United States: EB-5 ALERT #3: California Governor's Office Announces Changes In California's TEA Procedures For EB-5 Immigrant Investor Financing

The Governor's Office of Business and Economic Development held a stakeholders conference call to announce modifications to its new procedures for designating "Targeted Employment Areas." On June 19, 2012, Brook Taylor, Deputy Director for Communications and Policy of the California Governor's Office of Business and Economic Development (known as "GoBiz") held an open conference call to discuss further changes in the procedures adopted on April 30, 2012 by the State of California for designation of "Targeted Employment Areas" or "TEAs".

TEA Designation is critical to the viability of an EB-5 project. As our readers know, the EB-5 investor visa program allows non-U.S. persons to obtain United States permanent residency (green card) if they invest $1,000,000 in a new commercial enterprise that creates at least 10 new, permanent, full-time jobs per investor. If the new commercial enterprise is located within a TEA, the required investment is reduced to the $500,000 level (while still creating 10 full-time jobs). If a project in not located in a TEA, then the project is for all purposes shut out from raising EB-5 funds because EB-5 investors will not want to invest at the $1,000,000 level when other projects are available at the reduced $500,000 threshold.

The new procedure will designate individual census tracts with qualifying high unemployment as TEAs. As modified effective yesterday, the California TEA designation procedure will now allow individual census tracts with qualifying high unemployment to be designated as TEAs, in addition to metropolitan statistical areas ("MSAs"), counties, cities with qualifying high unemployment and rural areas. In addition, California will issue individual letters to project developers certifying qualified TEA areas for specific project locations, in order to provide assurance to EB-5 investors that the projects they invest in are qualified at the $500,000 investment level.

The good news: This inclusion of individual census tracts with high unemployment is good news for many project developers who have projects located in individual qualifying census tracts, and some good news for cities, such as San Francisco, San Diego, San Jose and Anaheim, that had been completely disqualified under the prior policy since individual census tracts with high unemployment within these cities can now qualify for TEA designation. In addition, the Deputy Director reiterated the support of the Governor's Office for projects throughout California using the EB-5 immigrant investor program. We appreciate the willingness of the Governor's Office to review and further refine its policy in the future.

The bad news: While we appreciate that the Governor's Office has expanded the TEA designation procedure to include individual census tracts with qualifying high unemployment, we are disappointed that the new procedure stopped there. We believe that it would have been relatively easy to aggregate census tracts in a sensible manner -- particularly census tracts that are immediately contiguous to the project location census tract -- to achieve a TEA. The fact that California has failed to consider census tract aggregation was particularly frustrating to many of the callers whose projects are now in jeopardy because of the inability to raise EB-5 funds. It should be noted that California is now the only state in the nation that does not have a policy of designating TEA areas based on contiguous census tracts, and that means that California will still have a disadvantage in competing for EB-5 investments.

The Governor's Office believes that project developers can get TEA designation from the USCIS. We know that the Governor's Office recognizes that this is an important issue, and it has even included a statement on its website EB-5 Investor Visa Program that seems to address this issue, stating as follows:

"IMPORTANT: If your project is NOT in a qualifying metropolitan statistical area, county, city, or individual census tract designated as a TEA by the State of California, your project does NOT qualify for certification from the state. However, you can still apply to U.S. Immigration Services without the state certification and provide evidence on your own showing that the new enterprise is in a high unemployment area."

There is a problem with this approach. The problem with this approach is that the USCIS regulations specifically provide that an authorized body of the state can designate a geographic or political subdivision of a metropolitan statistical area, city or town with a population of 20,000 as a TEA - but the regulations do not state that the USCIS is authorized to make this determination. California seems to be ceding this authority to the USCIS, but we do not know whether the USCIS will in fact accept this responsibility. In addition, USCIS TEA designation is typically made at the time a regional center application is filed as part of an I-526 exemplar application, or as part of the I-526 petition, which requires that all project documents be filed along with the application. The USCIS processing time could take more 6 months or longer, which effectively precludes USCIS TEA designation for all practical purposes.

Why won't California designate TEAs for qualifying geographic or political subdivisions? If every other state in the U.S. is willing and able to designate TEA areas consisting of contiguous census tracts that are geographic or political subdivisions of a city or county, why is the state of California not able to do that? According to the Deputy Director, it is because the Governor's Office wants a procedure that is consistent, transparent, meeting the goals of locating projects in areas of high unemployment and easy for the state to administer without devoting significant time to the process. While we do not disagree with these goals, we believe that all of these goals can be met - in fact can be better met - by a process that would include the designation of TEAs based on a reasonable number of contiguous, qualifying census tracts.

All of the other states are doing just that, each a bit differently, but each designed to meet the same goals as the state of California. For example, in Arizona, the state uses a policy it calls "solid configuration," meaning the census tracts make up an area that is a reasonable geographic area around the project in which jobs will be created. We hope that the Governor's Office will continue to review its procedure and refine its TEA policy to make it competitive with other states. Billions of dollars of investment and thousands of California jobs are dependent on it. In fact, based on our discussions, the stakeholder group with the greatest support of the new policy are regional centers located in other states that now believe their projects will be more attractive to EB-5 investors.

Why did California decide that its prior procedures were taking too much staff time? According to the Deputy Director, the California Business, Transportation and Housing Agency ("BTHA") (which was formerly responsible for designating TEAs), was inundated with requests for TEA designations using a wide variety of political and geographic subdivisions to establish the area to be designated as a TEA. The reason for this was that a year ago, the BTHA decided that it would require project developers to use a pre-existing political area as a TEA, such as a community planning district, rather than simply designating one or more census tracts. As a result, project developers spent time trying to locate a pre-existing political area, which could in some cases be made up of over 100 census tracts. We agree that the old requirement of a pre-existing political area is not required by the regulations and creates needless additional work for the state as well as project developers.

The better policy, as other states recognize, is to look at a reasonable number of adjoining census tracts from which it can logically be expected that a project will draw its employees. In a large project, such as a hotel, employees will not only come from the census tract where the project is located - they will come from the surrounding areas. There is no need for the state to designate a minimum or maximum number of census tracts - the state can examine the evidence compiled by the developer and make a decision whether the area covered by the proposed TEA is reasonable. A developer with an actual project will be motivated to provide the necessary supporting information, from a professional economist, that will support the rationale for defining a reasonable aggregation of census tracts. By doing this, project developers can reduce the workload of the staff of the Governor's Office, without denying developers, cities and the people who could be employed at dozens of projects throughout California, the ability to get the EB-5 financing they need to get these projects off the ground. If the Governor's Office is truly committed to creating jobs in California, expanding EB-5 financing is one of the best possible ways to achieve this goal - at no cost to the state or the taxpayers of California.

The new California procedure will not drive more EB-5 projects to high unemployment areas in California - but it may drive more EB-5 projects to other states. We understand that the Governor's Office wants to focus on job creation in the areas that need it most in keeping with the spirit of the program - but in fact the largest projects that will create significant jobs will often not be located directly in the areas of highest unemployment. The competition for EB-5 dollars is not between EB-5 projects located within have and have-not regions of California. The competition for hundreds of millions of EB-5 dollars is between EB-5 projects located within globally recognized areas of California and globally recognized areas of other states. If projects within globally recognized areas of California are unable to secure a TEA designation in more than individual census tracts, then the EB-5 funds will flow to globally recognized areas of states that interpret the TEA rules more broadly.

For example, no one is going to build an 800 room hotel in an area that does not have high tourist demand, but there is currently a demand for large hotels in Anaheim near Disneyland. EB-5 investors are looking for high profile projects in highly desirable areas - not small projects where there is a high risk that the project will fail. So, EB-5 investors will be attracted to the best projects in the U.S. Which means that if the EB-5 investor has a choice between investing in a hotel in Manhattan, New York and a hotel in a town somewhere in California that no one in China has ever heard of - the foreign investor will invest in the hotel in Manhattan. But if the choice is between investing in a hotel in Manhattan and an 800 room hotel next to Disneyland - the Disneyland hotel will attract many of those EB-5 investors.

We hope to continue discussions with the Governor's Office on the new TEA designation policy. We greatly appreciate that the Governor's Office representatives have been open to discussion with us and other stakeholders, and we understand that there are many factors that must be considered in making policy decisions that affect the millions of stakeholders in the EB-5 investment program - and we include the millions of Californians that will benefit from job creation as a result of EB-5 projects in California. We hope to continue the dialogue with the Governor's Office, and we believe that more can be done to encourage EB-5 investment in California. We urge other stakeholders to make their views known to the Governor's Office.

For more information about EB-5 financing

How to finance hotel development in 2012 . . . Alternate financing for new hotel construction in a brave new world

EB-5 Lawyer Alert #3: Update on California TEA designation procedure. What's the problem in California!

EB-5 Lawyer Alert #2: Update on developments in California on TEA designation procedure

EB-5 ALERT: California's new TEA approach will discourage EB-5 capital

EB-5 Lawyer with the latest wrinkle in EB-5 financing for hotels -- the Tenant Occupancy Issue

Financing new hotel development today: Finding the right "regional center" and negotiating terms for your EB-5 financing

Chinese investment in U.S. hotels: what the real estate professionals want to know

Hotel Development Lawyers: 10 things you can do to win the "race" for EB-5 capital for your hotel development project

Hotel Investment: Why Asian investors are targeting U.S. hotels for purchase and investment, and what could it mean for you?

Hotel Developers: Why a "regional center" may be the key to financing your next hotel development or expansion. And what you need to know . . .

How to use the EB-5 Immigrant Investor Visa Program for financing

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