EB-5 economist Michael Kester says the new rule leaves a lot of question marks about what investments qualify at the $900,000 TEA level, versus the $1.8 million non-TEA investment amount. Department of Homeland Security (DHS) will not provide one specific methodology to use. This potentially allows for greater flexibility — but more uncertainty. With the burden of proof now on investors, they no longer have the reassurance of state-designated TEA letters.
Most people seriously interested in EB-5 should know about the new EB5 investment levels increasing to $900,000 for TEA projects and $1.8 million for standard projects. But Michael Kester, an expert in TEA designation, says the new regulations leave many unanswered questions that beg for DHS clarity.
‘The burden is on the petitioner’ — and what a burden it is
With the burden of TEA proof now resting on investor shoulders (prior to November 21, 2019, individual states determined TEA designation), this is a critical question: what data or methodology should be used for determining the unemployment rates critical to TEA designation?
What we know
DHS does allow for unemployment data from two sources: the U.S. Census Bureau’s American Community Survey (ACS) and the Bureau of Labor Statistics (BLS). The BLS has more recent data, but this information only goes to the city/town level. ACS data is more outdated but drills down to smaller geographic units, such as census tracts.
Which set of data to use is the potentially $900,000 question (the difference between the TEA and non-TEA investment levels). DHS does not provide a clear answer for investors in search of a Green Card by investment.
The positive from opacity is that an investor may have more flexibility in providing proof of TEA status for his or her investment. Most states under the old regulations (prior to November 21, 2019) used “census-share methodology,” a combination of both ACS and BLS data, to make TEA determinations. Kester brings up the point that it would be reasonable to assume that DHS will now require census-share data to be used.
But DHS will not advise using any one methodology: “Although DHS recognizes that there are benefits to limiting the unemployment statistics to a single dataset, the final rule does not provide one specific set of data from which petitioners can draw… because currently, no one dataset is perfect for every scenario. Thus, the burden is on the petitioner to provide DHS with evidence…”
Census-share or ACS-only data: the differences
Kester infers that DHS will accept census-share data as well as ACS-only data. So how do these two methodologies differ? Census-share goes down to the tract level and then “trends” the older data using more current BLS data to give more recent numbers than ACS-alone data would provide.
Therefore, each methodology uses a different 150% national unemployment average. Kester points out that as national unemployment rates have been dropping over the last several years, using the census-share methodology based on more recent data will require a project to meet a lower national unemployment rate than ACS-only data requires.
In spite of this national unemployment trend, Kester says that a project, depending on its location, maybe in one of three situations: it may be preferable to use census-share data; it may be better to use ACS-only data; and there may be no benefit in choosing one methodology over the other.
How often is there an advantage to using one methodology? Kester notes that with census tracks in Metropolitan Statistical Areas (MSAs) that qualify as a single tract with no need for aggregation, the two methodologies bear out similar results a little over 20% of the time.
So sometimes the two methodologies offer similar results —but there is not total overlap. For example, out of about 62,000 census tracts in MSA’s, roughly 2300 qualify using ACS-only data, while not qualifying under census-share data; and about 1,900 census tracks qualify with census-share data, while not qualifying with ACS-only data. So results can differ, depending on the methodology used and this may be good EB5 news for investors.
‘A very nervous two years’
The flip-side to this flexibility is that, to quote Kester, “the general lack of clarity in the Final Rule is problematic, especially because petitioners will not receive a firm DHS ‘answer’ on the question of TEA compliance until the I-526 is adjudicated.”
This point is worth special consideration: there is no separate application process for TEA designation. An EB-5 investor must wait for his or her I-526 to be adjudicated to know whether TEA designation has been officially approved. As processing times can currently take between 27.5 to 46.5 months, Kester says this wait time can be a “very nervous two years (or more)” for investors. He says that without DHS clarity on TEA designation, the industry must likely wait two or more years from this point to see how adjudications under the new rule will offer more clarity on this issue.
DHS has estimated, from a sample, that 54% of projects will be impacted by the new TEA regulations. Kester feels this number is too conservative. He refers to an IIUSA Policy Research Report that projects a higher number — as much as two-thirds of current projects are impacted by the new rules. This means the majority of projects will see an investment hike from $500,000 (the former TEA investment level) to $1,800,000 as most will no longer be eligible for TEA designation under new rules.
Prior to the new rule, state designation of TEA’s made it easy for EB5 Green Card investors to know that a project qualified before offering up their capital. Now the burden lies with the investors themselves. So what is the best course of action to minimize investor risk? Kester advises reliance on a third-party expert to provide evidence of TEA qualification with the proper supporting documentation.
Additionally, Kester advises the following as best practices: give a detailed formal analysis that proves TEA eligibility under the Final Rule, with references to the new policy; if a project qualifies as a TEA with both census-share and ACS-only data, provide an analysis using both methodologies; ensure you are working with and provide only the most recent data.
Read Michael Kesters’ article TEA Designations: Final Rule Leaves Many Questions and Risks
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