By Jeffrey B. Carr
It seems almost a “given” these days that the rules for counting new jobs under the EB-5 regional center program keeps on evolving. EB-5 investors are often confused about what can and cannot be used in job impact studies for projects under the EB-5 program. Many are unsure whether or not the economist’s job impact estimate for a project is reasonable or risky, particularly for projects that rely heavily on construction expenditure activity for the creation of jobs to be used in the “10 jobs per EB-5 investor math.” Because so many EB-5 projects in today’s market are using jobs created mainly by construction activity, what constitutes “best practices” and what is more risky, is important for investors evaluating which EB-5 project to chose.
The key to optimizing a project’s EB-5 capital raise and reducing an investor’s risk is to use as many newly created construction activity jobs as can be supported in a technically sound way by a transparent economic impact study and EB-5 project business plan. Proper technical support, combined with a clear presentation of the economist’s job impact estimate, are vital to the potential success of any EB-5 job benefits request for the EB-5 investor. The following are key items investors can look for in a project’s filing materials to help protect themselves against unnecessary risk.
AN ACCURATE BUDGET ESTIMATE AND TIMELINE FOR CONSTRUCTION EXPENDITURES IS A MUST
Given the fact that it is not uncommon today for EB-5 projects to rely heavily on jobs created by construction, the first key aspect to look for in an EB-5 project’s job impact estimate is a well-supported construction expenditure budget, where expenditures are presented on a reasonable timeline. As an investor, ask yourself if the construction budget reflects a realistic level for building costs for that type of construction. Is the cost per square foot comparable to other similar recently constructed projects of the same type and scale in that geographic region? Is the timeline for the project reasonable for the length of the construction season in the area and also for similar types of projects that have been built in the recent past?
For the answer to the first question, investors should seek support from an independent third party that opines to the rationality of the project’s budgeted development-construction expenditure plans. This support can come from several sources, including a reputable developer-builder with a good amount of past experience in developing similar projects in the area, a written analysis-report from a construction budget review specialist firm or a financial institution that is experienced, or the presentation of well-sourced government or reputable industry association statistics for similar projects in the region.
With respect to the second question discussed above, investors should look to see if the timeline has been confirmed by any combination of the third parties described or through the presentation of credible government data. This project completion data can typically be obtained from the U.S. Bureau of the Census. Adequate support to the level of construction expenditures and the construction timeline are key because the construction budget lays out the level of construction spending by type that was used to calculate the new job creation and the timeline prescribes what rules must be used for the jobs that can be counted in the “10 jobs per investor” math. If the investor does not demand such documentary support, it is almost a certainty that the U.S. Citizenship and Immigration Service (USCIS) case officer will require that information at some point in the adjudication process.
DOES CONSTRUCTION ACTIVITY LAST FOR AT LEAST TWO YEARS OR 24 FULL MONTHS?
The correct support for the timeline of the project’s construction spending is important because it impacts how many of the new construction activity jobs created by the project can actually be used to support the investor’s application. Under current EB-5 rules, both created direct and indirect jobs (at least as an economist sees them1) may be used to qualify the investor if the construction activity lasts for at least two 2 years or for 24 continuous months. If a project is not expected to last for at least two years, then only the economically indirect jobs can be counted towards the project’s EB-5 program jobs benefits request.2 For most EB-5 projects, the two-year period typically begins at ground-breaking and ends when the final finishing work is completed. If there is a significant amount of demolition involved in a project, a project can often effectively argue that the applicable construction timeline actually began with the project’s demolition activities.
A conservative approach used by some projects is to apply the two years of overall activity duration requirement by each specific construction activity as defined by the North American Industry Classification System (NAICS) activity or “economic” activity category, even though the USCIS has indicated it is not necessary to use such an approach. For investors, using the more conservative, individual NAICS activity approach for counting both economically direct and economically indirect jobs can provide some extra margin of safety that the project will have enough jobs at the end of the project at the I-829 petition phase to cover all investor petitions filed even if the project did not go according to plan. Although most projects use a more holistic approach to the construction project’s overall timeline -- that is, counting jobs using the period defined from ground-breaking to the completion of the final finishing work for a project in its entirety -- those projects should be viewed as being more risky by investors than projects that employ a less aggressive approach to counting jobs.
CONSTRUCTION ACTIVITY JOBS MUST BE CREATED WITHIN 2½ YEARS OF THE ADJUDICATION OF THE INVESTOR’S I-526 PETITION
An investor in a construction project also has to be concerned about the actual timing of estimated job creation. At the I-526 petition filing stage, the USCIS requires that all jobs be created within two years and six months of the adjudication of the investor’s I-526 petition.3 Known as the so-called 2½ year rule, this has significant implications for the EB-5 program-eligible job count for a construction project. If the development project is a substantial one, covering multiple years of significant amounts of construction activity, it may be useful to consider phasing the larger development project and presenting the project’s information to the USCIS as multiple EB-5 projects and offerings, each of an acceptable duration to conform to this important job counting rule.
This is because the typical maximum length of a construction project that is likely to comply with the 2½ year rule under the EB-5 program is roughly 4 years considering typical adjudication times are now roughly 19 months and it usually takes at least 6 months to solicit and secure any significant number of EB-5 investors. If a project wants to include any amount of operations activity-based jobs, it is almost a necessity that construction activity not last for longer than 3 years, so the project can ramp up operations to a sustainable level to count both direct and indirect jobs from operations. It usually takes about a year for operations in any project to ramp up to a significant enough level of activity to make it worth the effort to develop the supporting materials needed to adequately support an EB-5 program job benefits request for operations jobs. This is important when more EB-5 program-eligible jobs are needed than can reasonably be obtained from using expenditures from project’s construction activities.
WHAT TYPES OF CONSTRUCTION SPENDING CAN BE USED FOR ESTIMATING JOBS
As a general rule, properly estimating construction activity job impacts for a project follows an analytical process, where the analyst applies the final demand multiplier through the selected input-output tool4 to the estimated or planned level of construction expenditures after properly adjusting the construction expenditures for inflation. Typically defined as the “change in final demand,” the final demand multiplier or multipliers are then directly applied, or applied through the use of an economic impact model tool, to those inflation-adjusted expenditure levels to produce an estimate of the number of total jobs (direct and indirect) created per increment of change in final demand.
For most projects, the implied aggregate job impact multiplier for construction activity is generally between 10 and 15 jobs per $1.0 million in expenditures, depending on the type of construction activity, the mix of horizontal and vertical construction, the type of structure or structures being built, and the geographic area where the project is located. The correct geographic area is important to investors because the same construction draw schedule for the same exact project located in Los Angeles, New York, Chicago, Miami, and/or Texas will sometimes produce dramatically different job impact results. This is because regional economies have differing economic structures, where businesses, households, and individuals engage in and emphasize different types of economic activities based on the region’s hard and soft assets, its comparative advantage, and the education and skills of its workforce and businesses. Investors should be wary of job impact studies which use national average multipliers or multipliers that cover broad geographic areas because “averaging impacts” in this way can sometimes result in inaccurate job impact results that can be questioned by case officers during the adjudication process.
The investor should also examine the economic impact study carefully to see that the economic impact analysis exercised great care in properly distinguishing between the types of budgeted expenditures than can be included or should be excluded from job impact studies under the EB-5 program. If the job impact estimate is not done according to USCIS rules in this regard, investors should be concerned that this can result in over-subscribed deals and other problems for EB-5 investors, project sponsors and EB-5 marketing professionals.
First, USCIS rules allow for most of a project’s hard construction costs, including costs of materials and labor to be included in EB-5 job impact studies. In fact, projects that rely for the most part on reasonable “hard construction costs” are generally considered by marketing agents and investors as relatively low-risk EB-5 program-eligible construction expenditures. Expenditures for site work and shoring, demolition and expenditures for utilities and items such as hardscapes also are expenditure items that are typically included in job impact analyses. Items such as General Conditions and Hard Cost Contingency expenses at times can be included,5 although investors should understand these expenditures are considered to be “higher risk.” A good rule of thumb for investors is to try to think about whether including jobs from such expenditures are really needed to make the project’s overall capital stack work versus the higher level of adjudication risk that including them entails at the I-526 petition adjudication. Investors should also try to look ahead in anticipation of what will be needed to “prove” those expenditures at the I-829 removal of conditions adjudication. If they are not needed to make the project go forward, these project expenditures should likely be excluded. In particular, remember if you include contingency expenditures, they need to be allocated to actual expenditure categories in order to be approvable at the I-526 phase, and if they are going to be meaningful to help prove job creation at the I-829 removal of conditions phase.
In addition to the project’s hard construction costs, investors should be aware that there also are a number of other “soft construction costs” that can be considered for inclusion in a project’s job count. The most typical of these costs are expenditures for architects, engineers, environmental review, marketing, non- EB-5 legal and other professional consultant expenses—as long as they are paid to competent third party professionals. Other “soft cost” expenditures that appear to be allowed included expenditures for insurance and for certain types of financing costs. But these insurance and financing costs are of “high risk” to include in any job impact study.
In addition to those risky, but still potentially eligible soft cost, project expenditures, investors should be aware that there are a number of expenditure items that are not appropriate for inclusion in any job impact analysis involving construction expenditures. These include expenditures for items such as obtaining state and local permits, local property tax payments, and expenditures for local, state and regional fees and other exactions.
In addition, investors should know that project expenditures for land acquisition or otherwise gaining control of the land for the project also are not eligible to be included in construction impact analyses. This is true, even though expenditures for land acquisition has clearly been found to be legitimate and eligible expenditure from the EB-5 capital that has been raised for an EB-5 project. Since land acquisition expenditures create no net new jobs under the EB-5 program rules, the job creation associated with other project construction expenditures will need to create enough jobs to support the investor petitions that supplied the EB-5 capital used to acquire the land asset needed for the project that will have to be scored as creating zero new jobs for EB-5 program purposes. Finally, expenditures which are budgeted for the legal and professional services required for undertaking an EB-5 approach to financing a project should never be included in a job impact request.
Two other common project construction expenditures used under the EB-5 Program that also deserve mention for potential investors in a project are: expenditures for Tenant Improvements (TI), and for Furniture, Fixtures & Equipment (FF&E). Regarding TI expenditures, the process for being able to include those expenditures in an EB-5 job impact analysis is relatively straight-forward. Expenditures should be categorized by specific economic activity category (or NAICS) and direct and indirect jobs estimated separately for any tenant Improvement expenditures undertaken for a project. If the project developer completes the TI on behalf of tenants, then the process of documenting those construction expenditures is exactly the same as outlined above. If TI expenditures are made by third parties, then investors should make sure that agreements to accurately supply expenditure documentation are firmly in place so that projects can accurately obtain the required expenditure documentation so that those expenditures can be included at both the I-526 stage job impact study and then “proved” later on as the project’s investors are filing their I-829 petitions.
Regarding the inclusion of new jobs created by FF&E expenditures, investors should make sure that all such expenditures are properly “margin adjusted” to comport with “best practices’ in economic-job impact analyses in order to prevent the potential “double-counting” of project job impacts. Many economic impact analyses used under the EB-5 program omit this critical analytical step when assessing the job impacts associated with these FF&E expenditures. Investors should be mindful that this common mistake could lead to erroneously high job impact numbers for projects for EB-5 program purposes.
ALL EXPENDITURES MUST BE ADJUSTED FOR INFLATION TO THE INPUT-OUTPUT TOOL’S “BASE YEAR.”
After carefully estimating the expenditures to be included in the construction project’s economic impact study, all dollar amounts -- before they are applied to the various job and other impact coefficients -- must be adjusted for inflation to the base year of selected input-output tool. This is because input/output tools’ coefficients and multipliers use data that correspond to economic relationships from a historical base year. As a result, current dollar values and future dollar values for a project need to be translated (or deflated) to the values of the input/output tool’s base year. This is required in order to properly arrive at the correct dollar amount that properly reflects the “change in final demand” for each construction expenditure category.
Most input-output tools now use calendar year 2009 as the base year and some are now using calendar year 2012 as the base year. A lot of EB-5 projects use simple historical inflation rate averages to deflate future dollar values. In most cases that approach will not be reflective of inflation rates in the future. Another option is to acquire a credible forward-looking inflation forecast from a reputable forecaster. Using an arbitrary historical average of either a general inflation index change or even a gauge that measures historical construction cost inflation is unlikely to do a good job in estimating future construction cost price changes. Investors need to be mindful that errors in properly adjusting nominal dollar past and future construction expenditures for inflation will result in errors in the estimate of economic and job impacts for an EB-5 project to the detriment of a smooth case adjudication.
PROPERLY AGGREGATING THE JOB IMPACT STUDY’S RESULTS
When totaling up the result of any economic impact study, there are several important considerations of interest to investors, including the requirement that direct jobs must last for at least two years, the requested jobs occur within a reasonable time, and that the admissibility of a request to attribute jobs to a regional center. Job impact analysis results from the selected input-output tool should be carefully extracted and laid out on an annual time line for each of the construction project’s NAICS economic activity categories, ideally for the geographic area both within and outside of the sponsoring regional center’s geography. Although impact results for narrower geographic regions can still be used for filing purposes, investors should understand that they could be leaving a significant number of potentially EB-5 program eligible jobs “on the table” if they do not use total U.S. job creation.
When aggregating job impacts for EB-5 program purposes, jobs created by construction activities should not be summed across multiple years or multi-year construction expenditures should not be summed as if they had occurred within a single year. This is a technical error that likely double counts at least all economically direct jobs and elevates the risk to investors that a project may become “over-subscribed.” The USCIS rules make clear that they require job impact studies to properly count EB-5 Program-qualifying jobs. There is no provision under the EB-5 program for counting job-years as there is no provision under the EB-5 program for counting “10 job-years per EB-5 investor.” Once the job impact analysis has been completed and fully double-checked, the impact analysis should transparently lay out the job impact estimates by category and by calendar or project year per the clear statement of Nicholas Colucci, Chief of the Immigrant Investor Program back in May of 2015 -- which clearly delineated the concept of economically direct and economically indirect jobs. Results then should be aggregated for EB-5 Program purposes following the program’s precedents and rules. The report should transparently provide the USCIS case officer with the following: (1) the economic impact study’s input-output model inputs and corresponding specifications by year by NAICS-specific economic activity; (2) the total number of economically direct and economically indirect jobs created both inside and outside the Regional Center (or for the United States economy as a whole) by year and by NAICS-specific economic activity; and (3) the total number of jobs the petitioner is requesting for EB-5 Program job benefits corresponding to the jobs to be attributed to the regional center. The jobs attributed to the regional center correspond to the net new job opportunities created by the project’s activities that are then used in the 10 jobs per EB-5 investor math.
Properly counting the economic impacts can be a complicated matter, but doing so according to “best practices” and EB-5 program rules is fundamental to having a successful EB-5 project for investors. Under-counting job impacts for EB-5 Projects may leave otherwise EB-5 program eligible jobs out of the 10 job per EB-5 investor math to the detriment of the project’s investors’ sought-after immigration benefits and/or provide a surplus jobs cushion that is smaller than otherwise would or could be the case for EB-5 marketing purposes. Over-estimating EB-5 Program eligible job impacts can lead to that the project could be over-subscribed for EB-5 Program purposes. Projects that are over-subscribed can lead to significant problems for investors at the I-829 petition job proving adjudication. Beyond those investor concerns, accurately accounting for the EB-5 program’s job creation impacts from project activity is crucial to the EB-5 Program’s long term success as a U.S. job creation program.