The EB-5 program requires that each EB-5 Investor create ten (10) jobs. Job cushion refers to the percentage of jobs exceeding the requirement. Having a Job cushion is important so that the job creation estimates are above the minimum required by all investors in a project.
So, what is a sufficient job cushion? Is there a magic number that is acceptable and anything lower than that is rejected? Generally speaking, a higher job cushion provides some assurance that job creation estimates will be met — but EB5 investors need to look deeper than just the job cushion numbers.
Job Cushions from 155 EB-5 offerings
Based on our review of 155 EB-5 offerings, job cushion has ranged from 0% to 900%. Seventy five percent (75%) of the projects have a job cushion of 25% or more and thirty percent (30%) of the projects have a job cushion of 100% or more. The median job cushion is 51%.
How are jobs estimated?
Jobs are estimated using an input/output model which represents the relationship between different industries, and this model estimates the economic impact of the EB5 investment in a particular region. RIMS II and IMPLAN are the two mostly commonly used models. They use multipliers to estimate the number of jobs created for every $1 million of construction spending and/or revenues.
The geographic location of the project and its industry affects its economic multipliers. The larger the impact area, the larger the multiplier which results in a larger number of jobs. Certain industries such as manufacturing have larger multipliers than others. Industries are classified using the NAICS codes (North American Industry Classification System).
Inputs used: Construction spending or operational revenue, or a combination of both It is more important to evaluate whether the inputs used are modelled correctly than the size of the job cushion.
Regarding construction spending, it's important to confirm that a third-party has corroborated that the Project’s budget is in-line with industry standards and the construction timeline is reasonable. In order to count direct construction jobs, construction must last more than two years.
The different types of budgeted items should be clearly identified because not all construction expenses are allowable. Examples of non-allowable expenses include costs of obtaining permits and property tax payments.
Even in the best eb5 projects hard construction costs are generally considered low risk as they are generally acceptable versus soft costs such as certain financing costs that would require a higher burden of proof.
Overall, jobs estimated from construction spending are considered less risky than operational jobs because construction budgets are almost always fully spent, so long as the project has the necessary financing. All inputs must be properly documented.
If revenue is used as an input, the project must meet the revenue projections to create the estimated jobs. In order to assess whether a project is likely to meet its revenue projections, you must evaluate whether the assumptions used are reasonable. Also, you should perform a sensitivity analysis to test the impact on job creation if revenue targets are missed.
Operational jobs are riskier, as it’s not uncommon to miss revenue targets during the first few years of operations. If the construction timeline spans many years, the project may not be operational during the investor’s timeline. The EB5 process demands that all jobs be created within two and a half years of the approval of the investor’s I-526 petition.
It’s therefore incumbent on investors, or their advisors, to evaluate whether the inputs have been modelled correctly so that jobs are not being overstated. Job creation is one of the primary criteria to obtaining permanent residency via the EB-5 program, therefore understanding how jobs are calculated is critical.
If you have any questions about job cushion or any aspect of diligence in the EB-5 program, feel free to contact Rupy Cheema: firstname.lastname@example.org