EB-5 legislation and regulations
Jul 08, 2015
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Kurt Reuss
Kurt Reuss
Kurt Reuss is a registered securities broker who has been specializing in EB-5 since 2012. He offers advice on investment structuring and market conditions related to EB-5 investments.

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Regarding the Senate's EB5 Reauthorization Bill, what is the Big Picture?

Angelo Paparell: What is the big picture here? What is this bill going to do to the industry? There's a restriction on the amount of capital that can be raised from non-EB5 funds; there are disclosure requirements and the tax return submission requirements are now 7 years.

What are these changes going to do to the industry? Some have suggested that USCIS is now authorized to hire more expensive staff to review these applications and petitions. But what if the industry dries up because there isn't a big enough appetite and other nations offer more attractive citizenship or residency options. I'd like some predictions on where we're going.  

Ron Klasko: I think there are two key parts to this bill that if they were enacted in their present form would at the very least do very serious harm to the EB5 Investment industry and render many and possibly most present projects unable to use EB5 money.

First is the TEA provision. There's a very clear rural vs. urban aspect to this bill. The two sponsoring Senators are both from rural states and this bill clearly favors rural states, which is one of the reasons that many of the Senators from non-rural states are not going along with it.

Basically what it would say is that the only thing that's a TEA and the only thing that prevents the investment amount from going from $500,000 to $1,200,000 is if you're in a rural area or a single, high unemployment census tract.  I have a whole bunch of economists who've been looking at this and probably more than 90% of the present urban projects that our TEA’s using census tract aggregation are not currently in a census tract with an unemployment rate of 150% of the national average, and this is because the concept of census tract aggregation, using contiguous census tracts, takes into account where the workers are coming from and the commuting distance concept.

If you eliminate that as this bill does and only allow single census tract TEAs, virtually no urban project would be in a TEA.  

The other thing that will have a very serious effect on the EB5 industry is vast changes in what counts for job creation. If you put them together, many of the existing projects today would have a very little job creation that would count and many if not most of the projects today would not be able to use EB5 in the future.  

There are three different aspects to the changes in the job creation. There's a 90/10 rule, a 50/50 rule and there's a 30/70 rule.  

  1.  The 90/10 rule says, that at least 10% of all of the total jobs that you can count for EB5 must be direct jobs. The way I read the language of this bill, is it says it has to be direct jobs of the commercial enterprise and the commercial enterprise is defined as the NCE, which in most cases is the lending company which never has any jobs. Well let’s say what they really meant (and if they amend the language what it's going to say) is W2 jobs of the job creating enterprise or the borrower in the lending model. Well that's okay, but in most of the projects that are successful in today's marketplace, most of the jobs are construction jobs, which from an immigration point of view are indirect jobs of the job creating enterprise (JCE).The language would then have to be amended to allow for direct construction jobs, which are not W2 employees of the job creating enterprise.  Unless that's changed, it would render most projects no longer approvable. 

  2.  The 30/70 provision in the bill: Many of us who have read it many times don't completely understand it, but what it seems to say is that, if a project does not have mostly EB5 money in the capital stack, it’s going to have very severe limitations on the number of jobs that can be counted. If EB-5 funding is not more than 70% of the capital stack, then the job count is limited. There may be a limitation that only 30%, or less, of the jobs that presently count for EB-5 would count if this bill were to become the law. This clearly favors projects that are mostly or solely EB5 money in the capital stack, which is exactly the opposite of what's marketable in China in today's market, which is big projects where there's a lot of developer money and EB5 is a smaller part of the capital stack. 

  3.  The 50/50 changes to the job creation, which may have a little bit less effect, is whether the jobs that are created can be created outside of the TEA.  Basically what it says is that if a project is in a TEA and the TEA is in a metropolitan statistical area (MSA) or a CSA, then 50% of the jobs must be in the MSA or CSA. If the project is not in an MSA or a CSA, then 50% of the jobs must be in the same or adjacent county. This clearly limits a project that has indirect and induced jobs that are not in the local area.

You put those three changes of counting job creation together with the reduction in TEAs and the impact on the EB5 industry would be very, very substantial.  The good news is that the chances of all of that happening are not very good, based on my involvement in advocacy in Washington, I think there is a lot of opposition.

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