Virginia, US
On June 3, 2015, Senators Patrick Leahy (Dem.) and Chuck Grassley (Rep.) jointly proposed Section 1501 of the American Job Creation and Investment Promotion Reform Act of 2015 (“S. 1501”), a bill to renew and reform foreign capital investment and job creation in American communities through the EB-5 Immigrant Investor Visa program. Although the original Congressional intent behind establishing the EB-5 category was to promote U.S. job creation through the use of foreign capital, the proposed bill S. 1501 would drastically revise current law and would have the overall effect of decreasing the use of the EB-5 program. One major change proposed by S. 1501 concerns the legislation governing Targeted Employment Areas (“TEAs”), and may have an adverse impact on many EB-5 projects, ultimately limiting the ability of EB-5 programs to operate successfully.
Under current regulations, a TEA is defined as, “a rural area or an area which has experienced unemployment of at least 150 percent of the national average rate.” Placement of an EB-5 in a TEA allows foreign investors to decrease their capital contribution level from $1 million to $500,000, as one goal of the EB-5 program is to stimulate investment in struggling areas of the U.S.[i]
Under current law, TEA designations are granted by the state. A rural area is designated by the state, based on population, and defined as any area not within either a metropolitan statistical area or the outer boundary of any city or town having a population of 20,000 or more. Although the proposed legislation S. 1501 does not modify the definition of a rural area, as a practical matter, most EB-5 projects are located in high unemployment TEAs.
Currently, a high unemployment TEA designated is granted by the state and the state has significant discretion in defining the geographic area to be compared to the national unemployment rate. As such, many states pool employment statistics and census bureau tracts to reach the unemployment rate of 150 percent the national average rate, allowing them to classify more EB-5 projects in TEA areas.
This method is advantageous because areas that may not qualify as a rural area based on population and location may qualify as an area of high unemployment due to the aggregation of the unemployment records of surrounding areas. As such, aggregating statistics promotes the underlying policy of creating foreign capital investment and jobs in U.S. communities because it expands the definition of qualifying TEAs and allows for the development of more EB-5 projects, which leads to more U.S. job creation.
Under the proposed legislation S. 1501, however, the TEA designation process for high unemployment areas will change dramatically, thereby decreasing the number of areas which will qualify as a TEA. The first major proposed change places TEA designation under federal control; the federal government and the Secretary of Homeland Security will make the final determination of which areas qualify as TEAs, as opposed to the current state determination structure.
While handing designation determination to the Secretary of Homeland Security will provide significantly more oversight on the EB-5 program, the states remain best positioned to make the assessment of which areas experience high unemployment and need further development. Placement of TEA designation in the federal government will ultimately make it much more difficult for areas to qualify as high unemployment TEAs and will impact many on-going projects which would lose TEA designation.
The second major proposed change of S. 1501 in regards to TEA designation is how many census tracts can be considered in assessing a designation. High unemployment areas will be determined by “using the most recent census data available, consisting of a census tract that has an unemployment rate that is at least 150 percent of the national average unemployment rate.” As such, the Secretary will use only one census tract, as opposed to using various census tracts and employment records of surrounding areas to reach the required unemployment rate, as it is currently calculated in many states.
Limiting the designation process to the use of a single census tract will be problematic because many areas that currently qualify as a TEA, due to the aggregation of statistics, will no longer qualify for TEA designation if the bill is passed. Making a high unemployment TEA designation based on only one census tract is contrary to the overall policy of the EB-5 program, which is to create jobs in rural or high-unemployment areas. The resulting TEA areas will not accurately represent the goal of fostering economic investment in high unemployment areas, as the census tract only records where people live, and does not consider where people work. TEAs should not be determined based on population statistics alone because many EB-5 projects are developed in areas with low populations. Thus, it is essential to aggregate surrounding areas to reach the unemployment rate to allow EB-5 projects to develop in these areas.
Overall, the enactment of the proposed legislative amendments to the EB-5 program may result in a significant reduction of foreign capital investment and job creation, rather than an increase, which is the goal of the program. Ultimately, fewer TEA designations will result in less foreign capital investment and U.S. job creation.
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[i] See 8 C.F.R. Section 204.6(f) (S. 1501 also proposes a change in the minimum capital contribution levels based on the Consumer Price Index (“CPI”). S. 1501 proposes to raise the general qualifying investment amount to $1.2 million and TEA projects to $800,000.).