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No more EB5 job creation through tenant-occupancy models: New USCIS policy reduces availability of immigrant investor funds to create jobs for Americans

On May 15, 2018, USCIS revised its Policy Manual, effective immediately. The agency will no longer count the jobs created for US workers through tenant occupancy of EB5 properties. The result of this change is to reduce the amount of immigrant investor funds available to create jobs for US workers.

“EB5” refers to the US employment-based fifth preference immigrant visa. EB5 is a program (sometimes called “traditional EB5”) Congress created in 1990 to stimulate the US economy through job creation for US workers using investment by foreign investors. In 1992, Congress created the Immigrant Investor Pilot Program (regional center EB5), a temporary program that Congress has repeatedly extended, most recently through September 30, 2018. (See our previous posting “EB5 immigrant investor visas are available again”).

Both types of EB5s generally require that at least ten full-time equivalent new jobs for US workers be created by each immigrant’s investment. A key advantage of a regional center EB5 is that “indirect” and “induced” jobs are included in the job creation count (in addition to “direct” jobs), whereas a traditional EB5 counts only direct jobs.

Direct jobs refer to US workers employed directly by the business that received the EB5 investment. Payroll tax records show direct jobs. Indirect and induced jobs refer to employees of other business as a result of EB5 investment. The calculation of indirect and induced jobs is based on an economic analysis using models accepted by USCIS.

The “tenant-occupancy” model counts job creation by independent tenant businesses that lease space in buildings developed with EB5 funding. In the past, USCIS accepted the tenant-occupancy model.

USCIS’ skeptical attitude toward the tenant-occupancy model can be traced back to early 2012 when it rolled out a Request for Evidence (RFE) template for tenant occupancy seeking evidence that the projected jobs attributable to prospective tenants would represent only newly created jobs, and not jobs that had merely been related from another location. In December of that year, USCIS issued “Operational Guidance for EB-5 Cases Involving Tenant-Occupancy,” which clarified that to claim tenant jobs, the economic analysis must project the number of newly created jobs that would not have been created but for the economic activity of the EB5 commercial enterprise. In making that projection, the claimant must use economically and statistically valid forecasting tools. USCIS made determinations on a case-by-case basis and would generally require an evaluation of the verifiable details provided and the overall reasonableness of the methodology as presented.

The 2012 memo suggested two ways to demonstrate a causal relationship between the EB5 investment and tenant jobs:

  1. “[M]ap a specific amount of direct, imputed, or subsidized investment to such new jobs” (i.e., “show an equity or direct financial connection between the EB5 capital investment and the employees of the prospective tenants”); and
  2. Utilize a “facilitation-based approach,” seeking to “demonstrate that the economic benefits provided by a specific space/project will remove a significant market-based constraint” and “result in a specified prospective number of tenant jobs that will locate in that space.”

Beginning in 2013, USCIS modified its tenant-occupancy model position. The agency’s RFE template identified the following three distinct areas of concern:

  1. Will there be tenants to occupy the space once construction is completed?
  2. Will the tenant jobs be “new jobs” and not “merely relocated”?
  3. Are the job creation estimates based on a reasonable and transparent methodology?

Over the years, practitioners in the EB5 field have reported that in tenant-occupancy cases, USCIS, when issuing RFEs or Notices of Intent to Deny, tended to require EB5 immigrants to either (i) remove tenant jobs from the job creation calculation; or (ii) submit additional evidence that shows by the preponderance of evidence (more likely than not) that the tenants will be there to occupy the commercial space when the project is finished, that the tenant jobs are not merely relocated from another commercial space within the same geographical area, and that the estimated number of tenant jobs is a reasonable estimate.

Given the lengthy adjudication time, the capital at stake and the uncertainty involved, many EB5 immigrants gave up claiming tenant jobs. Subsequent formulations of EB5 projects largely steered away carefully from the tenant-occupancy methodology to avoid potential issues.

Now, USCIS has formally rescinded its previous guidance and will no longer consider tenant-occupancy methodology. The agency will continue to give deference to Form I-526 and Form I-829 petitions directly related to previous approved projects, absent material change, fraud or misrepresentation, or legal deficiency of the prior determination.

USCIS is accepting comments on the new policy until May 29, 2018.

Full text of the agency’s Policy Alert can be found here. Dentons represents regional centers, EB5 investment programs and individual investors on both traditional and regional center EB5 programs. Please contact your Dentons lawyer for more information.

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No more EB5 job creation through tenant-occupancy models: New USCIS policy reduces availability of immigrant investor funds to create jobs for Americans

EB5 immigrant investors: Comparison of Traditional and Pilot Programs

EB5 Puzzle

Investors, their spouses and unmarried children under 21 can become US permanent residents by creating (or saving) jobs for US workers through investment. This is the employment-based fifth preference immigrant visa (EB5), of which there are two types.

The first type of EB5 was created by Congress in 1990, has no expiration, and is called the “Traditional” or “Basic Program.”

The second type was created in 1992 and is commonly referred to as the “Pilot Program” or “Regional Center.” The Pilot Program, as the name suggests, is only a temporary law that  expires. It has been regularly renewed every few years.  The current Pilot Program expires in 2015.

While some of the requirements for the Traditional and Pilot Program EB5 are the same, there are very important differences. The choice of what type is best often varies depending on the needs of the individual investor and the investment project.

Here is a comparison of the two EB5 programs:

Expiration.  The Pilot Program EB5 expires; Traditional EB5 does not. This is an advantage of the Traditional EB5.

In 2012, the Pilot Program was extended for three years. Since it became law in 1992, Congress has regularly extended the Pilot Program. Sometimes the extension becomes law before the Pilot Program expires and sometimes after. The 2012 extension happened almost on the expiration date.

The temporary nature of the Pilot Program is a concern for the government-designated regional centers authorized by the Pilot Program. Investors are often concerned by the uncertain nature of the Pilot Program as a temporary law. This concern is especially acute every time that the Pilot Program nears expiration. Unless the EB5 immigrant petition is granted before the Pilot Program expires, it will be denied and the chance to immigrate through the investment lost.

Many ask if Congress will permanently authorize the Pilot Program.  Although this proposal is often discussed, there is no pending proposal before Congress at this time to make the Pilot Program permanent. In contrast, the Traditional EB5 does not expire. Individual investor immigrant petitions can continue to be processed at all times.

Job creation.  EB5 is the employment creation visa, not the investment visa. Creating jobs is key to approval of the EB5, regardless of whether the investment realizes profit or loss. Both Traditional and Pilot Program EB5 require the creation (or preservation) of at least ten full-time equivalent jobs for US workers.

Direct jobs. Both the traditional and Pilot Program EB5 count direct employment with the company in which the EB5 investment is made. The government looks to the payroll tax W-2 records and other evidence of direct employment.

Indirect and induced jobs. Only the Pilot Program EB5 counts indirect and induced jobs at other companies that are considered to be created as a result of the investment.

A typical example of indirect or induced jobs are the construction jobs created as a result of an investment in a company developing residential property. The construction company is their employer. The EB5 investor invests in the company that hires the construction company, which in turn hires the construction workers.

There are many types of indirect and induced jobs. The possibility to include these in counting the job creation can result in much higher job creation numbers. This allows for more investors to be involved in a common project, which in turn means there is more investor money available to fund larger, more expensive projects.  These are the types of investment opportunities that benefit from the Pilot Program.

But it is harder to count indirect and induced jobs. The normal payroll record approach is not an option.

Pilot Programs must apply to the government to be designated for the specific types of jobs that they plan to create to obtain government permission to count indirect and induced jobs. Additional rules apply to constructions jobs, which the government considers to be temporary and not counted except where the construction work will last for at least two years. This prevents the count of any (direct, indirect or induced) construction jobs for any shorter construction projects. Traditional EB5 does not require any government preapproval for specific types of job creation. Pilot Programs must submit detailed business plans that provide a detailed explanation of how and when the jobs will be created. The government reviews business plans carefully. Requests for Further Evidence or Notices of Intent to Deny are not uncommon if the government believes the business plan is insufficiently detailed or unsupported with sufficient backup documentation. Industry expert opinion statements may be required to substantiate claims about revenue projections, occupancy levels, etc. Traditional EB5 also requires business plans, except if all of the jobs are created prior to filing the immigrant petition.

Pilot Programs must obtain an economic analysis that uses one of the government approved economic models to forecast indirect and induced job creation. There are a number of private economists working with Pilot Programs. The process to obtain the economic analysis can be expensive and slow. The government recently hired its own economists to review the privately prepared economic analysis. The government economists have raised new questions in areas seemingly long resolved by the government. Some of their work has resulted in much lower job count, which means less EB5 investment money to fund projects. This has detrimentally impacted many Pilot Programs. Traditional EB5 does not require economic analysis.

Finishing quickly.  EB5 projects involving a single investor or a very small group of investors generally move through the immigration process faster than projects that involve large or very large groups of investors.

This is because most projects need a specific amount of investment from EB5 immigrants in order to hire all of the US workers and do business, including construction, if any. Until the project receives enough investors to proceed, the success of the project is in jeopardy. Big projects that require large numbers of investors can be under intense pressure to attract a sufficient number of investors quickly enough too proceed with the project. Small projects that require only a single or small number of investors are more likely to be able to immediately proceed.

Even EB5 investors granted two-year conditional residence status remain at risk until the required number of jobs are created and the conditional basis of their residence can be removed. Job creation and business operations must be scheduled so that all investors have their funds committed to the project. Even after individual investors have the conditions removed from their resident status, the investment and business operations are likely to need to continue until the last investor’s conditions are removed.

Traditional EB5 projects usually involve an individual or a very small group of investors. Pilot Program EB5 projects usually involve large or very large groups of investors. Because of this, traditional EEB5 projects tend to start and end more quickly than Pilot Program projects.

Annual reporting. Pilot Programs are required to file annual reports with the government. Traditional EB5 does not.

Pilot Programs report annually on their amount of investment and job creation.  This information is also allocated by industry category and each investment opportunity at the designated Pilot Program. Pilot Programs also report on the status of immigrant investor petitions and removal of conditional resident petitions. These reports are filled with the government, not individual investors.

The time and money involved to prepare the annual reports depend on the complexity and number of ongoing projects within the Pilot Program. Failure to timely file can result in lose of the regional center designation required for the Pilot Program and the denial of all pending individual investor petitions. No equivalent annual reporting requirement is imposed on Traditional EB5.

Investment amount.  A $500,000 investment can qualify for both Traditional and Pilot Program EB5.  In general, all types of EB5 require a minimum $1,0000,000 investment. To encourage job creation in targeted employment areas ( TEA), Congress lowered the investment requirement to $500,000.  TEAs are generally either areas with higher than normal rates of unemployment or areas defined by the government as rural.

Both traditional and Pilot Program EB5s can be located in TEAs.

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EB5 immigrant investors: Comparison of Traditional and Pilot Programs