15 Apr Do EB-5 Funds Reach Economically Distressed Areas?

The EB-5 program was designed to reward foreign investors who invest $1 million into a new commercial enterprise that creates ten full-time jobs as a result of their investment.  However, most EB-5 petitioners lawfully invest $500,000 for the same benefit. This lower investment threshold is made possible by the TEA incentive, which was passed by Congress to steer capital to poorer areas.[1] A TEA is either a “high unemployment area” in an urban setting (i.e. part of a Metropolitan Statistical Area, or MSA) that has an unemployment rate of at least 150 percent of the national average or a “rural area”.

Surprisingly, many TEA-qualified projects, such as luxury hotels and upscale residential complexes, are located in affluent urban districts. This raises the question of how wealthy urban centers—some with 0 percent unemployment because they are non-residential—become designated as economically distressed areas. The answer lies in how such areas are designated and the generous means by which they are established.

EB-5 law permits states the discretion to decide how TEAs are defined. Some states allow regional centers and developers to piece together multiple contiguous census blocks, which are smaller than full census tracts, such that the average unemployment rate of the combined area exceeds the TEA unemployment threshold.[2] Developers then submit their newly created “TEA” to a designated state agency for TEA qualification, demonstrated by a certification letter from the state. In some cases, the building blocks for a targeted employment area stretch across a state or wind through a county with an irregular chain of carefully chosen census tracts,[3] with many miles separating the economically depressed areas from the high-income ones.[4]

This aggregation of contiguous census tracts, commonly referred to as “gerrymandering,” to create a high unemployment area is accepted by USCIS if accompanied by a state designation.[5]  State governments facilitate the use of gerrymandering to create TEAs because it brings investment dollars and helps create jobs within their borders. Indeed, state government web sites, such as this one from California’s Governor’s Office, provide maps, census data, and tools to help developers to aggregate neighborhoods into an urban TEA that can then be submitted to the state for approval.

The leniencies in defining TEAs explain how projects like Potala Tower, a $190 million hotel in an upscale Seattle neighborhood; a Marriott hotel in elegant Marina del Rey, CA; a $20 million addition to a W Hotel in Hollywood, CA; and the luxury Four Seasons Hotel in affluent Tribeca, NY, are all receiving EB-5 funds under the $500,000 investment threshold.[6]

Rural areas also qualify as targeted employment areas, but designation of a “rural area” is less controversial because there are no gray areas. To demonstrate that a project is located in a rural area, the developer or regional center must demonstrate that it is located outside of an MSA (i.e. urban area) and outside of a municipality that has a population of 20,000 or more as defined by the most recent U.S. census. The Census Bureau’s web site provides maps of MSAs by state and its American Fact Finder tool permits EB-5 investors to look up a street address to determine if the project that they are considering for investment is in a rural location. Thus, when it comes to defining “rural areas” there is no need for creative aggregation of census tracts.[7]

The uninformed argue that gerrymandering to create new urban TEAs, although entirely legal, is an abuse of the EB-5 program whose intention is to create jobs in low-income areas.  However, even EB-5 projects in affluent areas benefit the nearby economically depressed neighborhoods that provide the construction workers and operational employees to support the projects.  Liberal creation of TEA’s benefits investors, developers and U.S. workers, which is the win-win-win upon which the EB-5 program is founded.

To inquire about our turnkey EB-5 services such as our best-in-class Matter of Ho-compliant business plans, project assessment and ancillary services, please contact us at info@ecouncilinc.com.

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[1] http://www.seattletimes.com/business/real-estate/money-from-investor-visas-floods-us-doesnt-reach-poor-areas-meant-to-benefit/

[2] http://www.seattletimes.com/business/real-estate/money-from-investor-visas-floods-us-doesnt-reach-poor-areas-meant-to-benefit/

[3] http://www.seattletimes.com/business/real-estate/money-from-investor-visas-floods-us-doesnt-reach-poor-areas-meant-to-benefit/

[4] http://fortune.com/2014/07/24/immigration-eb-5-visa-for-sale/

[5] http://www.eb5investors.com/blog/determining-if-your-eb-5-project-is-located-in-a-targeted-employment-area

[6] http://fortune.com/2014/07/24/immigration-eb-5-visa-for-sale/; http://www.seattletimes.com/business/real-estate/money-from-investor-visas-floods-us-doesnt-reach-poor-areas-meant-to-benefit/

[7] http://www.eb5investors.com/blog/determining-if-your-eb-5-project-is-located-in-a-targeted-employment-area