By Christian Triantaphyllis, Yiting Dora Hu and Houston R. Harris
According to the Visa Bulletin released by the U.S. Department of State (DOS) for May 2015, a cut-off date for mainland China-born EB-5 applicants has been established. Starting from May 1, 2015, mainland China-born EB-5 applicants with a Priority Date earlier than May 1, 2013 may obtain an immigrant visa through consular processing or file an I-485 adjustment of status application. EB-5 investor’s Priority Date is the date his/her I-526 petition is received at USCIS.
Visa unavailability occurs due to the maximum number of EB-5 visas for mainland China-born EB-5 investors being reached for the U.S. fiscal year. As demand for visa numbers by applicants grows, such demands can cause unavailability to retrogress with regards to the cut-off date that determines when an investor can become a lawful permanent resident in the United States, also known as a U.S. green card holder. Each year, when the new fiscal year begins on October 1, a new supply of visas is made available. However, according to visa usage trends, the DOS predicts that the new fiscal year of 2016 will likely continue to experience retrogressed priority dates throughout the entire year, which will continue to grow longer and longer backlogs as the EB-5 program remains popular.
The prolonged time frame between the approval of the I-526 and when a Mainland China-born investor may submit his/her application to the National Visa Center or file the Adjustment of Status application and the subsequent delayed filing of the I-829 petition to remove conditions will inevitably bring up the question of project sustainability, in terms of how far along the EB-5 project will be able to support the green card process, particularly in the sense of whether it can see the EB-5 process through the end. The facts are obvious here. Current EB-5 projects are structured to last approximately 5 years so that it will have enough time and jobs created for the I-829 petition to be a success. Imagine, EB-5 visa retrogression sets back the priority date to May 1, 2013 and progresses slowly by a few weeks each month, the EB-5 investor is then to expect a few years of wait before he/she may submit the application to receive green card. In turn, the I-829 petition is further pushed back and the filing window may not open for the Chinese investor until much later. Therefore, the entire EB-5 process may take not just 5 years, but rather 7 years or even longer.
If you are an immigration practitioner, or you are an EB-5 investor born in Mainland China, and you wonder how the visa retrogression affects you in terms of how you should decide in which EB-5 project you should place your investment, then a significant question to ask is the following: Will the EB-5 project carrying Chinese investors' applications still be around when it's time to file their I-829s and will there be enough jobs for allocation at the time of the Chinese investor’s I-829 filing? The authors of this article aim to provide guidance and address the importance for all parties involved – regional center, project developer, individual investors and migration agents – to keep abreast of the new, developing EB-5 landscape. Specifically, this article discusses which type of EB-5 project characteristics will be especially affected by EB-5 visa retrogression and how to determine whether certain terms are EB-5 visa retrogression friendly, and how job creation should be viewed in a visa retrogression prudent way.
Examples of the Effects of EB-5 Visa Retrogression on the Terms of the EB-5 Deal
Under EB-5 visa retrogression, foreign nationals, including mainland China-born EB-5 investors, may continue to file I-526 petitions, but the major effect of EB-5 retrogression is that it will create a much longer timeline for mainland China-born EB-5 investors to become green card holders. Therefore, the EB-5 immigration-related characteristics of the EB-5 project become an even more vital aspect of the selection process for EB-5 investors. There are certain deal terms that EB-5 investors and developers may have become accustomed to over the years, and these trends will need to be adjusted as a result of EB-5 visa retrogression in order for the EB-5 investors to remain compliant with the EB-5 program while completing the lifespan of the EB-5 process. Thus, the authors have provided guidance on what we believe are the most significant issues that will need to be analyzed and weighed heavily for EB-5 immigration law purposes when EB-5 investors selects their investment project.
According to U.S. immigration regulations, in order to qualify as an investment in the EB-5 Program, the immigrant investor must actually place his or her capital “at risk” for the purpose of generating a return, and that the mere intent to invest is not sufficient. The law does not specify what the degree of risk must be; the entire amount of capital need only be at risk to some degree. This requirement will potentially become the most analyzed aspect of the EB-5 project. Currently, whether the EB-5 investment is structured as an equity deal or loan deal, the common timeline described in the offering documents is that at least five years will pass until the regional center could make the principal investment potentially available to the EB-5 investment fund, in turn allowing for the EB-5 investors to exit the EB-5 project. Part of the thought process for the five year timeline is that it matches up well with the approximate timing it takes for the EB-5 investor to complete the EB-5 process, from the time of filing the I-526 petition through the end of the I-829 petition.
As a result, for loan structured deals EB-5 project developers have become accustomed to setting the loan terms to be at least 5 years until the job creating entity (the “JCE”), which is the project company, pays back the EB-5 investment fund (the “new commercial enterprise” or “NCE”). After five years, the loan may be paid back to the new commercial enterprise, and from there the funds could potentially allow the EB-5 investors to exit the investment. However, with EB-5 visa retrogression coming into play, the timeline for completing the EB-5 process, meaning the EB-5 investor obtains his or her non-conditional green card by completing I-829 process, could become more of a 6 to 10 year process depending on the severity of EB-5 visa retrogression. The longer the wait for mainland China-born EB-5 investors to first obtain the conditional green card, the longer it will take that same investor to complete the EB-5 process. Therefore, details pertaining to the loan that an investor should examine for EB-5 compliance purposes are especially important to recognize. For example, the loan term could still be set for at least five years, but there should also be the possibility for the loan to be extended by one year increments on an annual basis. It will take some time for EB-5 project developers to become accustomed to the idea of keeping loans alive for a longer period of time, but due to the inevitable increase of EB-5 processing times, a more realistic 6 to 10 year timeline should be addressed in the offering documents.
According to the seminal EB-5 case, Matter of Izummi, for the EB-5 investor’s capital to be “at risk” in the EB-5 project, there must be a risk of loss and a chance for gain. Therefore, the importance of the timing for paying back the loan to the new commercial enterprise becomes even more apparent. Considering that an extended EB-5 timeline means that the JCE will be asked to hold onto loans for a longer period of time, EB-5 project developers are bound to devise creative ways in the offering documents to comply with the EB-5 requirements but still adhere to business needs. Possible deal terms that may be seen in project documents are as follows: (a) keep the loan outstanding for as long EB-5 investors are still completing the EB-5 process, and in the event of sale of the project to a 3rd party, the loan remains outstanding with the only difference being that it is paid back by a new payor; (b) if the loan is paid back by the JCE to the NCE while there are EB-5 investors still completing the EB-5 process, then the offering documents may allow for the NCE, preferably with the consent of the EB-5 investors, to redeploy the funds of those remaining EB-5 investors into a similar type of project in order to keep the at-risk element of the investment ongoing; or (c) if the term of the loan expires while EB-5 investors are still completing the EB-5 process, then the offering documents may simply allow for the JCE to pay back the NCE, which will then allow for the EB-investors to exit the investment upon completing the EB-5 process. Whether one or all three of these scenarios is accepted by USCIS as keeping the investment funds at-risk during the span of the EB-5 process is still somewhat of an unknown; however, keep these scenarios in mind when selecting a project, considering that these options all have their more and less risky elements of remaining EB-5 compliant. For example, Mainland China-born investors tend to favor straightforward loan-model real estate development deals, but it will be interesting to see how the effects of EB-5 visa retrogression affect their tendencies as investors.
Another requirement of the EB-5 program is that the EB-5 investor must play an active role in the NCE. The concept of having an “active role” for EB-5 purposes is quite different than in other types of business activities. USCIS has stated that a corporate structure, such as a limited partnership, meets the active role requirement, specifically by granting the EB-5 investor certain rights to engage in policy formulation activities within the limited partnership. These rights can pertain to the determining the dissolution of the NCE. Therefore, due to EB-5 visa retrogression elongating the timeline it will take for investors to complete the EB-5 process, it will become increasingly important that EB-5 investors pay attention to the timing of the dissolution of the NCE because the EB-5 entity will need to remain in-tact for a longer period of time while some of the investors are still completing their EB-5 processes. That is important in order to fulfill the USCIS at risk requirement, because if the NCE were to try to dissolve before some of the EB-5 investors complete the EB-5 process, then those investors will have difficulty fulfilling the requirement of maintaining an at-risk investment throughout the EB-5 process.
For direct EB-5 investments, or stand-alone EB-5 investments that do not involve a regional center, EB-5 visa retrogression poses an issue that could make the EB-5 program impractical for running a business. For example, if a mainland China-born EB-5 investor is unable to immigrate to the U.S. for several years while waiting abroad to apply at the U.S. Consulate for an EB-5 visa, then the U.S. business may stall due to the investor not being able to immigrate and begin directing the company. Thus, for a direct investment scenario that involves investing with a U.S. partner, perhaps the EB-5 investor should consider making sure that the project documents call for other managers to lead the business while he or she is waiting abroad for the EB-5 visa, as long as USCIS is willing to allow for an investor to serve his or her active role for the company while abroad for an extended period of time.
Applying EB-5 Visa Retrogression to Job Creation
Of course, one of the most important aspects of the EB-5 investment still remains to be job creation, and EB-5 visa retrogression will have effects on how the EB-5 project’s offering documents are drafted. In the past, certain projects did not have a clearly outlined method of allocating jobs to EB-5 investors. Further, it was expected that each investor would reach the I-829 stage at approximately the same time. However, upcoming EB-5 visa retrogression, necessitates tying job needs to be to the stage at which the EB-5 investor becomes a conditional green card holder because the timing of the EB-5 process will vary dramatically if an EB-5 project has investors who are from mainland China and other countries. Retrogression means that regardless of the timing of when each investor filed his or her I-526 petition, the other foreign nationals will likely reach the conditional green card status stage long before the mainland China-born EB-5 investors. The latter system creates predictability for all in the project, but it means that Chinese nationals and migration agents must be very cognizant of the overall job creation numbers and the amount of investors the project will intake. Last in line means that Chinese nationals delayed by retrogression will be the most affected by any shortfalls in job creation.
The analysis of mainland China-born EB-5 investors being delayed from obtaining the conditional green card, and the detrimental effects that it will have on being credited for job creation, can be taken one step further. Terms of the EB-5 project that an EB-5 investor and a migration agent will need to pay close attention to when selecting a project are the types of jobs that are expected to be created. It will be essential to determine whether the EB-5 project will be counting the operations jobs of the development as part of the overall job count.
Let’s take a closer look at the question in a more specific context. A high-rise apartment building in New York is looking for EB-5 investors. The construction of the building began in January 2014. Ms. Wang, a mainland China-born EB-5 investor invested in the project on December 1, 2014. She filed an I-526 petition on January 1, 2015 and established her priority date. In the summer of 2015, EB-5 visa retrogression sets back the priority date to January 1, 2013 for mainland China-born investors and the priority date progresses slowly each month. The construction of the apartment building finishes in January 2016, while Ms. Wang is still waiting for her visa number to become current although her I-526 has been approved in February 2016. Two years after the construction of apartment building is completed, thanks to the booming rental market in New York, in January 2018, the apartment building is sold to a third party. Visa number for Ms. Wang becomes current in May 2017 when she immediately submitted her I-829 application to remove conditions; however, while her I-829 application is pending, the apartment building is already sold. Now that the construction is completed and building is sold, will any of the construction jobs during the construction stage or operations jobs before the building was sold that were created using her portion of the EB-5 funds still be available for her I-829 application?
Furthermore, current USCIS policy follows the guidance outlined in the Neufeld Memorandum from December 2009 which requires proof of the requisite ten jobs be created within 2.5 years of the approval of the investor’s I-526 petition. This approach allowed for approximately two years to pass after obtaining conditional residency to show job creation. This is consistent with the two years requirement to file the I-829 Petition to Remove Conditions.
The approach outlined by the 2009 Neufeld Memorandum will cause great confusion when EB-5 visa retrogression is introduced. Since visa retrogression will cause a delay between when the I-526 petition is approved and when the investor can even apply to adjust status or commence consular immigrant visa processing, and thus increase the amount of time it takes for investors to reach the I-829 stage by a time period of well beyond two to three years, a number of questions and concerns arise. Would compliance with the 2009 Neufeld Memorandum require the investor to submit proof of job creation within months of obtaining conditional residency in order to satisfy the guidance calling for jobs to be created with 2.5 years? Moreover, would the investor be only able to receive credit for jobs created by 2.5 years later? Or if the investor is not required to submit proof of job creation early, would the investor need to prove that jobs were created within 2.5 years three, four or five years after the fact, and would USCIS accept the job creation that occurs well beyond the 2.5 year mark? If not, that would allow the regional center and investors to only count construction and initial operations jobs, rather than also including operations jobs created years down the road, and therefore preclude most indirect and induced jobs created by the project.
Because of the inconsistency with current regulations and the untenable situations that the application of the 2.5 year would create, the investor should be especially attuned to the type of jobs that the project claims it will create, because when EB-5 visa retrogression occurs, the concept of receiving credit for creating operations jobs may become more limited. Overall, EB-5 visa retrogression is imminent, yet the EB-5 community does not yet know exactly how its effects will be interpreted by USCIS. However, we do know that there are ways to navigate these effects in the most prudent manner possible when analyzing the EB-5-related terms of the project.
Christian Triantaphyllis is an Associate Attorney of Foster, LLP. Mr. Triantaphyllis focuses his practice on EB-5 and business immigration matters, particularly those related to regional center and direct investments. He is very experienced in filing successful I-526 and I-829 petitions, and specializes in advising regional centers and foreign investors on EB-5 project documents. Mr. Triantaphyllis graduated from Southern Methodist University with a Bachelor of Arts in Political Science and earned his Juris Doctor from New York Law School.
Yiting (Dora) Hu has experience counseling immigrant investors through various stages of the EB-5 immigration process. Ms. Hu specializes in preparing and filing I-526 and I-829 petitions, assisting EB-5 investors in gaining U.S. permanent residency through adjustment of status and consular processing, and preparing investors for immigrant visa interviews. She is an expert in assisting Chinese EB-5 investors with properly documenting source of funds and navigating the EB-5 process from start to finish. She speaks fluent English and Mandarin Chinese.
Houston Harris is an immigration attorney with Foster, LLP, with his practice located in the law firm’s Downtown Houston office. He represents both corporate and individual clients, helping them to prepare and file immigrant employment-based visa petitions, along with non-immigrant petitions. He focuses specifically on EB-5 filings for regional centers and individual investors. Attorney Harris is admitted to practice law in the state of Texas, and is fluent in both English and Spanish.
 8 C.F.R. § 204.6(j)(2).
 USCIS Memorandum from Donald Neufeld to Field Leadership (HQ70/6.2, AD 09-38) (December 11, 2009).