EB-5 Economist Engagement on Tenant Occupancy RFEs etc.

The long-awaited engagement with the USCIS chief economist, John Rogers, and USCIS Director Alejandro Mayorkas, was held this afternoon. I think it is fair to say the session did not go far to address the critical need for clarity and transparency that prompted the engagement in the first instance, in the wake of the confusion generated by the “tenant occupancy” RFE’s. Indeed, it raised a number of new questions and revealed some fairly startling interpretations.

The most notable aspect of the engagement was the lack of willingness to offer examples or engage in specific discussion. More than once, the economists emphasized the “importance” of ambiguity, and they declined to reveal how they would view specific types of circumstances or data sets. The central underlying message seemed to be that they are willing to be persuaded that in the particular locale and under the particular conditions you can document (using comprehensive, current and well-sourced data that is consistent with industry standards), it is reasonable to conclude that the job creation will occur, will be the direct result of the investment of EB-5 capital, and will be “new” – as opposed to displaced—jobs.

Here are some of the key points we can glean from the presentation:

  • The laundry list of data sets and parameters outlined in the tenant occupancy RFE does not equate to a set of firm benchmarks that will lead to denial if they cannot be produced. The economists expressed that job creation methodologies represent an imperfect and evolving science, in which the available and most relevant data will differ dramatically by industry, geography, and conditions affecting the local economic climate. They expect the issues raised by the tenant occupancy RFE to be addressed, with whatever the best and most current and useful supporting data might be, in the required comprehensive business plan.
  • Credit for job creation by “tenant” or unrelated businesses may in fact be permitted where there is a “significant, long-term, sustained business/financial relationship” between the new commercial enterprise and the job-creating business, established with documentation, sufficient to make it clear that the functionality of the new commercial enterprise is dependent on the new jobs AND that the new jobs would not have been created but for the investment of EB-5 capital.”

    — The economists emphasized that the existence of a significant business relationship, such as a joint venture agreement or revenue-sharing agreement, would not necessarily mean that ALL of the third party’s employees could be counted, but only those whose jobs were integral to the “functionality” of the commercial enterprise.

    — They further declined to specify what would be considered “long-term” or “sustained.”

    — It does sound like hotel operations using standard management/branding agreements will pass muster on the “nexus” question.

  • Job displacement is a key issue. The economists stated that one of the burdens on applicants is to establish that the jobs will be “new,” and that disqualifying displacement can occur from anywhere in the U.S. Some applications of this principal are readily appreciated and have been counseled by prudent EB-5 practitioners for some time (e.g., if we develop a big box home improvement store in town, the net job gain must account for the loss of employees at local hardware stores). But the breadth of the USCIS economists’ statements was very surprising, in that it suggested that somehow project developers should be able to prove with data that the economic stimulus in their local area will not negatively affect the economy in any other area anywhere in the United States. As all job-creating activity affects local, regional, and national economies with direct, indirect, and cumulative impacts (some measurable or foreseeable; others not), is this view creating hurdles that bona fide/net-positive projects could not possibly overcome? This raises further questions about the economists’ adjudicative role, discussed further below.
  • Construction timelines and expenditure breakdowns are of great concern. The economists expressed the view that as a general matter, the data available to them suggests that it would be highly unusual for a commercial construction project to require more than 2 years to completion. Construction timelines beyond 2 years or otherwise out of line with industry expectations will have to be explained in the business plan and supported with data. As for construction expenditure breakdowns, the economists want to see detailed itemization of costs. Some soft costs, such as for architectural and engineering fees – during particular phases of construction – will be considered integral to the implementation of job creation and may be validly included as “inputs” in the applicable I/O model. Land acquisition costs, or expenditures relating to the purchase of a structure, may not be included as inputs for purposes of calculating job generation resulting from construction expenditures. Several attendees asked for clarification as to whether this only precluded the land/building acquisition costs from serving as inputs in the economic analysis, or whether they were indicating that expenditure of EB-5 funds on land/building acquisition would be impermissible. Neither the speakers nor the Director could answer the question, but they did indicate a response would be forthcoming soon.

As a lawyer, what I found particularly puzzling throughout this engagement was the procedure by which these economists participate in the adjudication of individual petitions. There is nothing in any of the regulations which suggests that RC applications or I-526 petitions will go through multiple tribunals or decisionmakers. The economists clearly implied they were delegated authority to decide whether to “grant economic benefits” (i.e., credit for job creation). And yet they specifically declined to identify benchmarks, standards, or even a standard of review. The economists were quick to decline questions relating to whether particular fact patterns would be approved, stating that those questions were “adjudicative.” And yet they were clear about the fact that they are making decisions about what job creation “benefits” may reasonably be “granted.” I didn’t hear anything about the preponderance of the evidence standard, and I didn’t hear anything that suggests that adjudicators have independence or applicants have the opportunity to rebut a USCIS economist’s recommendation once their “decision” is made.

Director Mayorkas did commit to providing responses to some of the most pressing questions, as well as providing his prepared remarks on the future of the EB-5 program (not delivered due to shortage of time), in short order – which I understood to mean the next few days. He also invited feedback, specifically requesting not only identification of issues but also proposed solutions to those issues, in e-mails to the OPE mailbox, public.engagement.

Engagement with EB-5 Economists Announced by USCIS (RE: Tenant Occupancy)

The long-awaited public engagement with the EB-5 economists regarding the “tenant occupancy methodology” and other economic methodologies has been scheduled for June 22, 2012, at 3:00 EST. The announcement and invitation to participate may be found here on the USCIS website.