California has adopted new policies that will deny EB-5 financing too many projects. On April 30, 2012, the California Department of Business, Transportation and Housing Agency released a bombshell that will have substantial negative effects on California businesses seeking to raise financing through the EB-5 immigrant investor visa program. In essence, the State of California has taken an action that will deny for all practical purposes the ability of many California cities to attract EB-5 investments because the State has decided that it will no longer issue “Targeted Employment Area” or “TEA” designations to any new areas other than the ones it designated in a letter dated April 30, 2012. This means that cities like San Francisco, San Diego, San Jose, Anaheim, and dozens of other cities, will be denied the ability for all practical purposes to raise EB-5 financing for new projects. Californians have a strong interest in the EB-5 program, as indicated by the fact that 59 of all approved U.S. Citizenship and Immigration Services (USCIS) regional centers are located in California – which is over 25% of all regional centers. We believe this new policy needs to be changed immediately because California stands to lose out to other States in billions of dollars of foreign investment and thousands of new jobs. We are reaching out to State officials to reconsider this short sighted policy and will update you on any developments.
EB-5 financing is raising billions of dollars in financing for United States businesses and creates thousands of jobs. As our readers know, the EB-5 investor visa program allows non-U.S. persons to obtain United States permanent residency (green card) if they invest $1,000,000 in a new commercial enterprise that creates at least 10 new, permanent, full-time jobs per investor. If the new commercial enterprise is located within a TEA, the required investment is reduced to the $500,000 level (while still creating 10 full-time jobs). This program has already raised billions of dollars in financing for job-creating U.S. businesses since 1992, and is poised this year to top all records for the amount of financing raised for U.S. businesses. As of March 20, 2012, there had already been 2,405 EB-5 visas issued for the first quarter of 2012, with Chinese nationals continuing to dominate the list (accounting for nearly 70% of EB-5 visas issued in 2011 and 2012 to date). The entire EB-5 program has a cap of 10,000 EB-5 visas per year. That could potentially represent several billion dollars of financing for new U.S. businesses every year.
Several factors are causing an increase in demand for EB-5 visas. The reasons for the big increase in demand for EB-5 visas are several, including the facts that more developers are seeking alternative financing because of the lack of traditional financing, more Chinese investors are seeking the benefits U.S. education and residency for themselves and their children, and similar investor visa programs in other countries, notably Canada, have a waiting list that stretches four years or more. In contrast, EB-5 investors can obtain a U.S. visa in six to eight months for qualified investment projects. The value that this program brings to cities around the U.S. cannot be underestimated – this is a program that brings thousands of jobs and millions of dollars to every community where new businesses are funded through the EB-5 program – at a time when every city is working hard to recover from the economic crisis that began in 2008.
The market for EB-5 investments is competitive and almost all EB-5 investments are sold at the $500,000 level. As you might expect, there is huge demand for EB-5 financing in the U.S., particularly among hotel and other real estate developers who have been unable to develop projects for years because of lack of traditional financing. As a result, there is strong competition among projects for EB-5 financing, and potential non-U.S. investors are looking for the best projects in which to invest. One of the most important criteria they look for is – how much do they have to invest in order to qualify for the EB-5 visa? All things being equal, an investor will invest in a project that requires only a $500,000 investment rather than a $1,000,000 investment. Consequently, virtually all EB-5 investors have gravitated to $500,000 threshold projects. The corollary to this is that it is virtually impossible for any project to raise EB-5 financing if it does not qualify for the $500,000 investment level. To a project developer, that means you are likely not going to be able to attract EB-5 financing if your project is not in a TEA, because you won’t be able to attract enough investors.
What is a TEA? The EB-5 regulations define a TEA as a rural area or an area which has experienced unemployment of at least 150% of the national average. For 2011, the national average unemployment rate was 8.9%, so any area with more than 13.4% unemployment will qualify. EB-5 regulations provide for two methods to evidence a TEA. One method is for an applicant to submit evidence to the USCIS for a determination that a metropolitan statistical area or county meets the required unemployed level to be designated as a TEA. The problem with this method is that a developer or investor won’t know if an area qualifies for TEA status until after the I-526 petition or exemplar filing has been made (A more comprehensive discussion of this is below). The second and preferred method is to have a state certify the TEA status of a project location in advance. This allows the developer to confidently structure the new commercial enterprise in a manner that will be marketable to foreign investors.
The State of California has stated in its new policy that since an applicant can file with the USCIS for TEA designation, “state designation is not essential”. We respectfully disagree. Given the many uncertainties with the EB-5 program, state certification of TEA status on a project by project basis (and not with a blanket form) is essential to make EB-5 projects within California marketable and competitive with projects in other states.
How do the states decide to designate TEAs? State and local agencies that have been empowered to certify TEAs interpret the EB-5 regulations differently with respect to the definition of “geographic or political subdivision”. When reviewing census tract unemployment data, almost every state will look at data from multiple adjoining census tracts to determine what constitutes a geographic or political subdivision for purposes of establishing a TEA. Some states, including California, have taken different approaches to approving TEAs, and sometimes their approach results in a more restricted interpretation of what constitutes a geographic or political subdivision for purposes of TEA designation. Not surprisingly, states and local agencies that use a more expansive method of determining the appropriate geographic area for a TEA are able to attract more EB-5 projects, because projects in TEAs can be sold at the $500,000 investment level, and almost all EB-5 investments are made at that level. The USCIS recently stated at the January 23, 2012 EB-5 Stakeholder Meeting that the USCIS “defers to the state’s TEA designation in terms of the state’s definition of the geographic boundaries of the TEA based upon high unemployment” so long as it is in compliance with statutory requirements. In other words, the USCIS will accept the methodology for determining geographic boundaries of a TEA adopted by each state.
California has decided not to work with business owners to designate TEAs. The California Business, Transportation and Housing Agency has now decided, according to the new procedures released on April 30, 2012, that it will not look at any local data for any project to make a determination of whether it is in a TEA. Instead, according to the website of the Governor’s Office of Business and Economic Development, “[The] certification of TEAs is a uniform letter intended to be used by all EB-5 visa applicants….There will be no customized certification letters issued with the name of the investor, the description and the location of the new enterprise…. This certification of TEAs is an exhaustive list of the areas designated as TEAs by the State of California. There will be no other areas or subareas designated as TEAs.” You can find this new uniform letter, along with the procedures quoted above, at: http://business.ca.gov/Programs/EB5Program.aspx. Some cities in California, including Los Angeles, Fresno, Sacramento, Long Beach and Oakland, are on the TEA designated list, so there is a small piece of good news for developers with projects in those cities.
Every city NOT listed in the uniform letter will lose EB-5 financing. If a city is not on the approved list, that city will not qualify for TEA designation from the State of California – no matter if a project is in an economically depressed area of that city or not. That is why four of the largest cities in California, San Francisco, San Diego, San Jose and Anaheim, along with dozens of other California cities, will not qualify for a TEA from the State of California for any project in their city. As a result, we can virtually guarantee that NONE of the cities that are left out of California’s new uniform letter will be able to raise EB-5 financing in any meaningful amounts for projects located in those cities. The latest action by the State of California will deprive dozens of California cities and unemployed people of capital and new jobs under a program that does not cost the state of California or its taxpayers any money.
Is there any way to get a TEA other than from the State of California? It is possible for a project developer to apply for a TEA designation directly to the USCIS. However, as previously noted, that application is typically made at the time that either a regional center application is filed that includes a project in that area, as part of an I-526 exemplar application, or as part of the I-526 petition, which requires that all project documents be filed along with the application. Most developers will not want to spend thousands of dollars on project documents until they know that their project will qualify as a TEA, because if the project area does not qualify for a TEA, the project will likely not be able to raise EB-5 financing at the $500,000 level. In addition, although the EB-5 regulations do allow the USCIS to make its own determination of whether an area qualifies as a TEA, we do not know if the USCIS will be willing to undertake the extra work involved in this analysis for every project that is not on the pre-approved TEA list for the State of California.
What happens if you already have a TEA letter from the State of California? According to the website of the Governor’s Office of Business and Economic Development, “Investors who received special area designations in previous years may request a renewed certificate if it is for the same investment project, it covers the same subarea, and the then current unemployment data provides a high unemployment rate. Such requests will be handled on a case-by-case basis and renewed certificates might be issued at the discretion of the state.” This means that if a project developer received a TEA designation before May 1, 2012, the developer may be able have that designation renewed, as long as the current unemployment data for the designated area still qualifies with unemployment above 13.4%.
What we are doing and you can do too. We are working to help those cities and developers who are negatively impacted by this new policy to work with the State Business, Transportation and Housing Agency to reverse this new policy so that everyone can compete for EB-5 financing. If you have a project in a city that is not on the designated TEA list, call your city and state representatives and let them know that you need EB-5 financing and you can’t get it without a TEA designation. Show them why your project area should be designated as a TEA, and tell them how many jobs your project will create. We believe that California’s new policy can be changed if the State Business, Transportation and Housing Agency understands the negative effect that their new policy will have on the many projects that are now seeking EB-5 financing throughout California.
Why everyone should support the EB-5 program. It is vitally important to every city in the United States to create new jobs and bring in new businesses, and EB-5 financing promotes those goals at no cost to the government or the taxpayers. This is one program where everyone wins – cities, developers, workers and investors – at no cost to the government. We have talked to and worked with developers and EB-5 regional center operators all over the United States, and we have seen many successful new businesses funded with EB-5 financing. We know from our own experience that this is a program that benefits everyone and deserves strong support. In fact, the EB-5 financing program may be one of the few government programs that is supported by both major political parties. Our goal is to help more businesses to use this program to bring new jobs to every city throughout California and the United States.
Catherine DeBono Holmes is the chair of JMBM’s Investment Capital Law Group, and has practiced law at JMBM for over 30 years. She specializes in EB-5 immigrant investment offerings and hotel and real estate transactions made by Chinese investors in the U.S. Within the Investment Capital Law Group, Cathy focuses on business formations for entrepreneurs, private securities offerings, structuring and offering of private investment funds, and business and regulatory matters for investment bankers, investment advisers, securities broker-dealers and real estate/mortgage brokers. Contact Cathy at CHolmes@jmbm.com or 310.201.3553.