Sorry for the delay in getting this month’s letter out the door. Fall is officially here – although you would not know it by the temperatures in Dallas. The Texas State Fair is open and the football season is well under way. And, as of September 1, new laws went into effect across the great State of Texas. A new law worthy of note for creditors involves the increase in the allowed exemption for personal property for families in Texas. This issue addresses that change in the law, finishes up our examination of how to bust the homestead exemption, and explores the Immigrant Investor Program commonly known as EB5.
We have added a new section called: Self-Deprecating Lawyer Joke of the Month in which we poke fun at ourselves. After all, we are a light-hearted group! If you know of any lawyer jokes you would like us to use in our newsletter, let me know.
We hope you enjoy this issue of our newsletter and, as always, should you have any questions or if we can be of assistance, please feel free to contact me at any time.
Bruce W. Akerly
Chair, Creditors’ Rights & Bankruptcy Practice Group
Cantey Hanger LLP Dallas
Busting The Homestead Exemption (Part 3) – Constructive Trust/Abandonment
In July we provided an overview of the homestead exemption in Texas. Last month’s issue explored the impact of bankruptcy on the homestead exemption. This month’s issue explores abandonment and constructive trust concepts as other ways to impact a homestead in an effort to gain its value to satisfy claims.
Homestead rights can be abandoned. The creditor must prove abandonment. Given the nature of the right, the burden is a substantial one.
To prove abandonment generally requires a showing that the debtor discontinued use of the homestead through some overt act and intent to not return to the property. Proof of intent must be clear and convincing, conclusive and undeniable. This emphasizes the significant burden on the creditor. But, fortunately, it is not an impossible burden.
What happens if there is an abandonment? It is not necessarily permanent. A debtor can abandon a homestead and later re-create a homestead in the same property. During this “gap” period, however, third party creditor rights can attach to the homestead. One example is the filing of a non-consensual lien, such as a judgment, in the property records. In such an instance, discovery of chronological facts will be important to determine if a gap arose in addition to abandonment.
Abandonment can also be partial in nature. The creditor must establish abandonment and the precise portion that has been abandoned. Precision is the key.
Sale or Transfer of the Homestead
As a general rule, the sale or transfer of real property terminates the homestead, unless perhaps a life estate is retained. While, at first glance, the sale or transfer of real property previously subject to a homestead causing the termination of that homestead exemption appears obvious, there are times when a sale or transfer involves the retention of possession of the real property. When seeking to force the sale of real property, i.e., property of the buyer or transferee of the property, care must be taken to determine if the occupier of the property, i.e., the seller or transferor might allege protection of the property as his or her homestead. Alternatively, cases arise where the legal owner encumbers Also, cases arise where the legal owner of real property encumbers the homestead with a deed of trust and then later defaults and the occupant tries to prevent foreclosure based on homestead protection. Creditors should try to get the debtor and/or homestead claimant to commit to the facts supporting their claim quickly before the debtor or claimant tries to fit within exceptions that may apply, since fee simple title is not necessarily required to be afforded homestead protection.
In these and other instances in which a homestead is sought to be “busted” an attorney should be consulted to make sure steps taken comply with applicable law and gain an assessment of whether action is worthy to be taken, legally or economically.
Bruce W. Akerly
Partner, Dallas, Texas
Texas Increases The Personal Property Exemption Amount for Married Couples
Section 42.001(a) of the Texas Property Code was amended this past legislative session to increase the allowed exemption for personal property for a family from $60,000 to $100,000 and for an individual from $30,000 to $50,000. The amendment, effective September 1, 2015, expressly provides that it does not apply to property subject to a voluntary bankruptcy proceeding as of the effective date.
Bruce W. Akerly
NAVIGATING THE IMMIGRANT INVESTOR (EB-5) PROGRAM
The United States immigration laws are not normally a place you would expect to find opportunities for lenders. However there is at least one immigration program that does so. In 1990, Congress created the Immigrant Investor Program — also known as the EB-5 Program ― to stimulate the United States’ economy through foreign investment. Under this program, if an immigrant invest funds that are used to create a new business, the foreign investor may be eligible to become a “Lawful Permanent Resident” (i.e., Green Card Holder).
There is no requirement that the invested-in, new business obtain financing solely from EB-5 applicants. At different times in their life cycle, EB-5-related businesses may need and benefit from traditional forms of financing.
At its core, the EB-5 Program is based on three elements: (1) the investment of at-risk capital; (2) in a new commercial enterprise; and (3) the result is the creation of at least 10 full-time jobs. The first element requires the immigrant to invest capital such that the capital is “at risk.” This is typically done by the immigrant purchasing an equity position in a new commercial enterprise. The amount of capital that is required depends upon whether or not the investment occurs in a United States Citizenship and Immigration Services (USCIS) Targeted Investment Area (TIA). If the investment occurs in a TIA, then the immigrant must place $500,000 at risk; otherwise, the immigrant must invest at least $1,000,000.
The second element requires the creation of a new commercial enterprise. A new commercial enterprise is one that is created after November 29, 1990, with certain exceptions. However, commercial enterprises that were in existence prior to November 29, 1990 may be eligible if the enterprise will be restructured or expanded with the immigrant investor’s capital.
The third element requires that the immigrant’s investment create at least 10 full-time jobs for qualifying employees. The new commercial enterprise itself must create the jobs, such that either the new business or its wholly-owned subsidiary must be the employer for the created jobs.
In addition to the basic EB-5 Program there is a specialized EB-5 program called the Regional Center Pilot Program. A “Regional Center” is an economic unit, public or private, that submits a business model and planning documentation to USCIS for approval so that foreign immigrants can participate in the EB-5 program. Under this program, the Regional Center entity creates the business opportunity that is structured under a USCIS-approved business plan, and the individual investor takes a position in this new business. In practice, the Regional Center essentially provides a turn-key business opportunity to the immigrant investor within a certain geographic locale. That is, the Regional Center creates the new commercial enterprise that will operate according to the Regional Center’s business plan and the immigrant buys into the project by providing at-risk capital. Most Regional Centers locate themselves in a TIA so that the immigrant investor’s capital outlay will be $500,000. An important distinction is that, under the Regional Center Pilot Program, the required 10-plus jobs can be created either directly (like the Basic Program) or indirectly.
Indirect jobs are those that are created by the new commercial enterprise, but which do not involve direct employment by that same commercial enterprise. Indirect job creation can be demonstrated by use of economic methodology, so long as it is able to link the job creation to the immigrant’s capital contribution. This methodology is usually part of the Regional Center’s business plan, which is then submitted to USCIS as part of the immigrant’s filings with USCIS.
By allowing the jobs-created element to be fulfilled by indirectly created jobs, the business enterprises have more flexibility. A Regional Center can create the new commercial enterprise and have the immigrant directly contribute capital in return for equity in the new commercial enterprise. This is informally known as the “Equity Model” and is similar to an ordinary purchase of an equity position in a business. By allowing indirect jobs to fulfill the jobs-created element, the types of new commercial enterprise is likewise expanded because jobs created for the producers of materials, equipment, or services may be counted even if the newly created EB-5 business does not directly employ those individuals.
Many Regional Centers are using a different framework informally known as the “Loan Model.” In this structure, the immigrant is not taking an equity position in the EB-5 job-creation company itself. Instead, the Regional Center separates the immigrant’s capital investment from the basic project or job creator. This is done by creating two entities ― one entity will pool the contributions of various EB-5 investors and loan the funds to the second entity that will be operating the job-producing business. The first entity is usually a limited liability partnership and acts essentially a debt fund for the underlying project. Because indirect job creation is allowed, the immigrant investor’s capital contribution can create qualifying jobs by virtue of the loan to the operating entity.
For example, a Regional Center would create an entity, let us say Debt Fund LLP. The immigrant would invest his funds in Debt Fund LLP, taking an equity position. Debt Fund LLP would then loan the immigrant’s funds to let us say Project LLC, which would involve the actual on-the-ground business operations. In this case, the equity position taken in Debt Fund LLP satisfies the requirement of at-risk capital being invested, while the jobs created by Project LLC satisfies the requirement of jobs being created. As a side note, the usual requirement for the immigrant to be involved in “management” of Debt Fund LLP is satisfied by having the limited partnership agreement provide the immigrant investor with certain rights, powers, and duties that are typical for limited partners under the Uniform Limited Partnership Act.
While somewhat more complicated than a typical equity set-up, the Loan Model has become popular because it allows the immigrant investor more certainty about his or her exit from the business. Typically, upon repayment of the loan, the funding entity will dissolve and distribute the amounts repaid on the loan, less fees and expenses, to the immigrant. This stability allows the immigrant relative certainty regarding his exit from the project. In contrast, in the usual Equity Model, the immigrant may have liquidity problems in divesting himself of his position after obtaining his Green Card.
EB-5-related projects involve operating businesses, meaning that they have capital needs just like any other business. Since the use of an immigrant’s capital is not the exclusive method of raising capital, bank financing is often a viable option for either short-term or long-term capital needs. Due diligence for any such loans would involve investigating whether the business structure meets USCIS regulations and requirements, in addition to the normal due diligence that would accompany a commercial loan. And, because these types of transactions involve a myriad of complex steps, pitfalls and verifications, it may be wise to consult with counsel experienced in such matters.
Bruce W. Akerly
Quote of the Month:
We are handicapped by what we think we can’t do. – Mark Twain
Self Deprecating Lawyer Joke of the Month:
Question: How many lawyers does it take to screw in a light bulb?
Answer: How many can you afford?