Evans, Carroll, & Associates, Inc.
EB-5 Economic Analysis

Evans, Carroll, & Associates, Inc.
EB-5 Economic Analysis

Evans, Carroll, & Associates, Inc.
EB-5 Economic Analysis

Evans, Carroll, & Associates, Inc.
EB-5 Economic Analysis

Evans, Carroll, & Associates, Inc.
EB-5 Economic Analysis

Evans, Carroll, & Associates, Inc.
EB-5 Economic Analysis

Evans, Carroll, & Associates, Inc.
EB-5 Economic Analysis

How the EB-5 Program Works

Overview

The primary purpose of the program is to attract foreign investment to the U.S., which will create new jobs.  From an economic viewpoint, the key requirement is that each investment must create a minimum of 10 permanent new jobs.

In some cases, the immigrant investor must raise a minimum of $1 million, while in other cases, the minimum is $500,000, which applies to facilities located in a Targeted Employment Area (TEA).  The smaller number applies if the investment is located in (a) an area of high unemployment, currently defined as more than 150% of the national average unemployment rate, which for 2014 is 9.3%, or (b) a rural area, currently defined as an area that is not in an MSA and is not within a municipality with population of over 20,000.  The 2014 national unemployment rate, based on preliminary data, was 6.2%, which puts the threshold rate at 9.3%.  Please note this rate will change again in April, 2015, and as a result, all TEA letters must be refreshed every year by obtaining an updated copy from the issuing agency, as discussed below.

Most of the EB-5 applications we have analyzed are based on the underlying assumption of a $500,000 investment per EB-5 immigrant investor.

How are the 10 jobs per investor calculated?  In some cases, only direct jobs can be counted – the jobs that are actually created by the new businesses that are started.   In other cases, indirect and induced jobs can also be counted.  In order for those jobs to count, the plan must include the formation of an EB-5 regional center, which requires additional paperwork, documentation, and economic analysis.  

However, because the job multipliers are often at least 2, the incentives to form a regional center apply in almost all cases.  Furthermore, in many cases, only indirect and induced jobs can be included in the EB-5 job count, so the regional center approach must be used in those cases.  ECA focuses exclusively on those cases where regional centers are created.

In other words, if you want to count indirect and induced jobs from both construction and operations, you will need to utilize a regional center, either by forming your own, or “renting” from an existing center.  Our analysis and reports are prepared only for those cases where indirect and induced jobs are included in the analysis.

ECA only prepares the economic impact analysis reports.  You will need a business plan writer to prepare the Business Plan, an immigration lawyer to prepare the requisite documents, and a securities lawyer to prepare the private placement memorandum.  We will be pleased so supply the name of those organizations we have successfully worked with in the past.
 

Determining What Type of Project

The first step in the procedure to establish an EB-5 regional center is to file an I-924 petition, which establishes the regional center area and the list of industries included in the RC.  At this stage of the process, the petitioner may file for a hypothetical, an actual, or an exemplar project.

In spite of the “hypothetical” nomenclature, such a project must be defined fairly specifically.  You must state what kind of business is being considered, present a construction budget and a pro forma income statement, and an appropriate business plan.  The hypothetical part means you may not have a specific address for the project – although you must know the city where it will be located – and the size of the business is subject to modification when actual plans are submitted.  By comparison, for an actual project, the specific location and size must be determined.  An exemplar project must be “shovel ready” in the sense that all building permits, architectural drawings, and utility hookups must be ready to go, and construction could start immediately once approval is granted.

In determining which type of project to file, the vagaries of the USCIS timing and backlog must be taken into account.  The major issue here is that once the I-924 petition has been approved (i.e., regional center status has been granted), the immigrant investor must then file the I-526 petition, which results in the granting of a temporary green card.  In granting the I-526 petition, the USCIS makes a determination that the project will in fact generate 10 permanent new jobs per immigrant investor.  In order for USCIS to make that decision, an actual project must be clearly specified.  So even if you start the procedure by filing a hypothetical project at the I-924 stage, you must have an actual project planned by the I-526 stage.

Here’s the tradeoff:  If you initially submit a hypothetical project, USCIS often issues approval in about 6 months; however, the time for the I-924 petition to be approved is then often another 15-18 months, because the USCIS must go through the process all over again for an actual project.  Conversely, if an actual or exemplar project is initially submitted, it usually takes longer to obtain the initial RC approval, but then the time of approval for the I-924 is shorter.   Either way, the whole process now takes as much as 2 years, even though the times stated on the USCIS website are shorter. 

Thus each RC applicant has to decide whether submitting a hypothetical or an actual/exemplar project is better.  If the actual land has been purchased and construction has already started, the exemplar is probably a better choice, but if the project has not yet been nailed down in all details, the hypothetical is probably better.   Currently, more than half of our new clients choose the hypothetical approach. 


Calculating the Number of Permanent New Jobs Created

Most projects have two different types of jobs:  those from construction and those from operations.  The calculations for the construction jobs are based on expenditures rather than the number of people actually working on the building.  By comparison, the operating jobs are based on the actual number of direct jobs, although the calculations are often based on revenue estimates, as explained below.

After the I-526 (temporary green card) has been obtained, another two years elapse.  At that point, the immigrant investor files an I-829 petition requesting removal of the conditions on the temporary green card – in other words, permission for the green card to become permanent.   At this stage, the investor must show that 10 permanent new jobs have been created by the investment made at the beginning of the process.  At the I-924 and I-526 stages, you need to show that if the construction and operating budgets were actually utilized, 10 jobs per investors will be created, whereas at the I-829 stage, you need to show that those jobs actually were created.

The economic impact analysis report, which ECA prepares, is primarily concerned with showing that 10 permanent new jobs are created per immigrant investor (the other major part of the report is concerned with showing that the area chosen is a viable RC).  In this respect it is useful to distinguish between jobs generated from the construction of the project, and jobs generated from operations.  Each of these is now discussed in turn. 


How to Calculate Construction Jobs

For construction, jobs are NOT counted directly. Instead, the amount spent on construction is multiplied by the final demand multiplier, which comes from the RIMS II model and states the total number of jobs created per $1 million of expenditures.  Usually, the final demand multipliers are in the range of 12 to 14.

In determining the number of jobs created from construction expenditures several factors must be noted, as follows:

1.  MOST IMPORTANT:  If the project takes more than two years, direct as well as indirect and induced jobs may be counted; if it takes less than two years, only indirect and induced jobs may be included.   Time of construction is defined as first shovel in the ground until certificate of occupancy (or, in the case of manufacturing, actual use of the facility).  Demolition times count providing that there is no idle time between demolition and construction.  Pre-planning time does not count.

2.  Not all hard construction jobs are EB-5 eligible.  In particular, contingencies and fees are not included.  Some adjudicators have also claimed that general conditions are not eligible; this appears to be a minority opinion, but it could change. 

3.  Hard costs, soft costs, and purchases of FF&E must all be treated separately, with different multipliers.  The only soft costs that are EB-5 eligible are architectural, engineering, design, and testing costs.  In particular, building fees and permits, utility hookup fees, taxes, financing charges, insurance, marketing, and pre-opening costs are generally not permitted.   We say generally because adjudicators vary on the list of included and excluded costs. This usually involves three separate sets of calculations, one for each of these categories.

4.  In general, costs will increase over time due to inflation, but this factor cannot be considered because the results are in constant dollars.   This leads to an additional adjustment due to inflation.   Usually the construction costs are based on in the year the project starts, which currently would be 2015.  However, the RIMS II model coefficients and multipliers are based on 2010 data, which means the construction expenditures must be deflated back to 2010 values.  Currently, the 2010-2015 deflator for hard costs is expected to rise 13.3%, which means hard costs must be divided by 1.133 before being multiplied by the final demand multiplier.

Once all these adjustments have been made, the RIMS II input/output model is used to determine the number of jobs created from all facets of construction expenditures.  At the I-526 stage, USICS will require evidence that these costs are reasonable.  That in turn requires a detailed construction budget on GC letterhead itemizing each cost category (a typical template is available from ECA).  It also requires we show the cost per square foot for this type of building in the particular region is consistent with industry standards; for this purpose, RS Means data are generally used.    Also, as noted above, if the project is expected to take more than 2 years, a monthly scheduled of expected construction costs will be required. 

At the I-829 stage, the applicant will simply be required to show that the funds were actually spent, using canceled checks, vouchers, and wire transfers; that part of the application is usually straightforward and is seldom questioned by USCIS.


How to Calculate Operations Jobs

We now turn to the calculation and verification of the jobs generated by operations.   In general, there are two ways to proceed.  One is to count the number of direct jobs and multiply by the employment multiplier.  The other is to take the top line revenues from the pro forma income statement, deflate by the appropriate factor, and multiply by the final demand multiplier.  These may sound like two different methods, but in fact they should give the same results; if they do not, USCIS is likely to deny the petition.

To provide a simple example, consider a full-service hotel with 200 rooms, an ADR of $240 and an occupancy rate of 75%.  Also assume in this example that room rates are 2/3 of the total revenue (the rest is probably mainly food and beverage service).  Total annual revenues would be $19.71 million in 2018 dollars, or $15.56 million in 2010 dollars.  If the final demand multiplier were 15, there would be 233 jobs, and if the employment multiplier were 1.75, there would be 133 direct jobs, or 0.67 direct jobs per room.  The latter figure is very close to the industrywide average of 0.71 for a full-service hotel.  All these figures would be explained and verified in the economic impact analysis report and the business plan.   Please note that these are average multipliers for hotel; the figures vary by county.

At the I-526 stage, it is sufficient to show that the revenues, including the ADR, occupancy rate, and room/total ratios are consistent with similar hotels in the area.  For that purpose it is usually advisable to have one of the large hotel consulting firms, such as PKF, HVS, or STR, prepare a feasibility study.  At that stage you don’t have to show evidence of the actual number of jobs being created because the hotel hasn’t opened yet.   At the I-829 stage, however, USCIS will want to see evidence those 133 jobs actually exist, based on W-2, I-9, and 941 tax forms.  Looking ahead, you should be prepared to offer this information.

Other factors to be considered are the following:

1.  Verification of full-time workers may be difficult in certain circumstances.  Each employee must work an average of at least 35 hours a week every week.   Part-time workers may be included if they are in the same job; i.e., 2 half-time waiters equals 1 full-time position, while a half-time waiter and a half-time cook would be 0 full-time jobs.  Please note this applies only to year-round jobs and not to seasonal jobs at resorts; in those cases, only the indirect and induced jobs may be counted.

2.  All newly hired employees must be U.S. citizens.  We assume that no one would deliberately skirt this requirement.  On the other hand, illegal immigrants may obtain false papers.  If the USCIS, with its deeper knowledge and data base of illegal immigrants, determines that false papers have been used, the developer has no recourse, and the I-829 petition will be denied.  This is one of the reasons that most applications include a job “cushion”.

3.  Direct hotel direct jobs are calculated from various surveys and shown they agree with the RIMS II estimates; similar surveys and metrics are available for restaurants and senior living centers.  For other types of jobs, the metric used is generally based on surveys showing the number of square feet per employee. 

4.  The USCIS position has evolved over the years, and may change again, but as of early 2015, in most cases operations jobs can be counted only if the developer maintains a significant ownership interest in the facility; other cases are discussed below.  The USCIS rules state a “significant” interest but they have never defined what that means; in general, we have found that a 15-20% interest appears to be satisfactory; a majority interest definitely does not seem to be required.  On the other hand, it is highly unlikely that a 1% interest would be acceptable.

From a practical viewpoint, USICS generally seems to approve hotels, restaurants, and senior care living facilities under this rubric, but rejects office buildings and shopping centers.  Their argument appears to be that in those latter cases, no net new jobs are created, the jobs just move across the street, so to speak, as the same customers who used to shop at the old stores now shop at the new stores.  USCIS regulations do contain language indicating that if the petitioner can show there is a shortage of that particular type of establishment in that particular region, operating jobs can be considered net new jobs, but in practice, this has been very difficult to show.    

As a result, the mix of EB-5 projects we do has changed over the years.  Before February 2012, office buildings and shopping centers were very popular.  Currently, those are generally out of favor, and the most popular choices are hotels, senior living centers, hospitals and medical offices, owner-operated restaurants, and residential dwellings, both single and multi-family.  The important concept here is that for these activities, there is one type of business and one owner -- as opposed to a shopping center or office building, where the space is leased out to dozens or even hundreds of individual tenants. 


What are indirect and induced jobs?

Indirect jobs are created when the business buys goods and services from local firms.  For example, a construction firm might buy some of its materials locally, or purchase locally produced doors and windows or roof tiles.  A retail store would buy some of its goods from wholesalers.  It would probably hire outside firms for building maintenance, waste management, and security.  Also, it would probably hire accountants, attorneys, and other professional business services.

Induced jobs are created when the employees of the new business spend part of their paychecks on locally produced goods and services.  That would ordinarily include purchases at supermarkets and gas stations, banking and real estate services, and health care.          


Determining Areas of High Unemployment:  TEA Analysis

In some cases, entire counties will qualify because the unemployment rate is more than 150% of the national average.  However, it is more often the case that the chosen area has a somewhat lower unemployment rate, but certain Census Tracts in the city or county do have a sufficiently high unemployment rate to qualify as a Targeted Economic Area (TEA).  The governor of the state will provide such a list except for Texas, where the decisions are made by the mayor or county judge.  In other cases, we calculate the TEAs based on unemployment statistics taken from the American Community Survey data, as discussed below.    

1.  Except for rural areas, as discussed below, a TEA must have an unemployment rate in excess of 150% of the national average.  THIS RATE CHANGES EVERY YEAR.  Thus there is no guarantee that the TEA designation obtained at the time of submission will still be in force at the time of the I-526 adjudication. The TEA calculations must thus be refreshed each year.2.  It is possible that the project is located in a county or city with an unemployment rate above the threshold level.  However, that is highly unlikely.  It is much more probable that the TEA determination will be made at the Census Tract (CT) level.  BLS does not publish unemployment rate data at the CT level, so a method known as the Census Share method is used to estimate those data. 

With some oversimplification, the method works like this.  Using the American Community Survey (ACS) data for the past five years, suppose the unemployment rate for CT 1 in County Z were 12.0%.  Also suppose that for the same 5-year period, the unemployment rate for County Z AS MEASURED BY ACS were 9.0%.  And the unemployment rate for County Z in 2014 using the BLS data were 7.5%.  The unemployment rate for CT 1 in 2014 would then be 75/90*12 = 10.0%, which is above the threshold level of 9.3% for 2014, so CT 1 would be a TEA – at least until the 2015 data are released in early 2016.

3.  While it occasionally happens that the project is located in a CT that is a TEA, as defined by the above method, that is unusual.  It is much more likely that the project is in a CT that is not a TEA, but that CT can be combined with contiguous CTs to form a TEA, using the above method.

4.  This is where the state differentials become important.  As the regulations are currently written, the appropriate agency in each state determines what qualifies as a TEA.  While all states use the Census Share method, there are still some important differences.  Some states use the data from the previous year, some use the latest 12 months.  New York State still uses 2000 as the benchmark year.  California permits the use of no more than 12 contiguous CTs.  Some states have specially recognized districts (such as redevelopment areas) while others do not.  We will obtain the TEA letters for you whenever possible.  In general, NY and FL are the friendliest toward TEA; CA is harsh, and TX is mixed, with Dallas more flexible than Houston.   In general, MA, NY, OH, MI, WI, IL, and WA are all reasonable. 

5.  In some cases, the project will consist of many small outlets (such as restaurants) all run out of a central headquarters.  In such examples, the business will qualify as a TEA if the headquarters location is in a TEA; it is not necessary for each individual facility to be located in a TEA.

6.  The Census definition or rural areas may not be the same as your definition.  According to Census, any county that is part of a metropolitan statistical area is not considered rural, even if in fact the location you have chosen is devoid of population and overrun with scrub brush. The location has to be outside an MSA to get the rural definition.  Furthermore, even in rural counties, any city with a population of 20,000 or more will not qualify as a TEA based on the rural definition.

What kind of businesses qualify?

Virtually any legitimate business qualifies for which at least 10 permanent new full-time jobs are created per investor.  It can be in manufacturing, retail trade, services, non-profit, research and development, or agriculture.  Some of the businesses that have recently been approved include hotels, restaurants, warehouses, manufacturing plants, research facilities, community centers, hospitals and nursing homes, farms, movie production, inland port facilities, lumber mills, forestry projects, and aquaculture.

However, a few caveats apply:

1.  The EB-5 regulations actually state that the contributions of each investor must create 10 new OR SAVED jobs.  Hence in certain cases, rehabbing an old structure might also qualify if the existing jobs would have disappeared.   In general, however, this is more difficult to show, and most EB-5 projects work best either with new construction, or with rehabbing old buildings that are currently vacant.

2.  Residential properties generally don’t have operating jobs; there are a few jobs from rental income, but that is usually less than 5% of the total.  Thus for practical purposes, the jobs from residential properties depend almost entirely on construction.  If the project takes more than 2 years, and if you are raising less than 50% of the funds from EB-5 sources, the general rule of thumb is that it will work.  In this respect, we note that while it seldom takes 2 years to build a single home, if the project consists of building many homes with the same construction crew with no down time between houses, the overall project will qualify as taking more than 2 years.

3.  The 10 new jobs must represent a net increase.  For example, suppose someone builds a new shopping center next to an old one, and people start shopping at the new place, so the old one closes down and people lose their jobs.  In that case, the total net effect would be a lot smaller than the number of new jobs at the new shopping center.  The report must also to show there will not be a net loss of jobs elsewhere in the region when this new project opens. 


The Concept of a Regional Multiplier

Not all multipliers are created equal.  Some models generate larger multipliers for any given project.  Yet all of the basic input/output data come from the same source, namely the Commerce Department.   How could the results be different?

There are two major answers to this question:  geography and timing.

The entire concept of a regional center is built around the idea that jobs will be created in a fairly narrowly defined region near the area where the new business is started.  Generally that is a few contiguous counties.  It is usually not the entire state.  And it is certainly not other parts of the country that have no geographical connection to the regional center.  

In general, the economic multipliers for a state are greater than a four-county region, and the multipliers for the U.S. are much greater than for an individual state.  In the past, some EB-5 studies have relied on those larger multipliers to get the job count higher -- and some of them were accepted.  More recently, however, USCIS has made it clear that methodology will not be accepted, and have rejected these approaches.  

In terms of timing, other modeling processes use the methodology of a dynamic multiplier.  In short, the idea is that when a new business is started, more people will move into the area; that in turn will result in more new homes and shopping centers being built, which will create even more jobs, and so on.  A variant of this approach is the "tourist" model, in which a new hotel, casino, amusement  park, ski slope, etc. will not only create new direct and indirect jobs as defined by the input/output model but will attract many tourists who will then spend additional dollars on food, gifts, and tourist services, hence boosting the job creation figure substantially. In general, USCIS does not accept this methodology, although there are occasional exceptions.

Recently there has been increased interest in larger regional centers.  One of the major examples is the “Texas Triangle” which covers 43 counties in an area bounded by Dallas/Fort Worth, Houston, and San Antonio.  Another is the 36-county New York City combined statistical area. Another is the entire state of Florida.

USCIS claims that “each case must be adjudicated on its own merits” but in our experience the only way they will approve such larger areas is if there are similar facilities in each of the smaller county groups within this area; these groups are usually 4-5 counties each except for NYC. USCIS expects to see the same type of facilities – hotels, restaurants, senior living care facilities – in each of the smaller county groups.  For example, in the Texas Triangle, there are 12 county groups.  You don’t have to build in all of these, but our report has to include the multiplier analysis for each county group.


What About Distressed Properties?

Some EB-5 prospects have asked about purchasing distressed properties at 1/3 or 1/4 of the previously assessed value, finding tenants for these properties, and then reselling them later at a substantial profit.  In the meantime, because the cost of purchase is so low, substantial income and also be earned on the rents received before they are sold.  

Is this an appropriate model for the EB-5 program?  As usual, the answer is "it all depends” -- but here are some guidelines to help you make a decision.

1.  You will only get credit for new jobs, so for practical purposes the building should be nearly or completely vacant.  You need the job credits by filling up the buildings with new tenants.  If there are existing jobs there, you can only count them if you can prove they are part of a troubled business, but that is often difficult to show.

2.  You want to be in a TEA; however, if the building is vacant, it may well be in a high-unemployment area, so this is not generally a very high hurdle.

3.  In summary, then, you want to buy a vacant retail, office, or industrial building at 1/3 to 1/4 of its previously assessed value, find new tenants, collect the rents, and then sell out for a substantial profit in the next five years.


4.  And now for the tough part:  virtually every client asks us, how can I write a business plan and have you generate an economic report if I don't have the properties yet?  I need EB-5 money to pay for them, so it seems like a chicken and egg problem.   So here's the answer.  Choose several likely properties and get USCIS approval for a hypothetical project, as discussed at the beginning of this section.  You can then be approved for those specific industries.  If the properties fall through, you can then file at the I-526 stage for a specific property that is different from the one you originally planned to purchase.  This method is OK with USCIS as long as you inform them of the change.