MSOs and MFOs: Making E-2 Investments Easier

Last week I posted a blog expressing my concerns about the passive real estate investment deals which are being marketed by Vietnam immigration agents as a viable mechanism for E-2 Treaty Investors, as in folks who secure Grenadian nationality as a means of getting their families to relocate to the U.S. swiftly.  As I explained, the requirement for ANY U.S. non-immigrant business visa which lets an investor live long-term in the U.S. with his or her family (e.g., E-1, E-2, L-1, etc.) is an “active” business investment and explained what that meant under US law. 

Subsequent to that post, several clients have asked me to distinguish between passive real estate investing and the other mechanisms LatourLaw uses to assist our foreign clients investing in U.S. real estate and, often, pursue immigration objectives through such investments.

The first is LatourLaw’s Family Office Services (LLFOS) , our MFO (“Multifamily Office”). LLFOS serves as the de facto legal representative and caretaker of all of the above needs for a small group of clients with U.S. investments while also offering bespoke services as required by our clients. We begin by meeting with the client to determine their U.S. investment and immigration objectives. If we can help the client, we charge 1) an initial set up fee to create the U.S. entities, bank accounts, hire staff and contractors, arrange business or RE purchases, etc. and 2) an annual fee, which is a small percentage of the total U.S. investment portfolio supervised by LLFOS. The larger the portfolio, the smaller the annual percentage fee.

This works great for portfolio investors looking at real estate. For example, we have had investors who purchased shopping centers and actively negotiated their deals but asked LLFOS to play a watchdog role for their U.S. assets, making sure both the business’ employees and its contractors (accountants, etc.) were doing their jobs correctly. By serving as General Counsel to the primary U.S. entity which overseas an investor’s portfolio of investments, LLFOS administers the portfolio while the investor remains active and in constant communication with our U.S. and Vietnam offices, meeting the “active” requirement for all visa categories.

Similarly, the MSO concept – “Management Services Organization” – we deployed last year for our L-1 and E-2 U.S. franchise investors insures an “active” role for the investor. The MSO was specifically created to facilitate investments by both U.S. and foreign investors who have multiple business activities which keep them from ONLY focusing on the specific US business. You see, most U.S. franchises require their franchisees to contractually agree that they will ONLY work on the new franchise, will dissolve their other business investments, and will dedicate 100% of their time to the success of the new franchise.  Since the overwhelming majority of investors in Vietnam have other investments they intend to keep, this means MOST U.S. franchises will not work for E-2 investors.

But a tiny number of U.S. franchises accept that their investors DO have other business investments and that a “100%” time requirement specifically culls their most qualified prospective franchisees!  We’ve worked very hard for years to identify those few franchises accept or encourage the involvement of an MSO. By partnering LatourLaw E-2 and L-1 clients with trusted MSOs in the U.S., our clients are able to get the business support they need with their investment while still retaining “active” control required by law.

The MSO is hired by and contractually bound to the investor. Sometimes they take a stake in the investor’s business, other times a percentage of sales or profits; each MSO deal is negotiated by and with the foreign investor. Very few, like the ones LatourLaw recommends, don’t make any profits until the business is profitable, effectively becoming the E-2 investor’s business partner, working toward the common goal of mutual profitability.

In both the MFO and MSO structures, the fundamental distinction is that the investor remains “active” in both, while simply making passive investments in U.S. real estate which are entirely controlled by the U.S. partner or provider is, in my opinion, “passive”. When an MFO like LLFOS supervises an investor’s portfolio of investments or when he/she has contracted with an MSO to organize, open and run a new franchise, all decisions are made by the investor-client. The investor retains full control on all decision-making, expenditures, and business direction in either case. He or she really DOES “develop and direct” the U.S. business, as required by law.

Structured properly with U.S. immigration laws in the forefront of consideration, the MFO or MSO play ADVISORY roles to facilitate U.S. business development, provide specific technical expertise, and get the ball rolling until the investor – in the instant discussion, the E-2 franchisee — is ready to take over daily operations of the U.S. business, if that is what he or she wants; other times, the MSO remains an ongoing operational partner for the E-2 investor. (Note that even in the latter case, the control of all investment funds, purchase/rental/improvement/sales decisions and continued involvement and specific duties of the MSO remain entirely in the hands of the foreign investor).

Contrast these to a situation where a U.S. company makes all decisions regarding specific investments, e.g., what properties are purchased, what price is paid, which will be rented, which will be improved and sold, setting rental and sale rates, establishing budgets, overseeing personal, etc. Is that “active” within the meaning of E-3 regulations?

If you want to know more about LLFOS or how LatourLaw’s MSO franchise management options can make for a smooth U.S. transition for your family, contact us.