New California Rules Limit EB-5 TEA Designations
Posted by
Adam Green on Wed, Jun 27, 2012 @ 08:27 AM
Location of California EB-5 Regional CentersLast week, the California Governor’s Office of Business and Economic Development held an open conference call with EB-5 visa program stakeholders. The topic of conversation was a new, controversial set of procedures for designating targeted employment areas (TEAs).
The state’s new rules, adopted on April 30, would make it harder to qualify as a TEA, something many in the California EB-5 community oppose.
No more TEA designations
That’s right. No more TEAs. None. That was what the State of California said when it adopted the new EB-5 procedures almost two months ago. While some areas like Los Angeles, Fresno, and Sacramento remain eligible for lower-threshold TEA EB-5 investments, cities like San Francisco, Anaheim, and San Diego do not.
To be eligible for TEA status, an entire city must be considered an area of high unemployment. Areas of high unemployment within a city cannot qualify. As stated in its announcement on the matter, California believes the new procedures would:
- encourage job growth in areas of high unemployment
- maintain consistency of methodologies used to designate TEAs, and
- streamline the process of providing TEA status to an economically-distressed area
Needless to say, many California regional center operators were upset about the new rules. Though rarely acknowledged publicly (until now), it’s common knowledge in the EB-5 world that few regional centers can actually compete in the global market without TEA designation.
Why? Because regional centers in a TEA qualify for $500,000 investments from foreign nationals. If you’re not in a TEA, the minimum investment requirement doubles, so why would an investor give your project $1 million when comparable projects are only asking for half as much money?
The new California rules, opponents contend, “virtually guarantee that none of the cities that are left out of California's new uniform letter will be able to raise EB-5 financing in any meaningful amounts for projects located in those cities.”
A few concessions
Following last week’s conference call, the State agreed to allow individual census tracts to be counted as TEAs, assuming they meet high unemployment criteria. This is good if your project is located within a qualifying census tract. But it’s bad if you were going to rely on contiguous census tracts to define a TEA. According to the JMBM Global Hospitality Group, California is the only state in the nation that doesn’t allow the use of contiguous census tracts in TEA determination.
While stakeholders will appreciate these concessions, they would be happier if it were possible to use contiguous census tracts. Of course, an EB-5 regional center can still obtain TEA status directly from USCIS, but going about it this way is problematic. JMBM explains why:
It is possible for a project developer to apply for a TEA designation directly to the USCIS. However, as previously noted, that application is typically made at the time that either a regional center application is filed that includes a project in that area, 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.
Most developers will not want to spend thousands of dollars on project documents until they know that their project will qualify as a TEA, because if the project area does not qualify for a TEA, the project will likely not be able to raise EB-5 financing at the $500,000 level. In addition, although the EB-5 regulations do allow the USCIS to make its own determination of whether an area qualifies as a TEA, we do not know if the USCIS will be willing to undertake the extra work involved in this analysis for every project that is not on the pre-approved TEA list for the State of California.
Needless to say, California’s new rules have made things complicated for several members of the EB-5 community in that state. Even with last week’s census tract concession, hopes will be dashed for a number of EB-5 projects that were relying on TEA status.
Developers pursuing projects that depend on contiguous census tracts for TEA designation and who already received approval to seek investments as a TEA can still have the designation renewed. It must be the same development project and the designated area must still have a qualifying unemployment rate.
This decision by the Governor’s Office comes at a time of exploding growth in the EB-5 immigrant investor program. With around 25% of the country’s designated EB-5 regional centers, California has been a huge leader in attracting investments in job creating projects.
These new rules risk making the state significantly less competitive in the market for foreign capital.