Holmes Shum EB and US Securities Laws Revised 2-27-2015
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EB-5 Program Regional Centers Have Been Re-authorized until 2015. EB-5 Regional Centers play an important role in raising EB-5 financing for new business development, and there has been some concern among investors and project developers that the federal regulations authorizing EB-5 regional centers were set to expire on September 30, 2012. We have been expecting that this portion of the EB-5 program would be reauthorized for some time, but we are now able to announce that an important step in the reauthorization has now been accomplished. Yesterday, the U.S. House of Representatives passed S. 3245 (412-3) – which includes a three year re-authorization of the EB-5 Regional Center Program through September 2015. The U.S. Senate previously approved the reauthorization on August 2, and the bill will now be submitted to President Obama for signature. Continue reading →

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On August 27, 2012, the California Department of Corporations adopted a new Rule 206.204.9, which was intended to encourage capital investment in private investment funds by providing an exemption from investment adviser registration requirements for the managers of these funds. However, the new Rule imposes so many new requirements that it may be a shock to managers of many private investment funds, particularly real estate related investment funds. This article describes what types of private investment funds are subject to the new Rule, what requirements apply under the new Rule, and some of the special issues that affect funds that invest in real estate assets as a result of this new Rule.

The new Rule applies to “private fund advisers”. The new Rule provides that “private fund advisers” are exempt from registration as investment advisers under California law if they comply with the restrictions and requirements of the Rule. Private fund advisers are persons who provide advice solely to one or more “qualifying private funds,” which are defined as funds that qualify for the exclusion from the definition of an investment company under one or more of sections 3(c)(1), 3(c)(5) and 3(c)(7) of the Investment Company Act of 1940. In order to determine if a manager of an investment fund is required to comply with the new Rule, the manager first has to determine if the manager is an adviser to a “qualifying private fund.” Continue reading →

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Buying or selling a hotel operating under a brand name requires special attention – the existing franchise agreement will be assumed, terminated or modified in some way, which will have a significant and lasting impact on the value of the hotel. The JMBM Global Hospitality Group® has represented buyers and sellers of all of the major, and many minor, branded hotels and have developed practical solutions for our clients to achieve a smooth transition of the franchise from the seller to the buyer, or to change the franchise if that suits the buyer’s goals. Knowing when and how to work with the franchisor as part of the transaction can save both parties tens of thousands of dollars, avoid major disruption of hotel operations upon the ownership transfer and increase the ongoing value of the property itself.

In this article, we some of our experience in dealing with the key hotel franchise issues that need to be addressed during the negotiation and transition process.

The first thing you need to know: the franchise does not follow the property – it terminates when the hotel is sold.

Some buyers and sellers of a hotel believe that the hotel brand can be sold along with the hotel; that is not true. The existing franchise agreement terminates when a hotel is sold and the buyer has to enter into a new franchise agreement if the buyer wants to retain the brand. Franchises are personal agreements between the franchisor and the franchisee, and virtually all franchise agreements include restrictions on the ability of a franchisee to transfer the franchise. This leads to two key concerns. First, unless a franchisee has negotiated otherwise with the franchisor, the sale of the hotel may cause the termination of the franchise agreement, making the seller obligated to pay a significant termination fee. While most franchisors will waive the termination fee on an approved sale, this fact has to be addressed. Second, a franchisee must make independent arrangements with the franchisor to continue to operate the hotel under the same brand (if it chooses to do so), starting on the day the transfer takes place. Continue reading →

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Thank you to my partner, Marta Fernandez, a Labor & Employment lawyer at JMBM, who is my co-author for this article. In the article, we will share some of our hotel-specific insights concerning the key labor and employment issues that the seller and buyer should address as part of their negotiation of the hotel purchase and sale agreement. We will also discuss some of the important decisions that the hotel buyer must make with regard to hotel employees. In addition, we will highlight some of the special issues that will apply to any sale of a hotel that has a unionized workforce in place at the time of the transaction.

The first thing you need to know: Who Is the “employer”?

Is the hotel owner or hotel operator the “employer” of the workers at the hotel. Where the hotel is managed by anyone other than the owner, the answer will usually be in the hotel management agreement. If the seller is the employer, then the employment issues can be worked out between the seller and the purchaser in the purchase agreement. If the hotel operator is the employer, the buyer will also need to work with the operator on employment termination and transfer matters.

Because of the WARN Act notification requirements (discussed further below), the seller and buyer will want to make sure that these issues are decided more than 60 days prior to the intended effective date of the transaction.

A key decision for the buyer: Who should be the employer after the closing?

Outside the U.S., the hotel owner is usually the employer of all hotel workers. However, in the U.S., the hotel operator is probably most frequently designated as the employer. Some hotel owners believe that it is always better to have the hotel operator be the employer of the hotel employees, because the operator has labor experts necessary to handle employment matters and the owner does not. Some owners also believe that if the hotel operator is the employer, then the owner will not be liable for wage and hour claims, harassment, discrimination and other labor law violations at the hotel. Continue reading →

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The Governor’s Office of Business and Economic Development is actively communicating with EB-5 stakeholders to address concerns raised with the new procedures for designating “Targeted Employment Areas.” We met with Brook Taylor and Mather Kearney of the California Governor’s Office of Business and Economic Development (known as “GoBiz”) on May 18, 2012, to discuss our suggestions for refining the new procedures announced by the State of California for designation of “Targeted Employment Areas” or “TEAs”. Economists Jeffrey Carr and Ashleigh Sewell of Economic and Policy Resources, Inc., also participated in the meeting by telephone.

As our readers know, our concern with the new California TEA designation procedure that became effective on May 1, 2012 is that it does not include the ability to designate TEAs within dozens of cities throughout California, including San Francisco, San Diego, San Jose and Anaheim, that do not qualify on a city-wide basis. In our meeting last week, the representatives of the Governor’s Office expressed a willingness to work with stakeholders in the EB-5 program to address these concerns. The Governor’s Office also made clear that the State of California strongly supports investments for projects throughout California using the EB-5 immigrant investor program and that the change in procedure was based on policy and resource considerations, not on a desire to reduce the ability of cities and project owners to obtain EB-5 financing. Continue reading →

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This article was first published by Hotel Business on May 21, 2012

Four years after the collapse of the traditional financing markets for new hotel developments, most hotel developers are still struggling to find the necessary financing to fill the capital stack required to build new hotels. Even for developers with access to construction loans, loan to cost ratios are hovering at 50%, and equity providers expect returns in the mid-teens to the mid-twenties. As a result, the “feasibility gap” between a typical project’s cost and its value is still too high, and hotel developments around the country are stalled.

Meanwhile, most cities and states are no longer providing public dollars to support private development. In California, for example, all community redevelopment agencies were abolished by the California legislature in 2011, and $1.7 billion that had been earmarked for redevelopment projects by approximately 400 redevelopment agencies state was instead required to be returned to state and local governments to fill operating budget deficits.

In other states as well, many governmental entities have no public dollars available, or are unwilling to use public dollars to support hotel development. Even in those areas where government financing is available, the time required to obtain approval is usually much longer than anticipated – often taking two to five years or more. There is also the risk that during that time mayors and city council members will change, and they may not support the projects approved by the prior administrations. Continue reading →

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California has adopted new policies that will deny EB-5 financing too many projects. On April 30, 2012, the California Department of Business, Transportation and Housing Agency released a bombshell that will have substantial negative effects on California businesses seeking to raise financing through the EB-5 immigrant investor visa program. In essence, the State of California has taken an action that will deny for all practical purposes the ability of many California cities to attract EB-5 investments because the State has decided that it will no longer issue “Targeted Employment Area” or “TEA” designations to any new areas other than the ones it designated in a letter dated April 30, 2012. This means that cities like San Francisco, San Diego, San Jose, Anaheim, and dozens of other cities, will be denied the ability for all practical purposes to raise EB-5 financing for new projects. Californians have a strong interest in the EB-5 program, as indicated by the fact that 59 of all approved U.S. Citizenship and Immigration Services (USCIS) regional centers are located in California – which is over 25% of all regional centers. We believe this new policy needs to be changed immediately because California stands to lose out to other States in billions of dollars of foreign investment and thousands of new jobs. We are reaching out to State officials to reconsider this short sighted policy and will update you on any developments.

EB-5 financing is raising billions of dollars in financing for United States businesses and creates thousands of jobs. As our readers know, the EB-5 investor visa program allows non-U.S. persons to obtain United States permanent residency (green card) if they invest $1,000,000 in a new commercial enterprise that creates at least 10 new, permanent, full-time jobs per investor. If the new commercial enterprise is located within a TEA, the required investment is reduced to the $500,000 level (while still creating 10 full-time jobs). This program has already raised billions of dollars in financing for job-creating U.S. businesses since 1992, and is poised this year to top all records for the amount of financing raised for U.S. businesses. As of March 20, 2012, there had already been 2,405 EB-5 visas issued for the first quarter of 2012, with Chinese nationals continuing to dominate the list (accounting for nearly 70% of EB-5 visas issued in 2011 and 2012 to date). The entire EB-5 program has a cap of 10,000 EB-5 visas per year. That could potentially represent several billion dollars of financing for new U.S. businesses every year. Continue reading →

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Since the release of its “Tenant Occupancy” Notice on February 17, 2012, the U.S. Citizenship and Immigration Services (“USCIS”) has begun issuing Requests for Evidence on pending regional center applications and exemplar I-526 petitions that involve “tenant occupancy models”. These Requests for Evidence articulate a new USCIS policy to reject “tenant occupancy” job creation models for employment created by tenants under leases in certain cases. Such Requests for Evidence have also been issued recently with respect to hotel projects that do not have any leases or tenants and that are operated under the industry-standard hotel management agreement. Apparently the USCIS may be questioning whether hotel operators operating a hotel under a hotel management agreement are similar to tenants operating a business under a lease. The answer is no, as explained further in this article. Continue reading →

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Why EB-5 financing is important to hotel developers now: Financing for new hotel development is still in short supply, even for experienced hotel developers. As a result, many hotel developers are exploring the EB-5 financing program as an alternative to traditional financing sources. The EB-5 investor visa program offers non-U.S. persons the opportunity to receive U.S. visas in return for an investment in a U.S. business that creates new jobs. In prior articles, we have discussed the basic requirements for EB-5 financing (See “How to use the EB-5 immigrant investor program for financing hotel development”; “Why a “regional center” may be the key to financing your next hotel development”; and “10 things you can do to win the “race” for EB-5 capital for your hotel development project”). If you want to know more about the basics of EB-5 financing, we encourage you to read those articles.

Beyond the basics of EB-5 financing: Once you understand the basics of EB-5 financing, you know that you will need to work with a United States Citizenship and Immigration Services (“USCIS”) approved regional center in order to be able to count indirect job creation that will result from your project. You also know that you will need to generate at least 10 new jobs per immigrant investor, and that almost all EB-5 investments are offered at the $500,000 investment level, which requires that your project be located in a Targeted Employment Area (“TEA”). You know too that you have two choices if you want to have your hotel financing sponsored through a regional center: you can establish your own regional center, or you can find and negotiate with an existing regional center to sponsor your financing. Continue reading →

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An immigrant investor has two primary objectives when shopping for an EB-5 project — to minimize the immigration risk and to minimize the investment risk.

No immigrant wants to move to the U.S. under a conditional green card (that requires them to generate jobs in the U.S.), buy a house, enroll children in school, and then be put in the untenable position of losing their entire investment and their green card two years later if the project fails both as an investment and as a jobs generator. Immigrant investors are understandably choosy about the investments they make under the EB-5 immigrant investor visa program.

There are 150 existing regional centers in the U.S. and 83 new regional center applications pending approval, all with projects trying to receive EB-5 funding. How do developers make their projects stand out from the rest?

How can you differentiate your project and make it more attractive than other EB-5 projects vying for the same money? A strong project will always trump a weaker one, but what does that mean for EB-5 projects?

Here are ten ways you can make your project stand out to immigrant investors in the competitive EB-5 marketplace:

1. Make sure your project is in a Targeted Employment Area (TEA)

To be competitive in the marketplace, a project must be located in a Targeted Employment Area (TEA). A TEA is a high unemployment area (150% of national average) or a rural area. Having a TEA designation permits the minimum qualifying investment to be reduced from $1 million to $500,000. There are too many $500,000/investor projects in the marketplace for a $1 million/investor project to be competitive. Work with your State agency to determine if your project location qualifies for TEA designation. Continue reading →