by Jeffrey Carr
The recent introduction in the Senate of the bipartisan reauthorization legislation for the EB-5 Regional Center Program, the “American Job Creation and Investment Promotion Reform Act of 2015” (S.1501), is shaping up to be a real game-changer for the EB-5 program if enacted as introduced. Significant changes in rules for counting jobs, for Targeted Employment Areas (TEAs), and for how regional centers are operated and report their activity are no doubt issues of great concern to the EB-5 stakeholder community. In the next 90 to 120 days, how the EB-5 stakeholder community addresses its concerns regarding the proposed changes will have a significant impact on the future of the EB-5 program for at least the next five years.
This bipartisan legislation is the result of literally months of exhaustive staff work within the offices of Senate Judiciary Committee Chairman Charles Grassley (R-IA) and Ranking Member Patrick Leahy (D-VT). Having a bipartisan reauthorization bill before the Senate is a significant improvement over where EB-5 stakeholders were just a few weeks ago. Although the legislation was introduced well in advance of the Sept. 30, 2015 sunset date for the EB-5 Regional Center Program, it has the feel of being somewhat late in the game considering the scope of the reforms proposed in the initial draft of the bipartisan legislation.
The bipartisan bill includes a five-year re-authorization of the EB-5 Regional Center Program through September 2020 and a number of far-reaching reforms. The more notable reforms in the bipartisan legislation include: (1) increasing the minimum investment amount; (2) significant changes in regional center oversight, compliance, and reporting requirements, (3) changes in processing procedures and new limits on USCIS processing times for exemplars, I-526 petitions and I-829 petitions; (4) new requirements on source of funds documentation; (5) the opportunity for expedited processing for an additional fee; and (6) significant changes in Targeted Employment Areas (or TEAs) and the EB-5 program’s use and estimating procedures for estimating EB-5 program eligible jobs. While the five-year reauthorization is a significant improvement over the three-year reauthorizations EB-5 stakeholders have had to deal with in previous regional center program reauthorizations, it still is well short of the permanent reauthorization that the EB-5 community has hoped for.
One key area of reform for EB-5 stakeholders to watch closely is the proposed reforms related to TEAs. TEAs are always a point of focus for any project because whether the project is located inside or outside of a TEA determines whether the EB-5 investor qualifies to invest the current $500,000 minimum amount or whether the investor will need to pony up the EB-5 program’s current default investment amount of $1 million.1 In fact, few investors pay the default amount. Well over 95 percent of the projects are located within TEAs, so it is crucial that the EB-5 reform effort get TEAs right. Reading the “tea leaves” of the EB-5 reform debate to-date, these amounts are almost certain to increase with the passage of any EB-5 reform legislation. In fact, this issue is so non-controversial that it is possible that the minimum investor amounts may be increased even if the program receives only a short-term extension past Sept. 30th while the legislative deliberations continue beyond Sept. 30, 2015 on the more significant points of the proposed reforms.
Reading through the initial reform legislation proposal, it is hard to imagine that the many points of disagreement with the original reform proposals will in fact be resolved prior to the EB-5 Regional Center Program’s current expiration date of Sept. 30, 2015. While it is possible a reform bill could pass before Sept. 30th, stakeholders should be prepared to see the legislative process continue past that point with a temporary, short-term extension.
Turning more specifically to the matter of TEAs, S.1501 proposes to make significant changes to current TEA policy.
First, the proposed reforms include a significant tightening to the definition of what areas can qualify as high unemployment rate TEAs in metro areas. The reform legislation (page 62) appears to limit sub-municipal high unemployment rate TEAs in metro areas to only one census tract that “...has an unemployment rate that is at least 150 percent of the national average unemployment rate.” The exception to that definition is if the EB-5 project is located “...within the geographic boundaries of any military installation closed...” during the past 20 years. In that case, the high unemployment rate TEA appears to be able to include the entire geographic area of a closed military base.
Second, the reform legislation (page 63) also includes language to place TEA certifications exclusively with the Secretary of the Department of Homeland Security thereby eliminating the states and localities (as well as other federal governmental and non-governmental entities) from approving-certifying high unemployment rate TEAs. Those are both major changes in TEA policy. Add to that the apparent new requirement that 50 percent of the total EB-5 eligible job creation will now need to occur within the legislation’s newly defined urban and rural TEA job areas,2,3 and the reauthorization legislation is a near total rewrite of existing TEA policy.
While the legislative language for defining “high unemployment rate” TEAs is still somewhat unclear, it appears the intent of the initial EB-5 reform legislation is to start deliberations within the EB-5 stakeholder community from a highly-limiting starting point. The term “limiting” is used because the proposed legislation essentially seems to eliminate what have become known as custom high-unemployment rate TEAs except for those within military bases that have been closed over the past 20 or so years. It is those custom TEAs that have recently been used to allow the larger metro area projects to occur under the EB-5 program. So, it would appear that this re-definition proposal is designed to limit the use of the EB-5 program by these larger metro area projects.
In fact, by limiting the definition of high unemployment rate TEAs to only one census tract, the reform legislation appears to want to make “high unemployment rate” TEAs a very exclusive club. In effect, it takes a step beyond what the State of California recently did on its own a couple of summers ago when it imposed what was the first numerical limit on the number of contiguous census tracts that could be included in a custom high unemployment rate TEA (to not more than 12 contiguous census tracts in total). At the time, the intent of the state was in fact to limit EB-5 project activity within its borders to areas that policymakers thought to be most in need of EB-5 investment capital. Skyscrapers in metro areas like Los Angeles or San Francisco do not need EB-5 capital, this reasoning went.
For California, limiting the use of the program by constraining TEAs also helped the state solve an inability to meet the explosion in demand for TEA review and certifications that had simply overwhelmed the state at that time. Constraining custom high unemployment rate TEAs to only one high unemployment rate census tract in the EB-5 reauthorization legislation will likely be limiting on EB-5 deal flow throughout the country, but especially in states like Florida, New York, Texas, Arizona, Illinois, Louisiana and the state of Washington. All of those states have placed a high importance on using EB-5 investor capital as an economic development tool to encourage capital investment and job creation within their boundaries. Proponents of limiting the size or scope of custom, high unemployment rate TEAs say this is necessary to return the EB-5 program to its original early 1990s roots of providing investment capital to the parts of the country, such as rural areas and economically distressed urban areas which are most in need of such investment. However, this reasoning involves a bit of grey area because usage of TEAs in a regional center context was not contemplated in the original 1990 legislation, and regional centers were only added into the EB-5 program mix in 1992.
The net effect is that such a proposal—if passed—would in fact curtail a significant amount of existing EB-5 project activity by more than doubling the minimum investor amount for EB-5 projects from $500,000 to $1.2 million. Projects, particularly for those projects outside of rural areas, would likely be particularly disadvantaged.
Looking at our own EB-5 project activity over the last three years, limiting the number of contiguous census tracts reaching a high unemployment rate TEA to 12 (like California does) could eliminate roughly 65 percent of the EB-5 projects we have worked on over the period. All of the “weeded-out” projects are those that would have been located in metro areas. Limiting the number of contiguous census tracts for a high unemployment rate TEA to one single census tract could eliminate roughly 90 percent of all of the EB-5 projects we have worked on over the last three years. From that data, it seems apparent that there are simply not enough single high unemployment rate census tracts all by themselves within metro areas that geographically intersect with the commercial marketplace for projects that could utilize the EB-5 program.
Limiting high unemployment rate TEAs to only one census tract (or any arbitrary number for that matter) is not even consistent with the economics of labor market commuter sheds (e.g. where the workers for an EB-5 project would reside) or supply chains (which reflect the supplier-vendor relationships and the geographic reach of the job creation of projects). Nor would such a proposal, if it survives as-is in the EB-5 reform legislation, reflect sound economic development policy. The approach should be to find ways to encourage more capital investment and jobs in the U.S. economy at no taxpayer expense—not restrict it!
For example, one possible reform that could be helpful in this regard would be to reduce the job requirement to eight jobs per EB-5 investor for rural projects. This could be done alone or in tandem with a reform that would increase the jobs per EB-5 investor requirement for urban projects. For example, a requirement that 12 jobs per EB-5 investor for urban projects without another compelling economic distress indicator in addition to a high unemployment rate at 150percent of the U.S. average,4 would not be an unreasonable approach for compromise. Such an approach to TEA reform would be a far better avenue into the urban-rural TEA reform division.5 That approach would also go a long way towards avoiding the possible negative outcome of the proposed EB-5 reform as written that would diminish the effectiveness of the EB-5 program as an economic development tool when needs across the country remain high. In short, it would avoid a proposed TEA reform approach that essentially punishes the EB-5 program for its success.
Lastly, leaving TEA review and certification to the USCIS likewise seems limiting. Aside from the loss of state or local input on the desirability of possible EB-5 projects, how does this seem like a good idea with USCIS processing backlogs at already unacceptable levels? Case adjudicators are already overburdened when all they have to do is check the mathematics of proposed TEAs and confirm the fact that the unemployment data used in the TEA calculations is “current.” One possible risk of accepting this reform proposal could be to encourage arbitrary denials of TEAs, if for no other reason than to possibly shorten a case’s adjudication time.
The next 90 to 120 days will be a test of the EB-5 stakeholder community to come together to encourage a thoughtful dialogue and consensus on the TEA and other reform policies as proposed. As a stakeholder community, a broad consensus will be needed on key reform issues like TEA policy to ensure a vibrant EB-5 program. Bolstering the program with appropriate safeguards and transparency will allow the EB-5 program to realize the promise it has to deliver substantial new capital investment and jobs throughout a U.S. economy in a diverse group of industries.
If the EB-5 stakeholder community allows itself to become divided during the reform process, the result will be a significantly smaller and scaled back EB-5 program where there will be “winners and losers” following reform. There will be much less new investment and job creation than there would otherwise have been. The EB-5 program is a rising tide type of a program that truly can make a large contribution to lifting all of the country’s economic boats. It is up to the stakeholder community to accept the challenge and guide the reform effort toward that result. If we as a stakeholder community fail to do so, all we will need to do is “look in the mirror” for who to blame. Thousands of more jobs and billions of more dollars of future investment in the U.S. economy hang in the balance.
1 These amounts would increase to $800,000 and $1.2 million, respectively, under the bipartisan bill. Further, the initial reform legislation allows for these minimum investment amounts to increase at least every five years (and gives the Secretary of Homeland Security the ability to adjust this amount more frequently, if desired), for the change in the Consumer Price Index over the period.
2 Urban TEA job areas include a Consolidated Statistical Area (CSA) if a project is located in an area defined as a CSA, a Metropolitan Statistical Area (MSA) if a project is located in a MSA. If a project is located in a rural TEA, the rural TEA job area includes a small, narrowly defined number of contiguous counties to include the county where the EB-5 project is located plus only the counties adjacent to the Targeted Employment Area (e.g. a contiguous ring of counties adjacent to the host county for the project—see page 12). It is not clear how this area would be defined for multiple project locations (potentially involving multiple rural TEAs).
3 That is, jobs that can be brought into the “10 jobs per EB-5 investor” math.
4 Such as including an economic distress metric like having a high poverty rate in at least one of the census tracts in a custom “high unemployment rate”
TEA. This was the approach adopted in the Senate via the Amendment No. 1455 (to S.744), which was agreed to by Senators Reid, Leahy, and Schumer last year. That Senate-passed legislation was not passed by the U.S. House of Representatives before 113th Congress adjourned.
5 In addition to an effort to find some common ground on the so-called “Derivatives” reform effort.