COVID-19’S Impact On EB-5: A Panel Discussion
Between Ron Klasko, Esq., Carolyn Lee, Esq., Jeff Carr, and Mona Shah, Esq.
Reported by: Christina Dilbone, Esq. & Mohit Karwasra
This is a report based on a special episode of EB-5 Investment Voice.[1] Mona was joined by a panel comprising well-respected experts from the EB-5 industry – Ron Klasko of Klasko Immigration Law Partners, Carolyn Lee of Carolyn Lee PLLC and Jeff Carr of Economic and Policy Resources (EPR). Together they discussed the anticipated concerns for EB-5 investors and developers, in lieu of the pandemic.
Please see the link below for access to the podcast episode:
The EB-5 program has been in existence since the 1980’s, and until recently, long-term stakeholders in the community thought that they had seen it all. But with the pandemic continuing to impact every sector of the U.S. and global economy, industry experts are now required to speculate as to how the EB-5 Program will be impacted.
Anxious Investors
Lately, a lot of nervous investors have been reaching out to their attorneys to get a better picture of what the future might hold for them. Their apprehension is a direct result of the unprecedented business losses that are being endured due to COVID-19, and the fact that they continue to be vulnerable on two different fronts:
- The potential inability to satisfy regulatory requirements, such as job creation, leaving them unable to immigrate to the U.S. despite all the time and money spent by them.
- And, the potential delay or inability of EB-5 projects to pay back their capital contribution, either due to a lack of sufficient profits or an incapability to refinance. The investment – which is required to be “at risk” – might never be returned to investors if a project is unable to recover from the financial blows of this economic downturn.
While it might be a natural reaction for investors worried about the security of their investments to consider withdrawing their capital from a project, they must remember that an early removal of EB-5 funds from the New Commercial Entity (NCE) may jeopardize their ability to meet the sustainment requirement, for the all-important I-829 approval. That said, investors with an approved I-526 petition may reinvest their EB-5 funds in a different project while still retaining their priority date – though they will be required to file a new I-526 petition.
While these concerns that are currently being faced by the investors might seem all-consuming, the panel went on to highlight several other issues. Issues that need to be dealt with on the project side and will require significant attention going forward.
A force majeure event
Force majeure – commonly overlooked as a standard clause in commercial contracts – has been getting a much attention of late. It is a doctrine that dictates a party’s performance obligations based on the occurrence of crucial and noteworthy events that are beyond its control, such as natural disasters, wars, etc. Carolyn gave this contractual principal a much-needed immigration gloss, by putting it in the context of EB-5 projects.
She emphasized the impact of the operational stoppages and developmental delays that are being caused as a direct result of the spread of Coronavirus. While operational EB-5 projects will experience a significant reduction in revenues, those under development are reasonably expected to be stunted in their ability to meet key targets. This situation is not only dire from a business standpoint but also creates regulatory issues, creating the possibility of – material change, potentially delayed and/or insufficient job creation, or even no job creation.
Jeff pointed out that this is specially a concern for the many EB-5 hotel projects, as the hospitality industry as a whole, accounts for almost 17 million jobs and has been impacted very adversely. Hospitality projects with EB-5 financing in their capital stack might have a difficult time hitting their job creation and income targets in the wake of COVID-19, as people are expected to travel and vacation far less than what was expected prior to the pandemic.
Mona also reminded us of Hurricane Sandy – an event that caused a lot of damage in and around New York City – resulting in significant delays. And that many of those impacted were able to take shelter under the doctrine of Force Majeure to avoid performance of their obligations, something that we expect several parties attempting to replicate in the near future. Ultimately, everyone on the panel agreed that this pandemic is of a much larger scale and for a much more prolonged duration of time than anything that has come before, making it unprecedented.
“Material change”
Not only was the concept of “material change” discussed in the context of COVID-19’s impact on EB-5 projects, but the panel also took some time to explain in detail for the listeners’ benefit. Simply put, the term refers to changes in a project after the filing of an I-526, which when deemed “material” result in a denial of that petition.
But Ron pointed out that USCIS does not have a specific definition for the term and that it is not defined anywhere in the law as to what constitutes a “material change”. He further explained that it was adopted by USCIS as a policy the rationale behind which is as follows – if a project is not approvable at the time a petition is filed, the petitioner will not be permitted to keep their priority date, if changes are made to the project thereafter in order to make it approvable.
To put it another way, if a project was approvable when filed, the fact that there is a change should not be considered legally relevant. And so, going forward it should be possible for immigration attorneys to successfully argue that many changes – particularly those resulting from the pandemic – do not constitute a material change.
In the wake of COVID-19, it is very likely that many businesses will see changes that might be considered to be “material” by USCIS. This will severely impact the investors in such projects who have not been granted conditional green cards yet, making it potentially worthwhile to assert – wherever applicable – that a change is not “material”, and also that regardless of its materiality, it is irrelevant because the project was approvable when filed. Everyone on the panel agreed that reasonable alterations should not be considered legally relevant grounds for a denial.
Potential changes in Targeted Employment Areas (TEAs)
More than 30 million unemployment claims have been filed over the past six-weeks, a figure that stood closer to 22 million at the time of recording the podcast just two-weeks ago. While this makes for an extremely sharp rise in unemployment, it is widely speculated that many of these jobs will be regained in a short duration, however the same will be dependent on the pace of economic recovery in the post-lockdown world. In relation to EB-5 in particular, the panel offered unique viewpoints on specific aspects of unemployment that impact the industry.
Jeff described how COVID-19 may actually alter existing TEAs. As widespread furloughing and layoffs continue across the country, the national unemployment rate might swing from about 3.5% percent in February – constituting a 50-year low, to well into the double digits. But since these figures only become available in April of the following year, they will not impact the TEA data until 2021.
He went on to state that TEAs were primarily designed by legislators to make rural TEA projects more attractive to investors, but despite that there has been a significant amount of investment that has continued to take place in high-unemployment-rate urban TEAs. The current run-up in the national unemployment rate has also led to concerns whether high-unemployment-rate urban TEAs will keep enough pace to maintain their designation, by continuing to have unemployment at or above 150% of the national average. This is expected to benefit rural areas as they will provide more certainty in providing a TEA designation to a project; making rural TEAs more attractive for upcoming projects compared to high-unemployment-rate urban TEAs – which will experience some uncertainty till the new data starts impacting their TEA designations next year.
While there may also be concerns over whether a change in TEA status constitutes a material change, Ron confirmed that in his experience EB-5 funds that were invested in a project which at that time was considered a TEA, meeting all statutory and regulatory requirements, will not encounter any such issues.
Mona brought up ongoing speculations regarding the EB-5 Program being considered for inclusion in one of the upcoming waves of the stimulus packages, possibly by relaxing the metrics for qualifying as a TEA – by bringing down the required average unemployment rate from the current standard i.e. 150% of the national average. The panel seemed divided on this, as Mona remained optimistic whereas Ron and Jeff expressed doubt. Making it worthwhile to recall, how during the 2008 economic downturn, the Regional Center Program was instrumental in encouraging foreign direct investments into the faltering U.S. economy through the inclusion of construction jobs in the job creation count. Everyone agreed that there is no playbook for a situation like this, and that it remains the federal government’s prerogative to encourage economic stimulation.
Jeff also pointed out that unlike the financial crisis of 2007/2008 our economy isn’t quite as starved for liquidity, and so compared to last time there is expected to be a lower demand from developers for non-traditional forms of financing such as EB-5. Thus, highlighting the countercyclical nature of EB-5.
Job creation issues: different scenarios
Undeniably, one of the biggest causes for concern is the potential lack of job creation, particularly in direct projects that are more at risk than a regional center project. And so, it was very apt that the panel chose to run through a few different likely scenarios, that a project or investor might find itself in. At this point however, it is worth mentioning that the following are potential solutions to problems that shall not be opted as the first plan of action. They are counteractive measures that should treated as such.
The panel laid out several different scenarios that illustrate this area. For example, if all the required job positions had been created but then due to COVID-19, employees were made redundant, as the positions have been created, then this will not negatively impact a project’s ability to satisfy job creation requirements.
Another scenario envisaged by Mona and Carolyn, considered a project converting its W-2 employees to 1099 contractors, while still continuing to control their activities and providing instructions as well as supplies for completing tasks. The project will in all likelihood meet IRS’s control test over these contractors to qualify them as employees. Thus, one might also be able to argue that such workers are employees that filled a position created by the project and are not independent contractors. Additionally, one could argue that the position was filled for a reasonable period of time, as this reasonableness standard has not been expressly defined by USCIS.
For investors who are already in the U.S. on conditional green cards, Ron made special note of a USCIS policy manual requiring that within three years of a person becoming a conditional resident, all of the necessary jobs that are projected to be created should be created, unless there are extreme circumstances. And then juxtaposed that with what the regulations i.e. the law says, that at the time that USCIS is adjudicating an I-829 application – which is often about three years after an I-829 is filed – the adjudicator has to determine whether the jobs will be created within a reasonable time after the adjudication. Which might be four years after filing an I-829 instead of what the Immigration Service says in its manual. Although, USCIS has not been giving much room on this so far, they may change their approach now.
Ultimately, the panel also reminded the listeners that USCIS by policy has a time period of 2.5 years after an I-526 petition approval for completing job creation, though this is not by regulations so it can change at any point. Also, its worth noting that USICS regularly chooses to point to the specific timelines from business plans, which more often than not are more restrictive than this policy providing for 2.5 years after I-526 approval.
Miscellaneous new issues
Mona brought up how, in light of the pandemic several requests are being made to make changes to offering documents, to include and amend the Force Majeure clauses as well as to include specific language pertaining to COVID-19. To which Jeff added that business plans and offering documents across the board can be reasonably expected to start carrying specific COVID related language from a credibility standpoint.
Although it is the last thing one would want to think about, given the multitude of fatalities around the world and here in the U.S., the death or incapacity of a principal investor or that of an essential EB-5 project team member, is unfortunately a growing concern that needs to be addressed:
- Ron stated that on the investor front, if the primary investor dies the dependents’ petitions can still be saved, as long as the surviving spouse and children were living in the U.S. at the time when the principal investor passed away, and are still continuing to live in the U.S.
- On the project side, as per Carolyn, depending on the role held by the individual who has passed away, a project’s viability may be impacted. This is something that new commercial enterprise managers should consult on with their securities counsel.
Finally, the panel also noted that site visits have been a valuable tool for USCIS to ascertain the legitimacy of projects. But with the current norms on social distancing, it is highly unlikely that USICS will be able to conduct their site visits at the same pace, if at all. Thus, it is expected that there will be a delay in I-829 adjudications as well as regional center compliance reviews.
Please see the link below for access to the podcast episode:
About the Authors:
Christina Dilbone, Esq. is an associate attorney with Mona Shah and Associates Global. She works with EB-5 non-public offerings, SEC compliance, and foreign direct investment (FDI) matters. Christina received her J.D. from the University of Florida and is a member of both the New York Bar Association and the Florida Bar Association.
Mohit Karwasra is a dual qualified attorney with a background in commercial dispute resolution Mohit received his LL.M. from Fordham Law School and BBA-LLB from Symbiosis International University. Mohit currently focuses on different aspects of EB-5 petitions as well as offerings for Mona Shah & Associates Global.
[1] EB-5 Investment Voice is the first Podcast series that focuses on the United States immigrant investor visa, EB-5 and foreign direct investment. Mona Shah, Esq. welcomes guests from the industry, including: Developers, Regional Center Operatives, Attorneys, Legislators and Politicians.