EB-5 Updates

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.”