PROPOSED REFORMS MEAN EB-5 INVESTOR RISK WILL INCREASE

Many EB-5 investors are preparing their I-526 petitions now so as to avoid the impending increase in the minimum investment amount to $800,000. But that’s not the only reason to get in before the reforms go into effect. The changes proposed (see discussion in an earlier blog article by attorney Stephen Yale-Loehr) mean that many of the lowest risk investments currently on the market will no longer be possible after reform.

A major focus of the proposed EB-5 reforms is the targeted employment area (TEA) rules that have been stretched so far by creative regional centers that virtually the entire United States can currently qualify for targeted employment area status. This has allowed many big-city developers with marque names to get into EB-5 and offer sophisticated low-risk investments, backed by prodigious financial resources, to EB-5 investors. Regional Centers have been able to stretch the concept of TEA because the USCIS currently permits “census track aggregation,” which allows a regional center to aggregate census tracts around the site at the actual development and use the average of these census tracks to win a designation of TEAs status for the project. In addition, current EB-5 law gives authority for deciding what is and isn’t a TEA to state officials, who are naturally very eager for the development take place in their state, and have been very liberal in granting TEA status to projects proposed in their state. These two characteristics of TEA designation will certainly change in any new reform scheme. The result will be a sharp decrease in the range of locations eligible for minimum investment, meaning fewer “low cost” choices for EB-5 investors.

Proposed rules that limit the counting of indirect jobs will also eliminate many of the premier low-risk investments currently on the market. By establishing a rule that requires every EB-5 project to have a minimum percentage of direct jobs (now there is no such requirement), the reforms will eliminate many projects – in fact, most of the lowest risk projects now on the market – that aren’t able to create direct jobs within the time period required for compliance with EB-5 law.

Other proposed changes will similarly reduce the range of possible projects eligible for consideration as an EB-5 compliant project, and will eliminate some of the tools that regional centers have used very effectively in recent years to structure deals that minimize EB-5 investor risk.  For example, limiting the number of jobs arising from developer money that may count toward the EB-5 job count will mean that projects with large “equity buffers” (a very big plus for EB-5 investors because the equity absorbs any possible losses before touching the EB-5 investments), will no longer be EB-5 viable in the future.

Most of the lowest risk projects we show to investors right now simply could not exist, or would need to be dramatically modified, should the proposed reforms go into effect.

We are probably now looking at the best projects we will ever see in EB-5:  a good reason to invest now, quite apart from the desire to avoid the proposed $800,000 or $1.2 million price tag for EB-5 investments looming in the future.

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