Economic Models and the Impact of HR 5992 with Kevin Wright – Episode 26
Economic Models: Direct, Indirect, and Induced Jobs… and the Impact of HR 5992
Fresh from her trip to Kazakhstan and the New York Real Estate Expo, Mona and Mark sit down with Kevin Wright to talk about how Regional Centers may be affected by the H.R.5992 bill. They also discuss how economic models work, what the new job provisions in the bill entail, as well as other recent bill updates.
Kevin Wright, Principal at Wright Johnson, has been a key player in the EB-5 industry for 10 years. They have assisted more than 180 entrepreneurs in receiving Regional Center designation not just within the United States, but around the world as well. They also specialize in economic studies with over 800 business plans and economic reports written over the last 7 years. Although economic reports are done for different purposes, the majority are done for very specific projects that plan to move forward in the EB-5 marketplace.
Kevin shares his views about the different provisions that the new bill H.R.5992 has, discussing its implications in the Regional Center applications as well as its general impact on the EB-5 market.
Direct, Indirect and Induced Jobs
- There are 3 types of jobs from an EB5 perspective:
1) Direct jobs refer to employment directly related to the production of products or services
2) Indirect jobs refer to employment that is generated in the businesses that supply goods and services to the direct jobs; and the last
3) Induced jobs are those jobs that generate income which direct and indirect generate jobs spend on such as food, clothing, entertainment etc. All these categories count for job creation that allows projects to move forward under the regional center format.
- One of the new provisions of the bill H.R.5992 is that each project should have direct jobs attached to it. In addition to that, 10% of the jobs need to be direct. The question is whether the USCIS need W2 direct employees or model-driven direct employees. The very nature of the way regional centers are set up is that investors come in to give a loan to the project. This means that every job is an indirect job because they would not be directly affiliated with the investors. If USCIS decides to require W2 jobs to be the 10% needed for the EB-5 application, this will significantly affect the asset classes.
- Confusing – loan model – a direct job is an indirect job
- The EB-5 market uses the Input-output economic models. This postulates that for every money spent in a project, there is a certain number of jobs as output. In operations, you base it in revenue.
- Another model often used is the Hybrid model. This can be evident when some investors are on a direct platform while some would be in a regional center. The complexity when using this model is about the job count. The investor needs to remember to take the direct jobs out of the model. A conservative approach to this model is to deduct the direct job creation right off the top to lower the indirect count. The disadvantage of this model is that the investor will lose direct and indirect jobs as an input.
- An alternative to the Hybrid model is the Expenditure-Revenue model where the total amount of job creation and just back out the direct jobs from there. There is less disadvantage moving forward from the investor’s point of view. However, this model is unproven since USCIS might go back and ask to reduce direct and indirect.
Regional Center Ownership
- There are instances when the EB-5 platform is not a good fit for a project. There has been an increase of technology projects in the EB-5 marketplace. The problem with this kind of industry is the job count. Technology projects employ significantly higher wages but only employs a limited number of seats.
- When deciding whether to opt for renting a regional center or operating one, it is best to consider how many projects an investor plans to do in the future. When an investor is only looking to fund 1-2 projects, it is better to rent a regional center. This significantly cuts the costs and burdens considering that the USCIS requires a lot of compliance to regional center operators. If an investor plans to fund 9-10 or more EB-5 projects for the long term, it would be beneficial to own a regional center.
- When renting a regional center, it is important to identify the group who would market the project as well as the regional center license the investor would be using. Quite recently, there are organizations specializing in business models that are specifically tailored to those investors looking to rent regional centers. The traditional model requires the regional center owner to go out and market their brand, the Regional Center, and the project. The rental model is project-centric, where in a separate team markets the project itself and are not focused on the regional center.
HR 5992 Updates
- There are a lot of foreign developers looking to setup projects in the United States. However, the new bill prohibits non-US citizens or non-green card holders from having ownership of regional centers as well as other entities affiliated with a regional center. The intent is to eliminate non-US ownership in any part of the process whether it is the NCE, JCE or the regional center.
- Regarding the TEA changes in the bill, if these provisions would be put into play, it might significantly limit the number of projects that qualify. This would reduce the effectiveness of EB-5.
- Another popular issue is increasing the minimum investment from $500 million to $1.2 million. There is a great possibility that of decreasing the number of investors that would apply to the EB-5 program. If the minimum is set to $800 million, this number is stable, reasonable and doable. Even if there is a loss of demand for the EB-5 program, each investor is still going to bring 40% more funds to projects. The overall effect is more money will still come into projects.
- Another concern is that projects from the big cities are taking away projects from the rural areas. As long as unused visas from rural areas are rolled over and put back to the mainstream, the concept of setting aside visas for the rural industry could work. Limiting the number of census tracks significantly limits the projects that currently qualify. However, if the limit is a reasonable number, this eliminates preference and can be a national standard.