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Guest Expenditures in EB-5: A Double-edged Sword

 

One piece of very good news that came about from the February 26, 2014 stakeholder’s call EB-5 Investmentwith USCIS was that they clarified when indirect job creation could be attributed to guest expenditures.  This is good news primarily because guest expenditures were never allowed to be used before.  More specifically, USCIS stated that guest expenditures could be counted when a project:

  • is serving an unmet demand in its area,
  • is providing a differentiated product (i.e. a
    product that is not otherwise available in the area) targeted to a specific
    market segment,
  • is being developed in response to
    (and presumably to serve traffic resulting from) a new development in the community

Despite the title of this article, this is very good news for the EB-5 community, as guest expenditures can have a significant impact on indirect job creation figures.

The Downside

There is a downside, however.  As many have documented in the case of tenant
occupancy, it often proved to be very difficult to know exactly how USCIS would interpret various attempts to meet the standards, given that they are not very specific.  With approval times as long as they are today, the unknown is whether or not USCIS would accept given justifications on a case-by-case basis. Since guest expenditures could arguably have a big impact on job creation and therefore the amount of money that an EB-5 project could raise from EB-5 investors, this unknown could have an impact on the capital stack and project timing if there is a delay or considerable back and forth in dealing with USCIS in terms of justifying the use of guest expenditures.  To the extent that a project can afford the time or can otherwise be flexible in terms of their capital stack, attempting to use guest expenditures can have a significant upside.  Most, however, would find that it would be very challenging to have to change an anticipated capital stack according to whether or not the use of guest expenditures would be allowed.

Over time, it is anticipated that more clarity will come both from USCIS in terms of policy memoranda and from the EB-5 community as we see what is accepted and what is not and the  reasons for those decisions.

Investors would also do well to try to recognize when guest expenditures are part of the plan, especially in a case where a hypothetical plan was submitted.  Until there is more clarity on what will be acceptable in the eyes of USCIS, guest expenditures can add some additional potential risk or delay in relation to the investor's approval at the I-526 stage.

 Phil Cohen is the founder and President of Strategic Element, a company that focuses on developing regional centers, EB-5 business plans and custom 'direct' EB-5 projects for its clients.

Canadian Immigrant Investors: Thinking About Moving To EB-5?

 

describe the imageOver the coming weeks I will be blogging about some specific issues that Canadian Immigrant Investors should be aware of if they are planning to switch to the EB-5 program and helping them to understand some of the important differences.

The EB-5 program is quickly proving itself to be a viable alternative for immigrant investors who have been pushed out of the Canadian Federal Investor Program.  Like the Canadian program, the EB-5 program allows foreign investors the opportunity to get a path to citizenship in the United States based on making a qualifying investment.  Unlike the EB-5 program,
however, the investment must be made in a qualifying business and must be 'at risk' (although this does not mean necessarily 'risky') and can therefore be a more risky proposition when compared to the Canadian program which is almost like buying a government bond (with no interest).

There are many differences between the two programs and the EB-5 program can be considerably more complicated for investors as compared with making investment in the Canadian program which was very similar to purchasing a government bond.  Some key points about the program:

  • The investment required is $500,000 as long as the business being invested in is located in what's called a Target Employment Area (most are)
  • The typical investment horizon is five years
    although some opportunities are for six years or seven years
  • The typical return to investors is in the range
    of 1% per year, but this varies widely from project to project

There are many other considerations involved in looking at the program and one should take good advice from legal counsel and/or from business consultants who may be able to help.

The EB-5 program has all kinds of businesses participating, some good and some not so good.  The key to mitigating risk in the program, in my opinion, is to work with a company
that carefully selects projects that it represents and does a significant amount of due diligence
(i.e. one in a position to know good from bad and one who is in a position to choose the best).  It also helps to see that the company that you work through does not take on more than one or two projects at a time, so that there is no conflict of interest in how it represents projects.

Those interested in taking advantage of the EB-5 program should be aware that the US government is intending to implement a 'Chinese visa retrogression,' whereby citizens of China may be put on hold while other countries get an opportunity to have access to the visa quota.  If other countries do not fill the quota then the program will be reopened to Chinese citizens.  This visa retrogression is expected to be applied on and off over the coming years,
although nothing is yet certain about how or when this will happen (based on the current trajectory many US immigration attorneys are projecting that it will be implemented as soon as this summer). 

For Chinese citizens especially, it is suggested that moving ahead sooner rather than later will
give them good placement in the lineup should the retrogression be implemented, thereby allowing them to avoid what may end up being a multi-year wait, such as the situation was in Canada.  It is expected that there will be an influx of investors from Canada who will no longer be able to apply to the Canadian program.

Still need help figuring it out?  Contact me.

Phil Cohen is the founder and President of Strategic Element, a company that focuses on developing regional centers, EB-5 business plans and custom 'direct' EB-5 projects for its clients.

The Importance of a Buffer in EB-5 Job Creation

 

When starting an EB-5 regional center or EB-5 project, many look to the regulations as the Start EB 5 Buffer resized 600guideline to what is required to have a successful EB-5 offering.  The guidelines, however, are only the beginning.  Starting an EB-5 project requires thinking that will not only get USCIS approval but which will also win over investors.  To this end, it is wise to consider the job creation component with the inclusion of a buffer of extra jobs.

Why Have a Buffer at All?

Creating a buffer of more jobs than are actually required by the program has the benefit of added security to investors, which in turn means added security for the project in terms of its ability to win investor interest in the first place and ultimately to maintain a reputation for successfully delivering job creation to investors, the core measure of success to all future investors.

Having buffer jobs means that if things don't go to plan and not all the direct jobs that were originally planned can be created, investors will not lose the opportunity to have the conditions removed from their green cards at the I-829 stage.

Where indirect jobs are concerned, job creation counts will be dependent on fulfilling the inputs that the economist had used to develop the indirect job creation calculation.  Most business people will take a conservative approach to planning their businesses, which means guessing high on costs and guessing low on revenues.  If costs are over-estimated, however, and these costs were counted as the input of investment used by the economist in his or her calculation, this conservative approach can backfire.  While coming in under budget is certainly a respectable and desirable outcome in almost any business scenario, a lower investment input to the project can mean that the originally-calculated number of indirect jobs may have to be revised downward to match the revised input, thereby meaning less jobs to go around.

How Much is Enough?

A good rule of thumb for a job creation buffer is to plan to create 20% more jobs than needed, or a total of 12 jobs per investor.  This is not a hard and fast rule but certainly 15%-20% is  recommended for those newer to the space as a minimum in order to be competitive.  With proven experience and track record, more leeway can be taken in the fullness of time.

Phil Cohen is the founder and President of Strategic Element, a company that focuses on developing regional centers, EB-5 business plans and custom 'direct' EB-5 projects for its clients.

 

Download Your Free Paper: 9 Things to Know Before Going Down The EB\u002D5 Road

 

EB-5 Investors: Hard to Find 'Good' Deals

 

Many ChoicesBad EB 5 Deals resized 600

Over the last 2 years, the EB-5 program's popularity has grown exponentially.  As of February 1, 2014, USCIS had approved approximately 440 regional centers.  And yet, investors today are often complaining of a lack of "good" deals available to them.

What Makes a Good Deal?

There are many factors that make up a good deal.  Investors are first concerned with getting their green card, which in turn means that the business has to create the jobs successfully.   Depending on which economic model is used and whether direct and/or indirect jobs are being claimed by the regional center project, investors may have to look at different factors to determine the likelihood of job creation, as presented by the regional center.

Because investors are also concerned about the preservation of their initial investment capital, there must be either a strong collateral base or a very strong likelihood of the business's success (which is preferred over collateral).

Another key element to a good deal is not only the number of jobs to be created (with a sufficient buffer over the required amount) but the likelihood of being able to claim those jobs.  Recent updates to the program such as tenant occupancy and updates on using guest expenditures in economic modeling, mean that there are more jobs that can be claimed, but also mean that claiming those jobs can be technically difficult, in terms of meeting USCIS requirements.  Simpler is better.

There are a multitude of factors that come into play in what comprises a good deal.  Many of these factors would be sought by any investor, let alone an EB-5 investor, however, there are  unique deal elements sought solely by EB-5 investors.  Many of these factors play off against each other, making for a relatively complex dynamic which must be balanced by any regional center wishing to raise capital successfully.

How to Strike a Balance That Sells

The best way to establish a deal that will sell to investors is to make oneself aware of the various possible permutations that can be considered in terms of structuring a deal and finding a combination that fits the deal and also suits investors.  Players who are newer to the game will have to offer more favorable terms to investors, as compared with regional centers who are more established, who can offer deals that may not be as strong but which will still be preferred by investors simply because of the reputation of the regional center.

Those wishing to start an EB-5 regional center or EB-5 project would be well advised to check with their advisors or resources such as The EB-5 Definitive Guide regarding what kinds of factors play well with investors in order to develop the right mix.

Why go to the trouble and expense of setting up an EB-5 regional center and project if your deal will not resonate with EB-5 investors?  Take the appropriate steps to ensure that you are not one of the more than half of EB-5 regional centers who are inactive.

Phil Cohen is the founder and President of Strategic Element, a company that focuses on developing regional centers, EB-5 business plans and custom 'direct' EB-5 projects for its clients.

 

 

An Update on Industry and Geographic Restrictions and Amendments

 

Until now, the practice in the EB-5 community has been to submit a formal amendment to USCIS in the event that a regional center wished to expand the industry codes in which it would be operating in order to comply with USCIS requirements.

In its EB-5 Policy Memorandum of May 30, 2013, USCIS put forward an important change to this requirement.  Moving forward, when an EB-5 regional center wishes to expand its industry codes, it may now do so with a given investor's I-526 submission.  With this change, the formal amendment process (and the very significant wait time that this implies) is no longer required as a separate action by the regional center.  The result is a considerably higher degree of flexibility afforded to regional centers who may wish to expand their sphere of focus.

There is still value, however, to the formal amendment process.  The main value is that investors can be more certain of the approval of the new areas of focus when a regional center has received approval of a formal amendment in advance of the investor submitting their I-526.

Ultimately, for the regional center, it is a judgment call whereby the 'saleability’ of a deal would need to be traded off against the delays involved in seeking a formal amendment.

USCIS has also provided some indication (although this appears not to be definitive in how it was presented) that a regional center’s geographic area of focus may also be expanded via an investor's I-526 petition.  In order to do so the geographic area must be contiguous with the existing regional center boundaries and would require a justification for expansion to the new boundaries.  Similar to what has been described above for expansion of industries of focus, investors will be taking a risk that the justification provided will be accepted by USCIS.

Phil Cohen is the founder and President of Strategic Element, a company that focuses on developing regional centers, EB-5 business plans and custom 'direct' EB-5 projects for its clients.

 

Closing of the Canadian Federal Investor Program and its Impact on EB-5

 

An article has been posted on EB5News.com about Canada's shutting down its Federal Investor Program and if/ how this might impact the EB-5 program.  The article provides some perspectives from several leading EB-5 practitioners including Strategic Element's Phil Cohen:

http://eb5news.com/categories/10-eb-5/posts/263-industry-reaction-to-the-cancellation-of-the-canadian-investment-visa-program

 Phil Cohen is the founder and President of Strategic Element, a company that focuses on developing regional centers, EB-5 business plans and custom 'direct' EB-5 projects for its clients.

Can I Apply EB-5 Capital to Multiple Companies Under a Single Project?

 

Not every EB-5 project is a giant, multimillion dollar development.  In fact, today we see more andEB 5 Multiple companies more so-called 'direct' or 'stand-alone' EB-5 projects in the market.

One question that is commonly asked is whether EB-5 funds can be applied to more than one business under the same project.  The short answer to this question is yes.  USCIS recently clarified that this approach is possible, however in the May 30, 2013 memo some additional clarity was provided.

As a result of this memo, in conjunction with previous guidance, it can now be taken that in a direct or stand-alone project, EB-5 capital can be applied to a group or a portfolio of subsidiary companies, provided that these companies are wholly owned by the project company.

In the case of an EB-5 regional center, EB-5 money can be applied to a group of unrelated companies.  This, of course, is a very high-level statement.  The mechanics of developing an EB-5 project in this manner should be reviewed in close consultation with a qualified and experienced EB-5 attorney.

Phil Cohen is the founder and President of Strategic Element, a company that focuses on developing regional centers, EB-5 business plans and custom 'direct' EB-5 projects for its clients.

Flexible Adjudication Saves Time on EB-5 Regional Center Applications

 

As readers of this blog are likely aware by now, the rules flexible resized 600
and processes involved in the development of an EB-5 regional center application are relatively complex and often subject to interpretation by the lawyers involved and also by the adjudicators. 

As a result, in anything but the most straightforward of cases, there is often the issue of whether the question has been properly answered or whether certain rules apply in particular ways or in particular unusual circumstances.

When facing these kinds of unknowns, developers of EB-5 regional centers and EB-5 projects are often in the position of putting their best foot forward and hoping for the best when it comes to the adjudication of their I-924 application (or the project plan itself).  In these circumstances some project or regional center founders might find themselves in a dilemma in terms of whether to submit their business plans as "hypothetical" or as "actual”/"exemplar" plans.  The reason for the dilemma is that a hypothetical plan requires less detail to be approved but if one can have their plan approved as an actual/exemplar plan then they can benefit from deference to this approval when their investors submit their I-526 petitions.

When unsure, there is the possibility of trying to get the maximum benefit of an actual/exemplar approval without losing time should USCIS determine that there is insufficient information to approve the plan as an actual/exemplar.  The way to go about this is to make a written request when the project is being submitted so the plan be adjudicated as an actual/exemplar, but if this is not possible to adjudicate the plan as a hypothetical.

In most cases, this will not hold up the process and allow the entrepreneur to move ahead with the project as quickly as possible should they not be able to get actual/exemplar approval right away.  Saving the step of a re-submission can also save some of the costs involved in doing so.

Phil Cohen is the founder and President of Strategic Element, a company that focuses on developing regional centers, EB-5 business plans and custom 'direct' EB-5 projects for its clients.

 

Download Your Free Paper: 9 Things to Know Before Going Down The EB\u002D5 Road

'Reasonable Expectation' of Job Creation for EB5 Regional Centers?

 

describe the imageOne of the issues that causes some concern and confusion among EB-5 Regional Centers is how USCIS assesses what "reasonable" expectation of job creation means when looking at an investor's I-829 petition.

The Director's View (Not Official Policy)

On a December 2012 phone call with USCIS, one of the few bits of useful information that came about was stated, albeit peripherally, when one of the stakeholders asked what USCIS's view is on this issue.  When asking the question the stakeholder suggested that USCIS should evaluate what "reasonable" means on a case-by-case basis, and went further to suggest that in some cases "reasonable expectation" could even mean one year from the time of the I-829 petition.  While this does not mean it is policy, Director Mayorkas suggested that he was inclined to agree.

This new revelation is not definitive by any means, but at least gives founders of EB-5 regional centers some kind of hope that reasonable expectation of job creation can and should likely be treated by USCIS as something that can be justified given the right business case and reasonable industry standards in any given situation.  This clarification gives those who are starting EB-5 regional centers some welcome added breathing room when it comes to job creation.

Phil Cohen is the founder and President of Strategic Element, a company that focuses on developing regional centers, EB-5 business plans and custom 'direct' EB-5 projects for its clients.

 

Can my EB-5 Project Claim Jobs Created by Tenants

 

 

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I am often asked about whether an EB-5 project can count jobs that are created by tenants of a particular development.  For example, if someone builds a shopping mall and each individual shop is leased out to third parties to operate their own retail ventures, can all the regular retail staff be counted?

The short answer to this question is yes it is possible, however, where this was once an easier task to accomplish, USCIS has since issued a series of rules and guidance that must be adhered to in order to qualify these positions.

The following is the guidance language issued by USCIS on the matter, however, as is often the case there is a question of interpretation on several points.  We have added our own comments to the text (in bold) but please recall that we are not lawyers and our interpretations are based solely on the language we see.  Many of these will likely require change as adjudications clarify the policy.

From USCIS December 20th, 2012

"December 20, 2012 GM-602-0001
Guidance Memorandum

SUBJECT: Operational Guidance for EB-5 Cases Involving Tenant-Occupancy


Purpose

This guidance memorandum (GM) is intended to facilitate adjudication of cases involving issues related to the "tenant-occupancy" methodology for establishing job creation in EB-5 cases. The guidance has been formulated following careful internal deliberation, consultation with sister government agencies, and review of responses to requests for evidence (RFEs) issued in February 2012 to a number of outstanding Regional Center applicants who relied on the tenant-occupancy methodology. This guidance will be applied to pending cases and cases filed on or after the date of this guidance that rely on the tenant-occupancy methodology. This guidance does not rescind or supersede other EB-5 guidance.

Scope

Unless specifically exempted herein, this GM applies to and binds all U.S. Citizenship and Immigration Services (USCIS) employees.

Background

Among the issues raised in the February 2012 RFEs, USCIS sought evidence that the projected jobs attributable to prospective tenants (which would occupy the commercial space created by the EB-5 capital) would represent newly created jobs, and not jobs that the tenant had merely relocated from another location. This determination is necessary to assess whether there is a reasonable causal link between the EB-5 enterprise and the job creation that would allow for the attribution of the tenant jobs to the EB-5 enterprise. These RFEs suggested the types of evidence applicants could submit to make this showing.

Implementation

Prior to issuing the February 2012 RFEs, USCIS determined that the tenant-occupancy methodology can satisfy the EB-5 program requirement of presenting a "reasonable methodology" that is "supported by economically or statistically valid forecasting tools," if the applicant presents in "verifiable detail" information sufficient to establish by a preponderance of the evidence that the tenant jobs have resulted from the EB-5 enterprise (i.e., that the creation of tenant jobs were facilitated by the EB-5 enterprise, for example through a showing of constraint on the supply of appropriate commercial space or of excess demand for such space)."

Our interpretation: have to show excess demand or constraints on supply

"In regional center cases that rely on tenant occupancy models, as in any other regional center
cases, USCIS requires evidence that the claimed jobs result, directly or indirectly, from the
economic activity of the EB-5 commercial enterprise. Jobs that are merely re-located rather than created do not count. With respect to indirect job creation, the task for the applicants and
petitioners is to project the number of newly created jobs that would not have been created but for the economic activity of the EB-5 commercial enterprise. In making that projection, they are to use economically and statistically valid forecasting tools."

Our comment: This can be done by an economist, above and beyond the normal economic impact report

"Whether an applicant or petitioner has demonstrated that an EB-5 enterprise caused the creation of indirect tenant jobs will require determinations on a case-by-case basis and will generally require an evaluation of the verifiable detail provided and the overall reasonableness of the methodology as presented. To claim credit for tenant jobs, applicants and petitioners may  present evidence backed by reasonable methods that map a specific amount of direct, imputed, or subsidized investment to such new jobs."

Our Comment: things such as tenant improvements and, rent abatements MAY qualify as a form of investment.

"However, for applicants and petitioners that instead seek to utilize a facilitation-based approach, USCIS will not require an equity or direct financial connection between the EB-5 capital investment and the employees of prospective tenants."

Our interpretation: if we are facilitating the development of a new business (e.g. setting up a building geared to restaurants with a kitchen, etc.), then USCIS does not need to see an overt nexus between money and jobs.

"Rather, facilitation-based tenant job credit will depend on the extent to which applicants or petitioners can demonstrate that the economic benefits provided by a specific space project will remove a significant market-based constraint. One way applicants and petitioners can make this showing is to indicate how a specific space project will correct market imperfections and generate net new labor demand and income that will result in a specified prospective number of tenant jobs that will locate in that space.

Our Interpretation: creating new demand for business by creating that business in the first place, will in effect create new job demand.

Continuing below: investing in a specific market category in a high unemployment area the project need only show that they are filling an 'investment void' to generate new demand.

"In high unemployment areas in which new projects are not likely to significantly displace other income or labor, applicants and petitioners should generally indicate how a specific project will fill an existing investment void in that area to generate new demand for the tenant business. Prospective tenant jobs demonstrated by reasonable methods and supported by verifiable evidence pursuant to the above approaches may be used as direct inputs into appropriate regional growth models to generate the number of indirect and induced jobs that result from the credited tenant jobs."

"Where applications for regional centers are approved based on their use of tenant-occupancy
projections, the approval notices should contain appropriate language regarding the assumptions underlying the approval, which if not borne out may impact related adjudications at the I-526 or I-829 stages. 1  For example, a Form I-924 with I-526 exemplar may be approved where no specific tenant has been identified to occupy space but where the applicant or petitioner reasonably projects that a restaurant will eventually lease the premises.2  If, after approval of the I-924, the space is leased to a different type of tenant (i.e., a type of restaurant that yields different expected employment or a non-restaurant), or fails to achieve previously projected occupancy rates, such a change alone will not generally constitute a material change that triggers the elimination of deference in an actual Form I-526 or negates any possibility of individual investors removing their conditions at the Form I-829 stage."

Our Interpretation: an I-526 exemplar based on tenant occupancy may be approved based on the projection that a certain type of tenant will lease the space. 

"3  However, while such modified tenancy arrangement(s) may be permissible under EB-5 program rules, they could nevertheless impact the project’s ultimate job creation numbers. Therefore, the approval notice should caution that the approved job creation estimates are based on a restaurant occupying that space, and that if no tenant or a different type of tenant eventually occupies the space, the economic impact analysis and ultimate job creation numbers will be revisited in future adjudications that relate to that project.

USCIS will issue separate guidance on crediting jobs in a situation where more than one EB-5 entity may be seeking credit for the identical job position. In the interim, where only one case filed with USCIS has sought credit for a specific job position, that case should be credited with the job, provided that all program requirements have been satisfied.

Adjudication of cases involving tenant-occupancy should proceed based on these principles.

Use
This GM is intended solely for the guidance of USCIS personnel in the performance of their official duties. It is not intended to, does not, and may not be relied upon to create any right or benefit, substantive or procedural, enforceable at law or by any individual or other party in
removal proceedings, in litigation with the United States, or in any other form or manner."

Phil Cohen is the founder and President of Strategic Element, a company that focuses on developing regional centers, EB-5 business plans and custom 'direct' EB-5 projects for its clients.

 

Download Your Free Paper: 9 Things to Know Before Going Down The EB\u002D5 Road

 

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