Holmes Shum EB and US Securities Laws Revised 2-27-2015
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JMBM is pleased to announce that Catherine DeBono Holmes, alongside fellow partners Jim Butler and David Sudeck, has been named to EB5 Investors Magazine’s “Top 15 Corporate and Securities Attorneys” list for 2023.

Cathy is the Chair of JMBM’s Investment Capital Law Group and the author of the Investment Law Blog. She helps clients worldwide to raise, invest and manage capital from U.S. and non-U.S. investors.

She has represented hundreds of EB-5 offering sponsors and real estate developers to obtain financing through the EB-5 immigrant investor visa program for the development of hotels, multi-family, assisted living and mixed-use developments throughout the U.S.

“The restoration of this program following the EB-5 Reform and Integrity Act of 2022 has provided an excellent opportunity for investors,” said Holmes. “I am honored to be recognized as a top corporate and securities attorney and I look forward to continuing to help my clients take advantage of the reauthorized program.”

Cathy also represents private investment fund managers, registered securities broker-dealers and investment advisers on securities offerings, business transactions and regulatory compliance issues.

With extensive experience in the hospitality industry, Cathy specializes in resort and urban mixed-use financing and development, hotel management and franchise agreements, resort and hotel purchase and sale transactions, and public-private hotel development. Continue reading →

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This article was first published by the IIUSA Regional Center Business Journal and is reprinted with permission.

All real estate development projects are subject to risks that the developer or project owner will not complete a project or will not meet operating projections, but the Covid-19 pandemic has substantially increased the number of real estate development projects and operating real estate businesses that are now experiencing severe financial distress.  In particular, many hotels, restaurants and retail operations throughout the United States have been forced to radically reduce their operations since March 2020, or to close completely.  In addition, a number of residential condominium, multifamily rental and mixed use real estate development projects have experienced delays in financing and construction, or delays of sales or rental of residential units in projects that have been completed.  Among the many real estate related businesses affected by these conditions are projects funded with EB-5 financing (referred to here as “EB-5 Projects“).

The issues faced by new commercial enterprises (“NCEs”) with loans to or equity investments in EB-5 Projects that are in default are particularly challenging for two reasons.  First, most NCE loans or equity investments on EB-5 Projects are subordinated to senior creditors, which require an analysis of what legal remedies are available to an NCE under all of the financing documents to which the NCE is a party, including agreements with the owner of the EB-5 Project (the “EB-5 Project Owner”) and agreements with the senior lenders.  Second, an NCE must analyze the effect of any action it may take that might negatively impact the eligibility of its investors (“EB-5 Investors”) for permanent  residence under the EB-5 program.  An NCE confronted with the problem of a defaulting EB-5 Project Owner must determine what remedies are available to the NCE and what the effects on the NCE and the EB-5 Investors will be if a senior lender exercises its remedies against the EB-5 Project Owner.

This article summarizes the types of remedies available to an NCE in the event of a default by an EB-5 Project Owner on a loan or equity investment made by an NCE, the effect of foreclosure actions taken by senior lenders on EB-5 Projects, and the immigration issues that will arise in connection with a potential foreclosure or sale of an EB-5 Project in distress.  Based upon the analysis of those issues, this article suggests a protocol for NCEs to use in analyzing potential remedies and outcomes to preserve as best as possible the visa eligibility and financial investment of its EB-5 Investors.[1]

A.  Legal remedies available to an NCE depending upon type of investment

The remedies available to an NCE upon a default by the EB-5 Project Owner will be primarily determined by the terms of the EB-5 financing documents.  Different remedies will apply depending upon whether the EB-5 investment is: (a) a loan secured by a senior mortgage on the EB-5 Project, (b) a loan secured by a junior mortgage on the EB-5 Project, (c) a loan secured by a pledge of membership interests in the EB-5 Project Owner[2]; (d) an unsecured loan; or (e) an equity investment in the EB-5 Project Owner[3].  The remedies available for each type of EB-5 financing are summarized below: Continue reading →

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The final IRS Regulations released December 19, 2019 modify and clarify some of the previously proposed regulations, and retain most of the previously proposed regulations, for real estate investors and developers in Opportunity Zone projects. 

The IRS Release of the final Opportunity Zone regulations – consisting of 350 pages of explanations of what was changed and what remained unchanged from the proposed regulations released in October 2018 and May 2019, and almost 200 pages of regulations and examples – contains mostly good news for real estate investors.  The regulations provide detailed requirements for investors seeking to qualify for the tax benefits provided from an investment in one of the over 8,700 designated Opportunity Zones, codified as Sections 1400Z-1, and 1400Z-2 of the Internal Revenue Code.  This article focuses specifically on those portions of the final regulations that impact real estate investment and development in designated Opportunity Zones.

The final IRS Regulations made the following modifications to the proposed regulations on real estate related investments issued in October 2018 and May 2019:

  • Gross capital gains from sale of depreciable property and non-depreciable real estate used in a trade or business for more than one year, otherwise known as “1231 assets” in the Code, are now 100% qualified for tax deferral, without the need to net out capital losses;
  • Capital gains allocated to investors by a limited partnership or limited liability company can be invested in a qualified opportunity fund (“QOF”) for up to 180 days from the due date of the pass-through entity’s tax return, which further extends the time period for investors to make a qualified investment in a QOF from the proposed regulations that would have started the 180 day period on the last day of the pass-through entity’s taxable year;
  • Property that has been vacant (defined as more than 80% unused as measured by square footage of usable space) for at least one year before the date the qualified opportunity zone was designated, or for at least three years after the date the qualified opportunity zone was designated, will now qualify as “original use” property, and will not be required to be “substantially improved” to meet the requirements for qualified opportunity zone business property (“QOZBP”);
  • All real property that is part of a “brownfield site,” including land and structures, will be treated as satisfying the “original use” requirement to be classified as QOZBP, provided that the land is improved after its acquisition, and the cost of remediation of contaminated land may be included in the calculation of substantial improvements to the property;
  • All real property in a designated opportunity zone that is purchased from a local government held as a result of abandonment, bankruptcy, foreclosure or receivership, , will satisfy the “original use” requirement for classification as QOZBP;
  • The 31 month working capital safe harbor for cash held by a QOF may be sequentially applied to each cash contribution on the date received by the QOF, which may extend the working capital safe harbor for a maximum 62-month period;
  • Capital gain realized from the sale of an asset to a QOF, if reinvested into the same QOF, will not qualify for either the deferral of original capital gain or tax free capital gain at the end of the 10 year holding period – which means that capital gains from sale of an asset to one QOF have to be invested in another QOF if the seller of the asset desires to defer the capital gains tax on the sale of the asset to a QOF;
  • Capital gain that is realized by an investor over time under the installment method can be invested within 180 days from the date of each installment payment, or may optionally be invested for all installment payments that are payable after December 31, 2017, even for installment sales that were entered into prior to December 31, 2017;
  • The 31 month working capital safe harbor for cash held by a QOF in connection with a real estate development has been expanded to provide that if a governmental permitting delay has caused the delay and no other action could be taken to improve or complete the project during the permitting process, then the 31-month working capital safe harbor will be tolled for a duration equal to the duration of the permitting delay;
  • If a project owned by a QOF that otherwise meets the requirements of the 31-month working capital safe harbor is located in a qualified Opportunity Zone that is or becomes a Federally declared disaster area, the project may receive up to an additional 24 months to utilize its working capital assets if the project is delayed due to that disaster;
  • With regard to leases of property between unrelated parties, there will be a rebuttable presumption that the terms of the lease were market rate and therefore satisfy the market-rate lease requirement for treatment of the leased property as qualified opportunity zone business property;
  • Clusters of commonly-owned buildings can be aggregated for purposes of applying the substantial improvement requirements; and
  • Taxes payable on deferred capital gains, due for the tax year ending December 31, 2026 or upon any earlier disposition of the QOF investment, will be calculated based on the tax rates in effect for the taxable year in which the taxes are payable (not the tax rates for the year in which the deferred capital gains were originally realized).

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The following article is reproduced with permission from Copyright 2019
The Bureau of National Affairs Inc. (800-372-1033) www.bna.com.

Summary: The qualified small business stock exclusion allows qualified business founders and investors to exclude from federal income tax some or all of the capital gains they realize on qualifying stock sales. Eric Bardwell and Catherine DeBono Holmes of Jeffer Mangels Butler & Mitchell LLP show how to take advantage of the exclusion.

INSIGHT: Are You Eligible for Tax-Free Capital Gains?

By: Eric Bardwell, Esq. and Catherine DeBono Holmes, Esq.

Tax code Section 1202 allows taxpayers to exclude up to 100% of the capital gains they realize on the sale of “qualified small business stock” (or “QSBS”) held for at least five years (Section 1202(a)).  This provision of the tax code was added in 1993, but it originally allowed only 50% of eligible capital gains to be excluded.  In 2009, the percentage of capital gains eligible for exclusion was increased to 75%, and in 2010, this percentage was increased to 100%, and the QSBS incentive was made permanent (Sections 1202(a)(3) and (4)).   Many business owners and investors, as well as their tax advisors, are still not aware that they may be eligible for this benefit.  In addition, existing small businesses and start-up founders may not be aware that the QSBS exclusion could enhance their ability to raise capital from investors seeking to boost their after-tax profits from investment in small and start-up businesses.  This article explains the basic requirements to qualify for the exclusion and discusses tax planning opportunities to optimize the exemption.

What is QSBS?

QSBS is stock that meets the following requirements: Continue reading →

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JMBM’s Investment Capital Law Group is pleased to announce that Catherine DeBono Holmes, Chair of the Group, will participate as a panelist for PLI’s 21st Annual Commercial Real Estate Institute.

Date:   November 7-8, 2019
Place:  Live in San Francisco or via Webcast

Cathy will participate on the panel focusing on Opportunity Zone Real Estate investments. The panel will cover:

  • How to structure a Qualified Opportunity Fund
  • The tax benefits of Opportunity Zones
  • Guidance on the Opportunity Zone program – what we know, what we don’t know, and what else is coming

Click here for more information, or to register.

PLI programs offer CLE credit in all U.S. jurisdictions that have mandatory CLE requirements and some foreign jurisdictions with CPD requirements. Please check www.pli.edu/credit for details.

 

Cathy HolmesCatherine DeBono Holmes is the chair of JMBM’s Investment Capital Law Group, and she has practiced law at JMBM for over 30 years.  She has also worked as a senior member of the JMBM Global Hospitality Group and JMBM Chinese Investment Group. Within the Investment Capital Law Group, she helps real estate developers and business owners, brokers, investment advisers and investment managers raise and manage investment capital from U.S. and non-U.S. investors. She has acted as lead counsel on numerous hotel, residential and mixed-use developments and transactions in the U.S., Europe, China, South America and Asia Pacific regions, as well as hotel management and franchise agreements and public-private hotel developments. She has also represented private investment fund managers, registered securities broker-dealers and investment advisers on securities offerings, business transactions and regulatory compliance issues. She is a frequent speaker and author on a range of topics related to capital raising transactions, including EB-5 financing and Opportunity Zone financing. Cathy can be reached at CHolmes@jmbm.com.

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Two years after the U.S. Citizenship and Immigration Services (USCIS) adopted Policy Manual changes addressing requirements for the redeployment of capital contributions of EB-5 investors until the end of their two-year period of conditional permanent residency, it has not provided any further guidance on these issues.  EB-5 sponsors have been left to navigate this uncertain terrain using their own best judgement.

EB-5 sponsors and their advisors now seek to establish a method for redeployment of EB-5 capital that will satisfy USCIS guidelines, U.S. securities laws, EB-5 investors, and all of the other parties who collectively have an impact on the investment of EB-5 capital. In some cases, EB-5 investors have threatened — or actually filed — actions against new commercial enterprises (NCEs) as a result of the approval process and/or selection of the reinvestment.

An article I wrote for the NES Financial blog addresses some of the questions that arise when EB-5 sponsors make redeployment decisions, including:

  • Should EB-5 investors be asked to approve a redeployment?
  • Why not have EB-5 investors approve every redeployment decision?
  • What process should be made to make a reinvestment decision that demonstrates protection of the interests of the EB-5 investors?
  • Should EB-5 investors be permitted to receive repayment, rather than their funds reinvested?

I also offer some thoughts on how to address the inherent risks of the redeployment process. Read the article here.

— Cathy Holmes

Cathy HolmesCatherine DeBono Holmes is the chair of JMBM’s Investment Capital Law Group, and she has practiced law at JMBM for over 30 years.  She has also worked as a senior member of the JMBM Global Hospitality Group and JMBM Chinese Investment Group. Within the Investment Capital Law Group, she helps real estate developers and business owners, brokers, investment advisers and investment managers raise and manage investment capital from U.S. and non-U.S. investors. She has acted as lead counsel on numerous hotel, residential and mixed-use developments and transactions in the U.S., Europe, China, South America and Asia Pacific regions, as well as hotel management and franchise agreements and public-private hotel developments. She has also represented private investment fund managers, registered securities broker-dealers and investment advisers on securities offerings, business transactions and regulatory compliance issues. She is a frequent speaker and author on a range of topics related to capital raising transactions, including EB-5 financing and Opportunity Zone financing. Cathy can be reached at CHolmes@jmbm.com.

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By Catherine Holmes, Brad Cohen and Jamie Ogden

The latest IRS Proposed Regulations Released April 17, 2019 provide greater flexibility to real estate developers seeking capital from investors for Opportunity Zone projects.

Some of the problems posed for real estate developers and others under the new Opportunity Zone (“OZ”) tax incentive program, codified as Sections 1400Z-1, and 1400Z-2 of the Internal Revenue Code, have been potentially solved by the latest round of IRS proposed regulations. In particular, the proposed regulations now provide helpful guidance and assurance regarding:

  • development of property that was acquired by a developer prior to December 31, 2017;
  • clarification regarding when real property will be considered to meet the “original use” requirement;
  • capital contributions received from new investors in a “qualified opportunity fund” (or “QOF”) with multiple closings;
  • distributions of debt financed proceeds by a QOF to investors during the 10 year required holding period;
  • greater flexibility to deal with “real world” problems (such as delays in governmental permitting);
  • sales of assets by QOFs before the 10-year holding period for investors and reinvestment of proceeds of sale;
  • sales of assets by QOFs organized as limited liability companies or limited partnerships after the 10 year holding period for investors;
  • clarification that a property rental business is considered an active trade or business (other than a triple net lease); and
  • clarification that depreciation recapture should not be taxable upon a sale of property by a QOF .

This article explains how these new proposed regulations help real estate developers and their eligible investors qualify for the tax benefits under the OZ program.  For information regarding the potential benefits to investors in a QOF and the basic requirements necessary to qualify as a QOF, see our prior article “How Real Estate Developers Can Use Opportunity Zone Funds to Finance New Real Estate Projects.”

Real property acquired before December 31, 2017 can now qualify for development by a QOF through a ground lease arrangement between a real property lessor and an affiliated real property lessee.

One of the requirements for a real estate development to achieve the status of “qualified opportunity zone business property” (“QOZBP”) under Section 1400Z-2 is that the property being developed must have been purchased after December 31, 2017.  Developers who acquired their properties before that date were prevented from qualifying for the OZ tax incentives unless they sold at least 80% of the property to an unaffiliated purchaser, and retained no more than a 20% capital and profits interest.  However, the latest proposed regulations offer another option to a developer in this situation – it can form an affiliated QOF, enter into a ground lease with the QOF as lessee, and have the QOF finance the development of the property. The requirements for ground leases between affiliates under the latest OZ regulations are that:

  • the lease is entered into after 2017;
  • the lease is on market rate terms when it is entered into;
  • the lease does not contain a prepayment of more than 12 months;
  • there is not a plan, intent or expectation that the QOF would purchase the property for other than fair market value to be determined at the time of purchase.

Continue reading →

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Recent posts on the Investment Law Blog have focused on Opportunity Zone Funds, a new source of financing for real estate development projects, created by the Tax Cuts and Jobs Act of 2017.

While these articles have focused broadly on real estate investment, I recently spoke with Bryan Wroten of HotelNewsNow, specifically about hotel development and Opportunity Zone investment.

His article, “What opportunity zones mean for US hotel development,” describes both the opportunities and challenges that hotel developers face when it comes to taking advantage of Opportunity Zone development.

The article also describes how the Peachtree Development Group is taking advantage of opportunity zones for viable projects that were already in their pipeline.

Read the full article here.

— Catherine DeBono Holmes

 

Cathy HolmesCatherine DeBono Holmes is the chair of JMBM’s Investment Capital Law Group, and has practiced law at JMBM for over 30 years.  She has also worked as a senior member of the JMBM Global Hospitality Group and JMBM Chinese Investment Group. Within the Investment Capital Law Group, she helps real estate developers and business owners, brokers, investment advisers and investment managers raise and manage investment capital from U.S. and non-U.S. investors. In the last ten years, she has represented over 100 real estate developers obtain financing through the EB-5 immigrant investor visa program for the development of hotels, multi-family and mixed use developments throughout the U.S. She also advises real estate developers on Qualified Opportunity Zone investments. She has also represented private investment fund managers, registered securities broker-dealers and investment advisers on securities offerings, business transactions and regulatory compliance issues. For the last two years, she has been named as one of the top 25 securities lawyers in the country by EB5 Investors magazine. Contact Cathy at CHolmes@jmbm.com or +1 310.201.3553.

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LOS ANGELES—Jeffer Mangels Butler & Mitchell LLP (JMBM) is pleased to announce that Catherine DeBono Holmes has been included on EB5 Investors Magazine’s list of “Top 15 Corporate Attorneys” for the second year in 2018.

Chair of the firm’s Investment Capital Law Group and author of the Investment Law Blog, Holmes has practiced law at JMBM for over 30 years, focusing on investment capital and business transactions.

She has extensive experience helping clients from around the world raise, invest and manage capital for real estate projects in the United States and abroad, and has obtained financing for over 200 hotels, multi-family, and mixed-used developments through the EB-5 immigrant investor visa program.

“The EB-5 program is in transition as waiting periods for visas and the issue of redeployment leaves investors and developers with a lot of questions,” said Holmes. “EB5 Investors Magazine offers important guidance, and I’m honored to be included on their Corporate Attorney list again.”

In the hospitality industry, Holmes specializes in resort and urban mixed-use financing and development, hotel management and franchise agreements, resort and hotel purchase and sale transactions, and public-private hotel development. Her finance and investment experience includes handling business formations for entrepreneurs, private securities offerings, structuring and offering of private investment funds, and business and regulatory matters for investment bankers, investment advisers, securities broker-dealers and real estate/mortgage brokers.

About JMBM’s Investment Capital Law Group
JMBM’s Investment Capital Law Group provides legal and business advice to assist our clients with raising capital for investment in U.S. real estate development and business; structuring offerings of investment securities, primarily for private investment; conducting offerings of investment securities in compliance with U.S. federal and state securities laws; and forming and obtaining approval of EB-5 Regional Centers for investment in U.S. business through the EB-5 immigrant investor visa program. We represents real estate developers, EB-5 Regional Centers, private fund managers and registered securities broker-dealers and advisors with respect to capital raising.

About EB5 Investors Magazine
EB5 Investors Magazine serves as a companion to EB5Investors.com and strives to deliver compelling and comprehensive articles and information for everything EB-5 related. EB5 Investors Magazine provides a platform for skilled EB-5 professionals to discuss pressing matters and keep readers up to date on the constantly changing laws and legislation pertaining to EB-5. Each of the publication’s articles is peer-reviewed and provides high-quality objective analysis to an audience of attorneys, EB-5 regional centers, migration agents, wealth managers, and EB-5 service providers.

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By Catherine Holmes, Brad Cohen and Guy Maisnik

On October 19, 2018, the IRS issued the first set of proposed regulations and a New Revenue Ruling on new Internal Revenue Code Section 1400Z-2 governing Opportunity Zone investments.

Under the new Opportunity Zone tax law, taxpayers who realize taxable capital gains from the sale of any asset (stock, property, etc.) and who reinvest those gains into “Qualified Opportunity Funds” (“QOFs”) or “Qualified Opportunity Zone Property” (“QOZP”) will be eligible to receive significant tax benefits, including deferral of their original gain, reduction of their original taxable gains after holding periods of five years or seven years, and no tax on capital gains realized from the new investment in a QOF or QOZP after a holding period of 10 years.

The first set of proposed regulations issued by the IRS under Code Section 1400Z-2 cover a number of issues that apply to individual taxpayers with respect to gains eligible for deferral, types of taxpayers eligible for deferral, the “180-day rule” defining when a qualified investment must be made in order to qualify for the deferral, and how to elect a deferral of the initial capital gain. In addition, the proposed regulations, along with new Revenue Ruling 2018-29, provide guidance to real estate developers seeking to form QOFs or determine whether their properties qualify as QOZP. This article focuses on the regulations and the Revenue Ruling that apply to QOFs and QOZP, and addresses how those regulations and the Revenue Ruling will help real estate developers seeking to raise Opportunity Zone investments to finance real estate development.

How to designate an entity as a QOF and how that Impacts the 90% Test for Eligibility as a QOF

The Regulations specify that any corporation or entity taxed as a partnership, including pre-existing entities, may self-certify as a QOF by using a form that has been proposed by the IRS. The Regulations further allow the QOF to choose the month in which the entity elects to be designated a QOF. If the QOF does not designate a month on the tax form, the Regulations provide that the designation will commence with the first month of the taxable year of the entity. This is important, because a QOF must hold at least 90% of its assets in QOZP as measured on the last day of the first 6-month period of the taxable year of the QOF and on the last day of the taxable year of the QOF. Therefore, if a QOF designates January as the first month of designation, the first six month test will apply in July. If a QOF designates any month after June of the taxable year, the Regulations state that the first test period will be the end of the first taxable year. Continue reading →