Klasko, Rulon, Stock & Seltzer, LLP
In the last blog, I prepared a set of FAQs to try to make the anticipated EB-5 quota retrogression understandable. In this follow-up blog, I will explain some of the changes in USCIS policy and interpretations and investor and developer strategies that will be necessitated by the first ever EB-5 quota retrogression.
One of the most obvious impacts of EB-5 quota retrogression for China is the impact on children who may be “aging out”. Since the child’s age is “frozen” while the I-526 petition is pending and is “unfrozen” when the I-526 petition is approved and there is a quota backlog, the investor is well advised to file the EB-5 petition years in advance of the child turning 21 rather than immediately before the child turns 21. Once the petition is filed, it is to the investor’s advantage if the USCIS processing time is elongated in the event of quota retrogression, since the child’s age is frozen longer if processing times are longer.
Quota retrogression may increase the onset of the 21-24 month conditional residence period by 2 years or more. This is problematic for the majority of investors who invest in regional center “loan model” projects. Most of these loans are 5 or 6 years in term since it is expected that all of the investors will have removed their conditions by the end of the 5 or 6 years, after which the investors can receive a return of their investments. But what happens if quota retrogression results in investors not being able to remove conditions for 7 years or more given the delayed onset of conditional residence status? USCIS has so far refused to opine on the impact of loan repayment to the new commercial enterprise before the investors have removed the conditions on residence.
This raises a number of issues for the I-829 condition removal petition. Has the investment been sustained? Since the investment must be sustained in the new commercial enterprise and not the job-creating enterprise, presumably the answer is yes. If the money just sits in the NCE for a period of time until all of the investors remove conditions, does the money remain “at risk”? Arguably it does, especially since it has already been used in creating the requisite number of jobs; and the NCE can use its own discretion on what to do with the money in the interim. In addition, it is not clear that the money must remain “at risk” during the entire conditional residence period as long as the investment is sustained and the jobs created. In any event, this issue must be clarified by USCIS.
Given this issue, we will be counseling regional centers and developers to consider increasing the length of the loan term to prevent money going back to the investors before their conditions on residence are removed. This is not beneficial to the exit strategy of an investor, but it may provide the developer with EB-5 financing dollars over a protracted period of time while protecting investors at the I-829 stage.
USCIS has created a so-called “2½ year” rule, requiring that all jobs be created within 2½ years of the approval of the EB-5 petition. In an earlier blog, I articulated in detail why this “rule” is wrong as a matter of both law and policy. In the event of EB-5 quota retrogression, it is not only wrong but its foundations crumble and it makes no sense. The premise of the 2½ year rule is that an investor will become a conditional resident within 6 months after approval of the EB-5 petition and then have 2 years to create the necessary jobs during the conditional residence period. The quota retrogression could result in 2 or 3 years from EB-5 petition approval until onset of conditional residence. In that event, the investor will be required to create all jobs before even becoming a conditional resident. This is not at all what Congress had in mind or what makes sense for the success of the program. We are advocating for USCIS to change this policy.
From the project developer’s point of view, quota retrogression may result in projects being able to get credit for more indirect and induced jobs. With most construction projects, if the construction period is, say, 18 months, and stabilized occupancy (and the job creation that goes with it) does not occur for another 24 months, the job creation resulting from stabilized occupancy would occur after the 30 month period. In the event of quota retrogression, since the time period for job creation should be extended to cover the full conditional residence period, the project may well be able to count jobs both from construction and operations where previously only construction jobs could be counted.
Also, developers will have longer periods of time to meet the required inputs in the economist’s job projection report, such as longer periods of time to spend the money, produce the necessary revenues, employ the necessary direct employees, achieve the necessary occupancy rate, complete construction, etc.
Direct EB-5 investors will confront additional challenges in the event of quota retrogression. If it will be an indeterminate amount of years before a direct EB-5 investor will be able to come to the U.S. to manage his investment, it will be more difficult – if not impossible – to prepare a business plan with realistic timeframes for the development of the business and the hiring of the employees.
Finally, foundations for the “troubled business” rule could crumble in the event of quota retrogression. The investor must demonstrate maintenance of the existing number of employees for a period of 2 years. If the investor, who may well be the key manager of his business, will not be able to immigrate for more than 2 years, such a showing may not be possible.
In summary, Chinese EB-5 quota retrogression will require a rethinking of conventional wisdom on many EB-5 issues. It will be incumbent for EB-5 counsel to prepare new EB-5 projects with these issues in mind and to advise EB-5 investors of these issues in potential investments.
In addition, and significantly, USCIS will need to reevaluate some of its policies and interpretations to accommodate the new reality. Hopefully, USCIS will be open to suggestions from stakeholders on how to do this. The AILA EB-5 Committee, which I chair, will be taking a leading role in this advocacy.