Written by Kate Allgrove
The employment-based fifth preference visa (EB-5) – previously an underutilized investment vehicle – has become a popular and controversial funding tool in recent years. Launched by the Immigration Act of 1990, 10,000 EB-5 visas are available each year to foreign individuals who invest in the United States. Created to be economic stimulants with built-in requirements for job creation in American communities, the goals connected to these visas mirror ICIC’s mission to drive economic outcomes of job creation, income and wealth in local economies. With that in mind, ICIC sees EB-5 as a tool that could greatly benefit U.S. inner cities, if used to do so.
Recently, the exact communities served by EB-5 investment have been central to a government debate over the reauthorization of a 20 year old program connected to EB-5, the Regional Center Program. Conversations in late 2015 focused on the Target Employment Area (TEA), a term used to signify an area in which a lower minimum investment is needed to qualify ($500,000 versus $1 million) because of the potential to maximize job creation benefits in high unemployment areas. Because of this incentive, most EB-5 funds are invested in TEAs.
The U.S. Citizenship and Immigration Service (USCIS) currently defines a TEA as “an area that, at the time of EB-5 investment, is a rural area or an area experiencing unemployment of at least 150 percent of (1.5 times) the national average rate.” To set TEA boundaries, the USCIS “defers to state determinations of the appropriate boundaries of a geographic or political subdivision that constitutes the TEA.” In other words, there is no consistent, national method for determining a TEA boundary. The broad and malleable nature of this definition is one of the reasons TEA was central to EB-5 debates in 2015. Legislators made strides late in the year to provide revisions to this definition that would both clarify boundaries and reinforce the economic development intent of EB-5. A final omnibus bill passed in December 2015 made no changes to the definition of TEA, although it is expected to be a critical piece of Regional Center renewal discussions again this year.
Two of the TEA definition variations considered during discussion for EB-5 Regional Center reauthorization bills were the Special Investment Zone (SIZ) and the Priority Urban Investment Area (PUIA). The SIZ definition requires an unemployment rate of at least 150 percent of the national unemployment rate. It can either be a city or county with at least 150 percent the national unemployment rate or it can be a limited set of contiguous census tracts with a weighted unemployment rate average that is at least 150 percent the national rate. Under this definition, an EB-5 project could be located within a census tract that does not meet the unemployment rate requirements, as long as the weighted average of the census tracts and those it borders meets this requirement.
Similarly, under the PUIA definition a census tract can qualify as a TEA based on proximity to a tract that meets the qualifying metrics. However, the metrics considered are different. Instead of just unemployment, the PUIA uses the New Markets Tax Credit (NMTC) standard that also considers high (at least 20 percent) poverty, or low (less than 80 percent of the local median) income. To qualify for location in a TEA, the project needs to be located within a census tract that meets the NMTC standard, or it needs to border a tract that meets the standard. Of note for both definitions is the fact that the use of nearby tracts for qualification of a project within a TEA is a primary point of contention amongst legislators, and has been the focus of negative articles about the EB-5 program, such as Eliot Brown’s September 2015 Wall Street Journal article.
The SIZ and PUIA definitions are efforts to restrict the definition of TEA in ways that will better align the area with the economic development goals of the program. But would these changes truly catalyze greater impact for EB-5? In January, New York University Stern’s Center for Real Estate Finance Research (CREFR) released an update to a working paper that analyzed the impact of these two proposed definitions of TEA. By applying these definitions to Manhattan geographies as a case study, the paper determines that these new definitions may decrease the number of qualifying areas in the borough. However, the paper flags that “a dramatic reduction in TEA status in Manhattan might have occurred in the absence of any new legislation, based simply on the improving employment data relative to the national average.” Therefore the impact these changes would have is difficult to accurately measure.
When Congress resumes deliberation on EB-5 this year (2016) there is a chance that they will again consider an alternative standard for TEA and ICIC believes that a more rigorous definition – our definition of the inner city – should be considered. ICIC defines an inner city as a geographic area that has a poverty rate of 20 percent or higher or a poverty rate of 1.5 times higher than the metropolitan statistical area (MSA) and an unemployment rate of 1.5 times the MSA and/or a median household income of 50 percent or less than the MSA. These areas are where America’s urban poverty and unemployment is concentrated. ICIC’s research shows that from 2003-2013, inner cities lost a significant number of jobs while the number of jobs within the central cities actually increased. The need for economic investment related to job creation is stronger in the inner cities and use of the inner city definition for TEA would ensure that urban TEA EB-5 dollars are being invested in these concentrated areas.
To supplement this, ICIC’s research has shown that inner city businesses are three times more likely to hire local residents. With this in mind, the likelihood that EB-5 projects employ residents in the underserved urban areas the EB-5 program targets increases exponentially by locating a project within the inner city. Matt Gordon, CEO of E3 Investment Group, spoke to a need for focus on distressed urban areas, when presenting to the United States House of Representatives Judiciary Committee on February 11: “TEAs are supposed to turbo-charge the social benefit created by the resulting job creation by focusing the activity in economically distressed areas. Simply put, job creation in economically distressed areas is more valuable to our society.”
Another important argument made by New York University’s CREFR paper is the suggestion that the most prominent draft bills considered last year seemed to reduce the importance of investing in a TEA. As reform discussions were renewed following the passing of the omnibus bill, TEA was not included within initial legislation, such as the S:2415 EB-5 Integrity Bill, proposed in late December.
If the government looks to make revisions to the EB-5 program, it should ensure that changes include directing EB-5 capital to high-impact investment opportunities in distressed urban areas. This is a recommendation included in ICIC’s report Increasing Economic Opportunity In Distressed Urban Communities With EB-5, and defining an urban TEA as an inner city would do just that. This appears to be more important than ever, now that TEA is only a piece of the conversation, and considering that the program’s annual cap of 10,000 visas is being reached each year.
As an expert in measuring job creation within America’s inner cities, ICIC could provide objective, data-backed, third-party impact analysis of the program if the inner city definition were used. However, a revised TEA definition alone will not allow us to measure the impact EB-5 is having, and whether or not focus on these distressed urban markets will truly create the job creation and economic stimulus for which the program was designed. Therefore this definition will need to be combined with a standard for collecting data, and for making that data available to stakeholders for analysis.
 “What TEA Projects Might Look Like Under EB-5 2.0: Alternatives Illustrated with Maps and Data”, p. 49-50; paper written by Professor Jeanne Calderon and Scholar-in-Residence Gary Friedland for New York University Stern’s Center for Real Estate Finance Research.