The article Rules Stretched as Green Cards Go to Investors by Patrick McGeehan and Kirk Semple of the New York Times has spurred a significant amount of commentary by EB-5 industry insiders, federal and state government officials, and advocates and critics of the EB-5 visa program. But interestingly enough, much of the feedback obtained by EB5Info was in agreement on one essential point:
There is a lack of consistency and clarity on the subject of what constitutes a TEA and how some states might use a certain methodology to designate a project as qualifying while other states might not designate a project as being within a Targeted Employment Area (TEA) using the same employment data and similar census tracts.
Which raises the questions:
- Are the majority of projects being funded today those that Congress envisioned when they enacted the laws that created the EB-5 Regional Center ?Pilot? program? That is, are developers ?gaming? the system in their TEA requests by including census tracts that will allow them to build projects that don?t actually employ (to any large degree) the residents who live in rural zones or areas of high-unemployment? Presumably, those would be the residents benefiting from the projects.
- How can we measure the results of the invested capital to demonstrate lower unemployment for that TEA amidst critics' claims that little actual job creation results from the EB-5 investor visa program?
I was in New York visiting with clients, EB-5 visa attorneys, and regional centers when I was asked to come and speak with Patrick and Kirk at the brand new New York Times building just off of 8th Avenue. I spent nearly two hours with Pat (Kirk had to leave at 5 PM to take his call with Director Mayorkas) discussing the benefits and issues with the program, and I was extremely impressed with the body of knowledge and amount of research they conducted in putting this piece together.
Michael Gibson at New York Times Headquarters in Manhattan, New York
They managed to interview a large number of attorneys, economists, regional center operators, and government officials in compiling the story and trying to paint as accurate a portrait as possible of the TEA ?gerrymandering? issue. Pat later explained that they had tried to get the full story to come out on Sunday, which would have given them more print real estate to describe all of the issues that states face in trying to balance the need for economic development with the vague constraints imposed by USCIS regulations, but their editors decided to print a shortened A-1 story for the front page of Monday's edition.
The principal question they asked was this one: Even if the TEA designations are inconsistent and the regulations are vague, who does it hurt if capital is raised to promote economic activity, even if it does not benefit, as Congress might have intended, true rural areas or areas of high unemployment?
I said one might argue that it hurts those in rural or impoverished urban areas who cannot compete with large MSA developers since the latter group has the resources to raise funds overseas. The developers in large cities like New York, Miami or Los Angeles have significant advantages and access both traditional and non-traditional forms of capital that might not be available to their counterparts in the farm, mountain, rural states or the impoverished inner cities with collapsing industrial infrastructures.
Location of EB-5 regional centers with concentrations in CA, FL & the Atlantic Corridor
If the commercial enterprises being built in the low-unemployment rate MSAs (the project locations themselves would not qualify based on the unemployment rate of their individual census tracts) hired people from the surrounding qualifying areas, then I felt that would meet Congress's intent.
I agreed that projects in high density urban/commercial areas of low unemployment may more efficiently utilize the capital raised and create a much larger number of jobs than could smaller enterprises without the support of a well-developed transit and enterprise support system to bring in workers from any surrounding low income, high unemployment areas that stood to gain the most from a large-scale commercial enterprise being built within a close proximity.
For instance, a skyscraper or factory may have the potential to employ hundreds of laborers from depressed urban and surrounding rural areas whereas the farms, recreational resorts, or hotels that use the same amount of EB-5 capital in their capital stacks may only be able to employ a fraction of the same labor force located in their respective TEAs.
What we are seeing, however, is that many large coastal developers are simply using EB-5 funding to lower their existing cost of capital and that, in some cases, relatively few new jobs are created (or preserved in the case of the "troubled business" category) as the EB-5 funding is simply being used to replace other forms of more expensive debt or equity. The EB-5 funding is essentially being used to take out the interim "bridge financing" which may come from a traditional lender or may be used to help exit the equity placed by the General Partners so that they can use that equity to develop other projects. The replacement of the more traditional form of financing does not create any jobs.
The question one could then ask is would the commercial enterprise being developed have been built and the initial jobs created (direct, indirect & induced) if there were no EB-5 funds available?
This would not be a problem if the supply of EB-5 investors was elastic and easily accessible, but unfortunately it is not, and the competition for these high net worth foreign clients is growing increasingly steep. As a result, the projects being funded are those that are in the highest profile markets. Those away from coastal regions that are newer and with fewer resources to compete are having an increasingly difficult time raising any capital at all.
The central question comes back to the point that Director Mayorkas was making when he asked, ?The question is, are the state authorities adhering to the spirit of the law? Where is the project being developed, and where are the jobs being created? Are the people from the areas of high unemployment being employed? Because that?s really the purpose. If they?re not being hired from those areas, then the question is justified.?
In Part II, we'll look at what constitutes a TEA as defined in the regulations and how different states interpret that meaning. We'll also consider guidance on how the USCIS and AAO have ruled on prior petitions and include commentary from those who work with developers, states, and USCIS officials to try and determine if their projects qualify for raising capital through the EB-5 immigrant investor visa program.