific provisions of the U.S.A. Patriot Act, which originally was signed into law after Sept. 11, 2001. The Patriot Act has created new guidelines that affect nearly every industry, and an extension is likely to continue to impact how commercial real estate professionals, among others, conduct business.

In short, the Patriot Act imposes detailed record-keeping and reporting requirements on certain individuals and businesses to help the government identify suspicious activity and to prevent money laundering and financing for terrorism. Commercial real estate property owners and landlords can benefit from understanding these requirements and the ways in which they can and should comply with these regulations.

Buyer and Tenant Screening

Owners' and landlords' duties start by thoroughly investigating buyers and tenants prior to entering into contracts, leases, or other transactions. Landlords can use the rules issued by the U.S. Treasury Department's Office of Foreign Assets Control that identify specially designated nationals, including known or suspected terrorists, international narcotics traffickers, persons who threaten international stabilization efforts, and other suspect individuals and entities. U.S. business professionals, including property owners and landlords, real estate settlement agents, and title insurers, are prohibited from engaging in transactions or dealing in property or interests in property with specially designated nationals unless previously authorized. The OFAC rules subject these individuals to economic sanctions and freezing of assets under U.S. jurisdiction.

To comply with OFAC regulations, commercial property owners and landlords should review the specially designated nationals list at www.treas.gov/ofac to determine if any parties in the transaction are listed by name, and if necessary, utilize a private search service to obtain further information. If a potential match is suspected, commercial real estate professionals should contact OFAC's Compliance Program Division at (800) 540-6322 for further guidance.

Commercial landlords should develop standard due diligence policies that incorporate specially designated national screening as part of all transactions. In addition, specific compliance programs can be tailored to reflect the particular degree of exposure owners and landlords have to specially designated nationals based on location, clientele, and other indicators.

Cooperation Is Key

In cases where a buyer or tenant is suspected of an illegal activity and the government launches an investigation, the Patriot Act restricts the information owners or landlords may disclose about the investigation. This law also authorizes Federal Bureau of Investigation representatives to obtain tangible items from leased property including books, records, papers, and other documents. The Patriot Act may require owners, landlords, or custodians to allow the FBI to install phone and Internet tracking devices.

The law acknowledges the burdens owners and landlords bear when complying with government investigations and provides for reasonable compensation for expenditures incurred during the investigation. The law also generally provides any persons who assist law enforcement in investigations and surveillance activities with immunity from prosecution.

Tenant Information Privacy Policies

The Gramm-Leach-Bliley Act, which pertains to the release of nonpublic personal financial information, also can be taxing for property owners and landlords. The act originally was designed to reform the banking industry, but it has reached into real estate transactions due, in part, to the Federal Reserve Board's interpretation of the law. The board has determined that covered financial activities include the act of leasing real property - or acting as an agent, broker, or adviser - without operating, maintaining, or repairing the property.

If applicable, the GLBA requires landlords to disclose their privacy policies and procedures to prospective tenants before releasing the tenant's significant nonpublic personal information to nonaffiliated third parties, such as credit-reporting or collection agencies. Consumers must be allowed to object to the disclosure and given an opportunity to opt out before any personal information is released.

However, the law is unclear about the GLBA's technical application, including whether it applies to commercial leases or only to residential leases. Many industry analysts feel the act applies mostly to individual customers, not businesses. However, there is further debate as to whether the nature of certain leasing activities invokes the act. The Federal Trade Commission and other government agencies are evaluating the GLBA's scope and application. In the meantime, commercial landlords should observe GLBA requirements and implement disclosure policies where tenant financial information for individuals would be released to nonaffiliated third parties.

Other Considerations

In addition to the Patriot Act, OFAC, and GLBA regulations, new standards are emerging that are transforming commercial real estate transactions. To be prepared for these changes, owners and landlords should follow a few important steps.

• Review leases and purchase agreements. Commercial real estate professionals should carefully evaluate these documents in light of current security standards and compliance policies under the Patriot Act, OFAC, and GLBA. An increasing number of transaction documents include clauses that require buyers and tenants to state that they are not a specially designated national or part of a terrorist organization and that they never have been indicted, convicted, or detained on charges involving money laundering.

• Prepare an action plan. Commercial real estate owners and landlords should be prepared if they encounter problems in transactions or are subject to governmental investigations. This includes procedures for communicating with authorities, complying with subpoenas, retaining records, and complying with federal and state laws.

• Consider security measures. Property owners should assess the costs and benefits of security measures for persons and buildings, such as metal detectors, X-ray machines, and imaging technology. In addition, it is important to develop an emergency evacuation plan and also to investigate terrorism insurance.

Stay Informed

As the threat of terrorism continues nationwide, commercial property owners and landlords should be aware of their duties to comply with the Patriot Act's regulations. Making use of legal counsel, industry resources, and policy groups to help understand these obligations is essential as the rules often change or are reinterpreted.