Chinese Investors Prefer TEA
Jeanne Calderon and Gary Friedland Oct. 5, 2015, 5:32 p.m.
In between the internecine budget wars currently raging in Congress and the immigrant wars raging on the presidential campaign trail, there’s one important issue that overlaps on both fronts, and which is largely being ignored in the media: what will happen with EB-5, the government program that offers visas to foreign investors?
Enough attention has been devoted to the perceived shortcomings of the current methodology to demonstrate that an EB-5 project is located in a Targeted Employment Area (“TEA”). Now is the time for Congress to devise a solution to what has become the most controversial part of the proposed legislative reforms to the EB-5 program. Technically, the continuing resolution to extend the key part of the program expires on Dec. 11. This is a battle between the rural areas that have not benefited from the program in recent years, and the urban areas, particularly the gateway cities, where the bulk of EB-5 capital has been channeled.
By way of background, if an immigrant invests in a real estate project located in a TEA, the minimum investment threshold is $500,000, rather than $1 million. Since the EB-5 investors secure the same visa and green card irrespective of the investment amount, and the investors generally receive interest of less than 1 percent per year, they strongly prefer to invest in TEA projects.
Simply stated, the EB-5 statute defines a TEA to include rural areas and high unemployment areas (at least 150 percent of the national average). United States Citizenship and Immigration Services (USCIS), the federal agency that administers virtually all aspects of this immigration program, delegates authority to the individual states to certify whether a project is located in a TEA. Although the legislative history leading to the law’s 1990 enactment might support the position that the TEA should be aimed at stimulating investment in projects in rural and economically depressed cities that would not obtain financing “but for” EB-5 capital, the law lacks real guidance. Consequently, the individual states that have an interest in retaining new projects have developed inconsistent standards. This has led to “gerrymandering” by developers, where contiguous census tracts are combined until the TEA high unemployment threshold is met. The unlimited array of permitted configurations results in the arbitrary inclusion of certain tracts to the exclusion of others that may be more relevant.
In recent years, approximately 85 percent of the immigrant investors in EB-5 projects have come from China. These investors and their migration agents generally favor large projects in the gateway cities, such as New York City, Los Angeles and San Francisco, especially those developed by mega-developers. They believe these projects are safer and more likely to be completed. Thus, they create the jobs needed to support their visa application and result in the safe return of their capital investment.
Before Congress grapples with the difficult task of how to define the geographical area that qualifies as a TEA, it must first update its vision for the program. And this raises many questions.
Does Congress wish to encourage investment in rural and depressed areas? Does it care where the workers live? Does it matter whether the jobs likely would have been created even if the program didn’t exist?
After it makes this determination, Congress can develop guidelines to accomplish these objectives. Should the focus be location of the project, with a single census tract, as proposed by Sens. Chuck Grassley and Patrick Leahy? Or should the focus be where the workers are coming from, as the program is predicated on job creation? If the workers’ homes are the focus, how do you determine the area to be taken into account, meaning which census tracts are to be included and which excluded?
But these questions really only scratch the surface. Should a minimum percentage of the EB-5 visas be allocated to the rural and single census tract projects? Does it matter that the EB-5 investors claim they will not invest in projects outside the gateway cities or should they be rewarded with a visa only if they take a real risk? Should the law continue the two-tier minimum investment structure—and what is the point of the two tiers if virtually every project qualifies as a TEA?
Furthermore, who should make the determination—the individual states or USCIS? If the guidelines are clear, then the determining body is not as critical.
The tension between rural and urban projects is largely attributable to the relatively few EB-5 visas authorized each year under the immigration law—10,000, including those issued to the investors’ family members. An easy solution to the TEA issue might be to exclude family members from the EB-5 visa count. This would result in a 200-plus-percent increase in the visas available to investors. However, Congress appears to have resisted this option.
Again, the first step is for Congress to articulate clear and specific goals. Then it can start to address the mechanism to arrive at a fair solution to determine which projects should qualify as a TEA. However, it is unlikely that Congress will devote the time necessary to resolve these politically sensitive issues, especially given the more pressing matters it faces. If Congress delegates this to USCIS, clear standards should be incorporated into the law so the agency has a clear mandate, rather than guess as to the Congressional intent. Unfortunately, this would require a significant amount of time, and in the meantime the flaws of the current system might continue. Sen. Jeffry Flake’s proposal, introduced yesterday, represents a serious first step that merits further consideration.
Jeanne Calderon is a professor, and Gary Friedland is a lecturer and research scholar, at NYU Stern School of Business. She can be reached at firstname.lastname@example.org. He can be reached at email@example.com.