Virginia, US

This is part 2 in a two part series. Click here to read part 1.

If the December 12, 2015, draft, titled the American Job Creation and Investment Promotion Reform Act of 2015, is used as baseline for this year’s proposed legislation, the TEA definition would be limited to EB-5 projects which qualify under one of the following standards. Again, if incorporated into future legislation, these changes would likely limit the ability of urban projects to qualify for TEAs:

  • Priority Urban Investment Areas (“PUIA”), defined as a single census tract or bordering tracts, each in a Metropolitan Statistical Area (MSA) and, using the most recent census data available, each of which has (1) an unemployment rate that is 150 percent of the national average unemployment rate, which may also include any census tract or tracts contiguous to 1 or more of the tracts that have the requisite unemployment rate; (2) a poverty rate of at least 20 percent; or (3) a medium family income that is no more than 80 percent of the applicable area medium income.
  • Special Investment Zones (“SIZ”), defined as (1) a city or county with an unemployment rate that is 150 percent of the national average; or (2) an area of no more than 12 contiguous census tracts bordering the primary physical location of the project, which has an unemployment rate of 150 percent of the national average.  
 
We read with great interest a working article titled “What TEA Projects Might Look Like Under EB-5 2.0: Alternatives Illustrated with Maps and Data (working draft)” published by Professor Jeanne Calderon and Scholar-in-Residence Gary Friedland from the NYU Stern School of Business, available at the following link: http://www.stern.nyu.edu/sites/default/files/assets/documents/What-TEA-Projects-Might-Look-Like-under-EB5-2.0-Alternatives-with-Maps-and-Data_0.pdf. Calderon and Friedland’s insightful article provides additional, in-depth analysis of how New York City would be impacted by the proposed changes to the TEA designation. 
 

Many urban projects are likely to fail the PUIA approach, as this methodology only grants TEA designation to EB-5 projects which are either 1) actually located in a census tract which meets one of the “High Unemployment”, “High Poverty” or “Median Family Income” standards set in the above PUIA definition, or 2) which meets one of the “High Unemployment”, “High Poverty” or “Median Family Income” standards set in the above PUIA definition with the help of bordering census tracts.[1] Further, the use of bordering census tracts under PUIA may effectively be rendered meaningless under the language of the December 12 draft, as the language “each of which” suggests that all census tracts used must individually meet one of the three the standards set in the definition, and thus the EB-5 Project Tract must be located in a qualifying census tract in any case.[2]

Many urban projects will not pass under any of the “High Unemployment”, “High Poverty” or “Median Family Income” options set in the PUIA definition. For example, in examining the most recent census data available[3], the borough of Manhattan in New York City has very few tracts which meet any of the above mentioned three requirements.[4] Based on the available census data, for the area below 96th Street in Manhattan, only 9 tracts would meet the “High Unemployment” standard and 33 would meet the “High Poverty” or “Median Family Income” standard under PUIA.[5]

The December 12 draft also provides a SIZ approach for TEA designation, which allows projects to extend the geographic boundaries beyond the project tract and review tracts with high unemployment rate to bring up the average unemployment rate of the combined area in order to meet the 150% threshold. However, the ability to extend the geographic region far beyond the project tract in order to reach high unemployment tract(s) is extremely limited based on the definitional language, which only allows extension up to 12 census tracts, all of which must be in the same county, and which must include all bordering census tracts to the Project Location. Additionally, the SIZ approach in the December 12 draft does not include areas with little residential population, such as parks, forests, or large bodies of water. Given these restrictions, a large number of projects in urban areas are unlikely to qualify as TEAs based on the SIZ approach.

As applied to Manhattan, the SIZ approach is unlikely to qualify many Project Locations in the Midtown and Downtown sections of the city, as it is likely that these Project Locations would need to extend over 12 tracts to reach a high unemployment tract. Further, with the exclusion of public parks, projects that are located along or near Central Park can no longer use the park to connect with the tracts on the other side of the park. Additionally, as all bordering tracts must be included in the total 12 census tract count, projects located in the popular development areas of Midtown, Upper East Side, or Upper West Side of Manhattan, are unlikely to extend far beyond their immediate proximity to reach a high unemployment tract. 

[1] The “High Unemployment” prong under PUIA also allows the use of census tracts contiguous to neighboring tracts to be considered in the analysis. Additionally, the PUIA approach also provides two additional avenues for granting TEA designation for EB-5 projects, in areas of “High Poverty” or areas which have a “Median Family Income” that is no more than 80 percent of the applicable area medium income. The High Poverty and Median Family Income avenues do not allow for the combination of census tracts which are contiguous to neighboring tracts to be considered in the analysis. 

[2] Previous drafts of compromise legislation did not include the “each of which” language, and based on legislative intent, it is likely that it was intended for a Project tract to qualify under PUIA if the weighted average of the combined area (including bordering tracts) meets any of the thresholds.

[3] The U.S. Census is held every ten years, with the most recent census data from 2010. It is unclear based on current guidance whether the U.S. Census data is considered the most current data available for TEA test purposes. 

[4]In Manhattan, the average unemployment rate has steadily and significantly declined over the last three years, from 7.7% in July 2013 to 4.7% in July 2015, lower than the national average. See http://www.bls.gov/regions/new-york-new-jersey/news-release/unemployment_newyorkarea.htm

[5] Calderon and Friedland, What TEA Projects Might Look Like Under EB-5 2.0: Alternatives Illustrated with Maps and Data (working draft), December 23, 2015, Center for Real Estate Finance Research, NYC Stern. Manhattan areas below 96th street are generally considered prime development areas in New York City.