Tenant-Occupancy Request for Evidence

6/23 Update: Note that I have set up a page collecting information on this issue, including details on the conference call with USCIS economists.
3/23 Update: Note that the comments to this post offer interesting discussion and useful insights.
3/1 Update: Peter Joseph of IIUSA, who has been collecting redacted RFEs, confirms that this is indeed the common language, and that applications using a variety of methodologies (including IMPLAN, RIMS II, and REMY) have been affected.

In the past week I have seen three new RFEs on initial Regional Center applications. Each application involved a different economist and attorney and different types of real estate development projects, but each RFE includes identical language related to the “tenant-occupancy” issue.  Since this language was applied to three such different cases, it’s evidently not case-specific and USCIS should have released it to the community at large. The fact that they didn’t, but instead released an evasive Public Engagement email while hiding the specifics in individual RFEs, suggests that they are uncertain and open to change based on feedback. And they will get feedback. Let’s not panic, but instead hunker down to create a solid response that addresses the root concerns and clarifies the misconceptions reflected in the following request, and prevents it from being repeated in future RFEs or official guidance.

Upon further review, it appears that __RC is using EB-5 capital to construct commercial buildings. The job creation estimates employed in this application are based, at least in part, on the assumptions that direct employees of the future tenants of the buildings can be utilized as inputs into the applicable input-output model. However, USCIS has concerns that the attribution of these direct jobs to the EB-5 investment may not be based on reasonable economic methodologies, and therefore do not demonstrate in “verifiable detail” that the requisite jobs will be created. Rather, contemporary economic methodologies appear to indicate that such jobs would be more appropriately be attributed to the tenants themselves and not to __RC because the demand for labor precedes the decision about where to house that labor as a general economic principle. For example, if a federal agency determined that additional federal employees needed to be hired to fulfill the agency’s mission at a particular location, the federal agency would see to hire the requisite number of employees and as part of that process, would also take steps to lease the appropriate physical premises to provide sufficient workspace for the new hires. In this instance, it is the federal agency that is creating the jobs through its decision to hire more employees, not the landlord who will ultimately lease the workspace to the federal agency.

USCIS observes that the tenant-occupancy methodology (that the direct jobs created by future tenants are intended to be attributable to the EB-5 investments) is not economically reasonable on the facts as presented. To allow for the existing methodology would require USCIS to credit the prospective EB-5 investors in the new commercial enterprise with the employment impacts created by the unrelated business ventures of future tenants (even though such tenants might engage in business activities within the requested industry categories and NAICS codes). After reviewing the tenant-occupancy methodology presented thus far, USCIS observes that the nexus between the investment and the job creation is either too attenuated or too incomplete to constitute a reasonable economic methodology. Consequently, the existing record presents USCIS with a justification to recognize only those employment impacts that could be attributed to __RC, such as those resulting indirectly from the construction activity and, if applicable, the ongoing building management activities that will be required to maintain the building.

However, USCIS does not foreclose the possibility that __RC might present additional evidence to demonstrate an economically acceptable nexus between the EB-5 investment and responsibility for the job creation asserted in the application. Accordingly, __RC may present additional evidence to demonstrate that the proposed methodology is economically reasonable.

To help illustrate the factors that USCIS finds central to adjudicating the fundamental reasonableness of this particular economic methodology, USCIS requests that any response address the following points:

    1. Evidence that there is excess demand for the specific types of tenants (various tenants as indicated in the business plan and economic analysis) to your construction project and business plan. Please provide a data-based assessment, and the source of data utilized by the assessment. To show such excess demand, the assessment should:
    a. Analyze: whether prospective tenants which would locate in the commercial space that will be constructed and/or renovated under the proposed project are currently suffering from a lack of a unique or specialized business space, that, in economic terms, such prospective tenants are “constrained” from commencing or expanding their businesses by a lack of unique or specialized business space.
    b. Provide a data-based analysis, including the source of data, which establishes whether there is “pent-up” demand for the specific professional and business services relevant to your project. Such data-based analysis should include:
    i.      Evidence of congestion externalities as demonstrated by a low vacancy-unemployment ratio pursuant to specific space and businesses seeking to expand, respectively; and
    ii.      Evidence of upward wage and rental pressures in specific regional sectors that are likely to be attracted to the proposed project space.
  1. The jobs that become located within the tenant space of the project should be shown to be a result of an expansion in specific services driven by your project as opposed to tenant shifting and/or relocation of already-existing jobs. Please explain how it will be verified that the jobs that will become located within the tenant space of the project can be considered “new” jobs.

Alternatively __RC is afforded the opportunity to provide business plans and an economic impact analysis for any industry categories and NAICS codes to demonstrate employment creation which is not based on tenant occupancy.

About Suzanne (www.lucidtext.com)
Suzanne Lazicki is a business plan writer, EB-5 expert, and founder of Lucid Professional Writing.

13 Responses to Tenant-Occupancy Request for Evidence

  1. Pingback: Economic analysis problem revealed! « EB-5 Updates

  2. Joe Whalen says:

    Thank you for sharing the text of the RFEs. I see both good and bad concepts expressed in the language and have written an essay about it if anyone cares to have a look. http://www.slideshare.net/BigJoe5/some-thoughts-on-uscis-tenant-occupancy-rfe

  3. Zoe says:

    I had a feeling that USCIS is discounting tenant jobs, and after seeing the content of a new RFE, this feeling is growing stronger. This particular regional center is seeking approval for projects related to hotel, retail, food services, and assisted living. These type of projects are more likely to be new businesses at a new location. For USCIS to issue RFE regarding nexus of investment and job creation, I wonder if USCIS are not interested in seeing commericial real estate development project altogether.

    Loan based vs Equity based EB-5 projects have created a split personality in the EB-5 investment, where the new commercial enterprises with EB-5 investment is not the job-creation entity. In the commercial real estate development project, the job-creation become the responsibility of a thire party. Even counting indirect jobs, the equity based EB-5 projects are the primary source of job-creation.

    Wh

    • Zoe says:

      I wonder how far USCIS allow the connection between EB-5 commercial enterprises and job creation entities to be. I have seen economic analyses that credit a hotel with the revenue of a nearby tourist destination or attribute a portion of a city’s tourist expenditure to a hotel project. And these projects are not put forward by a roookie regional center!

      I think USCIS should define in clear fashion what kind of indirect jobs or collaterial economic impact is allowed to attribute to EB-5 commercial enterprises.

  4. Joe Whalen says:

    When responding to the RFE, please remember that the Regional Center exists within a larger “Pilot Program”. The Pilot Program embraces “economic growth” through “increased domestic capital investment, improved regional productivity, increased revenues (originally through increased exports), and job creation”. Any of those “other contexts” can be used as a basis for establishing “reasonable methodologies” for estimating “indirect job creation” as a result of the particular overall project affiliated with the Regional Center,or with which the RC is affiliated. Congress did not perform a wholesale importation of concepts from econometric theory. The new USCIS economists have to be taught about EB-5 and the Pilot Program. Take this as an opportunity to teach them to think outside their particular box or “comfort zone”. Embrace the challenge!
    Here are some tools for your use:
    http://www.slideshare.net/BigJoe5/rc-affilated-eb5-structure-option
    http://www.slideshare.net/BigJoe5/what-is-the-immigration-pilot-program
    http://www.slideshare.net/BigJoe5/how-many-kinds-of-nexus-can-you-find-within-eb5
    http://www.slideshare.net/BigJoe5/eb-5-newsletter-march-2012

  5. Joe Whalen says:

    I was asked for input on the following:

    1. What could be the economic theory or theories (e.g., authors) that they are relying on re: excess demand?

    2. What form of evidence (e.g., occupancy rates, testimonials from realtors, sector growth studies…) would you suggest would prove excess demand?

    Here is my take on this:

    It is not economic theory that drives USCIS on this but rather it is reality. They expect sound business decisions to drive EB-5 financed projects. They expect that a huge project will not be contemplated,let alone commenced without a darn good reason. (Picking the pockets of rich aliens is not a darn good reason.) The darn good reasons should be laid out blandly and bluntly in the Matter of Ho compliant business plan. That plan should be where underlying factual data (such as from statistically sound surveys) is stated (with sources cited–such as BEA, BLS, DOL, Census, a specific state office or program, chambers of commerce, industry-specific interest groups like a PEW Institutes, or a think tank, or policy institute, universities, etc…). A feasibility study may have been done for the particular project; or a local government (usually with state and/or federal support) may have produced a regional study to support legislation or an economic growth plan and/or grant applications for federal or state funding.

  6. Zoe says:

    “USCIS observes that the tenant-occupancy methodology (that the direct jobs created by future tenants are intended to be attributable to the EB-5 investments) is not economically reasonable on the facts as presented. To allow for the existing methodology would require USCIS to credit the prospective EB-5 investors in the new commercial enterprise with the employment impacts created by the unrelated business ventures of future tenants”
    From USCIS statement above, I assume that EB-5 investors set up a new commercial enterprise to provide a loan to a developer who builds a shopping mall. In this case, EB-5 investors will not be credited with tenants’ new jobs. In another case, where EB-5 investors set up a real estate development company that builds and operates a shopping mall. Will the EB-5 investors be credited with tenants’ new jobs? How the latter case is different from a new commercial enterprise by EB-5 investors to provide loan to a local government and get credit from the infrastructure project?

  7. Suzzane: I must congratulate you for your blog. It’s very intelligent and a great resource of consulting all what is need to know about EB5. Hope I can meet you person in one of the future events you may speak.

    As part of Riviera Point Holdings, we are developing a 70,000 square feet Office Park in the City of Miramar, Broward County, Florida, we are located on the Greater Fort Lauderdale market. We obtained our first I-526 approval in December 2011 and our second one in late 2012. Our business Plan and our econometric Study were performed in the last quarter of 2010 and they do comply with the current Economist criteria of the USCIS.

    The reason for that compliance is that we share their opinion. In a recent Request for Evidence (RFE) they stated, “USCIS believes that based on contemporary economic methodologies appear to indicate that such jobs (the ones derivate by tenant occupancy) would be more appropriately attributed to the tenants themselves and not to the development itself. “…Because the demand for labor precedes the decision about where to house that labor as a general economic principle”. We consider this to be truth.

    Site selection it’s a complicated process with many variables to be considered, and when you add the constraint of the EB5 regulations it gets more complicated, specifically the constrain of a Targeted Employment Area (TEA), while considering the previous statement about the labor and the house of the labor, If the unemployment is high how can the Real Estate Development be attractive?

    As Developers we are proud to say that we are continually monitoring the markets on all main MSA (Metropolitan Statistical Areas) of the state of Florida, in order to identify a market need and provide a solution, a respond that would satisfy such need. When we decided to get into the EB5 raising funds challenge, we didn’t loose our site selection criteria to fit our development into the Eb5 frame of legal and economic regulations. Our main core ideology and values that supports our company and to execute the envisioned future of our project needed to supersede EB5 rules.

    We did deep research until we found a site within our site selection criteria of market need, and that it would comply with EB5 regulations: it’s hard but is doable.

    Have in mind with all this new “Tenant Occupancy Issue” the USCIS did not rejected the tenant occupancy model for the adjudication of the job creations, they left an OPEN DOOR: while stating: “However,… Regional Center may present additional evidence to demonstrate that the proposed methodology is economically reasonable”.

    As standard procedure on our research we use 6 broad areas of data, that happen to comply with the USCIS request, we recommend this data to be gathered a use of as best practice for site selection on every real estate development, and with more importance in this time that will also satisfy the USCIS guidelines.
    Such areas of data are the following:

    1. Geographic area of which the data is presented.
    a. Formal, these are the established political boundaries like the nation, state, county, cities, Metropolitan Statistical Areas, Consolidated Metropolitan Statistical Areas, Census Tract, Zip codes.
    b. Segmentation or Functional Regions, this are chosen and established by the analyst and are define by considering the area from which the majority of business will come to support the site’s use. The must common are the radius (around the site) and the driving distance (contemplates the traffic factor that influence how the people will drive to the site).

    2. Demographics:
    a. This means, “describe the people”, this data includes, population statistics by age, race, sex, education, occupation, income, house value, etc.

    3. Jobs (Employment):
    a. it’s important to understand the causes and effects that creates a demand. Economist uses employment as the primary predictor of real estate demand because it starts a chain of reaction. The way such chain works: First identify the basic industries and business that bring export oriented income into a community and measure relative importance of basic employment to the local economy, identify any employment changes due to changes in the basic industries, forecast the impact the changes in the basic industries and the resulting changes in total employment, that way the demand for office and for warehouse space (based also on the type of employments) can be determine, and the impact of such employment change on the total population change, the will define the expenditure dollars amount for the retail space demand.
    b. Basic Employment: Jobs in industries with activities that produce more goods and services that can be consumed in the local area. It brings money into the local market drives the local economy.
    c. Non Basic Employment: Activities that produces goods for the local economy, production for internal production.
    d. Within the EB5 world: The description of such business activities must be done within the requested industry categories and NAICS codes.

    4. Vacancy Rates:
    a. Is the number of square feet available for occupancy at a certain point in time, usually the present and is expressed as a percentage of the total supply.
    b. If increases: the supply is increasing or there is a loss of basic employment.
    c. If decreases: An expansion in the market is occurring and the demand is increasing due to rapid growth on basic industries and its reaction on the non basic sector.
    5. Rental Rates:
    a. The way the rental rates varies it must be analyze in conjunction with the vacancy rates and absorption data, if the rental rates are stabilize mode or the growth is below in the inflation rate, is a sign that the market is expanding.
    b. Market is in clear expansion when rental rates rise rapidly toward new construction levels.

    6. Absorption:
    a. It’s the amount of inventory measure either by unit or square footage, that becomes occupied during a specific time period, either a quarter or a year, an acronym that you often find in the market reports is YTD (year to date).
    b. This data helps to decide the amount of new square footage or units that can be added every year.
    c. Absorption is calculated my subtracting the total amount of unit occupied at the beginning of the year period to the total amount of units (or square feet) occupied at the beginning of the year.

    By gathering this data from reliable sources and analyze them with the proper methodology and adding them to the USCIS acceptable econometric methodologies (including IMPLAN, RIMS II, and REMY) every developer should be able to fulfill the PATH ALREADY SET: “To adjudicating the fundamental reasonableness of any particular economic methodology, USCIS requests that any econometric study provide a data-based assessment, and the source of data utilized by the assessment in order to address the following points:

    1. Evidence that there is excess demand for the specific types of tenant.
    2. Data, which establishes whether there is “pent-up” demand for the specific professional and business services relevant to your project
    3. Evidence of congestion externalities as demonstrated by a low vacancy-unemployment ratio pursuant to specific space and businesses seeking to expand, respectively; and
    4. Evidence of upward wage and rental pressures in specific regional sectors that are likely to be attracted to the proposed project space
    5. The jobs that become located within the tenant space of the project should be shown to be a result of an expansion in specific services driven by your project as opposed to tenant shifting and/or relocation of already-existing jobs.

    In our case, Riviera point Holdings, the vacancy rate for the submarket where the project is located is 8.9% and it has been on a consistent declining trend since last quarter of 2010.
    There is no new construction in the area due to lack of land with entitlements for office space and lack of Bank Financing for construction projects.
    We add to the formula that we are developing a Green Building that are very few in the state of Florida, what give our project a unique proposition that our competitors don’t have.
    Our project is and “On Going” project and we are breaking ground on a week from now ready to satisfy that gap we found in the market.
    For more information about Riviera Point Holdings wisit our website http://www.rivirap.com or contact me at razpurua@rivierapointholdings.com, cc: Rodrigo.azpurua@gmail.com

    Warmest Regards,

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