What is EB-5 Qualifying Job Creation Anyway?

It’s often said that an EB-5 investment must create 10-full time jobs for U.S. citizens or lawful permanent residents. But that statement is only partially true, and overlooks many of the nuances of proving adequate and sufficient job creation in the two types of EB-5 filings, direct EB-5 petitions and regional center petitions. Further, critics of the EB-5 program allege that jobs are not actually created and subject to fraud. Several of the comments made during the Feb. 3, 2016, Senate hearing evidenced some confusion as to exactly how EB-5 job creation is to be documented under the law and how it is proven in practice.

It is worth reviewing the law and dispelling some myths. How does EB-5 job creation actually work in the regional center and in the non-regional center “direct” context?

Applicable INA and Regulatory Provisions

Let’s start with the hard law. INA § 203(b)(5)(A)(ii) provides that the investor’s 10 full-time jobs must be created for:

United States citizens or aliens lawfully admitted for permanent residence or other immigrants lawfully authorized to be employed in the United States (other than the immigrant and the immigrant’s spouse, sons, or daughters).

Further, the statute defines “full-time employment” as “employment in a position that requires at least 35 hours of service per week at any time, regardless of who fills the position.”

The regulations mirror this language and offer some additional illustrative examples, defining the term of “qualifying employee” as:

a United States citizen, a lawfully admitted permanent resident, or other immigrant lawfully authorized to be employed in the United States including, but not limited to, a conditional resident, a temporary resident, an asylee, a refugee, or an alien remaining in the United States under suspension of deportation. This definition does not include the [immigrant investor], the [immigrant investor’s] spouse, sons, or daughters, or any nonimmigrant alien.

8 C.F.R. § 204.6(e).

Further, the regulations clarify that full time employment is:

Employment of a qualifying employee by the new commercial enterprise in a position that requires a minimum of 35 working hours per week. […] A job-sharing arrangement whereby two or more qualifying employees share a full-time position shall count as full-time employment provided the hourly requirement per week is met. This definition shall not include combinations of part-time positions even if, when combined, such positions meet the hourly requirement per week.

So how does this actually work in practice?

Regional Center Filings

The statute giving rise to the regional center program (Pub. L. No. 102-395, § 610) allows investors to “establish reasonable methodologies for determining the number of jobs created … including such jobs which are estimated to have been created indirectly through revenues generated from [note: now among other things] increased exports resulting from the” program (emphasis added).

What does this mean? While regional center investor filings have the option of using only direct job creation (discussed below), most instead prefer to use the “reasonable methodologies” as allowed by the statute. The May 30, 2013, EB-5 Adjudications Memo (PM-602-0083) further clarified that “for purposes of demonstrating indirect job creation, petitioners must employ reasonable economic methodologies to establish by a preponderance of the evidence that the required infusion of capital or creation of direct jobs will result in a certain number of indirect jobs.” (emphasis added).

In other words, to calculate indirect job creation, regional center investors have two options: (1) base job creation off of the infusion of capital into a job-creating enterprise (such as a construction loan to a developer); or (2) calculate them based off of direct employment, i.e. the employment of qualifying workers, in turn, creates indirect job creation.  Both options require the use of economic modeling.

Virtually all regional center filings use input-output economic modeling to calculate job creation. A handful of such models exist, which have been accepted by USCIS to be economically valid, including RIMS II, IMPLAN, and REDYN. The inputs to the model are usually expenditures of EB-5 capital (such as the use of loaned funds in construction), revenues generated by an entity receiving EB-5 capital (such as business profits and hotel revenues), or increased visitor spending to an area relative to a pre-project baseline. The output to the model is the creation of full-time equivalent positions on the basis of direct, indirect, and induced employment.

Tenant occupancy was one common input to economic modeling before USCIS’ December 2012 EB-5 Memo (GM-602-0111) curtailing its use. In a tenant occupancy model, jobs attributable to prospective / actual building tenants could be credited to investors. A project developing a shopping mall, for example, might be able to estimate the number of jobs to be created at the retail stores and administrative offices in the mall and allocate them amongst the investors.

However, throughout 2012 USCIS questioned the causal relationship between the development and the input: if a store were to move from another mall in the next street, was job creation actually occurring? The clarifying guidance posited that investors would need to demonstrate “economic benefits provided by a specific space project [that] will remove a significant market-based constraint” such as by “indicat[ing] how a specific space project will correct market imperfections and generate net new labor demand and income that will result in a specified prospective number of tenant jobs that will locate in that space,” something quite difficult in practice. Consequently in current practice, the tenant occupancy model has been largely disfavored by EB-5 stakeholders and USCIS for the past 3+ years.

At the I-526 stage, investors generally include project-specific economic modeling reports with projections for project performance (e.g., spending, revenues, direct hires) that are further validated with independent industry-related market studies. The “output” of the model must be a number of jobs that is equal to, or greater than, the number of investors in the project multiplied by 10. Most investors and their counsel demand a job creation cushion to protect against less than anticipated inputs to the model, and thus projects creating 12-13 jobs per investor are more common.

At the I-829 stage, investors need to prove that the inputs to the model were reached or can be expected to be within a reasonable time, enabling the calculation of the job output. This is done through bank accounts, construction expenditure reports, checks showing payment of expenditures, revenues of the job creating entity, etc., that substantiates the inputs of the model.

The economic impact of a project creates full-time equivalent jobs indirectly and the models allow for job creation to be tracked by industries. However, regional center investors do not (and based on the models really cannot) pinpoint the jobs to particular identities of people and their occupations, unless direct employment is the input. In other words, the regional center investor’s I-829 filing generally will not include the kinds of documentation that direct filings do given the very nature of indirect employment and of economic modeling.

Direct Filings 

Job creation for direct cases can be only one thing – full-time employment by qualifying U.S. workers in the investors’ new commercial enterprise. In this context, the regulations define an employee as one who “provides services or labor for the new commercial enterprise and who receives wages or other remuneration directly from the new commercial enterprise […] This definition shall not include independent contractors.”  Because the employment is direct, the identity of the employees, their positions, their immigration status, and their activities are to be documented.

At the I-526 stage, the investor(s) in a direct project will submit a business plan that includes the prospective positions of the business. In practice, the jobs may not be created at that time. The business plan will include the various weekly hour requirements of the positions and the rate of pay for each.

At the I-829 stage, the investor will include proof that the petitions have been filled by qualifying employees. This includes proof of the following:

The employee must possess the requisite immigration status. Documents such as Form I-9, U.S. passports, Green Cards, U.S. birth certificates, immigration approvals, etc., generally must be provided to show the individuals are qualifying as required by statute. Note that the statutory language of “other immigrants lawfully authorized to be employed in the United States” is not fully clarified by the regulation as discussed above, given that the INA defines nonimmigrants as people falling in discrete categories and immigrants as essentially all other aliens. See INA § 101(a)(15).

The employee must be full-time, defined as 35 hours or week or more. This is proven through payroll records, timesheets, IRS Forms W-2, etc.

http://www.natlawreview.com/article/what-eb-5-qualifying-job-creation-anyway

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• Matthew T. Galati

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