In the fallout from the Victorville Regional Center's termination, the EB-5 stakeholder community learned much about how USCIS interprets the rules governing the EB-5 visa program.
A December decision from the agency's Administrative Appeals Office (AAO) clearly spells out why the agency affirmed the California Service Center (CSC) director's decision to terminate Victorville's eligibility. The language in that decision also calls into question at least one additional issue ? whether projects that rely on bridge financing risk the denial of investors' petitions in situations where the project created jobs before EB-5 capital entered the equation.
The Victorville Regional Center in Victorville, California received notice of its termination in October of 2010, but several things happened both before and after that event. Here's a quick refresher on the termination saga:
May 4, 2010: The CSC director issued a "Notice of Intent to Terminate" (NIT) the regional center's status. At that time, the agency's chief concern appeared to be problems with the regional center's job counting methodology.
August 10, 2010: After considering the regional center's response to the initial NIT, the director issued a second NIT.
October 20, 2010: The director considered Victorville's response to the second NIT and issued a notice of termination.
May 24, 2011: Affirming the October decision, the agency issued a final termination notice and ended the city's immigrant investor program.
This was the first time USCIS terminated an EB-5 regional center. Since the Victorville termination, only one other regional center ? also in Southern California, incidentally ? has met a similar fate.
After filing a Motion to Reconsider, which was dismissed by the CSC and certified to the AAO, the City of Victorville then filed a lawsuit against USCIS, the Department of Homeland Security, and some government officers. However, since the AAO's final decision on the regional center's motion was still pending at the time, USCIS agreed to a stay on the lawsuit until that decision became available.
The AAO decision
In a decision dated December 21, 2011, the AAO issued an Affirmance of both the CSC's dismissal of Victorville's Motion to Reconsider and the termination, noting that the regional center failed to demonstrate that its project satisfied the EB-5 visa program's job creation requirements. In particular, the AAO found Victorville's plan "one of job preservation and not job creation."
This distinction is significant because Victorville's investments do not fit into the program's "troubled business" category nor did the regional center ever claim it was investing in a troubled business.
According to the AAO:
[The Victorville Regional Center] is seeking to invest capital only after the jobs have already been created. [Dr. Pepper Snapple Group] and Plastipak began hiring in December 2009. As of June 2010, the [city's proposed industrial wastewater treatment facility] was 90 percent complete. Regardless of the stage of financing the investors propose to provide, it remains that the jobs for which the applicant wishes to receive credit already exist.
Victorville's projects included financing for the soda bottling facility as well as a new wastewater treatment plant. It appears that the regional center decided to infuse EB-5 capital into these projects after new jobs had been created, an approach that the AAO found unacceptable:
Notably, the record does not show that the applicant made a commitment to provide later-stage financing at the outset of the project. Instead, the applicant appears to have decided to commit capital toward later-stage financing only after the initial stages of the project that created the jobs in question were already complete."
What does this language mean for other EB-5 investor projects that use bridge financing?
In a conversation with EB5info, Robert Divine, a noted immigration attorney and former Acting Director of USCIS, said the above statement actually "leaves hope" for business plans relying on EB-5 capital to replace a bridge loan. As long as those plans are explicit about their intention to use EB-5 capital ? presumably before the actual bridge loan is made ? Divine thinks USCIS will count the jobs.
"It appears that USCIS may, in fact, be willing to honor specific plans to obtain interim financing that would be taken out by EB-5 capital," he said. "Although it remains less than clear under exactly what circumstances bridge financing can succeed."
Divine also thinks investors relying on bridge loan agreements should "hope to distinguish" their projects from the Victorville decision.
Other experts appear to share this view. Joseph Whalen, a former INS (and later USCIS) adjudicator who has published prolifically about the EB-5 program, writes the following about how regional centers can use EB-5 funds to pay off a loan:
One of the easiest way [sic] to make it possible is to use a mix of domestic and foreign investments and to make it even easier, structure the project in phases. Alien investors can enter and exit projects at different times so timing the infusion of certain alien investors' funds is a key component to success.
Now suppose that there have also been some domestic investors involved all along and/or bridge loans that have built up as well. As long as there are enough new direct or indirect jobs available to be allocated in sufficient numbers, then new EB-5 alien investors can buy into the project and displace or join with domestic investors or pay down some bridge loans. In this sense, the buy-in is generally in the form of joining the investor group that is supplying financing to the developer rather than direct ownership of the [new commercial enterprise] creating jobs but it has been made possible by the EB-5 investors. This is especially OK if the bridge loans from lenders or short-term domestic investors were obtained because of EB-5 money known to be in escrow or on the way due to aggressive Regional Center marketing efforts known to the domestic investors and/or bridge loan sources.
It would follow, then, that relying on EB-5 financing to replace a bridge loan should be acceptable to USCIS. Those submitting applications, however, would be wise to make any bridge financing arrangements only in anticipation of EB-5 capital infusion and to clearly state to the agency that it is their intention to do so.
In his additional writings on the Victorville debacle, Whalen opines that USCIS was simply "cutting off the ability for an applicant to lay out one course of action and then follow another." To clarify that assertion, he quotes the following section of the decision:
The applicant responded to concerns about timeliness by stating: 'project-finance projects, such as this one, typically require three or more stages of financing; the EB-5 funds are a critical part of this project's funding life-cycle, and each phase is critical to job creation. Indeed, job creation will not occur unless the entire project is funded throughout.' The applicant asserted that USCIS approved the concept of bridge loans when it approved the regional center application. The applicant continued that USCIS has no authority to link expenditure of alien investor funds to the construction phase only, but that the applicant could have done so had the director not terminated the regional center's status. The applicant claimed that it would have reached its $25 million goal but for the fact that the director terminated the regional center, and it would have focused funds differently if the focus had been a condition of the original approval. The applicant acknowledged that the IWWTF was 'constructed with non-EB-5 funds,' but asserts that existing job creation is in jeopardy if the applicant's ability to refinance is in question. While the regulations do allow alien investors to rely on job preservation, they may only do so if the investment is in a troubled business. 8 C.F.R. § 204.6(j)(4)(ii). The applicant, however, has never asserted that the alien investors will be investing in a troubled business.
And as Whalen explains, Victorville's concession that it "would have focused funds differently if the focus had been a condition of original approval" reveals that it failed to plan ahead for that very contingency.
"Failing to plan = planning to fail," he concludes.
Although a regional center can lay out an initial series of contingencies for approval by USCIS, Victorville did not do so. "Transparent complexity," Whalen told EB5info, "is critical to the precise application of EB-5 funds."
On February 6, 2012, the City of Victorville submitted a voluntarily dismissal of its complaint against USCIS and the Department of Homeland Security.
Given the AAO's Affirmance of the director's decision to terminate, not to mention the potential expense of a lawsuit against the federal government, the city was hardly in a position to continue fighting. Though it recruited a total of 19 investors prior to its termination, none of them will receive green cards ? at least not through this EB-5 project.
Local press in Victorville reports that the city's decision to drop the lawsuit demonstrates "some fiscal restraint in the wake of financial uncertainty." And despite the dissolution of its regional center status, it looks like Victorville was able to hang on to jobs in 2011.
The Dr. Pepper-Snapple bottling plant was supposed to create 200 jobs back in 2008. It now employs 269, according to the report.