On Sep 16 2015 by H. Ronald Klasko

Some Ideas for Resolving the Controversial Issues in the EB-5 Legislation

The EB-5 Reform and Integrity Act of 2022 brought many changes to the EB-5 program. For the latest information, please click here.

Here we are in the middle of September, and the following facts appear to be indisputable:

  • Unless Congress passes an extension, the regional center EB-5 program will lapse (at least temporarily) on October 1;
  • Nobody involved in a decision-making or leadership position in Congress or the Administration wants the program to lapse;
  • Virtually everybody in a decision-making position wants some changes to the program before there is an extension;
  • There is agreement on almost all of the suggested changes among key players in the Senate and House;
  • Senate Bill 1501 (the Grassley-Leahy Bill) is not moving forward;
  • No new bill has yet been introduced in the House or Senate, and time is clearly running out (see first bullet point).

There appears to be consensus that a program extension will be premised upon an increase in the investment amount and inclusion of many of the “integrity” or “transparency” provisions contained in the Grassley-Leahy Bill. That’s not the problem.

There is also mostly consensus on the need for a change in how TEAs are defined. The problem is that there is no consensus – and in fact serious philosophical or ideological differences – surrounding what the changes should look like. The rural-urban divisions that were so apparent in the Grassley-Leahy Bill, and that played a major role in that Bill not moving forward, remain in dispute. For better or worse, the key players want to limit the ability of states or developers to “gerrymander” TEAs. Some of the key players want to provide incentives for investors to invest in projects in rural areas and, secondarily, infrastructure projects. However, other key players believe that projects in urban areas create more jobs from workers coming from high unemployment areas to work in the project, even if the project is physically located in a more affluent or lower unemployment area.

Some different way of looking at the issue may be necessary to dislodge the logjam, and it better happen quickly. Here’s an idea for dealing with high unemployment TEAs. Both the present system and the suggested legislative changes focus on the census tract where the project is located. There is one problem with that – it makes no sense. If the EB-5 program is about job creation, and if the goal is to provide an incentive for investors to invest in projects that will create employment in high unemployment areas, shouldn’t the issue be where the workers are coming from rather than where the project is located? To my way of thinking, the answer is clear. Workers in a project rarely live in the census tract where the project happens to be located. Rather, they commute from nearby distances. (By the way, this is the point that The Wall Street Journal missed in its recent front page article.) So it would seem that the goal would be to determine what the normal commuting patterns are and come up with a system that is more objective and not subject to what opponents of the present system term “gerrymandering.”

Well, there’s good news. The job has already been done for us, and we don’t have to invent the wheel. There is a concept called “area of intended employment” that exists in the U.S. Department of Labor regulations and that has been used in adjudicating labor certification applications for immigrants in the EB-2 and EB-3 categories for decades. Why not just adapt the EB-2 and EB-3 regulatory language to EB-5?

I asked that question to eight of the most experienced EB-5 economists. They reviewed the definition of “area of intended employment” in the Department of Labor regulations and uniformly agreed that it would be a reasonable – or even ideal – definition for TEAs in the EB-5 context.

So it’s worth examining what that definition is and what the economists had to say.

“Area of intended employment” is defined in the Department of Labor regulations as follows:

“Area of intended employment means the geographic area within normal commuting distance of the place (worksite address) of the job opportunity for which the certification is sought. There is no rigid measure of distance that constitutes a normal commuting distance or normal commuting area, because there may be widely varying factual circumstances among different areas (e.g., average commuting times, barriers to reaching the worksite, or quality of the regional transportation network). If the place of intended employment is within a Metropolitan Statistical Area (MSA), including a multiple MSA, any place within the MSA is deemed to be within normal commuting distance of the place of intended employment. The borders of MSAs are not controlling in the identification of the normal commuting area; a location outside of an MSA may be within normal commuting distance of a location that is inside (e.g., near the border of) the MSA.”

All of the EB-5 economists who commented believe that this definition is feasible, logical and workable since it takes into account where the workers actually come from and the unemployment rates in those areas. Consistent with the definition, there would be no limit (maximum or minimum) on the number of census tracts or other political subdivisions as long as all are within the MSA (metropolitan statistical area). (If the project is near the border of an MSA, there could be a limit.)

The economists noted that this definition fits within the definition of a “labor market area” as defined by the DOL Bureau of Labor Statistics. By utilizing MSA definitions (which are set based on commuting patterns), there is a recognition that commuting distances are not uniform across the United States, but vary by area/region. This definition would allow for census tract combinations only if all tracts used in the combination are within the MSA of the project. This would also be consistent with the system used by the U.S. Office of Management and Budget in determining MSAs and CSAs (combined statistical areas).

I have not heard any argument as to why “area of intended employment,” combined with rural areas, would not be a solution to the TEA conundrum. It would place some limit on urban gerrymandering, it would allow for most urban projects to move forward upon proof that the workers commute from high unemployment areas and it is a system that has been used successfully for many years in immigration adjudications. The keys are that it would have to be an objective standard, not subject to discretion, and that combinations of census tracts could be used as long as they are within the area of intended employment.

That appears to be the sole philosophical or ideological issue that is preventing the introduction of a consensus Bill that could be approved under the suspension rules in the House and the unanimous consent rules in the Senate before September 30.

However, there is also the practical and legal issue of effective dates and grandfathering. This is actually a very thorny issue. Senate Bill 1501 proposed to grandfather all projects that filed for advance approval (presumably an exemplar petition) before the effective date of the new law. This grandfathering would apply at least to investment amount and TEA determination. However, the Senate Bill did not grandfather investors with pending I-526 petitions. Both of these decisions proved to be controversial and both are still the subject of debate among the leaders in the House and Senate who are trying to craft a bill.

The issue of grandfathering investors is a particularly difficult one. There are good arguments on all sides. To me, the clearest issue is that it would be manifestly unfair to investors, and very probably subject to endless litigation, if investors are not grandfathered. In many cases, the investors’ money has already been used in the project, the project may have been built and the jobs have been created. It would be hard to fathom how the EB-5 program could continue to exist if investors were now told that their pending petitions – many pending more than a year – no longer qualify because of a combination of a delay in USCIS adjudication of their petitions and a change in the law. This would be a travesty.

However, there is a flip side that is preventing – or at least delaying – inclusion of the language grandfathering the investors. The issue is that there are reportedly approximately 15,000 pending I-526 petitions. Since the EB-5 quota only allows for 3,000 to 3,500 investors annually (the rest are family members), that would mean that any of the changes that Congress now implements (including changes in the minimum investment amount) might not apply for five years or more. Some of the key players in the debate are not copacetic with that result.

So how to deal with this conundrum? There really is no easy answer. However, here’s my attempt at trying to come up with a creative solution.

The issue of recapture of unused visa numbers has been discussed for years. Until now, Congress has not been prepared to enact legislation to accomplish this result. However, there is no visa category quite like EB-5 where Congress allocated far more numbers than were ever used until the last year or two, and now the numbers are nowhere near sufficient to accommodate the demand. How about if the legislation provided for a one-time recapture of unused EB-5 visa numbers sufficient only to accommodate the investors who would be grandfathered under the new legislation? This would allow Congress to have the new investment amount apply to all investors who file I-526 petitions after the effective date of the new law without negatively impacting investors who invested in good faith prior to the effective date.

I will certainly be interested in any comments to these ideas; and, of course, any reader of this blog is encouraged to use any of these ideas in their ongoing advocacy efforts.

I will look forward to updating many of you who will be attending our EB-5 seminar on September 17.