2012 EB-5 Investment Summit in New York City: April 27, 2012

With the growing interest in EB-5s in recent years, a number of EB-5 conferences are held throughout the country. In April, Brian Su's EB-5 conference is coming to New York City again. To date, I've attended three of Brian's conferences and spoken at one. It's a one-day crash course for those new to the topic as well as a great opportunity to hear about the hot topics of the day for practitioners (and we all know that the USCIS is always throwing us new curve balls - last year it was the unanticipated I-526 denials for multi-census tract TEAs, this year it is the "tenant-occupancy" issue....).

If you live in the New York City area and are interested in EB-5s, consider attending. You can sign up here. (A 20% off promotion code will be sent out with my March EB-5 Newsletter in the last week of March. If you are not on my mailing list, first sign up here (scrolldown to bottom left sign-up sheet) and then send an email to info[at]juliaparklaw.com with "Please Send Code" in the subject line.)

When: Friday, April 27, 2012
Where: Hilton Hotel, New York City

The Great Tenant-Occupancy Model Debate of 2012 (Part 3)

The USCIS's recent policy change regarding how to count indirect jobs created by tenants has thrown a monkey wrench into the world of EB-5s. The following is Part 3 of a three-part post on the recent "tenant issue" that has thrown many pending Regional Center applications into limbo.

Part 1: Chang v. United States - The USCIS has made sweeping changes before, and has even applied it retroactively.

Part 2: How did the tenant issue unfold? (A chronology of what happened in early 2012 - only for real EB-5 junkies.)

Part 3: What does this mean going forward? (Unless you are an EB-5 junkie, you don't have to read the first two posts.)

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So what does this all mean? Here are some thoughts.

1. It will become more difficult to raise large amounts of financing through EB-5s. Until January of this year, if you were building a shopping mall, all the indirect and induced jobs created by your tenants could be counted for EB-5 purposes. Same applies if you build a commercial building and house tenants. Not any more. The USCIS is now asking for proof of excess demand (see language of RFEs in Part 2), simply put, if you want to count the tenants of a Ruby Tuesday in your mall, show us through verifiable evidence that the said Ruby Tuesday would not have gone ahead and set up a new restaurant in a nearby vacant facility had you not built your mall. This means, absent strong demand studies and other verifiable evidence, facilities that house a lot of tenants (shopping malls, office buildings, etc.) will only be able to count construction jobs (assuming the project lasts for more than 24 months) which in turn means smaller job numbers and fewer investors. This new policy also has the effect of the EB-5 program favoring owner-operated projects that have few or no tenants, in other words, smaller projects. (Yes, this is a big thing.)

2. Effectively, one will no longer be able to file applications for Regional Centers without a concrete project (though not necessarily a shovel-ready project). These types of applications, known as "generic applications" were fairly common. Until recently, one could apply for an initial Regional Center designation for, say, a hypothetical hotel in a hypothetical location and get a hypothetical business plan and economic report based on hypothetical numbers. Then, the information pertaining to the actual project would reach the USCIS for the first time when the very first investor's I-526 was filed as long as they were in the already approved industry and geographic area. Sometimes people would have one real project and a couple of hypotheticals in the initial I-924 (the idea being, 'I'm spending all this time/energy/money to get the RC approved for my hotel project, might as well throw in a couple of hypotheticals for different industries for later use'). Recently, one could sense the discomfort of the USCIS with generic applications or hypothetical projects in comments made during public engagement conference calls. (Why I think this discomfort is understandable but not warranted, I will explain in a future post.) But now, by requiring each project to provide demand impact, hypothetical projects seem to have been effectively been prohibited except for a very narrow group of industries.

3. Retroactive Application? As mentioned in Part 1, the USCIS has in the past retroactively applied new rules to pending applications. In the case of Chang v. United States this resulted in hundreds of people already in the United States being denied I-829 approvals. After 6 years in the district and federal court system, the USCIS was chastised for being unfair so we can hope that they won't do it again. BUT, in the case of the tenant issue, there are many layers of potential "retroactive" applications that need to be considered.

• New Regional Center applications. It is not surprising that the tenant issue is being raised in the context of RFEs for initial I-924s (applications for new Regional Center approvals). No money has been raised and no investors involved yet. The only people who lose are businesses that have waited months and months (in some cases over a year) for their Regional Center approval. (But hey, non-approval of a governement application is a valid business risk - ask people in the pharma industry.) Plus they are being provided an opportunity to supplement their petitions to add demand information. (But really, the problem right now is that no one, including the USCIS, really knows what the USCIS is looking for. No one yet knows how much information will be sufficient or exactly what magic numbers or words will close the deal.)
• Regional Centers with projects including tenant numbers that have already been approved at the I-924 stage and A) have no I-526s approved OR B) have at least one I-526 approved OR C) have many, many I-526s approved. Will the USCIS start issuing RFEs asking for demand studies for those RFEs in category (A)? Or will they say, if you have an approved I-526, we will not treat the different investors for the same project disparately so people who fall under (B) and (C) are okay? Or will they say for (B), well, it is only one or two already approved, so we will let those go but start issuring RFEs for pending I-526s, but not for (C)? If so, then what is the magic cut-off number?
• Regional Centers with all I-526s approved but no I-829 approvals yet. Will the USCIS readjudicate the business plans at the I-829 stage? Hopefully, after the Chang debacle, they will not do such a patently unfair thing, but the USCIS has been known to readjudicate issues at the I-829 stage (though the law clearly states they can't) which is making some people nervous.

I'm sure there are more issues that the EB-5 community has not thought about yet. Just remembered one! Is the USCIS's change of policy valid to begin with? But I will not venture into that territory. My grasp of the economic concepts is rudimentary at best, though I will add that people who know more than I have been submitting letters to the USCIS citing Keynes and Adam Smith and the whole lot. What I do know for sure (and maybe it is the pessimistic Asian in me who grew up in a military governed state until my sophomore year in high school and then spent the rest of high school and all of college witnessing firsthand the clumsy attempts at "peaceful transition of power") but as long as there is room for debate on the right or wrong interpretation of a theory (i.e. unless the government is CLEARY wrong), it is highly unlikely a government agency will say, "OK, we were wrong and we'll let you do what you used to do". That said, as a practitioner, I just want the USCIS to at least let the community know what it intends to do and how it intends to do it. Unfortuately, historically, people have only been able to figure out the USCIS's position on controversial issues only after a meaningful numbers of RFEs, denials, and AAO decisions have been issued. And by then the EB-5 Program might experience the type of reputational harm that effectively shut down the program for 6 or so years in the late 1990s (see Part I).

The Great Tenant-Occupancy Model Debate of 2012 (Part 2)

The USCIS's recent policy change regarding how to count indirect jobs created by tenants has thrown a monkey wrench into the world of EB-5s. The following is Part 3 of a three-part post on the recent "tenant issue" that has thrown many pending Regional Center applications into limbo.

Part 1: Chang v. United States - The USCIS has made sweeping changes before, and has even applied it retroactively.

Part 2: How did the tenant issue unfold? (A chronology of what happened in early 2012 - only for real EB-5 junkies.)

Part 3: What does this mean going forward? (Unless you are an EB-5 junkie, you don't have to read the first two posts.)


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So what exactly is the "tenant issue" that has given rise to much anxiety and debate in the EB-5 community and why should you as 1) a potential investor or more importantly 2) a potential Regional Center care? In a nutshell, the USCIS announced in February of this year that it would give credit to tenant created jobs only if one could provide proof, on a case-by-case basis, that these jobs would only be counted if one could show "excess demand" for the jobs (more on this below).

It all started with rumors on the Internet and LinkedIn groups that the USCIS had put a blanket hold on new Regional Center applications. In fact, when inquiries were made to the USCIS, many of us received the following email:

Dear Julia,

We apologize for the delay; however, this I-924 (RCW-**-***-****) is being held pending resolution of an issue at Headquarters.

Thank you for your continued patience.

Sincerely,

USCIS Immigrant Investor Program

A few weeks later, the USCIS issued the following statement:

Dear Stakeholder,
In our last stakeholder call regarding the EB-5 immigrant investor program, a number of stakeholders raised questions with respect to our adjudication of petitions that for purposes of the job creation requirement have utilized what has been commonly termed a “tenant-occupancy” methodology. In light of the number of questions we received on this subject, we thought that providing clarification of our approach was warranted.
The “tenant-occupancy” methodology seeks credit for job creation by independent tenant businesses that lease space in buildings developed with EB-5 funding. USCIS continues to recognize that whether it is economically reasonable to attribute such “tenant-occupancy” jobs to the underlying EB-5 commercial real estate project is a fact-specific question. Each case filed will depend on the specific facts presented and the accompanying economic analysis.
USCIS is now moving forward with the adjudication of certain pending I-924 Applications For Regional Centers Under the Immigrant Investor Pilot Program that are supported by the “tenant-occupancy” economic methodology. Our newly-hired economists and business analysts will be bringing expertise to these new adjudications, and requests for evidence will be issued to certain applicants and petitioners to address any questions or issues we have about the economic methodologies employed in their specific cases. Our adjudications will continue to be made on a case-by-case basis and we do not intend to revisit factual findings. I-526 Immigrant Petitions by Alien Entrepreneurs and I-829 Petitions by Entrepreneurs to Remove Conditions will have predictability in connection with early regional center adjudications.
Our retention of experts with economic and business analysis expertise is part of our ongoing efforts to improve our administration of the EB-5 program. We are taking other steps to both improve the efficiency of the program as well as to ensure its integrity. We look forward to keeping you informed of these improvements.

Kind Regards,
Office of Public Engagement
U.S. Citizenship and Immigration Services
www.uscis.gov

Then, soonafter, scores of pending Regional Centers recieved the following identical RFE (request for evidence):

Upon further review, it appears that __RC is using EB-5 capital to construct commercial buildings. The job creation estimates employed in this application are based, at least in part, on the assumptions that direct employees of the future tenants of the buildings can be utilized as inputs into the applicable input-output model. However, USCIS has concerns that the attribution of these direct jobs to the EB-5 investment may not be based on reasonable economic methodologies, and therefore do not demonstrate in “verifiable detail” that the requisite jobs will be created. Rather, contemporary economic methodologies appear to indicate that such jobs would be more appropriately be attributed to the tenants themselves and not to __RC because the demand for labor precedes the decision about where to house that labor as a general economic principle. For example, if a federal agency determined that additional federal employees needed to be hired to fulfill the agency’s mission at a particular location, the federal agency would see to hire the requisite number of employees and as part of that process, would also take steps to lease the appropriate physical premises to provide sufficient workspace for the new hires. In this instance, it is the federal agency that is creating the jobs through its decision to hire more employees, not the landlord who will ultimately lease the workspace to the federal agency.

USCIS observes that the tenant-occupancy methodology (that the direct jobs created by future tenants are intended to be attributable to the EB-5 investments) is not economically reasonable on the facts as presented. To allow for the existing methodology would require USCIS to credit the prospective EB-5 investors in the new commercial enterprise with the employment impacts created by the unrelated business ventures of future tenants (even though such tenants might engage in business activities within the requested industry categories and NAICS codes). After reviewing the tenant-occupancy methodology presented thus far, USCIS observes that the nexus between the investment and the job creation is either too attenuated or too incomplete to constitute a reasonable economic methodology. Consequently, the existing record presents USCIS with a justification to recognize only those employment impacts that could be attributed to __RC, such as those resulting indirectly from the construction activity and, if applicable, the ongoing building management activities that will be required to maintain the building.

However, USCIS does not foreclose the possibility that __RC might present additional evidence to demonstrate an economically acceptable nexus between the EB-5 investment and responsibility for the job creation asserted in the application. Accordingly, __RC may present additional evidence to demonstrate that the proposed methodology is economically reasonable.
To help illustrate the factors that USCIS finds central to adjudicating the fundamental reasonableness of this particular economic methodology, USCIS requests that any response address the following points:

1. Evidence that there is excess demand for the specific types of tenants (various tenants as indicated in the business plan and economic analysis) to your construction project and business plan. Please provide a data-based assessment, and the source of data utilized by the assessment. To show such excess demand, the assessment should:

a. Analyze: whether prospective tenants which would locate in the commercial space that will be constructed and/or renovated under the proposed project are currently suffering from a lack of a unique or specialized business space, that, in economic terms, such prospective tenants are “constrained” from commencing or expanding their businesses by a lack of unique or specialized business space.

b. Provide a data-based analysis, including the source of data, which establishes whether there is “pent-up” demand for the specific professional and business services relevant to your project. Such data-based analysis should include:

i.      Evidence of congestion externalities as demonstrated by a low vacancy-unemployment ratio pursuant to specific space and businesses seeking to expand, respectively; and

ii.      Evidence of upward wage and rental pressures in specific regional sectors that are likely to be attracted to the proposed project space.

1. The jobs that become located within the tenant space of the project should be shown to be a result of an expansion in specific services driven by your project as opposed to tenant shifting and/or relocation of already-existing jobs. Please explain how it will be verified that the jobs that will become located within the tenant space of the project can be considered “new” jobs.

Alternatively __RC is afforded the opportunity to provide business plans and an economic impact analysis for any industry categories and NAICS codes to demonstrate employment creation which is not based on tenant occupancy.

But what does this all mean??? To be continued...

The Great Tenant-Occupancy Model Debate of 2012 (Part 1)

The USCIS's recent policy change regarding how to count indirect jobs created by tenants has thrown a monkey wrench into the world of EB-5s. The following is Part 3 of a three-part post on the recent "tenant issue" that has thrown many pending Regional Center applications into limbo.

Part 1: Chang v. United States - The USCIS has made sweeping changes before, and has even applied it retroactively.

Part 2: How did the tenant issue unfold? (A chronology of what happened in early 2012 - only for real EB-5 junkies.)

Part 3: What does this mean going forward? (Unless you are an EB-5 junkie, you don't have to read the first two posts.)


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Since its introduction in 1990, the EB-5 adjudication rules have undergone a number of major changes which have created an ebb and flow of foreign capital under the program in the United States. The biggest of such changes happened in the late 1990s:

Many of the EB-5 applications in the early 1990s involved limited partnerships that would pool multiple investors' money to be invested in a U.S. business but structured in a way that only a portion of the investor's capital reached the business enterprises by having much of the investment take the form of promissory notes of collateral that made it clear that a big portion of the invested capital was not at risk. In 1997, the Office of General Counsel issued an opinion that prohibited this practice, which in and of itself, was not a bad thing. The problem was, however, the Office of General Counsel directed legacy INS (the predecessor of today's USCIS) to previously approved I-526 petitions whose I-829s had not yet been approved. As a result, not only were all the I-526s filed before this change but not yet approved denied, but even worse, hundreds of people with conditional greencards through previously approved I-526 petitions were denied permanent greencards at the I-829 stage.

So what happened? Well, obviously, people sued. Without going into too much detail, in May 2001, a Californian district court ruled that the government cannot apply the standards retroactively to already approved I-526s and sent it back to the INS to review. They refused. Finally, in 2003, the Ninth Circuit Court of Appeals stepped in and said that what the INS was doing was "unfair" in its landmark decision Chang v. United States.

But note how long the process took: almost six years. And during this period, EB-5 numbers dropped sharply. You might think that other than the hundreds of people who were unfortunatly caught in the limbo why would it matter since new investors can just abide by the new rules? Well, most investors (or people who are closest to the investors, the local immigration consultants) do not keep up with judicial rulings or administrative rule changes. To many potential investors, the only thing they see are a friend or a family member investing a lot of money in a project to immigrate to the United States, sometimes even packing up to leave, then being told that everything is off. The program takes a huge hit of credibility and people are scared off. And then it takes a few years for the program to get back on its feet.

So what does history tell us and what exactly is the "tenant issue"?? To be continued...

A Note About STEM OPTs

(While this topic is not strictly EB-5 related, it came up recently and potentially affects an EB-5 client of mine so I thought I would share.)

People who are overseas when they apply for an immigrant visa (i.e. greencard) such as an EB-5 have to go through consular processing when their I-526 petitions are approved. If the people are already in the United States they can go through an Adjustment of Status (a/k/a AOS or I-485) instead of having to go back to their home countries for an interview. But in order to be eligible for AOS, one must be in valid status. For example, if you are in the United States as an F-1 student and you apply for an EB-5 visa, your F-1 status must be valid until your I-526 is approved and you can file for AOS. An F-1 is valid until the academic program that was the basis of the visa is completed. And, if you make a timely filing, you are eligible for Optional Practical Training (a/k/a OPT) for a 12 month period after the completion of your studies. A few years ago, the STEM OPT system was introduced for students who have Science, Technology, Engineering or Math degrees. STEM degree students can apply for a 12 month regular OPT and then if they can find an eligible employer who can sponsor the STEM OPT, apply for a STEM OPT which extends their stay for an additional 17 months. Obviously this program was introduced so that the United States can take advantage of the contributions that STEM degree holders can make by making it easier for them to stay. But unlike the regular OPT that anyone post-degree can apply for without a sponsoring employers as long as the job position is related to your degree, you can only get a STEM OPT if an eligible employer sponsors you.

Recently, I spoke to a foreign national with a STEM degree employed under his regular OPT who approached his employer for a STEM extension. What he nor the employer realized, however, was that the employer must sign up for E-Verify in order to be able to sponsor a STEM OPT. E-Verify is free and voluntary government program that allows employers to verify the work authorization status of their employees, both U.S. and foreign. Unless your company falls under one of the few exceptions, for example, you do business with the federal government, it is a voluntary program. Another exception would be if they intend to hire a STEM OPT employee. For whatever reason, which is none of our business, they opted not to sign up for the program and so the foreign national only has 30 days left on his OPT with no sponsor.

My client is affected as her OPT expires this summer but anticipates getting a STEM extension to cover her stay while her I-526 petition, which is being filed this week, is pending.

Moral of the story: if you are a STEM degree student and expect to get a 17-month STEM extension, make sure that your OPT employers knows what it needs to do in order to sponsor your STEM extension. Don't assume that they just know.

P.S. How do you know if you qualify for a STEM OPT? Check the number in front of your degree on your I -20 and see if it is on the ICE STEM OPT degree list. (Please note that this list gets updated annually and the list in the link is the most current as of the date of this blog post.)