July 22nd, 2014 by H. Ronald Klasko
I recently participated in a national webinar sponsored by NES, the largest EB-5 escrow administrator. The webinar focused on I-829s, and my presentation was entitled “Preparing for the I-829 Bubble”.
I stated at the time, and I will restate now, that the readiness of regional centers and project developers for the I-829 process is one of my most serious concerns for the future of the EB-5 program. It is the reason that our law firm has developed a compliance group within the EB-5 team. But more on that later.
Until very recently, the I-829 process was the province of direct EB-5s and a small number of regional centers which had investors in projects as far back as 2008 or 2009. The group of active regional centers at that time was extremely small and tended to be larger regional centers with in-house staff prepared for the onerous task of auditing and preparing the documentation necessary for the condition removal process.
As more and more regional centers were approved, including smaller and less well-staffed regional centers, the number of projects and investors attached to regional centers that have never gone through the I-829 process have increased. One can only hope that these regional centers and project developers are prepared for the major task that is the condition removal process.
Regional centers have to decide no later than when their first investors are approved how they want to handle this process. Do they want to do everything in-house? Do they want to outsource? Do they want their law firm to handle it? Do they want to hire an audit firm? The time of condition removal is way too late to make these decisions.
It is best if the audit process for the I-829 starts long before any investors are approved. The process of monitoring and documenting the investors’ flow of funds should commence when the investors invest. The process of monitoring construction expenditures should commence whenever the construction commences.
There are two main aspects to the condition removal petition. One is documenting that each investor made the investment and sustained the investment in the new commercial enterprise. Regional centers must have a system to trace the money from the investor to the escrow account to the new commercial enterprise and ultimately to the project. Regional centers and project developers need to either develop their own software to track this information or else buy the software or outsource the process.
Usually the biggest issue is documenting job creation. In most regional center projects, especially loan model projects, there are no direct jobs. Documenting indirect and induced jobs is a matter of documenting inputs to the economic report. For construction jobs, this means documenting construction costs, certain soft construction costs and furniture, fixtures and equipment. For operations jobs, this may mean documenting revenues, occupancy, direct employees or other inputs that the economic report utilized.
If all of the inputs were met or exceeded, there is no need for an additional economic report. However, if any of the inputs were not met, a new economic report may be necessary to determine how many indirect and induced jobs were created given the actual expenditures, revenues, etc. It is not necessary to prove that the jobs were created exactly as planned or that all of the inputs to the economic model were achieved. It is only necessary to prove that the necessary number of jobs were created, even if that is proven on a completely different basis.
We have seen in our practice interesting issues relating to construction timeline. There can be problems if construction is longer or shorter than planned. If the construction was projected to last more than 2 years, which resulted in the ability to count direct construction jobs, and the construction actually lasted less than 2 years, direct construction jobs cannot be counted at the I-829 stage. This can cause a big problem. On the other hand, if the construction timeline was projected to take less than 2 years, and it actually took more than 2 years, direct construction jobs can be counted, which can make up for a shortage of operations jobs. However, if the elongation of the time period was the result of extended periods of time during which little or no construction was taking place, questions might be raised.
I mentioned above that our firm has developed a compliance group to deal with these issues. In some cases, this group provides ongoing support to regional centers and project developers who are performing these functions in house. Other clients choose to outsource this function either to an auditing firm or to our law firm. In either event, our firm stays actively involved because the burden falls on us to actually prepare the I-829 template for all of the investors in the project. It is highly inadvisable for a regional center or a project developer to expect our firm or any other firm to be able to take raw, unreviewed and unmonitored data and turn it into an I-829 template on short notice.
Finally, regional centers and project developers have to understand that the I-829 process is a sequential process, meaning that the 21 to 24 month window opens for each investor on a different date. Investors and their attorneys are very eager to have their I-829 petitions filed as close to the beginning of the 3 month window as possible. The staggered filing dates can actually come in handy in situations where all of the necessary expenditures or revenues or direct jobs have not been created at the time that the first investor must file. However, when that is the case, the data must be monitored investor-by-investor to show which investors got credit for which jobs.
Thorough documentation, advance preparation, and providing regular updates to the law firm and to investors are key components of a plan to ensure that the I-829 bubble does not burst.
May 30th, 2014 by H. Ronald Klasko
Two of my recent blogs have focused on the possibility or likelihood that the EB-5 quota for China will be reached and that Chinese EB-5 investors will have a lengthy wait for a visa number that will allow them to enter the U.S. as conditional immigrants. This blog will focus on what can be done about that.
The most obvious answer is that Congress, which created the quota, can change the quota. This could be done by increasing the EB-5 quota above 10,000 numbers; by removing spouses and children from the quota; or by eliminating the per country limits. Unfortunately, today in Washington, none of these legislative options has any realistic chance of success outside of passage by Congress of comprehensive immigration reform. If you have at all followed the immigration debate in Washington, the chances of comprehensive immigration reform passing both Houses of Congress in the near future are exceedingly slim.
If Congress officially pronounces comprehensive immigration reform dead, there is then a possibility of piecemeal immigration legislation, including EB-5. If that were to happen, the issue of the EB-5 quota would be front and center. However, many members of Congress in key positions are unlikely to vote to increase EB-5 numbers unless at the same time voting to decrease numbers in other immigration categories. Any other category to be reduced likely has a constituency advocating for an increase in numbers and certainly fighting hard to make sure that no numbers are taken away.
In short, the legislative solution is not promising for the near or mid-term.
So what other option exists? The Administration, including USCIS or the Department of State, does not have authority to increase EB-5 numbers above 10,000. However, what if there were a way for the Administration to increase the number of investors while acting completely consistent with Congress’ 10,000 limitation? There is a way (and I give credit to my colleague Tammy Fox-Isicoff for suggesting this solution to me).
The answer lies in a review of the Immigration and Nationality Act. I suggest that a review of the statute reveals that Congress intended the 10,000 number to mean 10,000 investors. Logically, Congress decided on a number of investors who should be allowed to immigrate to the U.S. each year, which number should not be dependent on whether the average investor has one child or five children. But logic is not determinative – the language of the statute is.
Happily, the language of the statute is consistent with logic.
Section 203(b)(5) sets the worldwide quota for “qualified immigrants” seeking to enter the U.S. to invest in a new commercial enterprise. Spouses and children are not seeking to invest and, I suggest, should not be included in the 10,000 count. The relevant section of the law relating to spouses and children is Section 203(d). This is the section that is often cited to provide support for allocating most of the 10,000 numbers to spouses and children. However, that is not what it states. It states that spouses and children are entitled to the same “status” and “order of consideration” as the principal investor. The “status” referred to is the status of permanent resident. The “order of consideration” means that spouses and children should be able to immigrate at the same time as the principal. However, nothing in this language states or implies that separate visa numbers must be made available to the spouses and children.
In fact, the present system violates the statutory requirement of Section 203(d). Spouses and children do not necessarily have the same “order of consideration” as the principal investor. For example, if the principal investor obtains conditional permanent resident status when a quota number is available, the spouse or child who wants to immigrate subsequently is unable to join the principal investor if the quota has subsequently retrogressed. This is contrary to both the language and the intent of the law.
So what are the chances that this creative argument could prevail? There are two chances. One is that the Administration, which is looking for solutions to solve immigration problems that do not require legislative action, could implement this change unilaterally. Needless to say, that would take a lot of political courage. Efforts are presently underway to try to convince the Administration to take such action.
Absent administrative action, the other solution would be litigation. Although litigation is always difficult and the law could be interpreted differently, a purely legal issue such as this would be perfectly appropriate for a court’s review.
Impossible? I have always been a believer in creative solutions to complex problems. This is clearly a complex problem begging for a creative solution.
April 10th, 2014 by H. Ronald Klasko
Sometimes you have to step back. I usually publish blogs with my interpretations of EB-5 legal issues, critiques of EB-5 policies and my perspectives on EB-5 practice. I don’t publish blogs on what our EB-5 Team does day in and day out. Today is an exception. Our EB-5 Team at the Klasko firm deserves some credit in print.
I just returned from an EB-5 summit in Shanghai where I was asked to deliver opening remarks providing my perspectives on the past year. Although I rarely have time to think about it, when I had to put together the remarks, I realized that it has truly been an extraordinary year for our EB 5 practice.
I started my remarks stating that I love what I do. I love it because I believe we are making a difference, and helping to achieve the purposes of the EB-5 program, which was intended to promote job creation and an improved economy in the U.S. Within the past year, our firm’s Investor Team filed almost 400 EB-5 petitions for investors and helped hundreds of investors and their families successfully complete their immigration to the U.S. Our EB-5 Project Team performed the EB-5 immigration legal services for our developer clients for projects that resulted in the infusion of almost $1 billion of EB-5 capital into the U.S. economy. These projects include, among other things, hotels, casinos, condominiums, entertainment complexes, office buildings, retail projects, residential projects, and even the development of an entire neighborhood. The projects that our EB-5 Team have been involved in over the past year have added tens of thousands of jobs to the U.S. economy, and resulted in more than 500 approved I-526 petitions.
In addition, we have obtained regional center approvals for over 20 new regional centers within the past year. These regional centers encompass territories covering more than fifteen states, and will be a source of new jobs, new capital infusion and new investor immigrants in the coming years. The regional centers include a public-private partnership, a regional center approved based on a tenant occupancy model and a regional center encompassing two entire states. The projects on which the regional center approvals were based included a raceway, a cargo container transport terminal, check cashing stores, education and child care facilities, as well as the more traditional hotels, restaurants, shopping malls, charter schools, condominiums, office buildings, mixed-use facilities and residential projects.
So while future blogs will again return to discussions of cutting-edge legal issues and new developments in EB-5 law and policy, I wanted to devote one blog to stepping back and reflecting on our day-to-day accomplishments for clients and the impact that they have had on so many development projects, on the U.S. economy and on investors and their families. There is a reason that I, and our firm’s EB-5 Team, love what we do.
March 20th, 2014 by H. Ronald Klasko
In my last blog, I delineated my thoughts on the most important insights to be gleaned from the February 26 stakeholders meeting. This blog will focus on some of the most important issues that went unanswered.
For at least the third time during the period of the last two years, USCIS stated that it has not formulated its position on a critical issue that arises on many EB-5 projects. What if a developer wants to refinance after the completion of construction with the result being that the loan to the new commercial enterprise is repaid? What if the project is sold with the same result? Let’s assume that the NCE either uses the money to invest in another project or holds the money. In either event, no money is released from the NCE to the investors until they remove conditions. USCIS has again stated that it is “currently reviewing” this issue.
In my opinion, this event should not prejudice the EB-5 investors for reasons of both law and policy. From a legal perspective, the key issues for condition removal are whether the investment has been sustained and whether the jobs have been created. The investment that must be sustained is the investment in the new commercial enterprise. In these examples, the investment in the NCE is sustained. The jobs that must be created have presumably all been created (especially assuming the jobs in question are construction jobs). From a policy perspective, developers should not be precluded from making normal business decisions after all jobs have been created. USCIS should not be creating policies that result in the potential removal of investors who sustained their investments, especially where the investments have accomplished their job creation purposes.
Another issue that USCIS stopped just short of answering is the question of whether there is any temporal limitation on the use of EB-5 money to replace bridge financing or equity. USCIS restated its policy as articulated in the May 30, 2013 Policy Memorandum that EB-5 money can get credit for job creation if it is issued to replace debt or equity that is temporary in nature. At one point during the call, USCIS seemed to indicate that it does not matter how late the EB-5 money comes in to replace the bridge money, even if the construction is completed by that time. However, on a follow-up question, USCIS seemed to backtrack, indicating that USCIS will decide if additional clarification or guidance is needed to deal with a scenario where all of the jobs are created before any EB-5 money comes in. Especially with the increasingly lengthy processing time for I-526 petitions, it will be more and more frequent for EB-5 money to come into projects to replace bridge money after construction is completed. USCIS should state clearly and unequivocally that there is no time limitation as long as the EB-5 money is replacing temporary debt or equity.
USCIS responded to a question whether there is any violation of the “at risk” or “no guaranteed redemption” requirements if a developer or general partner – but not the investor – has the option to redeem the investment at a fixed amount. It appears to me that this question is appropriate for a direct answer – that this scenario creates no guaranteed redemption or at risk problem. Unfortunately, USCIS did not provide a direct answer to the question. USCIS stated that it would review the evidence to determine if there is a risk of loss and a chance for gain. This is certainly a true statement, but it does not answer the question.
Finally, USCIS confirmed that geographical expansion of a regional center must be to an area “contiguous” to the already-approved area. However, USCIS did not confirm how wide the geographical area expansion can be other than to state that it cannot extend from New York to California. USCIS should confirm that expansion can be to an area that may be a significant distance from the already approved area as long as the expansion includes all contiguous areas necessary to connect the new area with the original area.
Hopefully, USCIS will address these and other critical issues at the next stakeholders meeting scheduled to be held in late spring or early summer.
March 14th, 2014 by H. Ronald Klasko
After a lapse of well more than one year, USCIS held an EB-5 stakeholders call on February 26. This blog will highlight new information that we have learned. Equally importantly, the next blog will discuss critical open issues that remain and were left either unanswered or answered in a way that leaves open questions.
What we learned:
- USCIS is recommitting to quarterly engagements, the next one being in person in late spring or early summer.
- As of February 2014, all I-924s and all I-526s will be adjudicated by the new unit in Washington, DC. The unit at the California Service Center will continue to adjudicate all I-829 petitions and all I-485 applications based on approved I-526 petitions. This will continue through September 30, 2014, after which CSC will no longer be involved in any way in EB-5 adjudications.
- After a long delay, USCIS has finally updated and published EB-5 processing times. The published processing times, which will be updated monthly, are 11 months for I-526 petitions, 12 months for I-924 petitions and 11 months for I-829 petitions. While it is helpful to have published processing times, there are three problems with the processing times. First, they are too long. Second, USCIS has indicated that the processing times will likely increase now that 35 adjudicators from the California Service Center who were working on these applications will no longer be doing so. This leaves 20 economists and 25 adjudicators in Washington, DC. Third, the I-526 processing time and the I-924 processing time are not particularly helpful. Realistically, there are vastly different processing times for four categories of I-526 petitions:
- Direct I-526 petitions, for which the processing times are usually 3 to 6 months;
- First investors in a regional center project, for which the processing times are generally well over 12 months;
- Processing times for later investors once the project has been approved, for which the processing times are often well less than 11 months; and
- Processing times for I-526 petitions for which there is an approved exemplar, for which USCIS has indicated that the processing times should be reduced.
With respect to I-924 petitions, different petitions have vastly different processing times, with the longest processing time being for I-924 petitions with exemplar I-526s and the shortest processing time being for I-924 petitions with hypothetical projects or just geographical expansion.
- There are 7,131 I-526 petitions pending at USCIS as of September 30, 2013. Why is this number so significant? Given that the present 10,000 quota (including family members) leaves room for about 3,000 investors per year, the backlog represents about 2 1/2 years worth of investors under the quota. If all of these petitions were adjudicated relatively promptly, the impact on quota retrogression is obvious.
- USCIS clarified the deference given to actual projects. There was some clarity previously regarding the deference given to exemplar projects and the lack of deference given to hypothetical projects. The stakeholders call clarified that the business plan (assuming it is Matter of Ho-compliant) and the economic report would be given deference in the I-526 petition process for actual projects.
- There had been some lack of clarity regarding jobs created in multiple TEAs. USCIS clarified that jobs can be created in multiple TEAs as long as the principal place of business is in one of the TEAs within the regional center.
- USCIS clarified that an I-924 amendment is purely optional in the event of the sale of a regional center. USCIS does, however, want to be notified within 30 days.
- Perhaps the most surprising clarification during the stakeholders call was the detailed explanation of when guest expenditure jobs could be counted on construction projects. Following an earlier stakeholders meeting with USCIS economists, it appeared that USCIS virtually never accepted guest expenditure jobs. The economists had indicated that the standard was proving that guests would not have come to the city were it not for the building of the hotel or other structure. This was a clearly unrealistic and, in most cases unattainable standard.
USCIS has now set forth three potentially attainable standards, any of one of which could lead to approval of the guest expenditure jobs:
- Unmet aggregate demand. This requires a showing of unusually high occupancy rates with a detailed economic analysis of how the new hotel (or other structure) would serve unmet demand.
- Providing a differentiated project to a special market segment. This presumably requires showing that the hotel is a different type of hotel than is presently available on the market. For example, if there is no extended stay hotel in the market and the developer is building an extended stay hotel, presumably that would be considered a differentiated product.
- If the new hotel is built in response to new development in the community, guest expenditure jobs may be acceptable. For example, if a new sports arena or a new entertainment venue is being built in the area, a new hotel connected with or serving the sports arena or entertainment venue might be the basis for counting guest expenditure jobs.
This is very significant because jobs based on guest expenditures can sometimes double or triple the job count.
The next blog will discuss major unanswered questions remaining from the February 26, 2014 stakeholders meeting.
March 11th, 2014 by Matthew Galati
On February 26, 2014, USCIS held its first Stakeholder Engagement since the publishing of its comprehensive EB-5 adjudications memorandum last year (the “May 30 Memo,” which we discussed at length shortly after it was issued). During this conference call, the Service took the opportunity to introduce the new head of USCIS’ Immigrant Investor Division, Nicholas Colucci. USCIS also provided updates as to its geographic transition of EB-5 adjudications from the California Service Center to a dedicated, centralized office in Washington, D.C.
Although the call provided much needed insight on a variety of topics for stakeholders, there was one key message that may have stung the community: processing times for all EB-5 Forms (I-924, I-526, and I-829) will be increasing as USCIS transitions to its new office. One can be sympathetic with the Service in this regard – it has hired a multitude of new staff members and the challenges of opening a new office on the other side of the country must be quite daunting.
However, this increase in processing times presents a problem for USCIS which already exists – the Service is violating the Congressional statute mandating that Form I-829 be adjudicated within 90 days of filing.
By way of background, removal of conditions for an immigrant investor is governed by INA § 216A(c), introduced into the Act following the Immigration Act of 1990. Under those statutory provisions, the government is required to conduct a personal interview with investors within 90 days of filing the I-829. The statute provides the government an option of waiving the interview “in such cases as may be appropriate.” Under the provisions of INA § 216A(c)(3)(A)(ii), Congress mandated Legacy INS to make a decision on the I-829 within 90 days of the filing or of the interview, whichever is later. Given the unambiguous statutory language, the Service would need to issue an interview notice within 90 days or decide the I-829 at that time. As USCIS pattern and practice shows, interviews are quite rare absent indications of fraud or a petitioner’s inadmissibility/removability.
In 1994, while the EB-5 program was still in its infancy, Legacy INS first published the regulations governing removal of conditions for investors, found at 8 C.F.R. § 216.6. When the regulations were promulgated by notice and comment rulemaking, two commenters criticized the proposed regulation for lacking any time limits for the Service to adjudicate the I-829.
In response to these concerns, legacy INS explained:
Section 216A(c)(3) of the Act provides that the Attorney General make a determination on a petition to remove conditions within 90 days of the date the petition is filed or within 90 days of the interview, whichever is later. Accordingly, 8 CFR 216.6(b)(1) of the proposed regulation states that the Service Center director must either waive the interview requirement and adjudicate the petition or arrange for an interview within 90 days of the date the alien entrepreneur filed the petition. This regulation is, of course, subject to the provisions of 8 CFR 103.2(b)(10)(i) [relating to suspension of timing of adjudication due to missing evidence or biometric data]. 8 CFR 216.6(c)(1) provides that a decision on a petition shall be made within 90 days of the date of filing or within 90 days of the date of interview, whichever is later. The above provisions in the proposed regulation adequately address the commenters’ concerns as well as meet the adjudication time line set forth in section 216A(c)(3) of the Act.
Accordingly, the relevant regulatory text found at 8 C.F.R. § 216.6(b)(1) provides in pertinent part:
The director must either waive the requirement for an interview and adjudicate the petition or arrange for an interview within 90 days of the date on which the petition was properly filed.
Notwithstanding this regulation, USCIS is not meeting the temporal requirement that Congress and its own rulemaking process imposed upon it. As of December 31, 2013, the California Service Center reported that it was deciding I-829s filed by investors as of May 16, 2012, a period of 594 days, or approximately 1 year, 7.5 months. While our own experience has elucidated that certain petitions may move faster than others (calling into question whether the process truly is first-in, first-out), even if these processing times are average they clearly are in violation of the INA and the regulatory temporal mandate.
Some may argue, “Why is this a problem?” After all, the regulations do provide that an investor’s conditional lawful permanent resident status is “extended automatically, if necessary, until such time as the director has adjudicated the petition” upon proper filing and acceptance of the I-829. This view, however, fails to consider the undue burden placed on immigrant investors and their families.
First, consider the logistics. An I-829 must be filed within 90 days of the expiry of the investor’s conditional Green Card. After filing, the investor receives a notice that evidences that his/her status is extended for one year, but as explained above, the extension is indefinite. The notice allows the investor to prove lawful status for the purposes of readmission to the U.S. after international travel, employment authorization, and non-federal benefits such as renewal of a driver’s license. If the receipt notice expires (i.e. the case is still pending a year after filing), the investor must make repeated trips to a Field Office through InfoPass to obtain temporary stamps further evidencing that status. It is unfair to subject investors – who have supplied at least $500,000 in capital in an effort to spur U.S. job creation – to the burden of dealing with bureaucratic headaches to prove their ongoing status simply because USCIS cannot meet its mandated timeframes.
Second, and even more importantly, the regulations provide that an investor must have sustained his/her commercial enterprise, investment, and job creation at the time of I-829 adjudication (whenever that may be). The EB-5 program has never required one’s investment to be permanent or indefinite – on the contrary, any reasonable reading of the regulations cited above provide that the entire process should be completed within 27 months following admission as a conditional resident. By dragging out the adjudication process to almost two years after the filing of an I-829, investors cannot redeem their capital contributions and move on to other endeavors that may be worth their time and attention.
As restructuring continues, USCIS should recognize that its lengthy I-829 processing times are in violation of the INA, the applicable regulations, and of investors’ reasonable expectations for the program and act accordingly.
February 19th, 2014 by DanielLundy
In an unprecedented move, U.S. Senator Tom A. Coburn (Oklahoma), the Ranking Member of the Senate Committee on Homeland Security and Governmental Affairs, has issued letters to a number of approved regional centers seeking information about each one’s participation in the EB-5 program. The letter indicates that a similar letter will be sent to all USCIS approved regional centers. Our regional center clients have begun receiving this letter in the last few days. The letter is requesting the following information:
- Any approval from USCIS to participate in the EB-5 program regarding the regional center and its business plan, including any subsequent recertification;
- The total annual amount of investment and the number of individuals by country of origin making investments through the regional center since it has been in operation;
- The name, address, and a description of each business in which the regional center has made an investment of funds and the number of jobs created by each investment;
- Any fees charged to EB-5 applicants or received by the regional center, including amount and description;
- A list of any current or former corporate officers of the regional center, including title, position, and dates of employment, and
- The name and address of any individual or entity- either foreign or domestic- that the regional center has an agreement with to provide legal, accounting, recruiting or consulting services, as well as a description of the service provided.
The letters request a response via email by March 7, 2014.
While some of the questions asked in the letter reflect the information required in the Form I-924A required to be filed each year by every regional center, some of the questions far exceed the scope of the normal reporting requirements. It is unclear at this point why Senator Coburn is seeking this information. While we would like to think that this is an opportunity to show the positive impacts of the program by revealing the large number of projects that have been successfully completed with EB-5 funding, recent Congressional interest in the EB-5 program has appeared to be both negative and politically motivated. In light of this, we advise our regional center clients to contact us upon receipt of the letter to formulate an appropriate response.
February 18th, 2014 by H. Ronald Klasko
In the last blog, I prepared a set of FAQs to try to make the anticipated EB-5 quota retrogression understandable. In this follow-up blog, I will explain some of the changes in USCIS policy and interpretations and investor and developer strategies that will be necessitated by the first ever EB-5 quota retrogression.
One of the most obvious impacts of EB-5 quota retrogression for China is the impact on children who may be “aging out”. Since the child’s age is “frozen” while the I-526 petition is pending and is “unfrozen” when the I-526 petition is approved and there is a quota backlog, the investor is well advised to file the EB-5 petition years in advance of the child turning 21 rather than immediately before the child turns 21. Once the petition is filed, it is to the investor’s advantage if the USCIS processing time is elongated in the event of quota retrogression, since the child’s age is frozen longer if processing times are longer.
Quota retrogression may increase the onset of the 21-24 month conditional residence period by 2 years or more. This is problematic for the majority of investors who invest in regional center “loan model” projects. Most of these loans are 5 or 6 years in term since it is expected that all of the investors will have removed their conditions by the end of the 5 or 6 years, after which the investors can receive a return of their investments. But what happens if quota retrogression results in investors not being able to remove conditions for 7 years or more given the delayed onset of conditional residence status? USCIS has so far refused to opine on the impact of loan repayment to the new commercial enterprise before the investors have removed the conditions on residence.
This raises a number of issues for the I-829 condition removal petition. Has the investment been sustained? Since the investment must be sustained in the new commercial enterprise and not the job-creating enterprise, presumably the answer is yes. If the money just sits in the NCE for a period of time until all of the investors remove conditions, does the money remain “at risk”? Arguably it does, especially since it has already been used in creating the requisite number of jobs; and the NCE can use its own discretion on what to do with the money in the interim. In addition, it is not clear that the money must remain “at risk” during the entire conditional residence period as long as the investment is sustained and the jobs created. In any event, this issue must be clarified by USCIS.
Given this issue, we will be counseling regional centers and developers to consider increasing the length of the loan term to prevent money going back to the investors before their conditions on residence are removed. This is not beneficial to the exit strategy of an investor, but it may provide the developer with EB-5 financing dollars over a protracted period of time while protecting investors at the I-829 stage.
USCIS has created a so-called “2½ year” rule, requiring that all jobs be created within 2½ years of the approval of the EB-5 petition. In an earlier blog, I articulated in detail why this “rule” is wrong as a matter of both law and policy. In the event of EB-5 quota retrogression, it is not only wrong but its foundations crumble and it makes no sense. The premise of the 2½ year rule is that an investor will become a conditional resident within 6 months after approval of the EB-5 petition and then have 2 years to create the necessary jobs during the conditional residence period. The quota retrogression could result in 2 or 3 years from EB-5 petition approval until onset of conditional residence. In that event, the investor will be required to create all jobs before even becoming a conditional resident. This is not at all what Congress had in mind or what makes sense for the success of the program. We are advocating for USCIS to change this policy.
From the project developer’s point of view, quota retrogression may result in projects being able to get credit for more indirect and induced jobs. With most construction projects, if the construction period is, say, 18 months, and stabilized occupancy (and the job creation that goes with it) does not occur for another 24 months, the job creation resulting from stabilized occupancy would occur after the 30 month period. In the event of quota retrogression, since the time period for job creation should be extended to cover the full conditional residence period, the project may well be able to count jobs both from construction and operations where previously only construction jobs could be counted.
Also, developers will have longer periods of time to meet the required inputs in the economist’s job projection report, such as longer periods of time to spend the money, produce the necessary revenues, employ the necessary direct employees, achieve the necessary occupancy rate, complete construction, etc.
Direct EB-5 investors will confront additional challenges in the event of quota retrogression. If it will be an indeterminate amount of years before a direct EB-5 investor will be able to come to the U.S. to manage his investment, it will be more difficult – if not impossible – to prepare a business plan with realistic timeframes for the development of the business and the hiring of the employees.
Finally, foundations for the “troubled business” rule could crumble in the event of quota retrogression. The investor must demonstrate maintenance of the existing number of employees for a period of 2 years. If the investor, who may well be the key manager of his business, will not be able to immigrate for more than 2 years, such a showing may not be possible.
In summary, Chinese EB-5 quota retrogression will require a rethinking of conventional wisdom on many EB-5 issues. It will be incumbent for EB-5 counsel to prepare new EB-5 projects with these issues in mind and to advise EB-5 investors of these issues in potential investments.
In addition, and significantly, USCIS will need to reevaluate some of its policies and interpretations to accommodate the new reality. Hopefully, USCIS will be open to suggestions from stakeholders on how to do this. The AILA EB-5 Committee, which I chair, will be taking a leading role in this advocacy.
January 20th, 2014 by H. Ronald Klasko
From my dealings with my clients – both investors, developers and regional centers – there seems to be a misunderstanding of what the EB-5 quota backlog is and what it means. For this reason, I have decided to write this blog in the form of Frequently Asked Questions. I hope this helps to eliminate any confusion:
Q. What is the EB-5 quota?
A. Congress has allocated approximately 10,000 visa numbers for EB-5 investors and family members. This quota was established in 1990 and has never been changed. Until recently, because of a lack of demand in the EB-5 category, this 10,000 allocation has been sufficient to meet demand. With the increased demand in recent years – accompanied by increased investment dollars and increased jobs – that number is no longer sufficient.
Q. How many EB-5 investors can obtain conditional permanent residence in any year?
A. A majority of the EB-5 quota is used up by investors’ family members. The actual number of EB-5 investors who can immigrate in any year depends on the number of family members, but is generally in a range between 3,500 and 4,000.
Q. When are EB-5 visa numbers allocated?
A. Upon approval of conditional permanent residence – either issuance of a conditional immigrant visa at a U.S. Consulate or adjustment of status to conditional permanent residence in the U.S.
Q. There were over 6,500 I-526 petitions filed in the fiscal year ending September 30, 2013 with over 3,600 approvals. Why was the quota not reached?
A. From the time of approval of the I-526 petition until the time of issuance of conditional immigrant visa or approval of conditional permanent residence status, there is often a delay of about one year. The impact of the FY2013 filings and approvals will be realized in subsequent fiscal years’ quota allocations.
Q. The Department of State had predicted that the EB-5 quota might be reached for China in the last fiscal year. Why was it not?
A. The main reason is the very slow pace of I-526 approvals by USCIS. Processing times for I-526 petitions have increased from six months to, in many cases, more than eighteen months. If I-526 petitions do not get approved, investors do not get conditional permanent residence; and numbers are not used. In a curious way, the unprecedentedly slow processing times have delayed the onset of quota retrogression.
Q. Is the EB-5 quota likely to be reached in the fiscal year ending September 30, 2014?
A. If USCIS continues to process I-526 petitions at the present extremely slow pace, there is a possibility the quota will not be reached in this fiscal year. More likely, quota retrogression may begin in the last quarter of this fiscal year (July, August, September).
Q. If the quota is reached, will it affect all countries?
A. No, it will only affect China. 81% of the world’s EB-5 petitions are filed by Chinese nationals. Because there are per country limits that set in before the quota is backlogged for the entire world, the Department of State would create a waiting list for Chinese investors to make certain that EB-5 visas remain available for the rest of the world.
Q. What does it mean if there is a quota backlog for China?
A. Chinese investors will still be able to invest. Chinese investors will still be able to file I-526 petitions. Chinese investors will still be able to have their I-526 petitions approved. However, the final step of the process – issuance of the conditional immigrant visa or adjustment of status to conditional permanent residence – will not occur until there is a quota number available for the investor.
Q. If Chinese quota retrogression occurs, how long will be the wait?
A. No one knows the answer to this question. However, since there are a very large number of cases pending at the National Visa Center with I-526 filing dates (“priority dates”) in 2012, it is likely that some date in 2012 will be the cutoff date.
Q. What does it mean if there is a 2012 cutoff date?
A. Let’s just postulate that there is a China EB-5 quota cutoff date of November 1, 2012. This means that all investors whose I-526 petitions were filed before November 1, 2012 will be able to continue processing for their conditional permanent residence. However, all investors who filed I-526 petitions on or after November 1, 2012 will not be able to do so. This date is updated each month in the Department of State Visa Bulletin. (www.travel.state.gov)
Q. If there is a quota backlog, will there be a difference between regional center and direct EB-5s?
Q. If there is a backlog in the last quarter of this fiscal year, will it likely continue indefinitely?
A. There is a possibility that, at the beginning of the new fiscal year on October 1, 2014, the quota could again become current given the infusion of a new year’s visa numbers. However, it is even more likely that there will be a quota backlog at some time during the next fiscal year than there is for this fiscal year.
Q. Is there any chance that USCIS will increase the quota?
A. No, USCIS does not have the power to do so. Only Congress can do so.
Q. Is there any chance that Congress will increase the quota?
A. The comprehensive immigration bill that passed the U.S. Senate several months ago would have resulted in avoiding a quota backlog, probably for a number of years. This was done not through increasing the numbers but through removing family members from the EB-5 quota. So far, the House of Representatives has failed to take up this bill. Advocacy efforts are being undertaken by many individuals and groups, including IIUSA and AILA, to address the impending EB-5 quota backlog issue. The prospects for success at this time are speculative.
Q. Why should the EB-5 quota be increased?
A. Retrogression in the Chinese EB-5 quota could discourage investment. Since EB-5 investment contributes more than $2 billion of foreign direct investment to the U.S. and creates more than 40,000 jobs per year, this would be a result that is contrary to the national interest.
I hope that this FAQ is helpful in clarifying quota retrogression issues. My next blog will focus on actions to be taken in anticipation of a possible quota backlog and USCIS policies that need to be changed in the event of retrogression.
January 9th, 2014 by H. Ronald Klasko
Immediately prior to resigning under a cloud of suspicion and investigation, the Deputy Inspector General of DHS issued his long-delayed report on the EB-5 regional center program. This blog will not focus on that report, which has a number of inaccuracies that others have pointed out, most especially because it is at best of historical interest only. All of the findings and recommendations pre-date the May 30, 2013 Policy Memorandum, the establishment of the D.C. Investor Unit and the other significant reforms shepherded through by Director Mayorkas that render moot a substantial number of the major findings in the OIG report.
Rather, this blog will discuss new information that we have learned not from the Report itself, but rather from Director Mayorkas’ response to the Report dated November 4, 2013.
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