Qiang Bjornbak and Zhongzhi Gao

© June 2005 All Rights Reserved

I. Due Diligence in Establishing Business Presence in China

A. Form a WFOE in China.

1. There is a restriction of scope of business.

a. Encouraged to invest in the development and construction of the ordinary residential properties. (See the Catalogue for the Guidance of Foreign Invested Industries (“Catalogue”))

b. Restricted to invest in the large tract real estate development, luxurious hotels, villas, luxurious office buildings as well as international exhibit center, large-sized theme park and are allowed to make investment in all other types of projects.

c. Not permitted for high standard real estate projects such as apartments and office buildings. But luxury hotels are excluded. (WTO)

d. Not permitted to provide real estate services on a fee or contract basis. Only “EJV” or “CJV” are permitted and the foreign investors can hold majority shares.

2. Need to have a project approved first.

A project exists when foreign investors executes a contract for transfer of project with other land users or executes a contract for grant of land use right with the competent government agency for the commercial development.

B. Acquire the Equity Interest of an Offshore Company

1. Conduct Proper Investigations of the offshore company

a. Make sure the parent company of a foreign invested enterprise (“FIE”) in China engaging in the development of real estate.

2. Conduct Proper Investigation of the Legality of FIE

a. Make sure that FIE does not have bad debts and other serious liabilities, has secured interests or does not have pending suits in arbitration or litigation.

1) business license

2) qualifications (four grades qualification).Newly established real estate company is required to acquire the Temporary Qualification certificate. (“TQC”)

3) capital contribution verification report

4) structure of equity interest

5) assets and obligations as well as secured interest

3. Conduct Proper Investigation of the Legality of the Project

a. Make sure that FIE already has a project. (A project exists when foreign investors executes a contract for transfer of project with other land users or executes a contract for grant of land use right with the competent government agency for the commercial development.)

b. Make sure that FIE already acquired all necessary approvals from the government agencies before the construction can start.

1) Approval of initiation of project;

2) Approval of land requisition and conversion of agricultural land to construction land

3) Issuance of Planning Permit for Land for Construction

4) Issuance of Planning Permit for Construction of Building as well as acquisition of State Land Use Certificate

5) Issuance of Permit for Commencement of Construction.

C. Acquire the equity interest of a FIE in China

1. Alteration of Investors' Equity Interest in Foreign-Invested Enterprises (“Equity Interest Alteration”) governs. If the Equity Interest Alteration is silent on any issues, the Domestic Enterprise Acquisition can be used as reference.

2. Conduct Proper Investigation of Legality of the Company.

3. Conduct Proper Investigation of Legality of the Project.

D. Acquires the equity interest of a domestic company

1. the Provisional Regulation on Acquisitions of Domestic Enterprises by Foreign Investors (“Domestic Enterprise Acquisition”) governs

2. Conduct Proper Investigation of Legality of the Company.

3. Conduct Proper Investigation of Legality of the Project.

a. Make sure the land was not obtained through allocation. (The land allocation is a process by which the land user acquires land use right from the government without fixed period of time at no cost, or the land user is required to make the payment amounting to site use fee.)

b. Make sure that the land is owned by the State. If it is owned by the collective economic organization, the land user must acquire approval of conversion of the land use purpose and/or land requisition. (Beware of the land in rural and suburban area).

c. Make sure that the approval from government agency that does not exceeds its power and scope. (i.e the land requisition is illegally approved by the government agency at county level or lower instead of provincial level.)

d. The approval is not expired.

e. Make sure there is a Permit for Pre-sale Residential Property if the foreign investor wishes to purchase the pre-sold residential property.

4. Conduct Proper Investigation of Potential Liability of the Project

a. Make sure there is no mortgage placed on the Target Project. (title search at government agency).

b. The developer does not owe debts to contractors.

E. Purchases assets of the company and then uses the assets as capital contribution to establish a FIE

1. The Provisional Regulation on Acquisitions of Domestic Enterprises by Foreign Investors (“Domestic Enterprise Acquisition”) governs

2. Conduct Proper Investigation of Legality of the Company.

3. Conduct Proper Investigation of Legality of the Project.

4. If there are no permits, you need to apply for all the permits from very beginning.

F. Establishes a FIE and then purchases and operates the assets

1. The Provisional Regulation on Acquisitions of Domestic Enterprises by Foreign Investors (“Domestic Enterprise Acquisition”) governs

2. Conduct Proper Investigation of Legality of the Company.

3. Conduct Proper Investigation of Legality of the Project.

4. If there are no permits, you need to apply for all the permits from very beginning

II. Due Diligence to Follow the Existence of New Laws and Regulations and the Change of Old Laws and Regulations

A. Land will be granted to land user by bidding, auction or quotation, subject to very limited exceptions. (the Regulation on Grant of the Stated-owned Land Use Right by Bidding, Auction or Quotation ) (“Regulation on Land Grant by Bidding”)).

B. Establishment of land banking system to monopolize the supply of land use right by the government (tightening the supply of land and enhancing the transparency of land supply). (The State Council’s Circular on Strengthening the Management of State-owned Land Assets).

C. Seriously carry out the preliminary examination of land used for project before initiation of a project (the Administrative Regulation on Preliminary Examination of Land Used for Construction of Project)

D. Recover the power of approval of land requisition to the government at the provincial level (the State Council’s Decision on Deepening Reform and Tightening Management of Land).

E. Developers are required to increase the equity interest to 35%of their total investment. (“Notice to Adjust the Equity Interest of Fixed Assets for Certain Industries by State Council”)

F. Mortgage interest goes up and the size of down payment is also raised .

G. Opinion Concerning How to Stabilize Residential Housing Price Issued by Seven Government agencies on April 30, 2005

1. Residential Property Development should primarily focus on Middle or Low Price Range Residential properties. High-Standard Residential Properties should be restricted.

2. Land supply for villas is stopped. The land supply for high Standard Residential housing is restricted. If the developer did not commence the construction one year after the expiration date specified on land granting agreement, government can collect unused land fee.

3. Business tax will be levied on those who resell their residential properties within two years’ of their purchase.

4. Banks should strengthen the investigation, loan verification and loan review to restrict unreasonable need for real estate loan and prevent loan risks.

5. Preferential policies are given to middle or low price residential properties in respect of planning approval, land supply, loan, tax, etc. Middle or Low Price residential properties refer to Plot Ratio is above 1.0. The floor area of a unit of condominium is below 120 square meters, and the purchase price is more than 1.2 times lower than the residential property on the same class land.

6. Lower the construction Cost. The profit of developer should be under 3%.

7. Purchaser of unfinished presale residential property cannot resell it to another purchaser.

8. Strengthen the transparency of land supply, residential housing supply, land price and housing price.

III. Due Diligence in Purchasing Residential Property for Personal Use

A. Review the Preliminary -Purchase Agreement Carefully

1. Verify the Information of Developer.

2. Investigate and Verify the Subject Property (Location, Environment, Floor, Style, Unit Number, Size).

3. Verify the Price

4. Verify the Method of Payment.

5. Verify the Conditions of Purchase

6. Verify Related Legal Documents to prove the project is legal.

B. Review the Purchase Agreement Carefully

1. Verify the Land Use Certificate (how many years left)

2. Verify Commercial Residential Property Sales Permit

3. Verify the Price

4. Verify the Method of Payment.

5. Verify the Conditions of Purchase

6. Verify the information of Subject Property (Location, Environment, Floor, Style, Unit Number, Size) (Some info may be changed because the property is larger or smaller than the developer promises).

7. Verify the Date of Delivery.

8. Verify Repair Clauses

9. Verify Dispute Resolution, etc.

C. Presale Registration with the government agency in charge with 30 days after signing the Sale Contract.

D. Sign the Property Management Agreement

E. Transfer the Title of the Property and Obtain the Residential Housing Ownership Certificate