Can EB-5 Portfolio Investment Work?

[Post updated 1/19/2017] This post discusses the possibility and practicality of deploying an EB-5 investment across a portfolio of businesses. Packaging multiple projects or businesses within one EB-5 offering can be attractive. Diversification can mitigate investment risk and the risk of insufficient job creation. Increasing the size of an offering improves economies of scale and can make the offering more marketable. However, a portfolio or fund investment must navigate limiting provisions in the EB-5 regulations and deal with the human nature of USCIS adjudicators who struggle with complexity.

Here are issues to consider:

1. An EB-5 investor must always place the full amount of his or her qualifying investment in a single commercial enterprise. An investor can never qualify by placing $300,000 in one commercial enterprise and $200,000 in a separate commercial enterprise. However, the single commercial enterprise that receives EB-5 equity may be able to allocate the capital among multiple job-creating projects/entities.
2. What an enterprise can do with EB-5 capital depends on whether or not it’s associated with a regional center. If not associated with a regional center, the enterprise must deploy the capital internally — within a single entity, or a portfolio of businesses each wholly owned by that one entity. Qualifying direct EB-5 investment and job creation may not be divided among businesses that aren’t united by a wholly-owned subsidiary relationship. If the enterprise is associated with a regional center, then it is free to deploy the capital across a portfolio of related or unrelated businesses or projects. For example, the regional center enterprise receiving $500,000 of EB-5 investment could deploy $300,000 in one business and $200,000 in another business, and those businesses need not be under common ownership. (See my post What is the difference between direct EB-5 and regional center EB-5? for discussion of the differences in possible investment structures between direct and regional center investment. See 6 USCIS-PM G Chapter 2 (A) subsection 3 “Required Amount of Investment” and 6 USCIS-PM G Chapter 2 (D) subsection 2 “Multiple Job-Creating Entities” for policy statements on portfolio investments. For exemplar I-526 approvals for regional center portfolio projects, see for example Texas Golden Pacific, Citizens Regional Center of Florida.)
3. A portfolio investment can have special challenges in showing compliance with the following requirements that apply to all EB-5 investments:
   • The job-creating business must be located within a targeted employment area (TEA) in order for a petitioner to be eligible for the reduced minimum capital requirement. If a TEA portfolio includes job-creating businesses at multiple locations, each and every location must qualify as a TEA. (Matter of Izummi)
   • The job-creating business must be located within the geographic limits of the regional center that sponsors the investment. If a portfolio includes job-creating businesses at multiple locations, each and every location must fall within the regional center’s designated area. (Matter of Izummi)
   • The full requisite amount of capital must be made available to the business(es) most closely responsible for creating the employment on which the petition is based. If a portfolio investment involves multiple layers and multiple entities, then the EB-5 investment needs to be deployed entirely and only in those layers and entities that create jobs. USCIS will definitely question EB-5 investor funds being allocated to the expenses of holding companies and parent companies (Matter of Izummi) and may question EB-5 funds allocated to any business within a portfolio that’s not expected to contribute to job creation. (e.g. see p. 7 of 1/23/2012 Stakeholder Engagement. Non-precedent decisions that object to inclusion of passive or non-job-creating investments in a portfolio include Mar172009_03B7203, Mar062009_01B7203, Nov032008_01B7203, APR212005_01B7203.) EB-5 rules aren’t very clear on the level of nexus required between EB-5 investment and job creation, and individual adjudicators vary in what they expect. It’s not officially required to trace a clear line from X investment dollar to Y job, but (judging from anecdotal evidence) some USCIS adjudicators want to see such a line and will make trouble for portfolio investments where such a line is impossible. For official policy, see 6 USCIS-PM G Chapter 2 (D) subsection 2 “Multiple Job-Creating Entities,” and 6 USCIS-PM G Chapter 2 (A) “Investment” (particularly the “Made Available” subsection).
   • The I-526 business plan is required to show that job creation is likely to have occurred within 2.5 years of I-526 filing. For a portfolio with multiple job-creating businesses, the plan needs to show that all of them will have created sufficient jobs within the theoretically required time. (If there are also multiple investors/multiple I-526 filing dates, the plan needs to correlate the investors’ timelines with the business timelines.)
   • The job-creating business must create new jobs while sustaining any preexisting jobs (unless it qualifies as a troubled business). These requirements apply to each of the job-creating businesses in a portfolio investment. (Q&A from the 3/17/2011 stakeholder meeting with USCIS, slides 52-58). (However if the portfolio is a regional center investment, the job-creating businesses do not themselves have to qualify as “new,” per non-precedent decision MAR252016_02B7203.)
   • EB-5 is not an attestation-based program, and a petitioner must establish eligibility at the time of filing I-526. Prospective job creation must be demonstrated at the Form I-526 petition, when USCIS reviews and approves the business plan and associated economic analysis for the actual capital investment projects that will receive the immigrant investor’s capital. If a portfolio includes multiple job-creating businesses, all of these need to be identified and analyzed within the Form I-526 petition. I-526 petitions may not be approved for investments (or loans) to businesses that will not be identified or selected until after the approval of the petition. This is according to Q&A from the 3/17/2011 stakeholder meeting with USCIS, slides 52-58, and a number of non-precedent AAO decisions that discount investment into any businesses identified only after I-526 petition filing (e.g. JUN112013_01B7203, MAY172013_01B7203, FEB162005_01B7204). Some people report that USCIS approves I-526 petitions that do not specifically identify and provide complete business plans for each business foreseen in a portfolio or fund investment. But I suspect the truth is that such proposals have been optimistically filed, not that (m)any have been approved. The litigation around the Quartzburg Gold Company LP case gives a detailed autopsy and arguments and counterarguments in a denied portfolio investment case. To quote from USCIS’s 5/2016 response, “because the NCE was not able to specifically identify the JCEs, there was no way for USCIS to determine whether the business plan is credible and will result in the requisite job creation. Plaintiffs therefore failed to satisfy their burden of showing job creation.”
4. Some attorneys report receiving RFE and NOID from USCIS that required the petitioner to firmly link and trace X dollar to Y job in Z location, and refused to accept the very idea of distributing X investment among identified location Z1, Z2, and Z3 and then crediting the combined Z1-Z3 jobs to that investment. I think that here we are in the realm of human nature that just likes things simple, and that such RFE/NOID have no regulation/policy ground to stand on. But sometimes you don’t want a fight with USCIS, even if it’s a fight you have every right to win, and in that case may be advised to avoid deals with any kind of diversification complexity.

Published RC Decisions

As another in my series of “handy reference” additions to this blog, I’ve created a page summarizing and linking to  AAO decisions on Regional Center cases, including Regional Center investor petitions (I-526 and I-829)  and Regional Center applications (I-924).  These cases aren’t new and I’ve commented on each before, but I refer back to them often enough that it’s useful for me to link them in one place. For all of you out there searching for “sample EB-5 petition” or “example Regional Center application,” here’s your chance to look behind the scenes at how someone else assembled a petition and how USCIS judged it.

What is a “direct” job?

7/12/2015 UPDATE: I have a more recent post on this topic here: The basics: Regional Center investment structure and direct and indirect job creation

Now for a confession. After all this time working with EB-5 I’m still confused about how to use the word “direct job” in the Regional Center context. Here are the issues to reconcile:

1. Most regional center investments do not count job creation at the level of the “commercial enterprise” (the entity that raises EB-5 investment) but at the level of an “investment project” (the entity that deploys the EB-5 investment).
2. In discussing “direct” and “indirect” jobs, USCIS sources use “direct” to mean a job at the commercial enterprise level and “indirect” to indicate a job at the project level.  USCIS sources also use “direct” to mean an identifiable job that’s verified by payroll records and subject to 8 CFR requirements and “indirect” to mean a job that’s based on calculations by the economist. For example:
   

   “Direct jobs are those jobs that establish an employer-employee relationship between the commercial enterprise and the persons that they employ. Regional centers typically use the RIMS II or IMPLAN economic models to determine the number of indirect jobs that will be created through investments in the regional center’s investment projects.” Adjudicator’s Field Manual Chapter 22.4 (2)(A)

   “Direct jobs are actual identifiable jobs for qualified employees located within the commercial enterprise into which the EB-5 investor has directly invested his or her capital.
   Indirect jobs are those jobs shown to have been created collaterally or as a result of capital invested in a commercial enterprise affiliated with a regional center by an EB-5 investor.”
   June 16, 2010 Stakeholder Meeting Presentation

   The concept of what qualifies as a “direct” job for EB-5 purposes can be complicated. 1. For non-RC affiliated capital investments, job creation may only be credited through the creation or preservation of jobs that are directly within the commercial enterprise in which the EB-5 Investor made his or her investment. 2. For RC-affiliated capital investments, job creation may be credited through the creation of jobs directly within the commercial enterprise in which the EB-5 investor made his or her investment, but can also be credited with indirect job creation through equity investments or loans to other organizations, or through indirect job creation based upon an econometric model supported by a detailed business plan and associated economic analysis.3. The concept of a what a direct job is within econometric modeling differs slightly from a direct job described in #1 or #2 above, as a direct job in this context is a job that can be directly attributed to the economic impact of the capital investment in order to derive estimates of indirect job creation.
   Dec. 16, 2010 Stakeholder Meeting Presentation

3. I regularly see USCIS approving economic analyses that treat the Regional Center “investment project” only and use economic methodologies to calculate direct as well as indirect jobs created at the project level. In these analyses, “direct” jobs are part of a total calculation based various methodologies and don’t indicate jobs to be verified by payroll records.

It appears that in practice USCIS accepts that economists have a specialized definition of “direct,” and that the economist’s “direct job” is a subset of USCIS’s “indirect job.” Is this the solution, and does anyone have a clearer statement from USCIS on the issue? Do I dare use the word “direct” in my Regional Center business plans? How can the adjudicators tell when the word “direct job” means “ask for payroll records” and when it doesn’t? Several questions at stakeholder meetings have addressed the question (see particularly the 3/17/2011 meeting), but the published answers are not conclusive. And we need clarity because a lot of Regional Centers out there are counting on theoretical “direct jobs” for their projects, and don’t want to be hit with requests for W-2s and I-9s at the I-829 stage. Can anyone untangle this for me?

2011 UPDATE: Perspectives from other EB-5 commentators.

Joseph Whalen, who has experience as a USCIS adjudicator, writes in his essay on The Business Plan and the Economic Analysis in Support Of the Form I-924:

When the Economic Analysis bases and ties its projection as to indirect job creation on a base level of newly created jobs attributable to the alien’s investment in a particular commercial enterprise rather than simply to the dollar amount of the investment, it is critical to differentiate between “direct employees” on the alien’s payroll vs. “direct employees” of a third party who are “indirect employees” for EB-5 purposes. Third party direct employees used as “direct jobs” in terms of input into the Econometric Model may be termed as “hypothetical” or “base jobs” or some other terminology that clearly distinguishes them as not on the alien’s payroll. This is critical at the I-829 stage as to the evidence that will be required to lift conditions on residence. The classic and easiest example that illustrates this is “mall tenants’ employees” while another could be “factory workers” when the alien is loaning money to an industrialist in order to let that other person or entity build, convert, or expand a factory.

And attorney H. Ronald Klasko includes the following among his Top 10 Lessons Experience Has Taught Me about EB-5:

9. There is a difference between a direct job as defined by USCIS and a direct job as defined by an economist.
–USCIS defines a direct job as being a W-2 employee of the new commercial enterprise in which the investor invests. Economists define direct jobs as direct employees of the job creating enterprise or the construction company, as opposed to indirect or induced employment.
10. It is better to rely on indirect and induced jobs, rather than direct jobs.
–reliance on direct jobs could result in condition removal denial if there are less direct jobs than projected or if some of the employees can’t be proven to be U.S. citizens or permanent residents. Relying on indirect or induced jobs, such as through an economic model that relies on expenditures, may result in the regional center having more control over proving the required facts for condition removal.

2013 UPDATE: The 5/30/2013 EB-5 Adjudications Policy Memo includes the following paragraph (page 17):

Due to the nature of accepted job creation modeling practices, which do not distinguish whether jobs are full- or part-time, USCIS relies upon the reasonable economic models to determine that it is more likely than not that the indirect jobs are created and will not request additional evidence to validate the job creation estimates in the economic models to prove by a greater level of certainty that the indirect jobs created, or to be created, are full-time or permanent. USCIS may, however, request additional evidence to verify that the direct jobs will be or are full-time and permanent, which may include a review of W-2s or similar evidence at the Form I-829 stage.

The confusion continues. When the memo says “direct job,” is it referring to direct jobs as calculated by an economic model, even if such jobs are “indirect” with respect to the EB-5 commercial enterprise and not an input to the model? Since Regional Centers often invest in businesses whose payroll records they have no right to access, this is an urgent question.

What does “restructure and reorganize” mean?

[Post updated 4/18/2017] “The purchase of an existing business and simultaneous or subsequent restructuring or reorganization such that a new commercial enterprise results” is one of the ways to satisfy the EB-5 requirement to invest in a “new” commercial enterprise. (See my post on Options for investing in an existing business to see the whole range of options. The “restructuring/reorganization”option is relevant when the purchased business was originally established before November 29, 1990.)

The USCIS Policy Manual Volume 6 Part G Chapter 2 (C) (1) explains,

A new commercial enterprise also includes a commercial enterprise established on or before November 29, 1990, if the enterprise will be restructured or expanded through the immigrant’s investment of capital.

Purchase of an Existing Business that is Restructured or Reorganized

The immigrant investor can invest in a business that existed on or before November 29, 1990, provided that the existing business is simultaneously or subsequently restructured or reorganized such that a new commercial enterprise results. [50] Cosmetic changes to the décor, a new marketing strategy, or a simple change in ownership do not qualify as restructuring.

However, a business plan that modifies an existing business, such as converting a restaurant into a nightclub or adding substantial crop production to an existing livestock farm, could qualify as a restructuring or reorganization.

As explained (unofficially) in training materials for USCIS adjudicators,

This part of the regulations allows for the alien to purchase a business that was already in operation as long as it was changed to such a degree that one could consider the resulting business as completely new and different from the one that existed previously. For example, if an alien purchases a budget hotel and continues to operate it under a different business name, we would require more evidence of reorganization and restructuring. Look for real changes in modes of operation, products and services offered, business structure, organization of personnel, and other aspects which would indicate that a new business has resulted. Note that it is not enough that an entity merely be reorganized or restructured. It must be reorganized or restructured to such an extent that a new business has resulted.  (quoted from p. 752-753 of IIUSA DOC0042012 USCIS EB5 Training Materials – Oct 2012)

Each NCE is different and will require different evidence and analysis. If an investor has purchased an existing business, he or she must provide evidence of when that original business was created. Evidence of a business that has been in operation for many years and has only recently changed names or reopened after being closed for a short time may also be relevant. (quoted from p. 348 of USCIS EB5 Training Materials – April 2015)

The following cases have been mentioned as examples that do or do not qualify as the kind of restructuring and reorganization contemplated by the regulations (with sources – all unofficial/non-precedent except the Policy Manual and Matter of Soffici — in parentheses)

Examples that may meet the standard

• Converting a restaurant into a nightclub (6 USCIS-PM G Chapter 2 (C)(1))
• Adding crop production to a livestock farm (6 USCIS-PM G Chapter 2 (C)(1))
• Converting an hotel into condominiums (Mar302009_01B7203)
•  Converting a salvage yard into an auto parts retail/wholesale business (APR032013_01B7203)
• Purchasing a cafe and then restructuring it to also provide catering and banquet services in a new facility (2012 EB-5 Training Materials)
• Purchasing a Motel 6 business, and then through improvements and a new franchise begin operating a Marriott hotel (2012 EB-5 Training Materials)

Examples judged not sufficient to meet the standard

• Putting a Howard Johnson’s Motor Lodge under new ownership, making some changes to the hotel décor, and implementing a new marketing strategy (Matter of Soffici)
• Incorporating what used to be a division within a larger company (Mar312006_01B7203)
• Bringing a hotel back from foreclosure (Jan282009_01B7203)
• Renovating a hotel facility (adding miniature golf, fitness center, business center) and adding new services (free breakfast) (Mar272009_02B7203)
• Purchasing a dairy farm and switching to higher-producing cows, changing distributors, and adding feed production (Jul282009_01B7203)
• Reorganizing a dairy from a corporation to a partnership, but keeping the same employees, equipment, and cows. (EB-5 Training Materials)
• Changing the name of a taxi service changes and adding a new limousine to its fleet (EB-5 Training Materials)

Note that the “restructure/reorganize”option is particularly relevant to direct EB-5 investors, who must invest in a “new” commercial enterprise that is also the job-creating business owner. Regional Center investors have the option to invest in an entity that’s separate from the job-creating enterprise, and that separate JCE is not required to qualify as “new.” The non-precedent decision MAR252016_02B7203 on a regional center case clarifies that “In Izummi, when determining what constituted a ‘new commercial enterprise,’ we reviewed the date of creation of the entity in which a petitioner had invested or intended to invest, not the job creating entity where the funds were ultimately to be deployed.”

Investor referral fees

Since, as Jor Law and Martha Stewart remind us, it’s a good idea to keep on the right side of the Securities and Exchange Commission, do pay attention to the minefield involved in paying  investor referral fees. AILA yesterday reposted a  A 5/17/10 letter from the U.S. Securities and Exchange Commission denying the “no-action” request of Brumberg, Mackey & Wall in relation to the firm’s activities of referring investors to a company for a fee without registering as a broker-dealer. AILA Doc. No. 11062863.

Comment on Proposed Processing Changes

The comment period on the Proposed Changes to USCIS’s processing of EB-5 Cases ends today (6/17), and I finally did write and email my opinion. I commented on the words “shovel-ready” and “exemplar,” pointed out the revisions to Public Law 107-273 (2002) SEC. 11037(a) implied in the proposal, and offered an alternate suggestion for improving the adjudication process by establishing a separate workflow for Regional Center amendments. You may read the full text of my response here.

I’m very encouraged to see the comment filed by the AILA EB-5 Committee, which expresses a number of points I wanted to make even better than I did.

The “Shovel-ready” Concept

Proposed Step 1 in the “Proposed Changes to USCIS’s Processing of EB-5 Cases” (comment period ending this Friday 6/17) is “Accelerated and Premium Processing of ‘Shovel-Ready’ Cases.” The EB-5 community has been pressing for a long time for a premium processing option, and for a long time USCIS has said no because if they did everyone would use it and they don’t have the staff to accelerate everyone’s cases.  This new proposal suggests a way to select just a portion of cases worthy of expedite: the “shovel-ready” standard.  If your I-924 petition is based on a project that is “shovel-ready,” defined as “business projects that are sufficiently developed to support the immediate filing of actual I-526 petitions from participating investors,” it will enjoy hugely shortened processing times (as short as 15 days versus 5 months).

I have a few concerns about that word “shovel-ready” and its definition.

• USCIS shouldn’t create a situation in which as-yet-unauthorized regional centers would be forced to promote as-yet-unapproved projects and rush investor and source of funds screening – which would be inevitable if USCIS defines the term to necessitate “immediate filing” of actual I-526 petitions from participating investors the moment I-924 approval is received.
• If “immediate filing of I-526” isn’t a reasonable definition for “shovel-ready,” then what is? We do need USCIS to give a strict definition, or for sure nearly all RC applications will claim that their projects are shovel-ready and we’ll be back to square one with premium processing impossible because everyone is trying to take advantage of it.
• USCIS might learn from the history of the “shovel-ready” concept as a standard for privileging applications for stimulus funding. Sec. 1602 of the American Recovery and Reinvestment Act of 2009 Division A Title XVI provides a definition of the standard that President Obama and others have referred to using the term “shovel-ready”: “In using funds made available in this Act for infrastructure investment, recipients shall give preference to activities that can be started and completed expeditiously, including a goal of using at least 50 percent of the funds for activities that can be initiated not later than 120 days after the date of the enactment of this Act.” I feel that “120 day” standard might be reasonable in the EB-5 context as well — definitely more sensible than “immediately” anyway. However the term is still slippery enough that USCIS may find itself with President Obama who saw stimulus projects starting to take off over 16 months after the Act was enacted and who joked yesterday at his Council on Jobs and Competitiveness that “Shovel-ready was not as … uh .. shovel-ready as we expected.”
• The “actual (shovel-ready)” and “actual (exemplar)” distinction makes some sense only at the I-924 stage, not at the I-526 stage. The I-526 petition is being filed by an EB-5 investor — of course at that point the project is ready to receive EB-5 investment! If not the petition will get denied, not just demoted. By the “shovel-ready” standard, all approvable I-526 would qualify for premium processing.

The deadline for comment on the proposed changes is this Friday, and I’m still struggling with what to say. It’s easy to point out problems, but what constructive suggestion can I make? I sure don’t want to kill the impulse to improve procedures and shorten processing times, so I don’t want to tell USCIS what’s wrong with its proposal if I can’t suggest better options.

Is I-924 the new I-526? And what does “exemplar” mean?

UPDATE: The content of this post is now outdated. See instead my post with on-going updates I-924 options: What are actual and hypothetical projects? What does exemplar mean?

In its Proposed Changes to Processing of EB-5 Cases, USCIS offers interesting possibilities for the future — including accelerated and premium processing options — and also provides insight into its current thinking about the Regional Center program. The agency privileges “clear, focused applications and petitions,” and assumes that I-924 regional center applications are based on real projects and closely linked to I-526 investor petitions.

I sense a shift from the 2009 Neufeld Memo, which said that RC proposals could be based on “actual” or “hypothetical” investment projects, and that a “hypothetical” project would “demonstrate how an actual investment project will be capitalized and operate in a manner that will create at least 10 direct or indirect jobs per alien investor.” That seemed to leave the door open for regional center proposals to present hypothetical scenarios in lieu of actual projects — which is in line with regulations stating that an RC proposal is based “on general predictions, contained in the proposal, concerning the kinds of commercial enterprises that will receive capital from aliens” (Public Law 107-273). But I don’t see that flexibility in the Regional Center application options assumed in the most recent proposal.

[quoted from page 1 of Proposed Changes to USCIS’s Processing of EB-5 Cases]

Regional Centers submit I-924 applications in one of two varieties.
• First, “actual” applications present “shovel-ready” business projects that are sufficiently developed to support the immediate filing of actual I-526 petitions from participating investors. “Actual” applications are supported by specific business plans and economic analysis, the actual capital-investment structures and documentation for the investment offering, the anticipated regional economic impacts, and the Regional Center’s operating plan and structure. The review of the specific documentation to be provided in I-526 petitions for projects that can be started immediately after the approval of the I-924 application promotes efficiency and predictability within the EB-5 immigrant petitioning process as issues can be identified and resolved within the I-924 application prior to the filing of any I-526 petitions.
• Second, “exemplar” applications present feasible business projects that are not yet “shovel ready,” together with an exemplar I-526 petition, for a preliminary determination of EB-5 compliance. The “exemplar” process allows Regional Centers to seek approval of new, job-creating projects in principle before the business projects are fully developed to the point where participating investors can submit their I-526 petitions.

In these explanations, “exemplar” appears to mean an actual project that’s just not fully developed yet. This breakdown leaves no space for an RC proposal based on hypothetical scenarios or general predictions of the type of projects to receive EB-5 investment. It seems to require presenting real project(s) — the only option being whether or not you claim they’re “shovel ready.” And both “actual” and “exemplar” I-924s, as presented here, seem narrowly project-focused and to function essentially as pre-approval to the I-526 petition.

I’m very glad that USCIS is getting serious about offering a premium processing option, because unfortunately if someone calls me now with a genuinely “shovel-ready” project I can’t recommend Regional Center EB-5. With processing times as they are now, most projects that are ready to go today would be already finished or dead by the time the RC got approved and EB-5 investors had been recruited and received I-526 approval. I’ll be very excited if that whole process can be compressed from 1.5+ years to under 4 months. On the other hand, I’m not comfortable with streamlining at the expense of simplifying the I-924 into essentially a pre-I-526. What is a “Regional Center” after all? Do we want it to turn into a narrow umbrella for one particular immediate project? Do we want to send RC applicants who have a variety of potential projects at various stages of development to the back of the line while selecting for one-hit wonders? That’s the vision that seems to be emerging.

EB-5 to replace existing financing

UPDATE:

from the 5/30/2013 EB-5 Adjudications Policy Memorandum [Note: this is official policy. The other sources quoted below provide reference but are not policy.]

See 8 C.F.R. §204.6(j) (it is the new commercial enterprise that will create the ten jobs).

Since it is the commercial enterprise that creates the jobs, the developer or the principal of the new commercial enterprise, either directly or through a separate job-creating entity, may utilize interim, temporary or bridge financing – in the form of either debt or equity – prior to receipt of EB-5 capital. If the project commences based on the interim or bridge financing prior to the receipt of the EB-5 capital and subsequently replaces it with EB-5 capital, the new commercial enterprise may still receive credit for the job creation under the regulations. Generally, the replacement of bridge financing with EB-5 investor capital should have been contemplated prior to acquiring the original non-EB-5 financing. However, even if the EB-5 financing was not contemplated prior to acquiring the temporary financing, as long as the financing to be replaced was contemplated as short-term temporary financing which would be subsequently replaced, the infusion of EB-5 financing could still result in the creation of, and credit for, new jobs. For example, the non EB-5 financing originally contemplated to replace the temporary financing may no longer be available to the commercial enterprise as a result of changes in availability of traditional financing. Developers should not be precluded from using EB-5 capital as an alternative source to replace temporary financing simply because it was not contemplated prior to obtaining the bridge or temporary financing.

ORIGINAL POST

Many people ask me about the possibility of bringing in EB-5 capital to replace existing financing. This option is especially attractive to developers, as it would allow them to deploy EB-5 money at a later stage in the development process and avoid making the project wait on EB-5 marketing and immigration delays. It may or may not be approved by USCIS depending on the circumstances of the case.  The key point is that you need to have an argument for how the investment can be said to result in creation of jobs. Some written evidence for you to consider:

from USCIS’s Executive Summary of the 5/1/2012 EB-5 Quarterly Stakeholder Engagement

Bridge Financing
Q: Under what circumstances will USCIS approve bridge financing? Will the memo address this? This does not appear to be covered with adequate specificity in the last iteration of the policy memo. Stakeholders are not aware of any written guidance on bridge financing other than am AAO decision on the Victorville case, and this is an extreme example with specific facts. Of the two memos in 2009 (June and December) on construction, the December 2009 memo superseded the June memo, but stakeholders continue to receive RFEs referencing the June memo.
A: Pursuant to 8 C.F.R § 204.6(j)(4)(i), the new commercial enterprise, not the EB-5 investors, must create the requisite employment. As such, it is acceptable for the developer or the principal of the new commercial enterprise, either directly or through a separate job-creating entity, to utilize interim, temporary or bridge financing – in the form of either debt or equity – prior to receipt of EB-5 capital. If the project commences based on the bridge financing prior to the receipt of the EB-5 capital and subsequently replaces it with EB-5 capital, the new commercial enterprise still gets credit for the job creation under the regulations.

from AAO Decision Affirming the Termination of Victorville Development Inc. (December 21, 2011)

The regional center must be terminated because the applicant is seeking to invest capital only after the jobs in question have already been created. DPSG and Plastipak began hiring in December 2009. As of June 2010, the IWWTF was 90 percent complete. Regardless of the stage of financing the investors propose to provide, it remains that the jobs for which the applicant wishes to receive credit already exist. Notably, the record does not show that the applicant made a commitment to provide later-stage financing at the outset of the project. Instead, the applicant appears to have decided to commit capital toward later-stage financing only after the initial stages of the project that created the jobs in question were already complete.
The applicant’s argument that the IWWTF will be a ghost plant if it does not obtain bridge financing is inherently an argument that touches on preservation of jobs, not creation of jobs. The regulation at 8 C.F.R. § 20S.6G)(4)(ii) allows investors to be credited with preserved jobs, but only for investments in a troubled business. The applicant has never claimed or documented that the alien investors will be investing in a troubled business. As such, they may not rely on job preservation arguments to establish eligibility for benefits under the EB-S visa program.

from the December 16, 2010 USCIS EB-5 (Immigrant Investor) Stakeholder Quarterly Engagement

A stakeholder asked USCIS to confirm if it is permissible to utilize EB-5 funds to pay off a loan on a capital investment project as long as it is clearly described in the business plan and will result in job creation.  USCIS shared that there have been some instances where the plan presented has been approvable, and there have also been other instances where timing is a factor. If the project has essentially concluded and EB-5 capital is simply going to replace debt in which the jobs are already created through non EB-5 capital, this does not make a compelling argument that jobs were created as a result of the investment.  Also in all instances whether it’s an equity position or a loan instrument into a project, the agency is looking for EB-5 job creation.  Therefore, like in all EB-5 cases, the evidence must demonstrate that the loan is EB-5 compliant and that jobs would be created within a reasonable period of time.

from an April 23, 2010 AAO Decision (Denial of Form I-829 for a Regional Center project in Philadelphia)

The ultimate issues in this matter are …. whether the new investment demonstrates how the regional center’s bridge loan allows the petitioner to be credited with the statutorily required job creation.  … Had USCIS reviewed the Butcher & Singer business plan in the context of a Form 1-526 petition, it might have raised serious concerns about this plan, such as how the investors’ loan during the final stages of construction that purports to cover preliminary costs such as design fees can truly be credited for creating any jobs and where PIDC acquired the $1,500,000 to loan to the Partnership.  . . . Had the petitioner disclosed this plan, USCIS might have questioned how replacing one loan with another loan would create jobs.

from a December 22, 2009 AAO Decision denying a Regional Center proposal

The plan further indicates that the applicant is “in discussions” to invest in Phase I of the Westport Waterfront project and is “currently negotiating” to participate in the buildout of retail and office buildings to maximize job creation.” The Westport Waterfiont project is already financed up to $380,675,000 through private debt, private equity and grants. The business plan proposes that the limited partnerships would either “come in as equity (e.g. buying out the $30 million debt of Citigroup) or may fund individual projects within each phase (e.g. investing in the office and retail project for period ‘J’ in Phase I or investing in the office, retail and hotel project in parcel ‘D’ in Phase II).” The total investment by regional center limited partnerships would be between $30 million and $1 50 million. The applicant did not submit any evidence of ongoing negotiations or a letter from Turner Construction confirming that it is interested in the applicant’s proposed investment strategies. Moreover, the plan does not explain how assuming financing that already exists, such as assuming Citigroup’s loan, would create any jobs that would not otherwise be created. Without the proposed terms of such an agreement, we cannot conclude whether the “equity” from the limited partnerships instead of the “debt” fiom Citigroup would significantly improve Turner Constructions’ financial situation such that the limited partnerships’ financing could be said to create jobs and improve regional productivity. While we do not suggest that this type of financing is automatically disqualifying, the application cannot be approved unless the applicant first establishes that this assumption of existing financing will improve regional productivity.

USCIS questioning TEA designation

—- UPDATE —-
The issues in this post no longer apply since the 5/30/2013 EB-5 Policy Memo, which commits USCIS to defer to state determinations of the appropriate boundaries of a targeted employment area. To quote from page 8 of the Policy Memo:

b. A State’s Designation of a Targeted Employment Area
The regulation provides that a state government may designate a geographic or political subdivision within its boundaries as a targeted employment area based on high unemployment. Before the state may make such a designation, an official of the state must notify USCIS of the agency, board, or other appropriate governmental body of the state that will be delegated the authority to certify that the geographic or political subdivision is a high unemployment area. The state may then send a letter from the authorized body of the state certifying that the geographic or political subdivision of the metropolitan statistical area or of the city or town with a population of 20,000 or more in which the enterprise is principally doing business has been designated a high unemployment area. 8 C.F.R. § 204.6(i).
Consistent with the regulations, USCIS defers to state determinations of the appropriate boundaries of a geographic or political subdivision that constitutes the targeted employment area. However, for all TEA designations, USCIS must still ensure compliance with the statutory requirement that the proposed area designated by the state in fact has an unemployment rate of at least 150 percent of the national average rate. For this purpose, USCIS will review state determinations of the unemployment rate and, in doing so, USCIS can assess the method or methods by which the state authority obtained the unemployment statistics. Acceptable data sources for purposes of calculating unemployment include U.S. Census Bureau data (including data from the American Community Survey) and data from the Bureau of Labor Statistics (including data from the Local Area Unemployment Statistics).

—–OLD POST FROM 2011 —–

The USCIS quarterly stakeholder meeting on 10/14/2010 raised an important question:

A stakeholder inquired if it was acceptable, for purposes of defining a TEA, to link a high unemployment area with census tracts or political subdivisions with low unemployment in order to arrive at an aggregate finding of high unemployment when the intent is actually to invest in the low unemployment area.

At that time USCIS didn’t really answer the question (consult the Executive Summary linked above for detail), and the matter came up again in the 03/17/2010 stakeholder meeting. This time USCIS defined its position more clearly, emphasizing that the agency expects your “TEA area” to make sense as a unit, either geographic or political, and not just be a random assemblage of census tracts that happens to average a high unemployment rate, and that your designated state authority happens to approve. To summarize from the presentation (see slides 42-48):

1. It’s not enough to just have a TEA letter from the designated state official, but “A state-issued TEA designation must be supported by evidence, including a description of the boundaries of the geographic or political subdivision and the method or methods by which the unemployment statistics were obtained. The statistics used in the state’s analysis must reflect the national and local unemployment rates for these regions at the time of the alien investor’s capital investment.”
2. The TEA must be based on a “geographic or political subdivision” whose boundaries can be defined. (The presentation says that “elections districts such as congressional districts, state representative districts, state senatorial districts, county supervisor districts, city council member districts… appear to meet the legal definition of a political subdivision” and does not explain what constitutes an acceptable geographic subdivision.)

Now the community is buzzing over a 3/11/2011 Notice of Intent to Deny issued to an RC in Florida that calls out as unacceptable a strategy that many Regional Centers currently use. To quote from the notice:

In support of counsel’s contention that the job-creating enterprise is located within a TEA, the petitioner provided a letter dated March 25, 2010 from a State of Florida official. The official concluded that by joining several census tracts which are contiguous to census tract [tract number], the combined area experienced high unemployment at least 150 percent of the national average unemployment rate for 2009. Thus, according to the letter, the combined area qualifies as a targeted employment area.
The plain language of the regulation indicates that TEA must be “a” single geographical or political subdivision. … Nothing in the regulation suggests that a petitioner may qualify for the reduced investment amount by seeking government confirmation of the fact that adding several high unemployment census tracts to a low unemployment census tract produces a higher average unemployment rate. Census tract [tract number] does not qualify as a TEA by itself. Census tract [tract number] qualifies as a TEA only by combining adjacent census tracts and averaging the unemployment data. Such an analysis renders the reduced investment amount meaningless as any alien could qualify for the reduced amount simply by adding high unemployment census tracts to a census tract that is otherwise not a TEA. Rather, the investment must be in “a” geographic or political subdivision officially designated as a TEA.

If your project address doesn’t fall in a TEA census tract, how do you show that your larger qualifying area or group of census tracts is not random but counts as “a” geographic or political subdivision? Here is how the State of California Governor’s Office breaks down the requirements for special state designation:

If the location of the proposed new business does not fall into a qualifying area described in Step 2, justification for high unemployment area qualification might be possible by special designation of a smaller area within the otherwise non-qualifying area.  The state government may designate a particular geographic or political subdivision located within a metropolitan statistical area or within a city or town having a population of 20,000 or more as an area of high unemployment and having at least 150 percent of the national average rate.
In order to consider special area designations, applicants for such designation must observe the following criteria:
A)   The entrepreneur asking for designation should include a description of the boundaries of the geographic or political subdivision:
a.  A geographic subdivision would be an area carved out based on the physical features of the Earth’s surface.  (Good examples would be XYZ Valley, XYZ Bay, etc.)
b.   A political subdivision would be a division of a state that exists primarily to discharge some function of local government, such as a civil administrative unit of a county or city.  (Administrative units of the federal or state government do not qualify for special designation.)
B)   The proposed area must have an unemployment rate equal to or exceeding 150% of the national unemployment average based on the weighted average of the unemployment rate of the contiguous census tracts comprising of the desired area.

2011 AAO Decision (South Dakota)

The USCIS website has published a new AAO decision dated 4/14/2011 involving denial of an I-829 petition for a Regional Center investor. The investment was made in 2005 in a new dairy farm within South Dakota International Business Institute (SDIBI), Dairy Economic Development Region (DEDR). A few points of interest:

• This decision reveals that two investors in the same business had had their I-829s approved before this petition was denied. The AAO explains “With respect to the other two alien investors who have removed conditions, the AAO is not required to approve applications or petitions where eligibility has not been demonstrated, merely because of prior approvals that may have been erroneous.” Keep in mind that past success does not guarantee future success!
• The AAO did chastise USCIS for trying to deny the I-829 based on a factor that had been approved at the I-526 stage. “Under the reasoning of Chang, the director erred in revisiting the appropriateness of the multiplier. The director approved the Form 1-526, which disclosed that the petitioner would be using the 2.66 multiplier for the location of the dairy. The petitioner did not materially change the location of the proposed employment creation and the director does not identify information that was misrepresented or not disclosed at the Form 1-526 stage that would warrant a new evaluation of the multipliers used. Thus, the petitioner should be able to rely on the 2.66 multiplier as an acceptable means of demonstrating total job creation, including indirect jobs. The AAO withdraws the director’s concern that the 2.66 multiplier is not appropriate.”
• The AAO addresses (not very thoroughly) two important challenges by counsel: 1) that  the director is applying a clear and convincing burden of proof rather than the preponderance of the evidence standard appropriate to immigrant petitions, and 2) that an employer may not request any documents beyond those allowable for Form 1-9 purposes without violating employment discrimination provisions of the Act.
• All of you who considered verifying direct jobs with payroll records should read this, to see what a mountain of paperwork may be involved and what a comb USCIS may take to it. (Never guessed that the line spacing on your W-2s could become a focus of suspicion? Think again!)

Understanding “material change”

***2015 UPDATE***
This blog post is now old news. See instead my post What is material change?

—- OLD POST —-

The recently released USCIS EB-5 training materials include a couple pages (207-208 of pdf #1) addressing the question of what constitutes material change. The training material (which appears to predate the 2009 Neufeld memo and concept of “material change” at the I-829 stage) focuses on changes in the RFE context. The training emphasizes that the I-526 petition should present the business plan and investment terms clearly and completely, and that RFE responses are not supposed to contradict the I-526 info in any “material” way.

A petitioner must establish eligibility at the time of filing. The petition may not be approved at a future date after the petitioner becomes eligible under a new set of facts. See Matter of Katigbak, 14 I&N Dec. 45,49 (Comm. 1971). Therefore, a petitioner may not make a material change to a petition that has already been filed in an effort to make an apparently deficient petition conform to Service requirements.
– Note that the facts in place at the time of filing are important. In other words, the financial arrangements and other related factors which make a petition approvable need to be in effect when the petition is filed. It is common for the alien to be alerted to deficiencies in the petition through an RFE and to attempt to correct them. If such changes are material, the petition may need to be denied. The judgment of whether the change is material is up to the adjudicating officer. However, a material change is usually one which reflects a substantial alteration in circumstances on which the Service is relying in making its decision.
– EXAMPLES:
An alien files a Form I-526 on June 1,2008, based on a$400,000 investment. In response to an RFE, the alien provides proof of the remaining required amount being invested on July 15, 2008. Is this a material change? – Yes, this is a material change.
-An alien files a Form 1-526 with an arrangement for half of the capital to be paid back to him as a guaranteed return. In response to an RFE, he declares the arrangement null and void. Is this a material change? – Yes, this is a material change.
– An alien files a Form 1-526 and invests $1,000,000 in a business that is planning to operate a Chinese restaurant. In the RFE, it is revealed that the business has decided to operate a Peruvian restaurant instead. Is this a material change? – No, this is not a material change.

Here are a few additional examples that I culled from the AAO decisions on cases last year involving Capital Area Regional Center Job Fund (“CARc”) and Philadelphia Industrial Development Corporation (“PIDC”) and changes between the I-526 and I-829 filings. In each case, the change was judged to be “material.”

Change to project specifications and location
-PIDC changed from investing in the expansion of a home improvement seller to investing in the development of a new restaurant
Change in use of EB-5 funds
-CARc changed from letter of credit to be released after completion of construction to cash released to the project’s capital account
– CARc changed from using funds for development costs only to development costs plus purchase of property
– PIDC stated funds would be used for expansion costs such as equipment, inventory buildup, working capital and in fact used funds to refinance an existing mortgage

The theorists and policy-makers among you will want to review an in-depth article related to material change posted at ilw.com by Joseph Whalen, a former adjudicator. See: The Concepts of “Reasonable Reliance” vs. “Deference to Prior Decisions” in EB-5.

More EB-5 AAO Decisions

The USCIS website has posted several more 2010 Administrative Appeals Office decisions in the EB-5 category.

Feb182010_11B7203 to Feb182010_13B7203 and Feb182010_15B7203 are additional denials related to the Capital Area Regional Center Watergate Hotel project, which I described in an earlier blog post. These cases offer interesting insight into the official understanding of “material change,” TEA designation, acceptable investment terms for regional centers, and acceptable use of EB-5 capital.

Feb182010_14B7203 and Jul082010_01B7203 are new decisions on I-829 petitions for stand-alone EB-5 investments.  The first case involves investment in an existing restaurant, and treats the issue of what constitutes a “new” commercial enterprise and the necessity of a wholly-owned subsidiary relationship between the “new commercial enterprise” and the “job-creating entity.” The July decision involves investment in an existing hotel, and discusses source of funds documentation required when the EB-5 funds come from a gift. Both decisions trace failure to demonstrate job creation to faults in the I-526 business plan — a good reminder to invest thought and experience in getting the business plan done well.

Don’t bother reading the following, which are mis-categorized or very brief: Mar292010_02D7101 (though this one is kind of entertaining: a petitioner explaining that he hasn’t met his Chinese finance due to his fear of high bridges and flying), Aug032010_01D7101 to Aug032010_03D7101, Mar082010_01B7203, May212010_01B7203 (cases withdrawn), Aug042010_01D7101,  Aug052010_01D7101, Aug052010_02D7101 (misfiled L-1).

I have, by the way, compiled a log of EB-5-related AAO decisions from 2009 and 2010, tabulating the issues involved in each case. And if you’re very nice to me, I might share.