An exemplary government program that brings foreign direct investment to the United States and creates tens of thousands of jobs every year is being thwarted by government inaction.
The EB-5 (Employment-Based Fifth Preference) program is a congressionally created program to enable foreign nationals to obtain U.S. permanent resident status through investments of $500,000 or $1 million in job-creating enterprises that will create at least 10 jobs for every foreign investor. This can be done in one of two ways. When the program was created in 1990, the investor had to make an equity investment in his or her own business or another business and prove that his or her investment added (or in the case of a failing business, saved) at least 10 direct, full-time jobs for U.S. workers. This is called direct EB-5.
Subsequently, Congress added the option of investment in a "regional center." A regional center is a government-approved entity that sponsors projects in which investors can invest. However, unlike with the direct EB-5, an investment in a regional center project allows for the jobs created to be not only direct employees, but also "indirect" and "induced" employees. Indirect and induced employees are determined by applying "reasonable economic methodologies" to determine how much employment is created in the geographical region of the project (or sometimes in more far-reaching regions) as a result of the development of the project. This allows for pooling large numbers of investors in far more impactful projects, often with 100 or 200 investors, or even more. The Philadelphia Regional Center, with projects developed through the Philadelphia Industrial Development Corp., happens to be the largest of more than 225 government-approved regional centers.
For a variety of reasons, the growth of regional center EB-5 investments resulted in the decline of direct EB-5 investment. In recent years, 90 to 95 percent of all EB-5 petitions were filed by investors in regional centers.
This has now changed, and the trends are starting to reverse. One of the main reasons for this is that the adjudication of applications for regional center designation, amendments of regional center designations for geography or industry code and regional center project pre-approval has, for all practical purposes, ground to a halt. The inability of developers to obtain approvals of new regional centers or amendment to expand existing regional centers has significantly limited the availability of projects in which investors can invest.
One of the most attractive aspects of regional center investment is that, unlike direct EB-5 projects, regional center EB-5 projects can be "pre-approved" through the filing of an "exemplar I-526 petition." Although the "pre-approval" is not technically binding on the U.S. Citizenship and Immigration Services, it provides an increased level of comfort to investors. Lengthy delays in the adjudication of project pre-approvals (virtually always in excess of one year) have reduced or eliminated this option.
Why has USCIS delayed, and for all practical purposes stopped, adjudicating these applications? There are various speculations of the reason that USCIS fails to adjudicate these applications. I believe that the number one candidate traces back to February 9, 2012, when USCIS announced the implementation of its new policy on "tenant occupancy methodology." Many regional center projects produced large numbers of indirect and induced jobs based on employees of tenants. In February, USCIS issued a public announcement that it was questioning previously approved economic methodologies that projected large numbers of tenant jobs in hotels, office buildings, shopping centers and other projects. From February through the present, USCIS has iterated a number of different views on appropriate methodologies for calculating indirect and induced jobs produced by tenants — the latest being in December. The result is that, since February, to the best of this author’s knowledge, not one regional center or project application that included jobs based on tenant occupancy has been adjudicated by USCIS. This is especially problematic since most of these applications have some element of tenant occupancy contained within them or, if not, USCIS believes that its policy on tenant occupancy could ultimately affect its adjudication of the remaining petitions. Many of these applications were pending for lengthy periods of time — sometimes one year or longer — at the time the new policy was announced. Although many of these applications have received one or multiple requests for evidence (requests for more information), they remain pending. Approvals or denials have become a rarity.
So how has the USCIS inaction changed the strategy for developers with projects seeking EB-5 capital? Unless the developer is willing to wait an indeterminate amount of time — probably at least one year or longer — for approval of a new regional center application, the strategy of choice is to find an existing regional center that is approved for the geographical area and the industry code of the project and negotiate an arrangement whereby that regional center will "host," "sponsor" or "adopt" the project. Such an arrangement allows the developer to market the project immediately rather than waiting a year or more to begin marketing for investors.
We have advised developers to consider implementing this option in conjunction with filing of a new regional center application, which could be based on a hypothetical project, which will enable the developer to market future projects under its own regional designation.
Another option that we have advised developers to consider is a direct EB-5 proceeding concurrently with the adjudication of the application for regional center designation. If there will be direct job creation, but insufficient direct job creation for the number of investors required, or if future projects are envisioned that would benefit from indirect and induced employment projections, the optimal solution may be to proceed concurrently with direct EB-5 for the first group of investors while concurrently filing a regional center application for future investors in the same project and/or for future projects. For example, if there will be 200 direct employees, the first 20 investors could invest $20 million (or $10 million if the investment is in a targeted employment area) before a regional center is approved, while the remainder of the EB-5 investment money will come along at a later date once the concurrently filed regional center application is approved.
One of the indirect results of the stalemate is the realization by investors and investors’ agents that looking for projects that have been "pre-approved" is no longer an option. Since the project pre-approval requires the filing of an amended regional center application, the quoted processing time for which is 10 months, and since all of these applications get at least one request for more information, investors and their agents are coming to realize that investment opportunities being offered in the marketplace are likely not to be pre-reviewed or pre-approved by USCIS.
From the investor’s point of view, fewer and fewer exemplar I-526 "project pre-approvals" are coming to market because the timeframe to obtain the project pre-approval has become unrealistic. In addition, USCIS has backed off of the original concept of project pre-approval and has stated clearly that it does not consider itself bound by such a "pre-approval." The net result is that regional center projects have lost some of their luster.
As a result, we now regularly factor into our advice to project developers and businesses seeking capital the option of the pooled investor direct EB-5. And, in our discussions with agents, we now see more willingness to consider the direct EB-5 option.
Obviously, the option only exists to the extent that direct W-2 jobs will be created through the investment. If so, the direct EB-5 option allows the business or developer to market the project to investors virtually immediately without having to obtain any USCIS pre-approval. Another advantage is the elimination of the need for an economic report to project indirect and induced jobs. However, the need for a comprehensive business plan to present direct job creation projection in a credible manner is still critical.
There are some advantages and disadvantages from the investor’s perspective. Unlike with the regional center loan model, the investor must be an equity investor in the job-creating enterprise. This could be common shares or preferred equity. In either event, the investor’s chances for a more substantial return could be enhanced, but at the expense of a less certain exit strategy.
Another issue is the need for an investor to be something other than a purely passive investor. This legal obligation is met in the regional center context by granting the investor all of the rights and responsibilities of a limited partner under the Uniform Limited Partnership Act. In the context of a direct EB-5 investment, if the investor is not going to be employed by the investment enterprise, at the very least the investor should be placed in an advisory capacity similar to the capacity he would have as a limited partner. The USCIS training materials for EB-5 make clear that USCIS is very flexible in adjudications relating to this requirement.
One of the attractions of the direct EB-5 is the elimination of the plethora of issues that have arisen recently in the adjudication of regional center applications and regional center project adjudications. Tenant occupancy jobs, guest expenditure jobs, NAICS codes, bridge financing … these are just some of the issues involved in regional center project adjudications that do not have to be surmounted with a direct EB-5.
However, while there may be fewer issues, the condition removal process may be more problematic. (Investors receive two-year conditional green cards, and have to "remove conditions" by proving employment creation in order to obtain permanent resident status.) Whereas there may be no need to count actual workers in regional center adjudications, there is a need to do so with direct EB-5 adjudications. This means that the business or developer must document, through W-2 forms, I-9 forms and quarterly tax returns, the actual number of employees. In addition, unlike with indirect and induced jobs, there is a need to prove that each employee is a U.S. citizen or a permanent resident or other qualifying employee. This requires obtaining documentation not normally obtained in the I-9 process, which could put the commercial enterprise at risk of a national origin or citizenship discrimination charge if not handled properly.
All of this may change if USCIS successfully implements its proposal to create a new EB-5 office in Washington, D.C., which would adjudicate regional center applications in a targeted 90-to-120-day time period. Until that time, the trends and strategies in this article will likely prevail. •
H. Ronald Klasko is the managing partner of Klasko, Rulon, Stock & Seltzer, a firm devoted exclusively to the practice of immigration and nationality law with offices in Philadelphia and New York. Klasko is a former national president and three-term general counsel of the American Immigration Lawyers Association (AILA). He recently completed three terms as chairman of AILA’s EB-5 committee.