The Basics: Direct and Regional Center EB-5 Comparison

This post doesn’t break any news, but addresses a basic question: what is the difference between direct EB-5 and regional center EB-5?

In a nutshell, the answer is that a regional center investment is associated with a designated regional center and therefore may count indirect job creation, while a direct EB-5 investment is not associated with a regional center and may not count indirect jobs.

These two differences – regional center affiliation and indirect job creation – are the only fundamental differences between direct and regional center EB-5. The two tracks share the same basic EB-5 requirements: investment of capital in a new commercial enterprise that creates jobs. Contrary to popular misconception, direct and regional center EB-5 have the same minimum investment amounts, the same targeted employment area incentives, and (USCIS claims) about the same average petition processing times.

However, the two fundamental differences between direct and regional center EB-5 have implications that make direct and regional center investments quite different in practice. (Click on the images below to see full-size versions of the comparison charts, or click here for a PDF version.)



Examples
Some common scenarios will illustrate the differences, as described above, between direct and regional center investment:

• Real estate development projects are the most common investment for regional center EB-5 but awkward-to-impossible for direct EB-5. Indirect job creation allows the regional center investor in a landowner to count construction contractor jobs, indirect impacts of supply purchases, and sometimes even jobs created by the tenants of the completed development. A direct investor who invests in the same landowner could only count the permanent W-2 employees of the landowner – but normally the landowner wouldn’t have any employees. Most construction work gets done by employees of a variety of contractors, none of which “indirect” jobs count for direct EB-5, and any direct employee positions lasting only the duration of the construction project may also be disqualified because they are not permanent.
• Hotels are a common investment for both regional center and direct EB-5, but subject to different considerations. The regional center hotel investment has the luxury of segregating EB-5 investors in an entity that neither owns nor controls the hotel, but simply exists to raise EB-5 capital and make a debt or equity investment in the hotel. This entity can claim credit for hotel jobs, thanks to indirect job creation. Direct investors, on the other hand, can only get credit for direct jobs and so can’t be segregated, but must have equity interest in the hotel owner/employer. (This can bring up liability issues, and may mean that direct EB-5 investors have to be vetted as owners in the franchising and liquor license process.) It’s no problem for regional center EB-5 if one entity owns the hotel and a separate management company hires the hotel employees, since indirect job creation doesn’t take into account which name appears on payroll records. In direct EB-5, this is a problem. Direct EB-5 can’t separate investment from job creation, and therefore the entity that uses EB-5 capital to develop the hotel needs to be the same entity with new hotel employees on its payroll. (If multiple entities are involved in direct EB-5, they must be essentially united by a wholly-owned subsidiary relationship.) Furthermore, a hotel will be able to claim more job creation as a regional center project than as a direct project. A new-build 120-room Homewood Suites might subscribe two direct EB-5 investors based on a business plan anticipating creation of 23 full-time positions, or twelve regional center EB-5 investors based on an economist’s calculation that hotel construction and operation will result in 130 new jobs. Why are the two jobs numbers so different for the same hotel? First, the direct investor can only count hotel employees while the regional center investor can also count construction-associated jobs and economist-defined indirect and induced jobs (associated with supply purchases and employee spending). Second, the direct investor can only count payroll-record-verified full time positions, while an economic model is relatively generous in counting operating jobs. The economist’s multipliers are based on averages, cannot distinguish between full-time and part-time employment, do not consider who holds the jobs, and are not finely tuned to reflect labor variations among hotels of different flags and scales. The economic model calculates average direct employment for an average hotel with a given verified revenue, and this number usually exceeds the number of discrete, verifiable 35+ hour per week positions at an individual hotel. Finally, I-829 paperwork may be easier for the regional center investment than the direct investment. The hotel with direct investors needs to sign up for E-Verify, take special care that its employees are qualifying, maximize full-time employment, and prepare stacks of payroll records to verify job creation. The offering with regional center investors and an economic analysis using expenditure and revenue inputs can (in theory) not worry about individual employees but rather track expenditures and revenue, and prepare financial statements to verify employment by verifying economic model inputs.
• Small businesses such as restaurants and gas stations are likely to use direct EB-5. Such businesses tend to require only a couple EB-5 investors and will have sufficient direct jobs to justify those investors without needing to rely on indirect job creation. They can generally accommodate EB-5 investors as equity members and don’t require the complex investment structures only possible for regional center EB-5. No regional center affiliation means no regional center fees, no geographic limitation, and no vulnerability to regional center program changes. Regional center investment could work for these projects too and has the attraction of flexibility. But these projects may not be attractive to regional centers, which are often unwilling to sponsor offerings that only need a couple investors, and direct EB-5 provides a viable alternative.
• Investments involving multiple layers and diversification can work in the regional center context but not for direct EB-5. If a direct EB-5 case has multiple entities in the flow of EB-5 capital or in the staffing plan, then those entities must be united by a wholly-owned subsidiary relationship. If they aren’t so related, then the case will be denied. For example see OCT022015_01B7203 Matter of H-G- (direct investment in a new commercial enterprise that invests in a separate job-creating business), NOV122014_01B7203 and DEC042013_01B7203 (direct investment and job creation divided among several enterprises), JUN182013_01B7203 and JUN042013_01B7203 (job creation in partially-owned subsidiaries).

Regulatory Background
What rules underlie the practical differences between direct and regional center EB-5? To quote the EB-5 Policy Memo: “The EB-5 Program is based on three main elements: (1) the immigrant’s investment of capital, (2) in a new commercial enterprise, (3) that creates jobs.” Direct and regional center EB-5 investors share these elements and the requirement to contribute capital (equity not debt) to a (single) new commercial enterprise and create jobs. The difference comes in term definitions. “Employee” for a direct investor can only mean “an individual who provides services or labor for the new commercial enterprise and who receives wages or other remuneration directly from the new commercial enterprise.” The word has an additional sense for the regional center investor: “an individual who provides services or labor in a job which has been created indirectly through investment in the new commercial enterprise.” The EB-5 regulations at 8 CFR § Sec. 204.6(e) define terms:

• Commercial enterprise means any for-profit activity formed for the ongoing conduct of lawful business including, but not limited to, a sole proprietorship, partnership (whether limited or general), holding company, joint venture, corporation, business trust, or other entity which may be publicly or privately owned. This definition includes a commercial enterprise consisting of a holding company and its wholly-owned subsidiaries, provided that each such subsidiary is engaged in a for-profit activity formed for the ongoing conduct of a lawful business. This definition shall not include a noncommercial activity such as owning and operating a personal residence.
• Employee means an individual who provides services or labor for the new commercial enterprise and who receives wages or other remuneration directly from the new commercial enterprise. In the case of the Immigrant Investor Pilot Program, “employee” also means an individual who provides services or labor in a job which has been created indirectly through investment in the new commercial enterprise. This definition shall not include independent contractors.
• Invest means to contribute capital. A contribution of capital in exchange for a note, bond, convertible debt, obligation, or any other debt arrangement between the alien entrepreneur and the new commercial enterprise does not constitute a contribution of capital for the purposes of this part.

For additional discussion see my Direct EB-5 Page.

I-924 options: What are actual and hypothetical projects? What does exemplar mean?

This post doesn’t break any news, but replaces an outdated post from 2011 that I notice has been getting a lot of traffic. (Most recently updated January 2017 based on the 11/2016 EB-5 Policy Manual chapter.)

Regional Center application project types and actual, hypothetical, and Exemplar business plans

USCIS Policy Manual, 6 USCIS-PM G (November 30, 2016) Chapter 3 summarizes the requirements for an application for regional center designation,

A regional center seeking to participate in the Regional Center Program must submit a proposal using the Application For Regional Center Under the Immigrant Investor Program (Form I-924).

USCIS may designate a regional center based on a general proposal for the promotion of economic growth, including increased export sales, improved regional productivity, job creation, or increased domestic capital investment. The statute further provides that a regional center shall have jurisdiction over a limited geographic area, which shall be described in the proposal and consistent with the purpose of concentrating pooled investment in defined economic zones.

In addition, the establishment of a regional center may be based on general predictions, contained in the proposal, concerning the kinds of commercial enterprises that will receive capital from immigrant investors, the jobs that will be created directly or indirectly as a result of such capital investments, and the other positive economic effects such capital investments will have on the area.

The Policy Manual goes on to explain that “the level of verifiable detail required for a Form I-924 to be approved and provided deference may vary depending on the nature of the application filing,” and provides three options for type of application filing: hypothetical, actual, and exemplar. Table 1 summarizes each type as defined at 6 USCIS-PM G Chapter 3(B).

USCIS asks the applicant to label the project documents included in the I-924 application, identifying whether they are presented as hypothetical, actual, or examplar. One application may include a mix of project types, and USCIS may decide to re-classify and approve an “actual” project as “hypothetical” if it’s not sufficiently detailed.

The standard for actual/exemplar business plan content is clear and rigorous: the same “Matter-of-Ho-compliant” standard that applies to the I-526 business plan. The standard for hypothetical plans was not defined from 2013 to 2016, and appeared to be very low. The new Policy Manual introduced in November 2016, however, gives some positive guidance for hypothetical plan content.

General proposals and predictions may include a description of the project parameters, such as:

* Proposed project activities, industries, locations, and timelines;

* A general market analysis of the proposed job creating activities and explanation regarding how the proposed project activities are likely to promote economic growth and create jobs; and

* A description, along with supporting evidence, of the regional center principals’ relevant experience and expertise. (quoted from 6 USCIS-PM G Chapter 3(B))

A regional center applicant may classify its potential real project as “hypothetical” because it’s not sufficiently advanced for detailed description, or may submit business plans for projects that are purely hypothetical scenarios — just examples of the kind of thing the regional center might do. Hypothetical projects are relatively easy to write up, and applicants can apply for very expansive geographic areas by including many hypothetical projects in the application. My log of new regional center designations from 2013 to 2015 (based on RC designation letters) shows that about 85% of initial regional center designations have been based on hypothetical projects.  However, approval of “actual” or “exemplar” documents can be valuable, thanks to deference.  Once USCIS has granted an actual or exemplar approval in the I-924 context, it will not (generally) revisit those same documents when they appear in investor I-526 petitions. From 2013 to 2015, USCIS issued 122 letters formally approving actual projects that were filed with I-924 initial applications or amendment requests.

AAO decisions relating to 1-924 project issues

• JUN272013_01B7203, DEC302013_01B7203, and FEB102014_02B7203 are examples of AAO decisions that require USCIS to reconsider I-526 denials that neglected to fully address deference to I-924 approvals. These decisions indicate that AAO (if not always USCIS) take the deference policy seriously.
• A few AAO decisions indicate limits on what can be approved as a “hypothetical” plan.  FEB212014_01K1610 concludes that “While USCIS does not define the level of detail required for a general proposal, merely identifying the NAICS industry categories and the eventual input-output model without analyzing how the model would apply to a hypothetical project that falls under the industry categories is insufficient to meet the applicant’s burden within these proceedings.” In AUG222016_01K1610, AAO and USCIS refused to consider the actual, active project of another regional center, including the economic impact analysis, as the Applicant’s hypothetical project.
• In JUL192013_01K1610, AAO withdrew a denial, finding that USCIS should not have required a proposal based on hypothetical projects to provide detail such as letters of intent from lenders, commitments from prospective partners, and extensive cost and location detail.

Finally, recall that an I-924 application for initial designation must include a business plan for the Regional Center itself in addition to the kind of project proposals described in this post. See the I-924 Instructions item #4 and #6 for ideas about what to include in a regional center operational plan. The AAO decision JUL092015_01K1610 discusses an application that was denied in part for failing to submit a sufficient operational plan.

EB-5 Timing Issues

See my updated versions of this post EB-5 Timing Issues: Not a Fast Track (January 12, 2016) and EB-5 Timing Issues and Visa Wait: Process and Data (October 13, 2017)

The basics: Regional Center investment structure and direct and indirect job creation

With the EB-5 Regional Center program needing reauthorization by September 30 this year, and with the one piece of legislation on the table so far (the Leahy Grassley bill) offering to restructure it while reauthorizing it, I’d like to step back and look at what fundamentally characterizes the Regional Center program. What sets the RC program apart from regular “direct” EB-5 (which doesn’t need reauthorization)? What key features does any Regional Center program reauthorization bill need to protect?

The EB in EB-5 stands for employment based, and both direct and Regional Center EB-5 reward investment that results in job creation – 10 or more jobs per EB-5 investor. The major difference lies in which jobs can be credited to EB-5 investors, which in turn affects investment amount and structure and economic impact potential. Consider the following figures.

The key difference between Figure A and Figure B is indirect job creation, and the key benefit from this difference is that many more and much bigger projects can get funded with the Figure B structure. To elaborate:

• The traditional “direct” EB-5 program only allows EB-5 investors to be credited with “direct jobs,” defined as W-2 employees of the new commercial enterprise (NCE) that receives EB-5 investor equity. This fact limits the countable jobs (and therefore the maximum EB-5 investment) and also possible structures. There can be only one pot in direct EB-5: all the EB-5 money goes in that one pot as equity and only the full time W-2 jobs in that one pot can be credited to investors. If your business involves multiple entities (for example a holding company for the property and a management company for operations), then you have two pots and direct EB-5 won’t work for you (unless the management company is a wholly-owned subsidiary of the holding company, making them essentially a single entity). If your project creates jobs for people who aren’t your W-2 employees (e.g. construction workers on your job site), the direct EB-5 program doesn’t allow counting those jobs. If you’d prefer to segregate EB-5 investors in a separate entity rather than giving them a management role directly in your business and mixing them with your non-EB-5 investors, it’s hard to do that with direct EB-5. If you’d like the EB-5 funds to eventually come into the business as a loan rather than equity, direct EB-5 doesn’t allow that either. All this lack of flexibility results from the fact that there can’t be more than one enterprise/layer involved, which in turn follows from the fact that the buck literally stops with the new commercial enterprise, thanks to the direct job limitation. The NCE is where the money has to be invested and spent and where the jobs have to be created; any associated job creation that’s not within that one new commercial enterprise is “indirect” by EB-5 definition and can’t be used to justify EB-5 investment.
• The Regional Center program provides an attractive alternative to traditional direct EB-5 because Regional Center investors can be credited with “indirect” jobs, which EB-5 policy defines as “those that are held outside of the new commercial enterprise but are created as a result of the new commercial enterprise.” (Policy Memo p. 8) Indirect job creation opens up a new world of structure possibilities. Figure B shows a typical regional center investment with two pots: the new commercial enterprise (NCE) and the job-creating enterprise (JCE). The NCE is still subject to EB-5 requirements (must a single entity, must receive equity from the EB-5 investors, must give EB-5 investors a management role), but the business and job creation are separated in another pot that’s not so limited. The job-creating enterprise can encompass multiple entities, can receive investment from the NCE as debt or equity, can separate EB-5 and non-EB-5 investors, and can raise funds based on economic impact. If the Regional Center NCE has employees, it can verify them by submitting payroll records, just like a direct EB-5 NCE. However the typical Regional Center NCE has no business beyond investment and no employees. Instead, Regional Center investors in the NCE usually take credit for indirect jobs (i.e. the jobs created outside the NCE but resulting from the NCE’s investment – what’s in the green-shaded box in Figure B). These include impacts that an economic model would call direct (relating to the first round of inputs purchased by the subject industry) and indirect (relating to subsequent rounds of inputs purchased by supporting industries). If the job-creating enterprise funded by EB-5 investment is a hotel, the economic model would capture the employees required to build and operate the hotel and also some employment impacts of the hotel’s supply purchases. These new jobs could be on the payrolls of numerous third parties (the general contractor, the hotel manager, etc.), but it doesn’t matter because the NCE doesn’t have to control payroll records to verify job creation that happens outside it. EB-5 policy allows for using reasonable economic methodologies to calculate job creation outside the NCE but resulting from the NCE’s investment. For an example, the economist could use RIMS II Type II multipliers developed by the U.S. Bureau of Economic Analysis to calculate the employment impacts associated with the verified expenditures and revenues of a project funded by EB-5 investment.
  

Why is all this important? When you’re judging whether a piece of Regional Center reauthorization legislation is worth supporting, keep my Figure B in mind. Make sure that the legislation retains the possibility of the NCE and JCE as distinct entities, crediting EB-5 investors with job creation that’s outside the NCE aka indirect. If that core defining feature is compromised, then whatever the legislation would authorize, it’s not the Regional Center program. The Leahy Grassley bill is currently not clear on indirect job creation or the distinction between NCE and the JCE. The bill proposes regulating Regional Centers as if and assuming that they control JCEs, which is often not the case in the Figure B model (and not necessarily desirable either, considering potential conflicts of interest). A number of provisions are just confusing given the NCE/JCE distinction (ie do the provisions about non-EB-5 investors on p. 6 apply to the NCE or JCE?). Most critically, the bill proposes limiting indirect job creation. Maybe the section on p. 4 only intended to require investors to count some jobs beyond those generated from supply purchases, which is fair, but the terms are not defined and can just as well mean that at least 10% of jobs need to be direct jobs within the NCE, which would destroy the Regional Center model.

To avoid confusion, anyone using the term “indirect job” must specify if he means the EB-5 policy definition (see p. 8 of the Policy Memo) or an economic model definition, and if so which model, since RIMS II and others slice up the impact pie slightly differently (for example see p. 33 and 50 of the RIMS II Handbook). And he should think about the definition. Regional Center program critics tend to talk about indirect jobs as if they were mere mathematical phantoms. That’s not the case. The carpenter who installs the floor at the EB-5-funded hotel and the housekeeper who will clean it both have heads that you can go touch if you like, although they both can be indirect jobs by the EB-5 policy definition. Their existence is usually inferred using financial data and economic models rather than verified by payroll records, since the Regional Center EB-5 investor is at a remove and probably lacks access to the payroll records, but that doesn’t make their employment a fiction. Heads get harder to locate and to touch when you get down to economist-definition indirect jobs, which look at ripple effects beyond the project site, but they’re not fictional either. (Or at any rate you have to go up against the Bureau of Economic Analysis, the 1973 Nobel committee, and John Maynard Keynes himself to argue that multiplier effects are bogus. See the forthcoming July RCBJ for a good article on this topic: “Economic Multipliers in the EB-5 Arena: Voodoo Economics or Sound Economic Practice?” bu Scott Barnhart.)

The benefits that come with indirect job creation are many. It’s possible to raise more EB-5 money when you can count more jobs – not only the W-2 jobs in a single entity but the wider economic impact of a given project. It’s possible to fund larger and more complex businesses when you’re not limited to all spending and employment occurring within a single entity. It’s possible to be a Regional Center and raise money for various independent projects in the community when you can set up NCEs separate from the JCEs and can verify job creation using economic methodologies. Architects of the Regional Center program intended it to facilitate the concentration of EB-5 immigrant investor capital into larger projects deemed more likely to have significant regional and national impact. Indirect job creation has made this vision possible. A typical direct EB-5 venture raises less than $2 million, as compared with raises in the tens of millions per project possible with indirect job creation and a Regional Center structure. We wouldn’t be talking about EB-5’s $3.58 billion contribution to GDP if we didn’t have the Regional Center program.