MSOs: 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. That means that the speculative purchase of U.S. properties, whether to fix-and-flip or to rent, does NOT qualify.
Subsequent to my posting, several clients have asked me to distinguish between passive real estate investing and the MSO concept – “Management Services Organization” – we have been deploying for our U.S. franchise investors since last year. Here are the distinctions:
-Most U.S. franchises require their would-be franchisees – American or foreign – to contractually agree that they will ONLY work on the new franchise, will dissolve their other business investments, and will dedication 100% of their time to the success of the franchise. I have yet to meet a single Vietnamese investor for whom that is remotely possible, so MOST U.S. franchises will not work for E-2 purposes.
-A small number of U.S. franchises recognize that their investors DO have other business investments; moreover, they understand that most investors have multiple businesses, and that such “100%” time requirement specifically eliminates some of their most qualified prospects! Accordingly, these few franchises accept the notion of an MSO, a specific company partnering with the investor for the purpose of organizing the business and running the day to day needs under the direction and control of the franchisee.
-An MSO is contractually bound with the franchisee, sometimes taking equal ownership in the business, and is effectively their business partner. Some MSO deals guarantee income for the company, whether or not the business is making money; those are bad deals. Some, like the ones LatourLaw works with, don’t make any profits until the business is profitable.
-The ultimate key distinction between an MSO-supported franchise investment – which is “active” for E-2 requirements – and the kind of passive real estate schemes falsely claiming E-2 eligibility but clearly “passive” under E-2 law is that in an MSO-managed franchise, the E-2 investor retains full control on all decisionmaking, expenditures, and business direction. He or she really DOES “develop and direct” the U.S. business, as required by law, and the MSO is simply an operational tool to facilitate business development, provide specific technical expertise, and get the ball rolling until the franchisee is settled in the U.S. and ready to take over the enterprise.
The MSO is a TOOL via which the E-2 investor can insure a smooth franchise launch and transition the family to the U.S. until such time that they are settled in. At that time, whether the investor takes over as full time manager, hires direct management, or continues to work with the MSO, the “direct and develop” requirement is met because 100% of the financial and business decisions are made by the investor. The MSO is in an ADVISORY position, not a decision-making one.
In total contrast, the current real estate schemes being marketed as E-2 solutions are totally passive, the U.S. entity makes 100% of the calls on property selection, terms, rental plans, management, remodeling, reselling, etc. With a solid and transparent U.S. partner, a Vietnamese investor CAN make good money undertaking these passive activities…but they do NOT qualify as E-2 investments.
If you want to know more about how LatourLaw’s MSO franchise management options can make for a smooth U.S. transition for your family, contact us.
Attorney José E. Latour