by Elliot Winer
This past December, as the days led up to a decision on the Grassley-Leahy Senate bill with its latest iterations and reauthorization of the EB-5 program, there was great angst within the EB-5 community. Urban vs. rural TEA concerns, visa allocations, job creation methodologies, effective dates and minimum investment amounts were among the many concerns within the industry and how it might all play out. As you all know by now, an agreement could not be reached, in large part due to the opposing views on TEAs, and the program was temporarily extended until Sept. 30, 2016, when hopefully agreement can be reached on a new, longer-term authorization. I will leave it to others to comment and debate the many other aspects of this Senate Bill and other reauthorization proposals.
I am going to focus on the new TEA definitions put forward in the Grassley-Leahy bill and why for the most part it was an ill-conceived, poorly thought out approach to TEA revisions. I will address four particularly egregious parts of the TEA definitions:
(1) The controversial aspect of the number of allowable census tracts in TEA configurations; The potentially devastating impact of two largely overlooked components of the bill, (2) the elimination of block groups and other geographic and political subdivisions, and (3) the shifting of TEA designation authority from the states to Homeland Security; and (4) how a virtually ignored inclusion of ‘outlying counties’ into the bill would have made a mockery of the program by allowing for far more abuse of the TEA process than anything currently possible through gerrymandering.
I will conclude by presenting what I think is a more reasonable and comprehensive approach to TEA reform that would be fair and beneficial to both urban and rural interests.
Allowable Census Tracts
The number of allowable census tracts in configuring TEAs received a fair amount of discussion and debate, but the final proposal was poorly thought out and, in my opinion, deliberately misleading. The original proposal back in June 2015 was frankly absurd. Only census tracts that by themselves met the 150 percent of U.S. unemployment rate criteria could qualify as high unemployment TEAs. This essentially would have “unqualified” approximately 90 percent of existing high unemployment TEAs, if they were currently being evaluated.
Unemployment rates are not based on where the jobs are located but on where the residents reside. As a result, a downtown area that is not primarily a residential area can have very low unemployment rates. Workers rarely live in the immediate area where they work and areas with low unemployment are often in close proximity to high unemployment areas. A project located in one of these census tracts will have little or no impact on the unemployment rate of the project tract, if few or no workers reside in the tract. It can, however, have major impact on creating job opportunities and reducing unemployment in those nearby neighborhoods where residents are not only in close proximity to the project area, but also have easy access via public transportation. In a concentrated area like New York City, where one census tract might only encompass a few square blocks, a high unemployment census tract can be very close in distance to a project area even if it is many census tracts away.
In early December, a modification to the bill essentially allowed joining one contiguous census tract to the project tract (with ambiguous language, which makes it unclear whether a non-qualifying project tract can even be combined). It was hardly an improvement – most existing TEAs would still not qualify. This new category, called a Priority Urban Investment Area, was part of a two-step approach. Added on to the Priority Urban Area unemployment rate definition were new definitions for poverty rates of at least 20 percent and for median family incomes of not more than 80 percent of the greater of the statewide or MSA median family income. These two add-ons are innocuous but unnecessary, and just add an extra layer of confusion. Most areas that would qualify on the poverty or income basis should also be able to qualify with a combination of contiguous tracts. Furthermore, the income criteria should be the lesser of, not the greater of the statewide or MSA median family income, as it could make qualifying too easy in higher income metropolitan areas where median income is well above statewide averages.
The second new category, called a Special Investment Zone, allowed for up to 12 contiguous tracts. Referred to by some as the California approach which has been fairly effective in enabling TEA development in the higher unemployment and more populous areas of Los Angeles, Riverside and San Bernardino counties, the 12-tract limit does not work as well in other parts of California and also would be less effective in most other states. Furthermore, when California implements new TEA data on May 1, many existing TEA projects in Los Angeles, Riverside, and San Bernardino counties will no longer be eligible for recertification under the existing California 12-tract approach.
While these two new categories of TEA definitions were flawed, what occurred at the eleventh hour was downright outrageous. In what looked like a disingenuous attempt to slip in some new language that would deal a blow to urban interests, the latest December version changed the Special Investment Zone definition to read that the 12 contiguous census tracts must include each census tract contiguous to the project tract. It is very common for one census tract to have six to eight immediately contiguous tracts. In a case with eight contiguous tracts, most or even all of the contiguous tracts might have non-qualifying unemployment rates, leaving only three potential high unemployment tracts that could be brought in to impact the weighted average. This should no longer be referred to as the California approach because it would severely limit TEA formation in California. The majority of TEAs would no longer qualify under this hybrid 12-tract approach.
Another eleventh-hour dagger was the reserved visas. As others have discussed, the 2,000 reserved visas for each of the Priority Urban Investment Area, rural, and non-TEA groups places the more prevalent Special Investment Zone TEA in a second-class status, fighting over the 4,000 leftover visas. With visa waiting periods increasing, it could discourage investment in these Special Investment Zone TEAs.
The definition of an MSA is that a person can change jobs without changing their place of residence. By this definition, any job within an MSA should be able to be filled by any resident of a high unemployment area within that MSA. For example, a hotel project in an inner city is likely to bring in construction workers and permanent staff from other parts of the city and neighboring communities within the MSA. If there is not enough unemployment in a project’s commuting area, then it will not be plausible to designate a TEA. There should definitely be limits on TEA formation to prevent blatant attempts at gerrymandering, but allowing unlimited configurations within an MSA should be permissible. All gerrymandering concerns can be fully addressed by limiting the number of combined areas to 12, or to some other agreed-upon number when a TEA crosses MSA boundaries.
The TEA definition should not automatically exclude census tracts that encompass special land use census tracts or cover bodies of water since these can be legitimate connectors. However, a water-based tract with no or limited land mass and no population, such as the Pacific Ocean census tracts off the California coast, should never be allowed in any TEA configuration. Water-based tracts should only be allowed when there is a bridge, tunnel, or causeway connection.
USCIS EB-5 regulations provide that a state government may designate a geographic or political subdivision within its boundaries as a targeted employment area based on high unemployment. Consistent with the regulations, USCIS defers to state determinations of the appropriate boundaries of a geographic or political subdivision that constitutes the targeted employment area. However, subdivisions like those in the Grassley-Leahy bill only identify census tracts and not block groups, which are defined by the Census Bureau as statistical divisions of census tracts, and are the smallest geographic configuration for which official employment and unemployment data is available. Limiting TEA configurations to census tracts would negatively impact approximately 15 states that currently utilize block groups, with states such as Texas, Utah, and Washington seeing many TEA opportunities disappear. Furthermore, restrictions like those in the bill would no longer allow for the use of other currently used geographic and political subdivisions such as census designated places in California, wards in the District of Columbia, and city community areas in Chicago, all of which are compiled using the same approved federal methodologies.
State Designation Authority
Removing TEA authorization from the states and shifting the authority to Homeland Security’s USCIS could very well have dire consequences, but this major procedural change seemed to receive very little attention. State labor market information people have the technical expertise and know their local economies. They are best positioned to determine what constraints should be put on TEA formation within their states. USCIS staff does not have the same technical expertise to evaluate thousands of TEA requests and make the proper determinations. Unlike in states where turnaround times are usually a matter of days or weeks and in the worst case scenarios a month or slightly longer, USCIS will not likely be able to meet any reasonable mandated processing times and we would probably be looking at a year or longer for a final determination to be made. This means that investors may not know for a year or more if a project will ultimately qualify as a TEA. USCIS should continue to defer to state determinations of the appropriate boundaries of a geographic or political subdivision that constitutes the TEA. However, USCIS can have final authority and should still ensure compliance with the statutory requirement by reviewing state determinations of the unemployment rate and assessing the method by which the state authority obtained the unemployment statistics.
The new concept of an ‘outlying county’ as a rural TEA was another inclusion that seemed to receive no opposition, as it would be beneficial to some special rural interest groups and would have no detrimental impact on urban TEAs. Outlying counties within an MSA have one-quarter or more of its employed residents working in the central counties of the metro area, or one-quarter or more of its employment is composed of workers who live in central counties. However, this inclusion would enable far more abuse of the TEA process than anything currently possible through gerrymandering. This would automatically grant full TEA status for 450 non-rural counties all across the country, many of which have low levels of unemployment. These counties are all parts of MSAs and have strong social and economic ties to the central county based on commuting patterns and employment. In many of these counties there are a very limited number of census tracts (if any at all) that have qualifying rates and even if it were to be allowed, blatant gerrymandering extending through many distant counties could not get such areas qualified as a TEA. Yet, Senators Grassley and Leahy, along with many others, who are so concerned about allowing an urban TEA when the high unemployment areas may be a few miles (or sometimes even less) away from a project area, apparently have no concerns about allowing TEAs in these non-rural areas with low unemployment rates.
This ‘outlying county’ concept was inserted to gain TEA status for any county within an MSA that may potentially have a rural component. There are legitimate rural type areas within these counties; however, why game the system and open up the EB-5 program to exploitation just to grant TEA status to a few chosen areas within these counties that may be rural in nature? A much more effective, fair, and simple approach to expanding rural TEA opportunities within MSAs would be to grant rural TEA status to all census tracts not within an urbanized area of 50,000 or more population, as defined by the most recent decennial census data, if the individual census tract meets a predetermined minimum size and maximum population density criteria.
TEA and Non-TEA Investment Amounts Should Rise Together
Why raise the TEA investment from $500,000 to $800,000 while keeping the non-TEA amount at $1 million? I agree that the amount needs to be raised, but shouldn’t we keep the same proportion or at least something similar? Why not $600,000 and $1.2 million (same proportion) or $750,000 and $1.25 million (same dollar increase). If we don’t want EB-5 investments concentrated in low unemployment, high-income areas, why are we narrowing the investment gap between TEA and non-TEA?
TEA Proposals Not All Bad
Some of the TEA proposals make sense. Making TEA designations valid for a two-year period is a positive and I would even recommend going to three years. It is important to not put already TEA designated projects at risk and to not force some investors to come in at higher entry levels (as will now be the case with many previously designated TEA projects in Los Angeles, Riverside, and San Bernardino counties).
This will also relieve the unnecessary burden of having to re-apply each year. A local unemployment rate in relation to the U.S. rate is unlikely to change dramatically over a short period of time, but if it does decline, why should a project be penalized for an improving economy, which it may even have contributed to? After all, isn’t that what the EB-5 program set out to do: to create jobs in communities with high unemployment?
A nice inclusion in the TEA definition is areas within the geographic boundaries of any military installation closed during the last 20 years, based upon a recommendation by the Defense Base Closure and Realignment Commission (BRAC). I’m less enthused, but okay with the proposal to give equivalent TEA status to infrastructure projects and manufacturing projects.
The TEA provisions in Grassley-Leahy are clearly flawed, but if those in the industry work together there is no reason that we can’t achieve positive reform. With different interests at stake and the urban-rural divide, it is foolish to believe that everyone will be in complete agreement with any proposal, but the final provisions do need to be fair to all. The EB-5 program was created to bring private foreign investment into the United States and to create jobs. Rural counties already receive what some may consider an unfair advantage by getting automatic TEA status, and rural states have the lowest unemployment rates in the nation. As one example, Vermont, which already receives full TEA status for 11 of its 14 counties, would now increase that number to 13 counties under the ‘outlying county’ concept as it would gain full TEA status for Franklin and Grande Isle counties with respective 2015 annual average unemployment rates of 3.7 percent and 4.1 percent. I have proposed some suggested language for high unemployment and rural definitions that tighten up the high unemployment definitions and expand the definition of rural. This could be used as a starting point for discussion on achieving a balanced TEA reform.
Suggested Language for Defining High Unemployment and Rural Area TEAs
High Unemployment Area
A high unemployment area is defined as an area that has experienced unemployment of at least 150 percent of the national average rate, using the most recently available annual average or 12-month average data.
Acceptable data sources for purposes of calculating unemployment include U.S. Census Bureau data (including data from the American Community Survey) and data from the Bureau of Labor Statistics (including data from the Local Area Unemployment Statistics).
A state government may designate a Metropolitan Statistical Area (MSA), county, city or town of 25,000 plus (all cities and towns in New England), where official data is published on a regular basis, as a targeted employment area based on high unemployment. The state government may also designate a geographic or political subdivision such as a small city or town, census designated place (CDP), census tract, block group, ward, or city community area as a targeted employment area based on high unemployment. A state can combine contiguous combinations of smaller geographic areas such as census tracts, block groups, and wards where data can be derived through acceptable government methodologies, but cannot combine larger areas such as cities, towns and CDP’s. Where a proposed TEA crosses MSA boundaries, the total combination of contiguous census tracts or block groups cannot exceed 12. A water-based census tract with no or limited land mass and no population cannot be included as part of any TEA unless it serves as a connector.
USCIS will defer to state determinations of the appropriate boundaries of a geographic or political subdivision that constitutes the targeted employment area. However, for all TEA designations, USCIS will have final authority by ensuring compliance with the statutory requirement that the proposed area designated by the state in fact has an unemployment rate of at least 150 percent of the national average rate and that the state used proper methodologies in obtaining the unemployment statistics.
A rural area is defined as any area not within either a MSA or any city or town having a population of 20,000 or more based on the most recent decennial census of the United States; or
Any census tract within either a MSA or any city or town having a population of 20,000 or more that is:
- Not within an urbanized area of 50,000 or more population as defined by the most recent decennial census; and
- Is greater than 100 square miles; and
- Has a population density of fewer than 25 people per square mile.