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An Open Letter to USCIS From a Practicing EB-5 Economist on USCIS Guidance to Economic Inputs for Job Creation Studies

by Scott Barnhart, PhD

In a relatively rare event, on June 4, 2015 USCIS held a stakeholder call specifically addressing allowable project construction and pro-forma income budget items for EB-5 economic job creation modeling, i.e., “Expenses that are Includable (or Excludable) for Job Creation.”  The event was rare because, in this practitioner’s nearly 9 years of experience conducting EB-5 job creation studies and business plans, USCIS has seldom provided specific guidance on any individual line item in construction/development budgets outside of that given in Requests for Evidence (RFE). USCIS indicated that the goal of the call was to reduce the number of RFEs and adjudication times by clarifying how adjudicators assess project budgets, which are the basic input used by the economist to conduct job creation studies. The guidance that USCIS economists provide is essential, and they should be commended for providing practitioners with this information that not only results in fewer RFEs, saving industry stakeholders crucial time and expense, but is likely to make economic results more consistent from one practitioner to the next.

The purpose of this article is to briefly explain the most important aspects of the USCIS stakeholder call, which with one or two exceptions for most experienced EB-5 economists, was not too surprising. The article will then address some important questions that remain unanswered in an attempt to encourage USCIS to continue this type of useful interaction. The important issues for practitioners are not only avoiding RFEs to save time and expense, but also to ensure consistency from one economic study and practitioner to the next, which is crucial to project managers, regional centers, adjudicators/regulators and especially foreign investors, whose future life as an immigrant crucially depends on the job creation results.  Consistency across practitioners/economic reports should be a relatively easy objective to achieve considering most of the economic inputs and project types are similar. Some specific examples of what might aid all involved in this industry are provided below, but the message conveyed in this article is that more guidance from USCIS is preferred to less, provided this guidance is reasonable, follows economic logic, and is responsive to feedback given by stakeholder practitioners. The goal should be to have guidelines that lead to sound, conservative and realistic job creation estimates such that if several experienced professionals in the field analyzed a given project independently, each practitioner would obtain results that are not dramatically different.

The June 4th stakeholder call started with a prepared statement discussing, among other things, hard and soft construction costs, where USCIS economists encouraged practitioners to provide sufficient line item detail rather than aggregating items, how third party feasibility studies are very useful in grounding and supporting the reasonableness of the developer’s budgets, and then went through a number of specific items that most experienced economists already know can be included.  The most important line of demarcation in understanding allowable versus non-allowable items came during the question and answer session wherein USCIS said that, generally, items used in support of the actual project development are allowable, while costs associated with EB-5 compliance are not.  Thus, the usual items in construction hard costs, such as labor and materials for items such as site work, iron work, cement, plumbing, masonry, flooring, surface preparation, furniture, fixtures & equipment (FF&E), etc. are allowable. Also allowable are many soft costs related to the non-EB-5 compliance component of the project. Examples include architects & engineering (A&E), legal fees, marketing, some real estate transaction related expenses, such as document preparation fees, and realtor expenses, as long as EB-5 capital was deployed at the time.  As most economists in the field know, land transactions and other transfer payments were again cited as non-allowable, as they do not generate jobs or contribute to Gross Domestic Product (“GDP”).  Examples of such non-allowable items are title payments, stock and brokerage fee transactions, and other state and local government permitting, licensing and tax expenses.  In addition, any soft costs specifically to meet EB-5 compliance, such as immigration and private placement memorandum attorney fees, economist costs, and securities documentation were strictly ruled out.  Another noteworthy point from the discussion was that if the construction timeline lasts 24 months or longer, all direct, indirect and induced jobs would be considered by USCIS for associated soft costs even if the time period for these costs did not actually last that long, i.e., USCIS would not parse out items (in particular A&E) that might be used for, say, only 9 months.

Probably the two most surprising allowable items mentioned were construction contingencies and non-EB-5 related financing costs. Both make sense as they create jobs, and of course, contingencies have always been allowable at the I-829 stage if these expenditures were in fact spent. But in a complete about-face from all previous guidance provided in RFEs for years, USCIS indicated that contingencies “that adhere to acceptable industry practices” can be included in economic studies for I-924 and I-526 submissions, and that at the I-829 stage USCIS will review whether these funds have been spent. As a practical matter, since the dissemination of this information from this call, most of our clients still prefer not to use contingencies.  Non-EB-5 financing costs also make sense as banking and interest fees create jobs at financial institutions, and many jobs have been created by the non-EB-5 financing component of the capital stack in recent years as project size and numbers have increased.

While the bulk of the information provided by the USCIS economists was not necessarily new to experienced EB-5 economists, all of it was very helpful as an affirmation of how we conduct our analyses on a daily basis.  That said, there are a number of other issues that affect our work product, and items that can be sizable dollar amounts in developer budgets, on which this economist would like further guidance. Among these issues and items are the relevant size of the economic study area, which in essence addresses the use of local versus state or national multipliers/economic regions, construction overhead and profit, insurance expenses, and real estate sales commissions, especially on large timeshare developments.

General guidance from USCIS on the appropriate selection of the economic study area in terms of local versus state or national regions would be especially helpful. Federal regulations seem to be at odds with USCIS guidance, and practitioners sometimes wonder if is it logical to use an economic area of, say, a local three to five county area based on Metropolitan Statistical Areas (MSAs) and/or commuter data, or could the area be the entire state or country?  Sometimes the size of the project, access to labor and other supply chain governs this choice, but in other situations, it is not that clear.  In using a national area it is rationalized that the analyst does not necessarily know where the materials or FF&E for construction are actually produced, so a national model will capture this when a local model may count almost none of it as the Local Purchase Percentage (the share of a commodity sourced locally) may be very small. On the other hand, national multipliers could also be used for any of the items in the developer’s budget, including basic construction.

Current EB-5 regulations (8CFR 204.6(m)(3)(iv)) requires the applicant to provide a detailed prediction of the regional center’s positive impact on “…the regional or national economy in general as reflected by such factors as increased household earnings, greater demand for business services, utilities, maintenance and repair, and construction both within and without the regional center.” Thus the regulations call for impacts to be shown regionally or nationally as well as both within and without the regional center (boundary area).  In addition, the December 2010 letter from USCIS Director Mayorkas to Congressman Patrick Leahy (the well-known “Leahy Letter”) advises that although regional centers are required to focus their investment activities on a single contiguous area, there is nothing in the CFR that mandates all indirect job creation to take place within that area, implying that indirect jobs outside the regional center boundary can be considered.  By contrast, in the September 15, 2011 stakeholder meeting USCIS released a PowerPoint presentation advising practitioners under the heading “Common Issues Resulting in RFEs or Denials in Form I-924 Applications,” of the inappropriateness of “The application of national or state data in the economic model when more accurate regional data is readily available to demonstrate the economic impacts/job creation of the regional center’s investment projects.”  Although these are but a few citations of seeming inconsistency in guidance versus regulations, there are likely others, and the issue is that there are large differences in total multiplier effects between the various areas. 

For example, the following table illustrates total final demand (expenditure) employment multipliers for common EB-5 project industries using the IMPLAN model 2013 data-year for three areas: the entire United States, the State of Florida, and then the Miami-Fort Lauderdale-West Palm Beach Florida MSA.  As can be seen, the difference in local MSA multipliers versus the national multipliers is dramatic: on average, the size of the U.S. multiplier is slightly more than double that of the local MSA multiplier.  The implication is that use of a U.S. multiplier would result in approximately 100 percent more jobs than the MSA multiplier. For example, consider a $100 million, 28-month construction project modeled under IMPLAN sector 60 (multifamily residential construction); using the Miami MSA multiplier would result in 2,268 jobs versus 5,056 jobs for the entire United States, an increase of 123 percent (note that inflation adjustments were not considered in this calculation for expositional purposes). The size of the U.S. multipliers relative to that of the MSA multipliers in the table range from a low of 79 percent larger for “Nursing and community care facilities” to a high 148 percent larger for “Construction of new commercial structures” (the sector used for hotel construction).

IMPLAN Sector Code

IMPLAN Industry Sector

United States Total Effects Multiplier

Florida Total Effects Multiplier

Miami MSA Total Effects Multiplier

57

Construction of new commercial structures, including farm structures

47.3707

21.4364

19.1250

60

Construction of new multifamily residential structures

50.5546

25.3977

22.6794

449

Architectural, engineering, and related services

54.5641

30.3060

27.9636

483

Nursing and community care facilities

61.5462

37.0907

34.3400

499

Hotels and motels, including casino hotels

53.9243

29.3364

26.1161

501

Full-service restaurants

64.0053

37.4122

33.9460

 

Insurance is another line item that economists see in almost every project, and no guidance has been given on this issue to which our firm is aware.  While we know insurance companies employ many people across the United States, the premiums are most assuredly split between local agents, underwriters, and the corporate headquarters, which are likely to be located in large financial centers such as New York City or Chicago.  Our firm has conducted economic studies on large projects with insurance expenditures of as much as $60 million, and we used this in the economic model, which was approved by USCIS.  In the absence of clear guidance from USCIS on the treatment of insurance payments, some clients are hesitant to use expenditures on insurance, and ask us to remove them.

Guidance on real estate commissions (not asset sales price) on real estate would also be helpful.  In general, our firm considers that realtor commissions do create jobs.  But it is an especially thorny issue when dealing with large real estate projects involving timeshare condominiums.  Our firm has been hired for several projects where the construction budget for the condominium may be $300-$500 million, but the sales of each unit for 52 weeks per year generates hundreds of millions of dollars of total sales income that can total two to three times the size of the construction budget.  From these sales, commissions are paid to the sales staff, and this is a line item in the developer’s construction budget – not part of operations, which takes place during and after the sales commence.  The timeshare unit sales are typically conducted over a four to eight year period, well past the 24-month minimum duration for using direct, indirect and induced jobs. I know this first hand, as Marriott has a five condominium project in my neighborhood in South Florida where I have seen the sales staff guiding prospective clients along the walking paths for about five to six years now.  Yet some immigration attorneys have advised using only indirect and induced jobs from sales commissions as they have received RFEs on using all jobs, despite the length of the sales period.  Additionally, the sales commissions on these large projects are also very large. Commonly, 20 to 40 percent of the sales price goes to an operator who provides the sales staff and offices, such as Hilton, Marriott or another hotel flag. While the sales transaction amount is always excluded from EB-5 applicable construction costs, the sales commissions supporting the sales force are substantial and should be claimed.  Should only indirect and induced jobs be used if the sales staff is employed for longer than 24 months?

One final issue is construction overhead and profit, and developer fees. The stakeholder call addressed developer fees, indicating that if these are included for job creation then evidence needs to be shown that they were actually used to create jobs and not simply a return of developer capital.  For the most part, construction overhead and profit are a basic part of any construction budget.  Without overhead and profit, the construction contractor ceases to have a profitable business, unless it is a cost plus arrangement.  We have always included developer fees and overhead, but have gotten pushback now and then.  Guidance on these items would also be very helpful.

In sum, the type of guidance being suggested here is straightforward and similar to what was given in the June 4th call.  Streamlining the process will avoid unnecessary and costly delays, as well as RFEs that no one wants, especially with all the other inherent delays in this program.  Bringing more consistency into the job creation process is necessary so that the job creation studies are above suspicion by all within and outside of the EB-5 industry, especially those in Congress.

 

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