State of California will no longer issue TEA Letters

California announced on its website a few weeks ago that it would no longer issue TEA letters for individual projects. Instead, it has issued a blanket TEA letter designating certain municipalities as qualifying for TEA status. While providing certainty for some projects that will be located on this list, for many new projects that could otherwise qualify, this move by the state government will most likely dampen the introduction of new EB-5 investment projects being set up in California.

First, let's take a step back. Under the regulations, the minimum investment required to qualify as an EB-5 investment is $1 million. If the recipient project is located in a TEA, however, this minimum investment is lowered to $500,000. The number of jobs that must be created by the investor (regardless of the minimum investment) is ten jobs whether the minimum investment is $1 million or $500,000. (The common misconception is that if an investor makes a direct investment to run a business, the minimum investment is $1 million while the minimum investment is $500,000 if an investor invests in a Regional Center project. This is a misunderstanding. It is the location of the investment project/business that qualifies a project for TEA status.) Then, what is a TEA? The regulations define a TEA as being either a "rural area" or a "high unemployment area".

Rural Area

A rural area is defined as an area which is not in a metropolitan statistical area ("MSA") and not in the outer boundary or any city or town having a population of 20,000 or more. You can find out if your area is an MSA or not by going here. Pick any location on the map, drill down and scroll to the bottom of the page. (As the focus of this post is not on Rural Areas I won't belabor the fact that the regulations actually say that the location in question is either not an MSA OR not near a town/city with a 20,000+ population but the USCIS requires that the location be both a non-MSA AND a big town/city.)

High Unemployment Area

High unemployment is defined as an area that has experienced an unemployment rate that is 150% or more of the national unemployment rate at the time of the investment or the I-526 filing, whichever comes first. There are two ways an investor can prove to the USCIS that the location in question qualifies as a TEA under the high unemployment prong. You can either a) provide evidence (presumeably through public data) that the location in question in fact as the requisite unemployment rate OR b) have a designated state agency certify that a certain area qualifies for the high unemployment numbers and it thus a TEA. The latter is what people call a "TEA Letter". Not surprisingly, the majority of EB-5 projects that otherwise do not qualify for Rural Area TEAs, choose option b). And the State of California is not saying, we won't do b) anymore if you are not on "the list" because you can do it yourself (now do you get the picture for this post?).

What does this mean? Many things! Click on the EB-5 Alert that goes into detail about the implications.

How to Dial-in to the EB-5 Quarterly Stakeholder Engagement

April is coming to an end and you know what that means: the EB-5 quarterly stakeholder meeting is just around the corner! Four times a year, the USCIS "engages" with the EB-5 community via conference call. Anyone can dial in and ask questions and these quarterly engagement calls are one of the EB-5 community's main way to interact closely with the USCIS. (In the spring the meeting is open to the public at the California Service Center and in Washington D.C in the fall. I will be attending the California meeting in person this year.) The calls begin 1 pm EST and last about 3 hours. Click here for sign-up information.  

What will happen if the EB-5 Regional Center Pilot Program sunsets?

As many of you have been hearing ad nauseum, the EB-5 Regional Center Pilot Program is scheduled to sunset on September 30, 2012. For the avoidance of confusion let me make it clear that the subject of the potential sunset is NOT the EB-5 visa program but the Regional Center Pilot Program. The Pilot program was introduced in 1993 to make EB-5 investments more attractive. By investing in a Regional Center project, the investor is allowed to count indirect jobs that are created in the region, making it possible for even more investors to be pooled for a given project than in a non-Regional Center Program. So even if the Pilot Program is not extended, investors will continue to be able to invest the minimum investment amount ($500,000 in a Targeted Employment Area (TEA) or $1,000,000 in non-TEAs) and obtain a greencard as long as 10 direct, full-time jobs are created.

First, I must point out that the Pilot Program has always been extended every three years since its introduction in 1993. Second, there is a lot of activity to ensure that the required votes can be secured to extend the program or even make it a permanent part of the law so that we won't have to scramble like this every three years. And finally, there will be a lot of people who potentially have a lot to lose if the program is not extended, while nobody really stands to benefit. That said, there is always a first time for everything so this is a legitimate concern.

So what will happen? Well, nobody knows for sure now, and when asked, the USCIS has declined to discuss the matter. We can, however, turn to USCIS guidance in 2009 for a clue of what might happen. In 2009, the Pilot Program was set to expire on March 30 and because Congress could not make up its mind, it extended 6 months until September 30, 2009 as a first step. (Kind of reminds you of the whole debt ceiling debacle, albeit on a smaller scale.) Then as September 30 drew nearer and nearer and the extension didn't happen, USCIS was finally forced to issue some guidance on what they planned to do IF the program wasn't extended.

Basically what they said was the following:

1. I-526 petitions that are submitted by September 30 will not be affected.
2. Any I-526s that come in after September 30 will be accepted but we will adjudicate based on the project's ability to create direct jobs and will disregard any indirect jobs.
3. All pending Regional Center applications (at the time the I-924 didn't exist) will be "held in abeyance" if they count indirect jobs (which if you think about it, they all do because that's the whole point of a Regional Center). 

So assuming they adopt a similar plan of action this time around what this means is the following:

1. If you are a potential investor debating whether or not to apply for EB-5 through Regional Centers (in other words, you are not interested in setting up your own business for the greencard), you should probably act quickly. Even if your I-526 is not approved by September 30, 2012, as long as it has been submitted, you are okay.
2. Same as #1. (Because the possibility of a Regional Center project having enough direct jobs to save your petition is very small.)
3. If the program is not extended and you have an I-924 pending, they won't throw it in the paper shredder just yet, because there is always a possibility that Congress will get its act together and "reauthorize" the program even if it doesn't "extend" by the deadline. (Click here to read my thoughts on whether you should be applying for a Regional Center under these uncertain circumstances.)

Click here for the USCIS's guidance on the issue published in September of 2009. (Note how the USCIS never takes down old memo from its website. That's why it is dangerous to google your way around the internet for legal advice. All the old stuff is still floating around like this.)

Define "lease".

With rumors (unconfirmed as of yet, but as any small community, the EB-5 community is always rife with rumors) that some I-526s have been receiving tenant-occupancy RFEs, I wanted to point you to a great article discussing issues of EB-5 tenant-occupancy in the context of hotels and hotel management companies. I would think that nursing home operators are faced with the same issue, namely, that hotel builders/nursing home builders operate in the way that they "lease" the facilities to a hotel management company/nursing home operator. But this is not a "lease" in the way, say, the Olive Garden leases space in a mall, but an operating model that grew out of managing liabilities. The plot thickens...

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...