I don't know how many people outside the US who know about the EB-5 Program?
According to Darren Dahl Inc. magazine:
President Obama recently extended the government's EB-5 program, which grants foreigners green cards in return for an investment of between $500,000 and $1 million here which then creates at least 10 domestic jobs from that investment within two years.
How the EB-5 Program Works
The primary purpose of the program is to attract foreign investment to the U.S., which will create new jobs. From an economic viewpoint, the key requirement is that each investment must create a minimum of 10 new jobs.
In some cases, the foreign party must invest a minimum of $1 million, while in other cases, the minimum is $500,000. The smaller number applies if the investment is located in (a) an area of high unemployment, currently defined as more than 150% of the national average unemployment rate for 2010, or (b) a rural area, currently defined as an area that is not in an MSA and is not within a municipality with population of over 20,000.
Most of the EB-5 applications we have analyzed are based on the underlying assumption of a $500,000 investment per individual.
How are the 10 jobs per investor calculated?
In some cases, only direct jobs can be counted – the jobs that are actually created by the new businesses that are started. In other cases, indirect and induced jobs can also be counted. For that to occur, the plan must include the formation of an EB-5 regional center, which requires additional paperwork, documentation, and economic analysis.
However, because the job multipliers are usually at least 2, the incentives to form a regional center apply in almost all cases. We focus exclusively on those cases where regional centers are created.
The comments here apply to the economic analysis. You will also need an immigration lawyer to prepare the requisite documents, and a local lawyer to prepare the private placement memorandum.
Which model to use -- IMPLAN or RIMS II?
There are several different input/output models accepted by the USCIS, but the two major ones are IMPLAN and RIMS II. The principal difference is that IMPLAN is an employment-driven model, while RIMS II is an output-drive model.
To the non-economist, this may seem like a distinction without a difference. And in fact, the total number of jobs that are created as calculated by these two models is usually fairly similar. The big difference occurs at the verification stage.
After the proposal has been submitted, it takes the USCIS several months to issue a decision. Once the approval has been obtained, individual immigrant investors must then file an I-526 petition, requesting a temporary green card.
This process also usually takes several months. Once that is approved, another two years elapse. At that point, the immigrant investor files an I-829 petition requesting removal of the conditions on the temporary green card -- in other words, permission for the green card to become permanent. It is at that stage that the investor must show that 10 permanent new jobs have been created by the investment that was made at the beginning of the process.
This requirement has led many investors -- and some EB-5 developers -- to assume that in fact they must produce documentary evidence for all direct permanent full-time jobs in the form of W-2s, I-9s, and quarterly payroll tax records. That is indeed one way to meet this requirement. BUT IT IS NOT THE ONLY WAY.
Immigrant investors -- and hence their lawyers and EB-5
developers -- may also meet this requirement by showing that the total amount of construction expenditures, and the total amount of gross (top-line) revenues that have been achieved are equal to or greater than the amount of expenditures or revenues that were stated in the original proposal. In other words, verification can be made on expenditures and revenues as well as direct employees. If this latter method is used, then the economist uses the RIMS II input/output model for the economic impact analysis calculations.
Thus each EB-5 developer, at the time of the original application, must determine which method is likely to be superior for verification at the I-829 level. An overwhelming majority of our clients have recently chosen the RIMS II model for the following reasons:
1. Verification of full-time workers may be difficult. Each employee must work 35 hours a week every week. In USCIS arithmetic, two half-time employees do not equal 1 full-time employee. They equal 0 full-time employees. This is particularly critical for construction jobs, and for seasonal and part-time jobs that are likely to occur in such industries as hotels, resorts, or retail sales.
2. All newly hired employees must be U.S. citizens. We assume that no one would deliberately skirt this requirement. On the other hand, illegal immigrants may obtain false papers. If the USCIS, with its deeper knowledge and data base of illegal immigrants, determines that false papers have been used, the developer has no recourse, and the I-829 petition will be denied.
3. Although the USCIS has repeatedly stated that it accepts a variety of recognized input/output model, the USCIS economist recently reiterated her position that she prefers the RIMS II model because of its greater transparency.
Thus unless clients specifically state that they prefer the IMPLAN model and its direct employment approach, we will use the RIMS II model in our economic impact calculations.
A Generic Example -- Retail Shopping Center
To understand how the economic analysis works, consider the following generic
example. A foreign investor plans to build a retail shopping center of 100,000
square feet. The construction costs will vary substantially depending on the
location and type of buildings, but for purposes of this example, assume that the
actual “hard” construction costs are $100 per square foot. Total costs, including
soft costs, profits, and land purchases, are $200 per square foot. We make this
distinction because, as will be explained below, the hard costs have some input
into the total job count, whereas the other costs do not.
The total hard construction cost is $10 million. This figure is multiplied by the
RIMS II final demand multiplier for construction, which varies widely by region and can range anywhere from 5 to 20, although it is usually in the 10-15 range.
Suppose it is 15. That means 150 total jobs would be created from construction
activity, PROVIDING that all construction jobs can be counted.
In many cases they cannot. The USCIS has ruled that for projects taking less than 2 years to complete, only the indirect and induced jobs can be counted. They are usually 1/3 to 1/2 of the total jobs. If the projects really do take more than 2 years, all jobs can be counted. However, in that case, the USCIS will require a timeline showing the expected expenditures each quarter. Do not be tempted to pretend that, for example, an 18-month project takes 2 years simply by stretching out the last 1% over a 6-month period. In general, a bell-shaped curve for expenditures would be appropriate.
The actual sales per square foot will be based on the mix of stores and the location, but assume that the average is $500 per square foot. That would be a
total of $50 million in sales. Here again, the RIMS II multiplier varies widely by
region, but an average figure would be about 8. On this basis, 400 permanent new jobs would be created from the operations of the retail space. If all construction jobs are permanent, a total of 550 jobs would be created in this particular example.
Since the EB-5 regulations require a minimum of 10 jobs per investor, that means there will be a maximum of 55 investors in this project. If each one puts up $500,000, the developer could raise up to $27.5 million, which would more than cover the $20 million total costs. However, it is always advisable to leave a cushion of 10% to 20% in case the sales goals are not met by the time the I-829 petition is filed.
Actual cases will vary from this example. They depend, among other things, on the following parameters. All of these vary by the region chosen.
1. Cost of construction, per square foot
2. RIMS II final demand multiplier for construction
3. Mix of buildings constructed (big box stores, specialty shops, restaurants)
4. Mix of retail stores (including restaurants)
5. Sales per square foot for each type of establishment
6. RIMS II final demand multiplier for retail sales
All these data must be calculated separately for each individual project. The
numbers are based on the RIMS II model, Census data, national and regional survey data, construction costs manuals, and individual research for specific projects. The numbers must be collected separately for each project and are not just “pulled off the shelf”.
What are indirect and induced jobs?
Indirect jobs are created when the business buys goods and services from local firms. For example, a construction firm might buy some of its materials locally, or
purchase locally produced doors and windows or roof tiles. A retail store would
buy some of its goods from wholesalers. It would probably hire outside firms for
building maintenance, waste management, and security. Also, it would probably
hire accountants, attorneys, and other professional business services.
Induced jobs are created when the employees of the new business spend part of their paychecks on locally produced goods and services. That would ordinarily include purchases at supermarkets and gas stations, banking and real estate services, and health care.
How big should the regional center be?
It can range from a single project in a single location to a wide variety of projects covering an entire state. Currently, regional EB-5 centers exist for the states of Alabama, Mississippi, Louisiana, Florida, and Texas, as well as smaller states such as Vermont and South Dakota. The amount of investment per regional
center currently ranges from under $5 million to over $100 million.
A distinction must be drawn, however, between the area covered by the regional
center and the area used for calculating the employment multipliers. That area
generally covers about four or five counties based on the pattern of where people live and work. Suppose, for example, a new project would be built in Ft.
Lauderdale, FL. The employment multiplier would then include those counties
where people live who work in Ft. Lauderdale; data on commuting patterns are
available from the Census. In general, the counties are included that account for 90% to 95% of the total workforce of that county; in this example, the regional multipliers would be based on Miami-Dade and Broward counties.
If too few counties are included, then the induced effects – jobs created as new
employees spend part of their paychecks locally – would be understated. If too
wide a region is included, the job multipliers would be overstated, and for that
reason would probably be rejected by USCIS. Hence it is important to calculate
the employment multipliers separately for each individual project, even if there
are many such projects spread over a much larger area for the total regional center.
Determining Areas of High Unemployment
In some cases, entire counties will qualify because the unemployment rate is more than 150% of the national average. However, it is more often the case that the chosen area has a somewhat lower unemployment rate, but certain Census Tracts in the city or county have a sufficiently high unemployment rate to qualify as a Targeted Economic Area (TEA). In some cases, the governor of the state will provide such a list. In other cases, we calculate the TEAs based on unemployment and poverty statistics taken from Census data.
There has been quite a bit of confusion about what areas qualify for a TEA.
In a few cases, such as the state of Nevada for 2010, and a few urban counties
in California and Florida, the unemployment rate exceeds the threshold level for
2010, which is 14.4%, so any location in Nevada, or in these high-unemployment counties, may be used. In general, however, that is not the case. The usual default position is to calculate the unemployment rate by individual census tract.
While the BLS publishes monthly data on the unemployment rate for individual counties, and all cities with a population of over 20,000, the only unemployment rate data by Census Tract is for 2000. Hence these figures must be updated to 2010, using the Census Share method as explained in the Local Area Unemployment Statistics handbook. We will do these calculations for you.
For any given address, we will determine whether the Census Tract where the planned facility will be located is a TEA. If it is, no further analysis is needed.
However, it is more likely that the planned facility is NOT in a TEA. In that
case, we will attempt to construct a TEA by combining that census tract with
contiguous census tracts that have higher unemployment rates, such that the average unemployment rate in the combined area exceeds 14.4%. We will also undertake that calculation as part of our economic impact analysis report.
Some states will then certify these results by writing a letter stating that the appropriately authorized agency of the state has verified that the area in question is a TEA. Some states, such as Florida and New York, are very helpful about writing such letters. California used to be helpful, but we were recently informed that due to budget cutbacks, they might not be able to provide that service any more. Many other states have been unwilling or unable to provide such certification.
One final word about TEAs as they apply to rural locations. Your definition of "rural" may not be the same as the Census Bureau. Any county that is part of
a metropolitan statistical area may not be considered rural, even if in fact the
location you have chosen is devoid of population and overrun with scrub brush.
You have to be outside an MSA to get the rural definition. Furthermore, even in
rural counties, any city with a population of 20,000 or more will not qualify as a
TEA based on the rural definition.
What kind of businesses qualify?
Virtually any legitimate business qualifies for which at least 10 permanent new
full-time jobs are created per investor. It can be in manufacturing, retail trade,
services, non-profit, research and development, or agriculture. Some of the
businesses that have recently been approved include hotels, retail shopping
centers and restaurants, office buildings, warehouses, manufacturing plants, research facilities, community centers, hospitals and nursing homes, farms, movie production, inland port facilities, lumber mills, forestry projects, and aquaculture.
However, a few caveats apply:
1. The EB-5 regulations actually state that the contributions of each investor
must create 10 new OR SAVED jobs. Hence in certain cases, rehabbing an old
structure might also qualify if the existing jobs would have disappeared. In
general, however, this is more difficult to show, and most EB-5 projects work
best either with new construction, or with rehabbing old buildings that are currently vacant.
2. In general, residential buildings don’t work, unless they are combined with
others. The problem is that residences create very few direct jobs, and only
indirect and induced construction jobs can be counted. In general, residential
construction projects supply less than half of the jobs needed to meet the EB-5
target. You have to be able to borrow more than 50% of the funding in order to
make residential projects work.
3. The 10 new jobs must represent a net increase. For example, suppose someone builds a new shopping center next to an old one, and people start shopping at the new place, so the old one closes down and people lose their jobs. In that case, the total net effect would be a lot smaller than the number of new jobs at the new shopping center. The report must also to show there will not be a net loss of jobs elsewhere in the region when this new project opens.
The Concept of a Regional Multiplier
Not all multipliers are created equal. Some models generate larger multipliers
for any given project. Yet all of the basic input/output data come from the same
source, namely the Commerce Department. How could the results be different?
There are two major answers to this question: geography and timing.
The entire concept of a regional center is built around the idea that jobs will be
created in a fairly narrowly defined region near the area where the new business
is started. Generally that is a few contiguous counties. It is definitely not the
entire state. And it is certainly not other parts of the country that have no
geographical connection to the regional center.
In general, the economic multipliers for a state are greater than a four-county
region, and the multipliers for the U.S. are much greater than for an individual
state. In the past, some EB-5 studies have relied on those larger multipliers to
get the job count higher -- and some of them were accepted. In the past year,
however, USCIS has made it clear that methodology will not be accepted, and have rejected these approaches.
In terms of timing, other modeling processes use the methodology of a dynamic multiplier. In short, the idea here is that when a new business is started, more people will move into the area; that in turn will result in more new homes and shopping centers being built, which will create even more jobs, and so on. A variant of this approach is the "tourist" model, in which a new hotel, casino, amusement park, ski slope, etc. will not only create new direct and indirect jobs as defined by the input/output model but will attract many tourists who will then spend additional dollars on food, gifts, and tourist services, hence boosting the job creation figure substantially.
In fact such developments might occur. However, anyone planning to start an EB-5 regional center should be aware that the USCIS has different rules for counting jobs than are usually applied to economic impact analyses. For example, direct construction jobs are usually not counted (see below). Also, jobs must be full-time; full-time equivalents are not permitted. Only jobs held by citizens can be counted. And, with respect to multiplier analysis, only the indirect and induced jobs generated by the direct activity of the new business can be counted. In short, no super-multipliers need apply.
What About Distressed Properties?
Many EB-5 prospects are asking about purchasing distressed properties at 1/3 or 1/4 of the previously assessed value, finding tenants for these properties, and then reselling them later at a substantial profit. In the meantime, because the cost of purchase is so low, substantial income and also be earned on the rents received before they are sold.
Is this an appropriate model for the EB-5 program? As usual, the answer is "it all
depends" but here are some guidelines to help you make a decision.
1. If it is an existing building, there won't be any jobs generated by new
construction. However (see the next topic) that may not be a negative, because the USCIS often takes a jaundiced view of counting temporary construction jobs.
2. You will only get credit for new jobs, so for practical purposes the building
should be nearly or completely vacant. You need the job credits by filling up the
buildings with new tenants. If there are existing jobs there, you can only count
them if you can prove they are part of a troubled business, which is often difficult
3. Many new jobs can be created from retail, office, and industrial buildings; far
less from residential. For practical purposes, there will be a few jobs from
operating the residences, but the numbers only work out if you can buy the properties with substantial leverage (e.g., only 20% from EB-5 money, the rest
borrowed from banks).
4. You want to be in a TEA; however, if the building is vacant, it may well be in
a high-unemployment area, so this is not generally a very high hurdle.
5. In summary, then, you want to buy a vacant retail, office, or industrial building at 1/3 to 1/4 of its previously assessed value, find new tenants, collect the rents, and then sell out for a substantial profit in the next five years.
6. And now for the tough part: virtually every client asks us, how can I write a
business plan and have you generate an economic report if I don't have the
properties yet? I need EB-5 money to pay for them, so it seems like a chicken
and egg problem. So here's the answer. Choose several likely properties and
get USCIS approval on that basis. You will then be approved for those specific
industries. If the properties fall through, you can then file an amendment for the
specific property that is different from the one you orginially planned to purchase. Thie method is OK with USCIS as long as you inform them of the change.
How are Construction Jobs Counted?
We are probably asked that question more than any other. In general, it is always permissible to count the indirect and induced jobs from construction activity. These are calculated using the Expenditure Model. If, for example, construction expenditures for hard costs are $15 million, and output per construction worker in the county where the building is being constructed is $150,000, then 100 direct jobs would be created. These can't be counted, but the indirect and induced jobs, based on the IMPLAN multiplier, can be counted.
The USCIS has ruled that if the construction project takes at least 2 years,
direct jobs can also be counted. However, in order to use this method, you must
show that the jobs are permanent. It is the position, rather than the person, that
is important here. For example, if you were building a residential construction
development with 100 homes, and an electrician worked (say) 2 weeks on each house but was employed continuously for 2 years, the job could be counted. Also, if two different electricians worked over this time span, the job could still be counted as long as the employment was continuous. By comparison, if you are building a shopping center and the site excavation team works for 4 months, the electricians for 6 months, the plumbers for 5 months, and so on, all those jobs would be considered temporary and could not be counted.
Also, if you decide to use direct jobs, you must be able to produce W-2 and I-9
forms for each employee. Some contractors are reluctant to supply that information.
The bottom line here is that unless you need the direct construction jobs to raise enough money, it is better not to count them. The major exception to this rule is for residential projects, where the workers go from one house (or condo, or apartment) to another over a period of several years. In those cases, we have been successful in counting direct jobs.
A few other caveats: only hard construction costs can be counted. Yes, architects and engineers do represent new job positions, but they are included in the IMPLAN model in indirect jobs. Double-counting is not permitted.
Finally, please note that in general, you cannot use construction expenditures that took place before the EB-5 application has been filed. This is another gray area, but to be on the safe side, you should follow this guideline.
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