ThishearingcompilationwaspreparedbytheHomelandSecurityDigitalLibrary,NavalPostgraduateSchool,CenterforHomelandDefenseandSecurity.

APRIL13,2016

THEDISTORTIONOFEB-5TARGETEDEMPLOYMENT

AREAS:TIMETOENDTHEABUSE

UNITEDSTATESSENATECOMMITTEEONTHEJUDICIARY

ONEHUNDREDFOURTEENTHCONGRESS,SECONDSESSION

HEARINGCONTENTS:MEMBERSTATEMENTS

SenatorChuckGrassley(R-IA)[viewpdf]SenatorPatrickLeahy(D-VT)[viewpdf]

WITNESSSTATEMENTS

TheHonorableBobGoodlatteCongressman,Virginia’s6thDistrictTheHonorableJohnConyers,Jr.[viewpdf]Congressman,Michigan’s13thDistrictTheHonorableMarkAmodeiCongressman,Nevada’s2ndDistrictMr.DanielJ.Healy[viewpdf]CavitasCapitalGroup,Dallas,TXMr.TimothyWhipple,J.D.[viewpdf]IowaEconomicDevelopmentAuthority,DesMoines,IAMr.PeterD.Joseph[viewpdf]InvestintheUSA,Washington,DC

ThishearingcompilationwaspreparedbytheHomelandSecurityDigitalLibrary,NavalPostgraduateSchool,CenterforHomelandDefenseandSecurity.

Mr.GaryFriedland,Esq.[viewpdf]NewYorkUniversitySternSchoolofBusiness,NewYork,NY

AVAILABLEWEBCAST(S)*: [WatchFullHearing]

COMPILEDFROM:

• http://www.judiciary.senate.gov/meetings/the-distortion-of-eb-5-targeted-employment-areas-time-to-end-the-abuse*Pleasenote:Anyexternallinksincludedinthiscompilationwerefunctionalatitscreationbutarenotmaintainedthereafter.

Prepared Statement by Senator Chuck Grassley of Iowa

Chairman, Senate Judiciary Committee

Hearing titled “The Distortion of EB-5 Targeted Employment Areas:

Time to End the Abuse”

Wednesday, April 13, 2016

When Congress passed the omnibus appropriations bill four months ago, we reauthorized the

EB-5 immigrant investor program for the remainder of the fiscal year. Unfortunately, we

reauthorized a program that remains deeply flawed because the omnibus bill failed to include

much needed reforms. At the time, I gave a speech on the Senate floor explaining that the next

few months would be spent conducting oversight of the program and exposing the truths about

how it is being used. This hearing is part of that quest.

We held a hearing in February related to fraud, abuse, and national security vulnerabilities in the

EB-5 program. We heard from U.S. Citizenship and Immigration Services and the Securities

and Exchange Commission. At that hearing, I encouraged the agencies to do more to exercise

oversight and to tighten up the program using the authorities they already have.

U.S. Citizenship and Immigration Services has responded to that call and is working on

regulations that will, I hope, improve the program. I have given them several suggestions and

personally expressed to Secretary Johnson my desire to work with him in this effort.

Today, the committee will learn about Targeted Employment Areas, a term used in the

Immigration and Nationality Act to describe rural areas and areas with high unemployment in

which EB-5 investments are made. The law authorizes a lower investment threshold for such

areas in order to incentivize foreign nationals to invest there.

Targeted Employment Areas have been part of the EB-5 program since the beginning. Senator

Gramm offered this concept as an amendment in 1989 to the Immigration Act of 1990.

Supporting him, Senator Boschwitz stated, “I see no reason to shut out willing investors while

our small towns and inner cities across America are facing hard times.” He said the Gramm

amendment authorizing Targeted Employment Areas would benefit rural areas that have

difficulty attracting capital for economic growth.

Senator Paul Simon – who served on this committee – said on the Senate floor, “[W]e are

mindful of the need to target investments to rural America and areas with particularly high

unemployment—areas that can use the job creation the most. For this group, we make available

at least 3,000 visas annually. America’s urban core and rural areas have special job creation

needs and this visa program is sensitive to that in this way. Investments in this area must still

create 10 jobs but require an investment less than $1 million. The Attorney General is

authorized to set the required investment at a lower amount but at least $500,000. Clearly, the

closer the Attorney General sets this to $500,000, the more we can encourage investments in

these critical areas.”

Though Congress intended for most EB-5 investments to be made at the $1 million level, nearly

all EB-5 investments today are made at the $500,000 level in Targeted Employment Areas. And,

that’s just not right.

As a result, cities in Georgia, North Carolina and Minnesota compete with Beverly Hills, Miami

and New York City. It’s hard for smaller states and cities to compete with the glitzy hotels and

luxurious condo projects. In Iowa, we’re trying to create jobs through value-added agriculture,

biofuels, and ag-based manufacturing. Wealthy investors understand that the real estate market

is booming, and see the dollar signs, big returns, and the green card that comes with it.

Gerrymandering the boundaries of Targeted Employment Areas allows very affluent areas to

benefit from the lower investment threshold, resulting in little incentive to invest EB-5 funds in

distressed or rural areas, as was envisioned by Senators Simon, Gramm and Boschwitz. This is

done by drawing the Targeted Employment Area to include a long chain of census tracts linking

the affluent area at one end with at least one census tract, perhaps many miles away, which

includes low-income residents or subsidized housing. One TEA designation has an astonishing

190 census tracts covering 200 miles in order to include far-away economically distressed areas.

This problem could be fixed tomorrow if the Obama administration had the backbone. You see,

the states control the designation of Targeted Employment Areas. State officials will

gerrymander the boundaries of Targeted Employment Areas any way they can to ensure the flow

of investment money into their State. Unfortunately, the administration refuses to challenge the

designations. This administration has a chance now to change this and bring the program back to

the way Congress envisioned.

Targeted Employment Areas are at the heart of the controversy about EB-5 and the principal

reason we were unable to pass common sense reforms last year.

Yet, we proposed a lot of good reforms last year. For example, the Grassley-Leahy-Conyers-

Goodlatte proposal, for the first time, incentivized EB-5 investment in manufacturing and

infrastructure projects. Manufacturing employers create direct, long-term, quality jobs in

communities. As for infrastructure, we have a lot of needs in Iowa and the Midwest, including

rail and river transportation, wastewater treatment plants, and bridges. More EB-5 capital in

infrastructure projects would reduce the burden on taxpayers, especially when local governments

are up against federal mandates. We also proposed reallocating the visas – carving out enough

for rural and high unemployment areas, but leaving more than half of the visas for projects that

come in at the higher investment level.

Yet, the supporters of the status quo proposed ideas that would continue to steer investments to

luxurious real estate developments in affluent areas. They proposed allowing Targeted

Employment Areas to continue to be gerrymandered based on complicated commuter patterns

from remote census tracts, but without evidence that new jobs are actually being created in the

communities that people are allegedly commuting from. They even proposed having just one

investment level, which does nothing to incentive foreign investors to put money in areas that

need it.

My hope is that today’s hearing will shed light on the problem and why the status quo only

benefits a few areas of the country.

I’m proud that we have an Iowan here today to talk about my home state’s challenges. Iowa –

and surrounding states – are at a clear disadvantage.

We have a good mix of witnesses here today from all over the country. I want to thank them for

coming today. Allow me to introduce our very distinguished first panel.

-30-

Statement of Senator Patrick Leahy (D-Vt.),

Ranking Member, Senate Judiciary Committee,

Hearing on

“The Distortion of EB-5 Targeted Employment Areas: Time to End the Abuse”

April 13, 2016

It is not often that all four leaders of the Senate and House Judiciary Committees sit in the same

room, on the same side of an issue. But that is what you are seeing today. Chairman Grassley,

Chairman Goodlatte, Ranking Member Conyers and I are committed to bringing much-needed

reforms to the EB-5 Regional Center program.

This program was designed to bring jobs to underserved areas, but in reality it has become an

unintended boon for some of the wealthiest business districts in the country. The bicameral

compromise that all four of us supported last December would have ushered in much needed

reforms to improve this program. Our bipartisan proposal included improvements requested by

the Department of Homeland Security (DHS). It addressed vulnerabilities and concerns raised by

the Government Accountability Office (GAO), DHS Inspector General, and others. And

importantly, it would have restored incentives Congress created to promote investment in

undercapitalized locations known as “targeted employment areas,” or TEAs.

Newspapers across the country have exposed the abuse of TEAs through gerrymandering. This

abuse occurs when wealthy neighborhoods qualify for incentives intended for underserved areas.

The Wall Street Journal reported just yesterday that one big-city developer referred to EB-5

financing as “legalized crack cocaine.” Developers draw TEA maps in any shape necessary to

connect an affluent area with enough distressed areas to obtain discounted EB-5 financing.

Through manipulation of the EB-5 program, Beverly Hills can be considered just as distressed as

Detroit. This practice has been sharply criticized by The Leadership Conference on Civil and

Human Rights.

It has been suggested that the TEA reforms in our bicameral compromise would treat urban areas

unfairly. This could not be further from the truth. Our reforms would reserve a relatively small

numbers of visas for true urban poor and rural projects. Because investors are reluctant to invest

in these distressed areas, our reforms would allow true TEA projects to compete at a slightly

reduced investment level. Up to 80 percent of EB-5 investment dollars would continue to flow

into urban areas, and much of those funds would be funneled into luxury areas.

Yet our reforms would, for the first time, provide meaningful incentives to invest in true urban

poor and rural areas. And these reforms have been supported by the leading industry group,

Invest in the USA (IIUSA), which is here today. But even these modest reforms went too far for

those who want to continue driving cheap investment to wealthy projects at the expense of rural

and urban poor. Despite broad recognition that the program needs reform, Congressional leaders

blocked our efforts in December. As Chairman Grassley said at the time, “our House and Senate

leadership failed us.”

If this Regional Center program is to continue, it must be reformed. I will not support mere

window dressing. Proposals that do not require transparency and accountability for every EB-5

project are just that. The program is need of a blood transfusion, not a Band-Aid. We know what

is needed to repair this program. It is long past time that we fix it.

# # # # #

Written Testimony of:

Daniel J. Healy

Chief Executive Officer

Civitas Capital Group

Dallas, Texas

Hearing on:

The Distortion of EB-5 Targeted Employment Areas: Time to End the Abuse

United States Senate

Committee on the Judiciary

April 13, 2016

Written Testimony of Daniel J. Healy

United States Senate – Committee on the Judiciary

April 13, 2016 | Page 2 of 14

Chairman Grassley, Ranking Member Leahy and Distinguished Members of the Committee:

Thank you for the opportunity to testify before the Committee today. My name is Daniel J.

Healy. I am Chief Executive Officer of Civitas Capital Group, an investment management firm

based in Dallas, Texas. I founded Civitas in 2008 to bring the rigor of institutional-quality

investment management to the EB-5 marketplace, while at the same time leveraging the unique

flexibility of EB-5 immigrant investor capital to catalyze economic development and job creation

in underserved areas, especially in my hometown of Dallas. Today, Civitas is a leading manager

of EB-5 investments throughout Texas and around the United States, with more than $500

million in assets under management on behalf of more than 1,000 EB-5 immigrant investors

from more than 30 countries. I am very pleased that for each of the past two years, Civitas has

been named to the Dallas 100, a ranking of the fastest-growing private companies in the city.

My professional background is in institutional real estate investment management. In addition to

our EB-5 business, Civitas also manages capital for institutions, family offices and other

investors, both domestic and foreign, through our Alternative Investments division. Prior to

founding Civitas, I was a partner in a boutique real estate investment fund, and prior to that, I

was Executive Vice President of the real estate private equity arm of a Dallas-based investment

advisory firm with assets under management in excess of $30 billion, where I concurrently

served as the Chief Compliance Officer for an affiliated FINRA-registered securities broker-

dealer.

I am active in the Dallas business and civic community. I am a member of the Dallas Citizens

Council, the Dallas Assembly, and the Dallas Committee on Foreign Relations. In 2013, I was

honored to be recognized as Distinguished Young Alumnus by my alma mater, the Cox School

of Business at Southern Methodist University.

I am also very active in the EB-5 industry. Since founding Civitas, my colleagues and I have

been members of Invest in the USA (IIUSA), the nonprofit trade association representing

regional center operators. I served on the IIUSA Board of Directors from 2012 to 2014, and as

Chairman of the Best Practices Committee from 2013 to 2015. I continue to serve on that

committee, but I testify today in my capacity as CEO of Civitas Capital Group, and not on behalf

of IIUSA or any industry group.

Civitas Capital Group: Company Background and Philosophy

I founded Civitas in late 2008, as the frightening global scale of the financial crisis and

subsequent recession was just becoming apparent. To their great credit, the professionals at the

City of Dallas Office of Economic Development had identified EB-5 as a potentially powerful

economic development tool as far back as 2006, and were working on a plan to use EB-5 to

attract foreign direct investment to Dallas. Through a competitive RFP process, Civitas was

selected to collaborate with the City of Dallas to create the City of Dallas Regional Center

(CDRC), an innovative public-private partnership. After more than a year of planning, the CDRC

was approved by USCIS in late 2009. Today, this partnership continues to thrive. On behalf of

the CDRC, Civitas manages more than $350 million in EB-5 capital invested in more than 20

Written Testimony of Daniel J. Healy

United States Senate – Committee on the Judiciary

April 13, 2016 | Page 3 of 14

job-creating Dallas projects across a range of industries, including commercial real estate,

business services, hospitality, restaurants and seniors’ housing. These investments are designed

to align with the City of Dallas’ economic development priorities throughout the city, and

include several that are located in historically underserved neighborhoods and serve low- to

moderate-income citizens. I am pleased to report that the CDRC has been cited by the Brookings

Institution, the Urban Land Institute and others as a model for the efficient deployment of EB-5

capital, and as a mechanism to stretch precious municipal economic development resources so

they have the greatest possible impact.

Civitas focused exclusively on the partnership with the City of Dallas for more than two years,

building a well-known EB-5 brand both in foreign markets and here at home, and quickly

emerging as an industry leader. More recently, we have established similar public-private

partnerships with the Texas cities of Fort Worth, El Paso and Laredo. Each of these programs has

a different economic development focus that is tailored to the needs of each community. In

addition, Civitas now owns 20 regional centers covering most of the major markets in the United

States, coast to coast.

In the EB-5 space, Civitas is distinguished by consistently identifying and executing investments

that:

Provide low-cost, flexible capital to American businesses and developers of the highest

quality;

Exceed, typically by a substantial margin, the critical job creation requirements under

EB-5 program rules;

Demonstrate a creative approach to and a relentless focus on balancing risk and reward

for our investor clients, taking into account both their financial and non-financial (i.e.,

immigration) goals; and

Reflect our philosophy of requiring the highest standards of integrity and compliance in

everything we do.

With respect to standards and compliance, I commend you, Mr. Chairman, as well as Ranking

Member Leahy, for your work to incorporate important integrity enhancements into your EB-5

reform legislation. I also commend my home-state senator, Sen. John Cornyn, as well as

Senators Flake, Schumer and Tillis for co-sponsoring the EB-5 Integrity Act of 2015. I strongly

support holding EB-5 regional centers to high standards, and have long held Civitas to such

standards and encouraged my industry colleagues to do the same. I also strongly support

ensuring that USCIS and other applicable regulators have the tools and legislative authority they

need to weed out and punish bad actors. I am confident that virtually universal support for such

measures exists throughout the EB-5 industry.

Why Am I Here Today?

Mr. Chairman, my goal in testifying today is twofold.

Written Testimony of Daniel J. Healy

United States Senate – Committee on the Judiciary

April 13, 2016 | Page 4 of 14

First, I offer three case studies to provide the Committee with concrete examples of how the EB-

5 program can, should, and does work today. I am extremely proud of our work and will put my

investment, asset management, and compliance teams up against those of any investment adviser

in the country, large or small, in the EB-5 space or otherwise.

These examples are important because they lay the groundwork for my second objective: to

encourage this Committee to seek true reform of Targeted Employment Area (TEA) policy. In

this regard, I would note the following key points:

TEA reform is timely. The title of this hearing makes plain your view, Mr. Chairman,

that TEA designations have been abused. I was encouraged that in the EB-5 hearing this

Committee held on February 2, 2016, several Senators urged their colleagues to “mend it,

don’t end it” with respect to the EB-5 program generally and TEA policy specifically.

That hearing made clear to me that, as is the case with various stakeholders in the EB-5

community, Senators on this Committee differ on whether and the degree to which TEA

designations have, in fact, been abused. I invest in real estate, which means I am an

eternal optimist who is always focused on the best way to get a deal done, and in that

spirit, the good news here is that we need not agree or even focus at all on the “abuse”

characterization in order to agree on a revised TEA policy that makes sense going

forward. The fact that some Senators, clearly including you, Mr. Chairman, find current

TEA policy objectionable is certainly reason enough to rethink how TEAs work. Now is

the time to do so.

TEA reform is welcomed. I appear before you today on behalf only of myself and Civitas

Capital Group. In that capacity I can tell you without reservation that I support TEA

reform. In addition, I am very active in discussions among industry stakeholders about

meaningful EB-5 program reforms, and I am confident that there exists a willingness

industrywide to work closely with this Committee to enact a broad set of such reforms,

including with respect to TEA policy. I believe the industry desires a strong working

relationship with this Committee, and that means being responsive to the Committee’s

concerns. Accordingly, TEA reform is welcomed.

TEA reform can achieve all of your goals and industry consensus. Mr. Chairman, we

have the opportunity to create a new TEA policy that is both supported by the vast

majority of industry participants and meets each of the goals you have set forth, from

addressing TEA “gerrymandering” to reining in “rubber stamping” by state authorities to

creating an incentive for investment in truly distressed American communities.

Mr. Chairman, I respectfully urge you and your colleagues on the Committee to collaborate with

industry and other stakeholders to achieve true TEA reform, rather than tinker around the edges.

If you are willing to reimagine how TEAs work, let us engage in a substantive policy discussion

and do just that.

Written Testimony of Daniel J. Healy

United States Senate – Committee on the Judiciary

April 13, 2016 | Page 5 of 14

Civitas EB-5 Case Studies

I offer three case studies of actual Civitas EB-5 investments, each of which illustrates a different

aspect of (a) the power of the EB-5 program to facilitate job creation and economic development,

and (b) why TEA reform must be achieved in a manner that balances the program’s broad job

creation mandate with the desire to drive capital to distressed communities, be they urban or

rural.

Case Study No. 1: Distressed Urban Mixed Use. As of this writing, my Civitas colleagues and I

are in the midst of structuring an EB-5 investment in Dallas of which I am truly proud. Dr.

Michael Sorrell is President of Paul Quinn College (www.pqc.edu), a historically black college

located in the Highland Hills neighborhood in southern Dallas. He has served as a member of the

Civitas Advisory Board since shortly after the firm’s founding. I am honored to call Dr. Sorrell a

friend.

Mr. Chairman, if you and your colleagues on the Committee are unfamiliar with Dr. Sorrell’s

work at Paul Quinn College, I urge you to read up on it. It is truly an extraordinary story, one

that is getting better every day.

Nine years ago, Dr. Sorrell – then a lawyer with no experience or training in education – was

given the thankless task of taking over a failing institution and, everyone assumed, winding it

down. Paul Quinn’s enrollment had declined precipitously, the school was facing serious

financial difficulties, and its accreditation had been unceremoniously yanked. It is no

exaggeration to say that many in the community had simply written off the college. Folks

generally assumed that Dallas’ only historically black institution of higher learning would

disappear ignominiously.

It turned out Dr. Sorrell had other plans. He embarked on a turnaround effort that has been

nothing short of inspiring. He cleaned up the school’s finances, raising fresh capital and

eliminating entirely the school’s looming debt. He terminated – and this is in Texas, mind you –

the school’s football program and turned the football field into an organic farm, which now

supplies fresh produce not only to the local neighborhood (which qualifies as a food desert), but

also to the catering service at AT&T Stadium, home of the Dallas Cowboys. He converted the

school into the nation’s first urban federal work college, so students gain valuable work

experience and, with work credit offsetting tuition, pay an average of just $2,300 out of pocket

per year for their degree. Dr. Sorrell also teamed up with famed technology entrepreneur (and

Dallas Mavericks owner) Mark Cuban to transition the college to open-source textbooks and

other materials, further driving down the cost of attendance for students.

These and other changes Dr. Sorrell implemented – from the business-formal dress code to

demolishing dilapidated buildings to a student exchange partnership with Duke University –

have resulted in a remarkable renaissance at Paul Quinn. Today, for the first time ever, the

school has a waiting list for admission. The future is bright.

Written Testimony of Daniel J. Healy

United States Senate – Committee on the Judiciary

April 13, 2016 | Page 6 of 14

It’s a great story, but what is the connection to EB-5 and Civitas? Dr. Sorrell’s vision is that the

Paul Quinn campus – which is comprised of more than 140 acres in Dallas proper, most of which

is undeveloped – will soon anchor the revitalization of the long-neglected Highland Hills

neighborhood. More so even than the typical college president, Dr. Sorrell must be extremely

creative when it comes to the funding required to fulfill this vision. To that end, I have been

working with Dr. Sorrell and a well-known, community-minded Dallas developer on a mixed-

use project for the Paul Quinn campus that will jumpstart this process.

The project currently is in the predevelopment phase. We anticipate it will have the following

components:

Residential units designed to serve:

o Paul Quinn students (many of whom are nontraditional students);

o Faculty and staff;

o Neighborhood residents, especially single mothers; and

o Teach for America corps members teaching on the Paul Quinn campus and in

nearby Dallas Independent School District public schools;

Sliding-scale rent affordability guidelines for nonstudent residents, primarily targeting

those earning approximately 70% of area median income (AMI), which is approximately

$35,000 for an individual;

Onsite daycare in partnership with an award-winning nonprofit provider;

Retail space administered by Paul Quinn and leased to student-run and/or student-staffed

businesses as part of the school’s federal work college curriculum; and

Space for educational and/or administrative use by Paul Quinn College.

We are in the process of securing as many as seven sources of traditional and nontraditional

capital to finance the project’s roughly $30 million cost. These capital sources are anticipated to

include:

Traditional senior bank debt provided pursuant to the Community Reinvestment Act;

Subordinated debt from the GrowSouth Fund, a double-bottom-line investment fund

managed by Civitas and focused on southern Dallas revitalization. This fund was created

as the Dallas business community’s response to Mayor Mike Rawlings’ call for increased

investment in southern Dallas;

Subordinated debt from the TREC Community Fund, a double-bottom-line investment

fund sponsored by The Real Estate Council which provides nonprofits and for-profit

organizations in Dallas County access to capital for commercial real estate projects

benefiting low-income families and their communities (recouncil.com/community-fund);

Equity investment from both the private development partner and Paul Quinn College;

Written Testimony of Daniel J. Healy

United States Senate – Committee on the Judiciary

April 13, 2016 | Page 7 of 14

Grants and/or other financial support from the City of Dallas;

Philanthropic support from a private foundation for the nonprofit daycare and educational

components of the project; and

EB-5 capital from Civitas and the City of Dallas Regional Center (cdrc.us).

I provide this level of detail about the Paul Quinn project in order to illustrate several points.

First, this is what it takes to jumpstart economic development in a neighborhood as distressed as

Highland Hills. A project as ambitious as this one requires a tremendous amount of creativity

and work by a range of stakeholders in order to come together, and EB-5 is a critical component

of its feasibility. If low-cost, flexible EB-5 capital were not part of the picture, then either (a)

those dollars would have to be replaced with philanthropic funding, which is much more scarce,

or taxpayer dollars in the form of grants or subsidized loans, or (b) the project simply would not

be financially feasible.

Second, addressing the specific topic of today’s hearing, the Paul Quinn project is an excellent

case study that demonstrates the limitations of current TEA policy. The Highland Hills

neighborhood is truly distressed, with daunting generational poverty and unemployment to

overcome. Paul Quinn is located in Dallas County census tract 114.01, which today suffers from

an unemployment rate of 10.3%.1 EB-5 program regulations require that an area’s

unemployment rate be at least 150% of the national average in order to qualify as a TEA.2

Today, the relevant benchmark rate is 9.3%, which is 150% of the 2014 national average

unemployment rate of 6.2%.3 Thus, the Paul Quinn census tract qualifies as a TEA under current

law, as every member of the Committee would surely agree is appropriate were they to visit the

campus and its surrounding environs.

But while Paul Quinn’s TEA qualification today is obvious, it is easy to imagine a scenario

where the project’s location would not qualify. Consider that Paul Quinn and the University of

North Texas-Dallas are the anchors of the 3.5-mile “Education Corridor” along Simpson Stuart

Road, with Paul Quinn on the east and UNT-Dallas on the west. This corridor is a key economic

development focus for many Dallas civic and business leaders, led by Mayor Mike Rawlings via

1 This statistic and all unemployment data cited in this testimony are based on, as applicable, data from the U.S.

Census Bureau, U.S. Bureau of Labor Statistics (including the Local Area Unemployment Statistics dataset for

relevant years), and/or the American Community Survey. All such data was compiled by Kim Atteberry, Ph.D.,

principal of Vermilion Consulting, LLC, and an economist with decades of economic development modeling

experience, including serving as Chief Economist of the Investment and Economic Analysis Division of U.S.

Citizenship and Immigration Services. Dr. Atteberry has completed hundreds of economic studies for Civitas and

many other EB-5 regional center operators, which have been evaluated and approved as to methodology and results

by USCIS across hundreds, if not thousands, of EB-5-related petitions.

2 See 8 CFR § 204.6: “Targeted employment area means an area which, at the time of investment, is a rural area or

an area which has experienced unemployment of at least 150 percent of the national average rate.”

3 According to the U.S. Bureau of Labor Statistics (BLS), the national unemployment rate as of this writing is 5.0%.

For TEA calculation purposes, however, USCIS requires EB-5 program participants to use the average national

unemployment rate for the most recent calendar year. As of this writing, the BLS has not yet released this

benchmark rate for 2015; it is expected to be released in approximately three weeks. Accordingly, EB-5 program

participants must continue to use the higher 2014 rate until the new data is released.

Written Testimony of Daniel J. Healy

United States Senate – Committee on the Judiciary

April 13, 2016 | Page 8 of 14

his signature GrowSouth Initiative.4 Dr. Sorrell and his counterpart at UNT-Dallas have

discussed a number of ideas for pooling their resources to jumpstart Education Corridor

development. Suppose that instead of building the proposed project on the Paul Quinn campus,

Dr. Sorrell were to team up with UNT-Dallas to develop a joint project along the Education

Corridor in census tract 112, roughly equidistant between the two campuses – an idea the two

educators have actively considered. Today, this census tract’s unemployment rate is 11.1%, so it

would qualify, but the situation was very different in 2009, when the country was in the depths

of the Great Recession. In that difficult year, the average national unemployment rate was 9.3%,

making the 150% TEA unemployment threshold 13.95% – a massive figure. The unemployment

rate in Paul Quinn’s census tract 114.01 was over 37%, so it easily qualified, but curiously, the

rate for nearby census tract 112 was 8.59%, well below the 150% threshold. The wide disparity

in unemployment rates between the two tracts did not exist because Highland Hills residents who

live just west of the Paul Quinn campus in 2009, at the nadir of the financial crisis, were finding

work at a faster rate than their neighbors to the east. Rather, the disparity was the result of the

arbitrary locations of census tract boundary lines in a very concentrated area.

This matters for two reasons.

First, because the only current criterion for urban TEA qualification is whether or not a project

site meets the 150% unemployment threshold, truly distressed areas like Highland Hills are

disadvantaged even further when the national unemployment rate rises significantly, as it did

when the economic downturn hit its trough in 2009. Second, if the Paul Quinn project were built

along the Education Corridor rather than on the Paul Quinn campus itself – a scenario that many

have high hopes will actually come to pass in future phases – it would qualify as a TEA today,

but would not have qualified at all back in 2009, amid the worst economic downturn the United

States has experienced since the Great Depression.

This perverse outcome cannot be what Congress intended. Indeed, current law is not so rigid as

to require the individual census tract in which an EB-5 project is located to meet the 150%

unemployment threshold. In fact, the current TEA definition does not mention census tracts or

any other geographic unit at all, but rather refers much more broadly to “an area…which has

experienced unemployment of at least 150% of the national average rate.”5 The flexibility built

into this language amounts to a recognition of the concept of labor mobility, i.e., that the location

of a project and the location of the unemployed workers who will benefit from that project are

rarely one and the same – as the Paul Quinn project demonstrates. In other words, unemployment

4 See, e.g., the discussion of the “Education Corridor” on the website for Mayor Rawlings’ GrowSouth Initiative at

http://www.dallasgrowsouth.com/education-corridor/. The GrowSouth Initiative is an ambitious economic

development plan for southern Dallas in which Civitas is heavily involved. In addition to our EB-5 investment

activities, the firm manages the GrowSouth Fund, a private real estate investment fund sponsored by the nonprofit

Impact Dallas Capital and formed in response to the Mayor’s call for private investment in southern Dallas. The

GrowSouth Fund is a double-bottom-line fund which seeks to generate both financial returns for investors and a

meaningful social impact.

5 8 CFR § 204.6

Written Testimony of Daniel J. Healy

United States Senate – Committee on the Judiciary

April 13, 2016 | Page 9 of 14

as a metric is focused on people and is calculated based on where those people live, and people

generally do not live in the exact same location where they work.

This is why in practice, Civitas and other EB-5 regional centers hire economists to create

qualifying TEAs by averaging the unemployment rates of contiguous census tracts via the well-

established, statistically valid “census share” methodology that is used by agencies throughout

the federal government, among many others. This practice eliminates the perverse outcome

highlighted by the Paul Quinn example above; in the 2009 hypothetical, a TEA could have been

created by aggregating census tracts along the Education Corridor, and the location in census

tract 112 would have qualified despite the relatively low unemployment rate in that tract itself.

This is also why the City of Dallas uses this methodology to draw the largest possible TEA

within the city limits, reflecting an explicit policy choice to drive as much capital to the broadest

swath of the city as possible, with a particular focus, not surprisingly, on the historically

underserved southern sector.

Supporters of this approach point to well-documented commuting patterns that make clear, for

example, that the workers who build and staff a large project in Uptown Dallas (or Manhattan,

for that matter) generally do not live in the immediate area; rather, they commute from various

other neighborhoods, the vast majority of which are considerably less well-off. The other side of

the coin, of course – and the reason for today’s hearing – is that the practice of aggregating

census tracts for TEA purposes has in some cases led to the so-called “gerrymandering” that has

caused concern among some Committee members.

In the debate among stakeholders and Members leading up to the recent short-term extension of

the regional center program, TEA reform was the thorniest issue. A variety of reform proposals

were offered by members of the Committee, industry and others. At the end of that process, a

TEA compromise was reached, but the broader negotiations stalled over other issues and the

process simply ran out of time, resulting in the short-term clean extension.

I view the short-term extension as an opportunity to roll up our sleeves and get this right. The

reality is that the TEA compromise reached this past December – limiting the number of census

tracts that can comprise a TEA to twelve, essentially – was workable, but far from ideal. On the

plus side, by permitting aggregation of a limited number of census tracts, the compromise would

have limited so-called “gerrymandering” significantly, while retaining some ability to account

for labor mobility and commuting patterns. On the other hand, the 12-tract compromise approach

included a complex, unwieldy collection of criteria and exceptions to those criteria that would

have been a bonanza for the lawyers but would strike most normal people as needlessly

complicated. It is important to note that the 12-tract compromise would not have eliminated so-

called “gerrymandering.”. This is because it is safe to assume that as long as TEA status equates

to a massive pricing advantage, project sponsors will do anything within the rules to obtain that

advantage.

It doesn’t have to be this way. Now that the Committee is dedicating the time and energy to

discussing TEAs specifically, we have the opportunity to do better. If practitioners retain the

ability to combine census tracts, there will always be some degree of the so-called

Written Testimony of Daniel J. Healy

United States Senate – Committee on the Judiciary

April 13, 2016 | Page 10 of 14

“gerrymandering” that some Committee members wish to rein in. If that is the goal, I suggest we

dispense with the focus on census tract aggregation and adopt objective criteria that will (a)

eliminate the perceived problem altogether, while (b) taking into account a broad enough set of

criteria so the perverse dynamic that can result from focusing solely on unemployment, as

illustrated in the Paul Quinn example, is avoided in the future.

Case Study No. 2: Hotel Development in Five Rural Texas Markets. Civitas got started in the

EB-5 space with the CDRC, and is perhaps best known for projects in Dallas. However, Civitas

has also made significant investments in smaller, rural Texas markets. For example, we have

invested in a portfolio of Marriott limited-service hotels located in the west Texas markets of

Pecos and Snyder (populations 8,919 and 11,368, respectively) as well as the south Texas

markets of Cotulla, Cuero and Pleasanton (populations 3,843, 6,979 and 9,283, respectively).6

Under current TEA policy, four of these markets automatically qualify for the lower $500,000

investment amount because they are rural, but the fifth – Pleasanton – does not, because it

technically lies within the San Antonio Metropolitan Statistical Area (MSA). Under current TEA

policy, the fact that Pleasanton is in an “outlying county” is irrelevant. In the EB-5 context,

creating this distinction among markets that are all essentially alike economically does not make

any sense. Does anyone really believe that Pecos, Snyder, Cotulla and Cuero deserve the

advantage of being able to raise EB-5 capital in $500,000 increments, but Pleasanton should be

required to raise the same capital in $1MM increments, pricing it out of the EB-5 market? In

order to make the Pleasanton location work in today’s EB-5 market, we created an

unemployment-based TEA using the census share methodology described above. This solution

was workable but far from ideal, much like the 12-tract TEA policy compromise described

above. But now, Congress has the opportunity to reform TEA policy from the ground up. I

respectfully urge the Committee to do so.

Case Study No. 3: Rural Manufacturing. As the EB-5 program has gained popularity, the most

prominent EB-5 investments have been large-scale real estate projects in major markets, such as

New York City and Los Angeles. Civitas has certainly invested in large developments, in Texas

and elsewhere. They are a perfectly legitimate, job-creating use of EB-5 capital. But with the

rising awareness of the EB-5 program has come a spate of recent investments in a range of

industries beyond real estate development, including health care, manufacturing,

transportation/logistics, and energy. Civitas has embraced this trend. In late 2015, Civitas began

evaluating an EB-5 loan to partially fund the construction of a manufacturing facility in

Orogrande, New Mexico (population: 56). The facility will process garnet, a mineral used as an

abrasive in a variety of industrial applications in the marine, manufacturing and oil and gas

industries, among others. Currently, the vast majority of garnet used in the United States is

imported from India and China. The Orogrande project sponsor believes his domestically

produced garnet products will be competitive both on price and quality, and plans to invest more

than $20 million of capital alongside Civitas’ EB-5 investment in the facility.

If it proceeds, this project will result in the first large-scale economic activity in this tiny

unincorporated community between Las Cruces and Alamogordo in years. It is the farthest thing

6 All population data from American Factfinder American Community Survey 2014 (5-Year Data).

Written Testimony of Daniel J. Healy

United States Senate – Committee on the Judiciary

April 13, 2016 | Page 11 of 14

from a typical real estate deal; banks and other traditional capital providers will not finance it

until it is fully up and running, creating the chicken-and-egg problem that EB-5 capital is so

useful for solving. In short, it is an excellent example of what can be done with EB-5 with a little

creativity. In the context of the Committee’s consideration of TEA reform, it demonstrates why a

manufacturing project in a place like Orogrande, NM, might deserve an extra incentive relative

to other markets that qualify as rural, such as Jackson Hole or Aspen. In other words, the

distinction that TEA policy should make is not urban vs. rural, but distressed vs. not distressed.

Don’t Just Tinker With Existing TEA Policy – Reimagine It.

Mr. Chairman, you have chosen to dedicate your Committee’s precious time and resources to the

EB-5 program and specifically to TEA reform, and I thank you for that. Since we have this rare

opportunity to closely examine TEA policy, I hope Congress and industry stakeholders will

engage in an honest, open dialogue, so we can get this right. To that end, I would emphasize the

following:

The Committee has the opportunity to simply end TEA “gerrymandering” altogether,

rather than tinkering with it.

It is possible to adopt a TEA policy that incentivizes investments in Pecos and

Orogrande without disadvantaging Dallas and Houston and, for that matter, New York

City. I suspect we agree that creating jobs in the large and medium-sized urban markets

where the vast majority of Americans live is a good thing. Doing so should not preclude

driving EB-5 capital to distressed areas, be they urban or rural.

We can work together to agree on objective criteria for TEAs that do not require an

advanced degree in economics to apply. If your goal is to eliminate inconsistent state and

local TEA designations in favor of simple, objective criteria, I stand ready to work with

you.

The Solution: Objective, Narrow, Place-Based TEA Criteria

Objective TEA Criteria. Many industry stakeholders believe strongly that if urban TEAs are to

be redefined, commuting patterns should be incorporated into the policy. In my view, these

stakeholders have a point. Last year, Mr. Chairman, you and Ranking Member Leahy introduced

S. 1501, which would have limited urban TEAs to a single census tract. As discussed above, this

approach would continue the current reliance on a single metric, i.e., whether a census tract’s

unemployment rate is equal to or greater than 150% of the national average rate. It would apply

that metric to very granular, census-tract-level data, which are susceptible to the unintended

consequences illustrated by my actual experience planning the Paul Quinn College project and

other Education Corridor initiatives described above. Adopting this approach would be a step

backward; current TEA policy may be flawed, but as discussed above, it at least accounts for

commuting patterns indirectly. The 12-tract limitation compromise would partially address the

issue, but it remains a blunt instrument.

Written Testimony of Daniel J. Healy

United States Senate – Committee on the Judiciary

April 13, 2016 | Page 12 of 14

Devising and implementing an urban TEA policy that accounts for complex commuting patterns

without the potential to be “gamed” is, in my view, a tall order. It may be possible, but in my

opinion, there is another, better way, one that avoids the commuting pattern complexity in favor

of a simple and explicitly place-based approach. In this context, TEA eligibility would be the

exception, not the rule, and would be reserved for areas that are truly distressed – be they urban

or rural – based on objective criteria.

Congress need not come up with anything new to achieve this goal. Rather, Congress can craft a

simple, straightforward TEA policy by adopting a tighter version of the longstanding poverty,

income, and unemployment criteria enacted by Congress and implemented by the Treasury

Department to determine census tract eligibility for New Markets Tax Credits (NMTCs).7

Specifically, for EB-5 purposes, a TEA could be defined as one of the following:

a. “Priority Urban Investment Area”—A census tract within a Metropolitan Statistical

Area (MSA) that has any two of the following characteristics:

i. Poverty rate greater than 30%; or

ii. Median family income (MFI) does not exceed 60% of statewide MFI; or

iii. Unemployment rate at least 1.5 times the national average.

b. “Priority Rural Investment Area”—A census tract outside an MSA that has any one

of the following characteristics:

i. Poverty rate at least 20%; or

ii. MFI does not exceed 80% of the greater of the statewide MFI or the MSA’s

median family income.

For urban TEAs, the Priority Urban Investment Area idea builds on the “severely distressed”

concept from the NMTC program. For NMTC purposes, a census tract is considered “severely

distressed” if it meets any one of the criteria listed in (a) above. For EB-5 TEA purposes, I

suggest tightening this to any two of the same criteria. The rationale for this more restrictive

requirement is that unlike in the NMTC context, the policy goal in the EB-5 context is to restrict

TEA eligibility to the most truly distressed areas in the country, in recognition of the fact that

unlike NMTCs, EB-5 capital can be invested anywhere in the United States, regardless of

poverty, income and unemployment levels, as long as the EB-5 capital is raised at the upper-tier

investment level.

This approach would also provide a meaningful boost for truly distressed rural areas. Note that

the proposed thresholds for TEA qualification as a “Priority Rural Investment Area” are lower

7 See 26 U.S. Code § 45D. See also, e.g., NMTC 2015 application, “Part II—Community Outcomes” at p. 25.

Available at: http://www.novoco.com/new_markets/resource_files/application/2015_nmtc_app_102815.pdf.

Written Testimony of Daniel J. Healy

United States Senate – Committee on the Judiciary

April 13, 2016 | Page 13 of 14

than those for urban areas. In addition, a rural census tract need only meet one of the proposed

thresholds to qualify, rather than two. The lower thresholds are identical to those used by the

Treasury Department in determining rural area eligibility for NMTCs. This is in recognition of

the reality that all else being equal, it is more difficult to attract capital – be it foreign or

domestic, EB-5 or otherwise – to rural areas.

Importantly, these criteria are objective and easily measured. Adopting them would eliminate the

need to create TEAs via census tract aggregation and therefore would eliminate the

“gerrymandering” issue altogether.

Of course, the NMTC program is but one of a number of place-based federal programs that

include criteria that could serve as a model for TEA policy. I urge the Committee to consider all

options in reimaging how TEA policy should work.

Minimum Investment Amounts. Support for raising the minimum investment amounts for both

standard and TEA locations is nearly universal. But in my view, in order for the simple,

objective TEA criteria above to gain widespread stakeholder support, Mr. Chairman, it is crucial

that the associated minimum investment amounts be set at appropriate levels. The reason the

TEA issue has been difficult to resolve to date is primarily that under the current system, the

100% price difference between TEA and standard locations (i.e., $500,000 vs. $1 million)

creates a financial incentive for foreign investors to invest in TEAs that is nearly impossible to

overcome. In order to avoid this in the future, the delta between the minimum investment

amounts must be much narrower.

In my view, raising the standard investment amount to $725,000 and the TEA investment

amount to $675,000 would achieve the right balance. Specifically, these minimum amounts

balance the following factors:

Need to Raise Investment Amounts. I recognize that as a practical matter, the EB-5

program currently has a single price point – $500,000 – because virtually all EB-5

investments are in qualified TEAs under the current policy. Under the objective criteria

recommended above, this would no longer be the case. TEA qualification would be the

exception, not the rule, and the two-tier pricing system would be very meaningful. In that

context, the proposed increased investment minimums equate to an increase of 45% and

35% for standard and TEA locations, respectively. It is critical for this Committee to

understand that increases of this magnitude are very significant. By definition, such

increases will shrink the market of prospective foreign investors, and therefore could

significantly reduce EB-5 foreign direct investment in the United States. In any other

market – health insurance, for example – an overnight 35% or 45% price hike would

obviously be a market-shifting event, one that would clearly change behavior. While I

understand your impulse, Mr. Chairman, to raise the investment amounts to account for

past inflation as a matter of principle, I would again emphasize that my goal in testifying

today is to urge the Committee to reimagine TEA policy, not tinker with it. This means

considering not just past inflation, but more importantly, the following question: “What is

the pricing level that results in the maximum level of job-creating foreign direct

Written Testimony of Daniel J. Healy

United States Senate – Committee on the Judiciary

April 13, 2016 | Page 14 of 14

investment through EB-5?” After all, the purpose of the program is to create jobs. That is

the lens through which the minimum investment amounts should be evaluated. I believe

this strongly suggests limiting the magnitude of short-term price increases, especially

given that support for automatic indexing to inflation in the future is widespread.

Create Financial Incentive for Rural and Urban Distressed Investments Without

Harming Other Markets. The delta of $50,000 between the two investment levels creates

a significant financial incentive for TEA investment. Investing at the standard level

would require an investor to risk 7.4% more capital than would be the case for a project

in a TEA location. This financial incentive is significant enough to merit serious

consideration by a prospective investor, but unlike the $500,000 (or 100%) delta under

the current TEA policy, the incentive is not so strong that it outweighs virtually any other

consideration, including project location and sponsor quality.

Conclusion

Mr. Chairman, I urge you to seriously consider this TEA reform proposal. Thank you for your

interest in the EB-5 program and the opportunity to appear before the Committee today.

Senate Committee on the Judiciary:  The Distortion of EB­5 Targeted Employment Areas: Time to End the Abuse 

 Date: Wednesday April 13, 2016 

Time: 10:00 AM (EST)  

Location: Dirksen Senate Office Building 226  

Presiding: Chairman Grassley (R­IA)  

Written Testimony of  Mr. Timothy J. Whipple, J.D. 

Former General Counsel of the  Iowa Economic Development Authority 

    

Biography  My name is Timothy Whipple, J.D.  I am a proud native Iowan. I grew up in rural Franklin County and graduated from Cedar Falls High School in 1995. I am a 1999 graduate of St. Olaf College in Northfield, MN and a 2007 graduate of Drake University Law School in Des Moines, IA.  I am currently the General Counsel for the Iowa Association of Municipal Utilities, a trade association representing more than 540 community­owned water, gas, electric, and communications utilities. From 2007 to 2011, I was Legal Counsel to the Iowa legislature for Economic Development and Tax law.   From June 2011 to November 2015, I was the General Counsel for the Iowa Economic Development Authority. In this capacity, one of my duties was to coordinate the state’s effort to leverage the federal EB5 immigrant investor visa program.  A Brief History of the State of Iowa’s Regional Center  The state of Iowa, through its state Economic Development agency, has operated an EB5 regional center since approximately 2004. The administration of former governor Tom Vilsack, in cooperation with agricultural interests and with Iowa State University, initially established the regional center in order to facilitate the immigration of European dairy farmers to Iowa for purposes of setting up new dairy operations in the state. These early efforts saw some success. A few of these dairy farmers came to Iowa, created the requisite number of direct jobs, and received visas under the EB5 program.  Yet despite the modest success of these early efforts, it was clear that the initial design of the Iowa regional center was underutilizing the full potential of the EB5 program. Other areas of the country were financing much bigger and more internationally enticing developments through the program than Iowa was and they were more successful at using the program to attract foreign capital.  As interest in the immigrant investor visa program picked up nationally, members of the local business and economic development communities began to encourage the state to follow the lead of California, Texas, and New York in bringing foreign investment to Iowa. Debi Durham, the Director of the Iowa Economic Development Authority, and I took steps to expand the scope of our existing regional center.  Iowa’s Goals in Expanding Its Regional Center  The first reason we moved forward with an expanded regional center was that we felt the state government was better positioned than local communities to deal with the legal and financial complexities of EB5. Frequently, wealthy individuals from China or other countries would bring economic development projects directly to local community leaders, but such investors often 

wanted to leverage the EB5 program so they could obtain visas after making the investments. It was not feasible or wise, in most cases, for Iowa communities to set up and operate a regional center that might do as few as one or two projects. Mistakes were likely to be made, and we did not wish to see projects fail or investors lose their visas.  Second, on its face, the EB5 program seems to offer opportunities for rural areas. For example, Iowa has 99 counties, and 77 of them qualify for the $500,000 investment tier by virtue of their rural status. Most of these counties have been losing population for decades, and in 2015 an estimated 71 counties again saw their population decline.  It was our hope that with so much of 1

the state eligible for the lower investment threshold, we could use EB5 to bring jobs and investment to the rural areas of the state.  Third, as the state’s lead economic development agency, the Iowa Economic Development Authority has a host of grant, loan, and tax credit programs available for job creation projects and a steady stream of industrial prospects that take advantage of them. It was our hope that EB5 money could be deployed into such projects as part of the financing in those cases where more capital was required. In particular, given the state’s backlog of infrastructure projects and its heavy concentration of value­added agriculture, advanced manufacturing, and bioscience businesses, we had hoped to use EB5 to help finance large­scale industrial developments and infrastructure projects. Iowa needs new investments in road, rail, and bridge infrastructure and in manufacturing if it is to see sustainable long­term growth.  Fourth, we felt that as a state agency whose primary mission is to benefit Iowans through economic development, we had the right incentive to operate a regional center. As a government agency, we were not focused on operating the center for profit and could make financing decisions with the best interests of taxpayers and communities in mind.  Finally, we hoped that by operating the regional center at the state level and by also serving as the state’s TEA designating agency, we could bring consistency and predictability to the use of EB5 within the state.  Issues and Challenges of the Current EB5 Program  As a former state official who spent a number of years trying to make EB5 work for Iowa, I believe there are a few reasons why the deck is stacked against smaller, rural states.  First, the gerrymandering of census tracts to create targeted employment areas (TEAs) means $500,000 investment opportunities can be created virtually anywhere. With ample opportunity to invest in projects located in the prosperous urban areas of California, Texas, Florida, and New York, investors don’t bother to look for projects in rural areas. Moreover, Iowa simply doesn’t 

1 http://www.nwestiowa.com/news/state­releases­county­population­data/ article_d97b9a78­fdcb­11e5­9f35­3bedf65ac2f6.html  

see many projects on the same scale as the larger urban areas, and it is easier for international promoters to market a few mega­developments than many smaller size projects.   Second, because of the natural political and economic incentives of state officials, state­level TEA designation, without clear national standards, almost guarantees that TEA gerrymandering will continue. From a cost­benefit standpoint, approving a TEA means economic growth and political goodwill for a state agency whereas denying a TEA only brings criticism and potential political blowback. Politicians and community leaders want these projects to happen, and they don’t want state bureaucrats getting in the way.  Third, rural economies are smaller and less diverse than the economies of large coastal states. Most of Iowa’s big recent developments have been industrial and manufacturing facilities financed with internal corporate capital rather than the luxury hotel, casino, and tourism projects that tend to attract EB5 investment. Wealthy foreign investors seem to prefer the prestige associated with high­end commercial real estate development more than a value­added agriculture or advanced manufacturing project.  Fourth, the ability to leverage indirect job creation under the program favors affluent urban areas. Most indirect job creation is calculated using economic analysis tools that incorporate multiplier effects. All other things being equal, a project built in a larger urban area with a more diversified economy will see a better multiplier effect and thus a better job creation number for purposes of EB5.  This makes it less efficient, from a business standpoint, to invest in smaller 2

projects in rural areas.  Finally, a TEA designation should be an indicator of economic distress. The current focus on unemployment as the exclusive basis for TEA designation fails to recognize other indicators of distress such as low wages and high poverty rates. Much of rural Iowa, for example, has an unemployment rate below the national average, and some counties are below 3%.  Yet these 3

areas do face economic challenges. Rural Iowa has been depopulating for a century and this trend shows no sign of abating. As people leave in search of opportunity, the availability of skilled workforce becomes the top priority of local businesses and a limiting factor for recruiting a new industrial prospect. When good, well­paying jobs leave for areas with more workforce, the jobs that are left tend to be low­paying service sector jobs or part­time work.      

2 https://msu.edu/course/prr/840/econimpact/multipliers.htm  3 https://www.iowaworkforcedevelopment.gov/labor­market­information­division  

Congress Should Make EB5 More Fair  The current implementation of EB5 simply is not working for rural areas of the Midwest and something needs to change. Listed below are some common sense things that would make EB5 work better for rural areas:  

● Reserve a minimum of 20% of the annual available visas for investors who make investments in rural areas. 

● Stop the gerrymandering of TEAs. ● Use additional economic distress criteria for purposes of TEA designation. ● Require each individual census tract in a TEA to meet the criteria. ● Incentivize projects built in true distressed areas, rural and urban, that represent 

underserved capital markets. ● Create and enforce a consistent set of national TEA standards. ● Create incentives for infrastructure and manufacturing projects rather than commercial 

real estate development.   Conclusion  In conclusion, I would like to thank Senator Grassley and the members of the Judiciary Committee for the opportunity to testify today. Immigration and economic development are critical issues facing our country, and improving the EB5 program is an important step in addressing these issues. 

1

Written Testimony of

Peter D. Joseph

Executive Director

Invest In the USA (IIUSA)

Hearing on

The Distortion of EB-5 Targeted Employment Areas: Time to End the Abuse

Before the

Committee on the Judiciary

U.S. Senate

Washington, D.C.

April 13, 2016

EMBARGOED UNTIL DELIVERY

As Prepared for Delivery

2

Testimony of Peter D. Joseph

Chairman Grassley, Ranking Member Leahy, and Distinguished Members of the Committee:

Thank you for inviting me to testify today. My name is Peter D. Joseph. I am the Executive Director of Invest In the USA (“IIUSA”), the national non-profit trade association for the EB-5 Regional Center industry based in Washington, DC. I have been involved in the EB-5 Regional Center Program (the “Program”) for almost ten years, working first in the legal and private sectors of the industry before beginning at my current position over six years ago. I consider it an honor and a privilege to be here today to share my perspective with you. Leading IIUSA in the years following Great Recession allowed me to see the growing number of communities, industries, and people benefitting from EB-5 firsthand at a time our country needed it most.

IIUSA appreciate the bipartisan, bicameral support and leadership of many in Congress and on this committee. I have had the honor of working closely with many of your offices on this issue in the last several years and believe we have a shared goal of making EB-5 a more efficient and effective program. Our shared commitment to the Program has turned a once underutilized immigration program into a vital source of U.S. job creating investment capital today. Since 2008, the Program’s annual contribution to foreign direct investment (“FDI”) inbound into the U.S. grew over 1,200% to total almost $5 billion in fiscal year 2015 alone (see Appendix I). This investment capital is creating tens of thousands of jobs for U.S. workers in diverse communities by funding projects in a wide variety of industry sectors across the country - all at no cost to the taxpayer. In fact, the Program generates much needed tax revenue to the tune of over half a billion dollars in state and local tax revenue and over one billion in federal tax revenue from 2010-2013 alone.

Today’s hearing on “Targeted Employment Areas” (or “TEAs”) is an important opportunity to discuss one of the core interrelated issues that should be considered in the context of a long-term reauthorization of the EB-5 Regional Center Program to be possible. My testimony will start with background information on EB-5 and IIUSA. Next, I will discuss how EB-5 fits into the U.S. immigration system, domestic capital markets and global capital flows, and the competition for immigrant investor programs throughout the world today. I will then review TEA policy as it exists today before highlighting current practices and reform proposals from Congress, federal agencies, state/municipal governments, and other stakeholders. Finally I will conclude with observations on how TEA policy is interrelated with other important EB-5 policy issues that need to be addressed in order for the Program to reach its full potential as a 21st century economic development tool.

I. Background Information

EB-5 Regional Center Program

Congress created the EB-5 program in 1990 to benefit the U.S. economy by attracting investments from qualified foreign investors. Under the Program, each investor must prove that at least ten new jobs were created or saved as a result of the EB-5 investment, which must be a minimum of $1 million, or $500,000 if the funds are invested in certain high-unemployment or rural areas.

Other countries including Australia, Portugal, Spain, and the United Kingdom, use similar programs to attract foreign investments. The American program is more stringent than others,

3

Testimony of Peter D. Joseph

requiring substantial risk for investors in terms of their financial investment, job creation requirements, and immigration status. Specifically:

● Investments made through the U.S. EB-5 Program must be “at risk.” There is no guaranteed financial return or return of principal capital. If their petition for eligibility for visa status is approved by U.S. Citizenship & Immigration Services (“USCIS”) EB-5 investors receive a conditional immigrant visa (i.e., “green card”) that is valid for two years. To receive a permanent green card, these investors must demonstrate that the legally required economic benefits flowing from their investments have been achieved.

● Annually, the EB-5 Program accounts for less than one percent of the total number of visas issued by the U.S. Throughout the process, EB-5 investors are subject to the same background checks and national security screenings as applicants in any other immigrant visa category, and their ability to eventually apply for citizenship is subject to the same criteria as other green card holders - including the payment of U.S. taxes based on worldwide income.

In 1992, Congress enhanced the economic impact of the EB-5 Program by creating the EB-5 Regional Center Program and allowing the designation of Regional Centers to pool EB-5 capital from multiple foreign investors for investment in economic development projects within a defined geographic region. Today, well over 90 percent of all EB-5 capital is raised and invested in affiliation with Regional Centers. Regional Centers maximize the program’s job creation benefits by facilitating large scale capital formation and investment in projects that require multiple sources of financing to come to fruition. These projects are often undertaken in coordination with regional economic development agencies that use the EB-5 funds to incentivize additional domestic capital.

Invest In the USA (IIUSA)

Founded in 2005, IIUSA is the national non-profit trade association for the EB-5 Regional Center industry with a mission to make the Program a permanent and successful part of 21st century U.S. economic development policy. We are a diverse organization with more than 280 Regional Center members and 200 associate members, collectively representing big and small projects, urban and rural economic development, and industry sectors ranging from real estate, manufacturing and energy to infrastructure, economic development and more. Our Regional Center members are engines for economic growth in the United States, responsible for a vast majority of the billions of the dollars of EB-5 capital investment occurring nationwide.

IIUSA operations cover advocacy, education, industry development, and research on an international scale. We have over ten standing committees, an advisory board, and Board of Directors. Each of these deliberative bodies has a unique role within the association and are as diverse as our membership. IIUSA staff works diligently to keep this process informed through our emphasis on comprehensive industry data analytics and reporting in all of our communications to members, stakeholders, and the public. The story of EB-5 emerging as a multi-billion dollar source of investment capital creating tens of thousands of jobs annually makes for some astounding infographics that show EB-5’s: rapid growth, contribution to the U.S. economy, project characteristics, investor origin, and demand. I also have had the privilege of visiting EB-5 project sites across the country, met people who got jobs thanks to the Program,

4

Testimony of Peter D. Joseph

toured businesses accessing capital in tight credit markets, and saw revitalized communities - all thanks to this innovative program.

It is the mix of the astounding numbers we are seeing and the positive impact EB-5 is having on individuals, companies, and regions that lead us at IIUSA to come up with our mantra; EB-5 is Working. We advocate for policies that will maximize the economic impact of the Program and for ethical standards in EB-5 business practices. IIUSA develops and adopts policy positions only after careful and full consideration of key factors, including: global and national industry data, existing internal and external records of relevant deliberations, membership polling, committee recommendations, advisory board comments, and Board approval. We continue to take pride in being a resource to Congress and other stakeholders for facts, data, and legal/policy analysis on the EB-5 Regional Center industry.

IIUSA’s education offerings and industry development efforts have grown over time. We host online education, conferences, and trade missions; maintain a members-only database featuring the largest collection of EB-5 digital resources; speak at private and public sector events; and publish an industry-leading quarterly magazine publication, e-newsletters, annual reports, and much more. We also educate the public on industry practices by raising the bar of professional conduct in the marketplace through regularly publishing best practices and promoting compliance and self-regulatory policies.1

We also educate existing and emerging investor markets internationally, and the business community domestically, by building partnerships and collaborative relationships with U.S. business and government interests here in the U.S. and abroad, such as American chambers of commerce and U.S. Foreign Commercial Service. IIUSA has also developed partnerships with a variety of organizations around the world that serve constituencies benefitting from EB-5. Conference of Mayors, National Association of Counties, Council of Development Finance Agencies, and American Chambers of Commerce overseas are but a few examples.

Lastly, IIUSA’s industry data collection and analysis regularly produce written reports and interactive online tools represent a more comprehensive way of understanding of numerous EB-5 related activities. For example, our website (IIUSA.org) features three interactive maps of economic impact, investor origin, and Regional Center office location. There is also a page full of statistics and data visualization on a digital dashboard tracking investment, economic impact, processing times, petition/application filing volume, and much more. All of this is only possible thanks to the Freedom of Information Act (FOIA), which we support adamantly like so many of you currently leading bipartisan efforts to reform the FOIA process. We support you there as well, having been frustrating of late in the efficiency and resulting data from the process. IIUSA uses the most relevant industry data and developments for analysis in its education offerings, policy considerations, and advocacy efforts.

II. EB-5 is Vital to Job-Creating Projects Happening Right Now in the U.S.

After years of underutilization, post-2008 the Program has become an essential financing tool for economic development in diverse communities across the country. It has financed projects big and

1 See https://iiusa.org/us/bestpractices/.

5

Testimony of Peter D. Joseph

small, rural and urban, and private and public (and public-private-partnerships), by providing financing in post-recession capital markets. EB-5 capital has accelerated the fulfillment of community and economic development goals in industries ranging from construction, infrastructure, manufacturing, film, arts and entertainment, hospitality, mining, power generation, oil and gas extraction, transportation and warehousing, healthcare, retail, financial and management services, education, infrastructure, agriculture, and more. In supporting the success of our Regional Center members, an integral part of IIUSA’s mission is to support this kind of economic development and job creation.

According to a New York University study, what was once around an 80% loan on property/land value by banks pre-recession is more like 40-50% post-recession. A variety of factors contributed to the lack of available capital since 2008: (1) the economic contraction of 2008-2009 made banks more risk-averse; (2) new requirements of the banking sector that resulted from the Dodd/Frank Act put further uncertainty and regulation on lending and derivative markets; and (3) guidance from the Office of the Comptroller of Currency (OCC) against over-exposure in the commercial real estate market. As a result, the sources of capital for a project (a “capital stack”) have to be diversified earlier in the development process for an economic development project to move forward. EB-5 has become an essential development finance tool and a critical source of capital for regional economic development. Analysis of IIUSA’s proprietary database of almost 600 EB-5 projects provides further insight into the various ways EB-5 is being integrated into development finance to deliver on its promise of capital formation and job creation for the U.S. at no cost to the U.S. taxpayer.2 III. Targeted Employment Areas (“TEAs”)

A TEA is an area which, at the time of the EB-5 investment, is either a rural area, or an area with an unemployment rate of at least 150 percent of the national average. In designated TEAs, the minimum investment for an EB-5 investor is $500,000 instead of $1,000,000. There are three ways that an area can qualify as a TEA for EB-5 investment purposes:

● An area qualifies as a rural area TEA if it is not within either (1) a designated metropolitan statistical area (MSA) as determined by the Office of Management and Budget (OMB), or (2) the boundary of a city of town with population over 20,000.

● An area qualifies as a high unemployment TEA if it is an area, MSA, county or city with an unemployment rate of at least 150 percent of the national average as measured by the U.S Department of Labor’s Bureau of Labor Statistics through its Local Area Unemployment Statistics program.

2 The last time the U.S. Congressional Budget Office (CBO) officially “scored” a five year reauthorization of the Program in 2008, it was given a “neutral” score – meaning that user fees cover the costs of administering the Program. See: http://www.cbo.gov/sites/default/files/cbofiles/ftpdocs/92xx/doc9244/hr5569.pdf.

6

Testimony of Peter D. Joseph

● A smaller geographic area within an MSA, county or city can qualify as a TEA if it meets the unemployment rate requirement through a designation letter issued by the appropriate state authority based on the latest federal data.

Each state appoints an agency, board or other appropriate governmental body – typically, a state’s labor department or workforce agency but sometime even municipal governments – to review and designate TEAs using federal sources of unemployment data. For areas where the Bureau of Labor Statistics does not produce employment estimates, states are required to use the U.S. Department of Labor’s Local Unemployment Statistics Program methodology to calculate unemployment rates.3 Federal regulations give states discretion in how TEA boundaries are drawn and the size of a TEAs geographic area similar to the discretion given to states for other federal programs that use unemployment data.

EB-5 regulations give states discretion to configure TEAs as long as the areas are contiguous. The purpose of qualifying TEAs through state designation is to permit a state to identify areas not encompassed by typical political subdivisions as high unemployment TEAs. As the agency with primary oversight of the EB-5 Program, USCIS reviews all proposed state TEA designations to ensure use of the most recent federal statistics and compliance with high unemployment requirements under the EB-5 Program. USCIS regularly issues requests for evidence for state TEA designation letters to assess the data and methodologies used by the state agencies, and USCIS retains the authority to approve or deny a state’s determination of a TEA if it finds the data or methodology to be flawed. The U.S. Department of Labor provides the states with guidance, including technical instructions on proper methodology for determining EB-5 TEAs.

The TEA designation applies to a geographic area that, as a whole, is either a rural area or meets the high unemployment threshold. An EB-5 project may be located anywhere within the designated TEA. In cases where the project site itself is not in a high unemployment census tract, the TEA includes adjoining tracts with high unemployment. This takes into account the flow of labor and economic impact in regional economies and is consistent with how the federal Bureau of Labor Statistics calculates unemployment and how economists study economic impacts. The U.S. Department of Labor’s Bureau of Labor Statistics measures unemployment based on a worker’s place of residence, not place of employment.

Typically, workers do not reside in the census tract of the business or job site where they work. Rather, the labor pool for any business is drawn from a commuter area that comprises surrounding communities. Economists also look at surrounding communities when they calculate the economic impact of a business or economic development project. For example, although a construction worker is employed on a project in one area, they likely live in a different census tract that they are employed. This recognizes that when they leave the work site, workers go home and spend wages at local businesses – buying groceries, clothes and other goods and services.

3 See http://www.bls.gov/lau/lauov.htm

7

Testimony of Peter D. Joseph

IV. Various Approaches to TEA Reform

Over the years, the number of TEA policies has steadily grown. Some are state policies being implemented under current law. Other ideas originate from legislative proposals in Congress, regulatory reform from the relevant federal agencies, or recommendations from outside experts. It is important that the variety of views on this topic are considered to build consensus among diverse constituents towards a compromise that can lead to a long term reauthorization. Another source of ideas is policy tools used in other federal economic development programs administered by agencies throughout the government. This hearing is an good example of public discussion of how both the legislative and regulatory reform processes can be used to carefully consider the policy ideas already on the table, ranging from the suggestion by the Secretary of Homeland Security last year to limit the number of census tracts that can be aggregated into a TEA (like some states do) to legislative proposals to create new categories of TEAs in areas that are: distressed urban, rural, cities of a certain size or less, closed military bases, accounting commuting patterns of workers to projects, and industry sectors such as infrastructure and manufacturing. Other incentives were also recently introduced that would seek to use visa availability to further incentivize investment in TEAs. This is why TEAs are so interrelated to other core issues.

Last year, after the introduction of several pieces of EB-5 legislation on various aspects of the EB-5 Program, IIUSA sought to catalyze a long term reauthorization and reform package last year by offering a compromise proposal to Congress on how to approach the four major issues perceived to be impeding progress towards a deal at the time: effective dates, TEAs, minimum investment amount, and job creation methodologies. The compromise was recommended and supported unanimously by the IIUSA Board of Directors, and also received unanimous support from IIUSA’s Public Policy Committee and the vast majority of our membership in a poll (83%). The TEA part of the compromise proposal offered the current California TEA policy limiting special high unemployment areas to 12 census tract aggregation.4 This concept remained a key aspect of the reform and long term reauthorization package that was close to being included in last year’s omnibus appropriations legislation effort lead by Judiciary Committee leadership last year that IIUSA was proud to support at the end of the year.

V. Conclusion

Since offering this feedback to Congress, IIUSA’s internal process to set our agenda and consider policy priorities has progressed. This process will culminate at our upcoming membership meeting as initial results of a poll of our members are reported. The poll is based on a set of initial policy priorities unanimously adopted by IIUSA’s Board of Directors in February as an initial set of consensus priorities for members to consider as priorities for the industry have shifted as new data has become available. The initial list of priorities currently under consideration by our members is as follows:

• Extend the EB-5 Regional Center program for at least 5 years.

4 See http://business.ca.gov/International/EB5Program.aspx.

8

Testimony of Peter D. Joseph

• Increase visa capacity to enhance economic impact of EB-5 and address the backlog of investors currently waiting for visas to be available.

• Staff commercially viable processing system at USCIS that addresses existing backlogs

and prioritizes predictability and length of processing times for EB-5 related petitions and applications.

• Avoid retroactive application of new law and reform to protect the existing EB-5

investors and their families and the billions of dollars in financial commitments and contractual obligations.

• Ensure all EB-5 investors with petitions currently filed, or at a later stage in the EB-5

process, are guaranteed adjudication (not approval) and eligibility for immigration benefits throughout the entire EB-5 process (I-526 petition, EB-5 visa issuance, and I-829 petition) regardless of future reforms, lapses, or expiration of the program.

• Continue to allow economic impact models including indirect/induced job creation to

count for EB-5 purposes (using the same econometric models that are generally accepted as economic policymaking tools by government, academia, and business).

• Improve program integrity, including through enhanced oversight and reporting

requirements of Regional Centers that are not unduly burdensome, such as site visits funded by user fees.

• Clarify geographic (including targeted employment areas (TEAs)), structural, and

industry project characteristics that enable consistent adjudication of EB-5 petitions and applications.

IIUSA has long supported and advocated for reform via legislation or regulation via the formal rulemaking process. We are encouraged by recent public statement by USCIS to initiate the regulatory reform process soon and has scheduled a stakeholder meeting for this Monday to discuss next steps in that process. Regardless of regulatory action, there are several issues - especially strains on visa capacity limiting the economic contribution of the EB-5 Program to the U.S. and certain anti-fraud and national security enhancements - that need Congress to act no matter what. IIUSA, the EB-5 Regional Center industry, and our stakeholder partners stand ready to work with Congress and relevant federal agencies to reform the EB-5 Regional Center Program and bring it up to date with 21st standards of anti-fraud, anti-money laundering, and regional economic development policy. Short term reauthorizations of the Program that do not find the right balance of reform on the core interrelated issues (including TEAs) threaten to undermine the EB-5 Program. Whether it is Congress through the legislative process or USCIS through the regulatory process, TEA reform should not be a zero sum game that results in existing capacity being redirected. Instead, we should seek a solution that expands visa - and thereby economic impact - capacity as part of a long term reauthorization package. The annual visa capacity of 10,000 people - which means

9

Testimony of Peter D. Joseph

about 3,500 investors and the rest dependents - is accounted for several years by those already deemed eligible for a visa once it becomes available to them based on the U.S. In addition, according to most recent data, as of January 1, 2016 there were approximately 22,000 investors with petitions waiting on government adjudication that will - once processed (see Appendix II) - eventually account for several more years of EB-5’s visa allocation. This line represents over $11 billion of investment capital that will be investing into job creating projects while attracting successful from abroad to join us in writing the next chapter of growth for the American economy. With this explosive growth comes a need for reform. USCIS has made significant improvements in how it administers the program - increasing staffing, enhancing expertise and improving interagency cooperation particularly in the areas of fraud and national security protections. However, the backlog of applications and petitions continues to grow as processing times slowdown even more (see Appendix III). Reform of the Program needs to find a way to provide USCIS with the necessary resources so that people who want to invest and create jobs in America are not averaging a wait of over a year for their application to be processed. In the meantime, IIUSA is ready to put its policy consideration process to work to review any new EB-5 reform ideas and continue our important work together making the Program a more potent economic development tool for our country by finding a reform and long term reauthorization deal that reforms TEAs alongside the other core issues presenting unprecedented challenges to the EB-5 industry today. The EB-5 industry can adapt to new statutory and regulatory requirements with the right guidance - and as that occurs, the EB-5 industry will continue putting investment capital to work and creating jobs in communities across the country at no cost to the taxpayer. On behalf of all IIUSA members, thank you for your leadership on EB-5 and thank you for the opportunity to provide today’s testimony. I look forward to answering any questions.

IIUSA Data ReportSource: U.S. Citizenship and Immigration Services (USCIS)

$0.32

$0.63 $0.68$0.79

$1.84 $1.85

$2.56

FY2015: $4.38Billion

$0

$0

$1

$1

$2

$2

$3

$3

$4

$4

$5

$0.00

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00

$3.50

$4.00

$4.50

$5.00

2008 2009 2010 2011 2012 2013 2014 2015

Billion

sEB‐5 Foreign Direct Investment (FDI) in $Billions by Fiscal Year since FY2008 

Since FY2008, EB‐5 Program has generated 

$ 13.05 Billion in foreign direct investment

EB‐5 FDI growth rates: 

from FY2014: 

77.8%since FY2008:

1,263.8%EB‐5 FDI in $billions by fiscal year

Appendix I

IIUSA Quarterly Data Report

Data Source: U.S. Citizenship and Immigration Services (USCIS) Data Set

6,095 6,074 6,5067,131 7,363

8,302

10,375

12,45313,526 13,731

13,129

17,367

21,9880% 0%7% 10%

3%13%

25% 20%9%

2%‐4%

32%27%

‐300%

‐250%

‐200%

‐150%

‐100%

‐50%

0%

0

2,500

5,000

7,500

10,000

12,500

15,000

17,500

20,000

22,500

25,000

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1

Num

ber o

f I‐526

 Pet

ition

s Pe

ndin

g

I‐526 Petition Quarterly Statistics ‐Petitions Pending v. Growth (FY2013 ‐FY2016, Q1) 

Represents over 

$10.99 billion in EB‐5 FDI pending by the end of FY2016 Q1

FY2013 FY2014 FY2015 FY2016

I‐526 Petitions Pending

I‐526 Petitions Pending Growth Rates

Appendix II

Prepared by: Invest In the USA (IIUSA)Data source: USCIS Processing Time Information

Jan, 2015 Feb, 2015 Mar, 2015 Apr, 2015 May, 2015 Jun, 2015 Jul, 2015 Aug, 2015 Sep, 2015 Oct, 2015 Nov, 2015 Dec, 2015 Jan, 2016

I‐526 14.2 14.2 14 13.4 13.4 13.5 13.4 13.8 14.4 12.8 15.5 16 16.3

I‐829 12.3 12.3 12.7 13.1 13.6 14.3 14.7 15.5 15.4 15.8 15.7 16.2 16.9

I‐924 11.7 11.7 12.1 12.2 11.5 11.8 12.4 12.3 11.6 7.9 7.9 8.5 9

I‐526: 16.3 Months

I‐829: 16.9 Months

I‐924: 9 Months

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

11.0

12.0

13.0

14.0

15.0

16.0

17.0

18.0

Processing

 Tim

es (M

onth)

USCIS EB‐5 Petition Processing Times (Months) ‐ January 2015 to January 2016I‐526 I‐829 I‐924

14.2Months

10.8Months

14.5Months

Last 12‐month Average Processing Times:

I‐526 I‐829 I‐924

Appendix III

1

TESTIMONY Gary Friedland Gary Friedland Scholar-in-Residence New York University Stern School of Business Hearing on “The Distortion of Targeted Employment Areas: Time to End the Abuse”

Before the Committee on the Judiciary U.S. Senate Washington, D.C. April 13, 2016 Chairman Grassley, Ranking Member Leahy and Distinguished Members of the Committee: Thank you for inviting me to testify today about the EB-5 immigrant investor program. My name is Gary Friedland. I am a Scholar-in-Residence at the NYU Stern School of Business. I have conducted research on various aspects of the EB-5 program and have prepared several academic papers with my NYU Stern colleague Jeanne Calderon. We jointly teach a course that focuses on the legal, tax and finance aspects of commercial real estate transactions. We created the course and developed all of the course materials. A segment of this course focuses on foreign investment in the United States, including EB-5 capital. Professor Calderon was unable to attend today’s hearing due to teaching commitments. This testimony reflects our collective views. Our first paper was released in early 2015 and provides a comprehensive overview of how EB-5 capital has become a mainstream source of capital to fund large-scale real estate development projects in major urban areas. We also compiled an extensive database of 25 of the largest real estate development projects that are utilizing, or have utilized, EB-5 capital, each ranging from $50 Million to $600 Million, with a cumulative potential EB-5 capital raise of $4.6 Billion.1 We recently supplemented the database with 27 additional large-scale real estate projects that are utilizing EB-5 capital, with a cumulative potential raise in excess of $5.6 Billion.2 Thus, our 1 Jeanne Calderon and Gary Friedland. A Roadmap to the Use of EB-5 Capital: An Alternative Financing Tool for Commercial Real Estate Projects. (May 22, 2015). New York University Stern Center for Real Estate Finance Research. Available at: http://www.stern.nyu.edu/sites/default/files/assets/documents/EB5%20paper%20final%205.24.2015.pdf 2 Jeanne Calderon and Gary Friedland. EB-5 Capital Project Database: Revised and Expanded (March 29, 2016). New York University Stern Center for Real Estate Finance Research. Available at:

2

combined databases examine 52 large-scale real estate projects with a potential cumulative capital raise in excess of $10 Billion, which would require more than 20,000 immigrant investors that would translate to more than 50,000 visa applications. Our second major paper was released as a working draft on December 23, 2015 within a week after the Grassley-Leahy reform bill, S. 1501, failed in mid-December of 2015. This paper focuses on the definition of urban area Targeted Employment Areas (“TEAs”) and related matters because those were the most controversial portions of the reform bill. We described the three alternative approaches considered by the discussion drafts based on the S. 1501 in December 2015 (the “Discussion Drafts”). We compared each of the alternatives. We also explained how each of the alternatives might have impacted projects in New York City. We focused on New York City because it is at the epicenter of the debate. We also illustrated these points with maps and data. The most recent version of this paper is dated February 6, 2016.3 We will refer to this paper as “TEAs under EB-5 2.0.” On February 11th, Professor Calderon testified at the hearing entitled “Is the Investor Visa Program an Underperforming Asset?” before the House Judiciary Committee. Subsequent to her testimony, we prepared a paper focusing on possible reform by USCIS of the TEA definition.4 This morning my testimony will focus on TEAs: the original intent of the EB-5 law; testing the effectiveness of any new TEA proposals; “gerrymandering;” USCIS’ role in fostering gerrymandering and its authority to designate TEAs; proposed standards to be implemented to define a TEA; and visa reserves. EB-5 Program In 1990, Congress created the fifth employment-based preference (EB-5) immigrant visa category for foreign nationals seeking to invest in a commercial enterprise that will create at least 10 U.S.

http://www.stern.nyu.edu/sites/default/files/assets/documents/EB-5%20Capital%20Project%20Database%20-%20Revised%20and%20Expanded.pdf 3 Jeanne Calderon and Gary Friedland. What TEA Projects Might Look Like under EB-5 2.0: Alternatives Illustrated with Maps and Data. (Last revised February 6, 2016) New York University Stern Center for Real Estate Finance Research. Available at: http://www.stern.nyu.edu/sites/default/files/assets/documents/What%20TEA%20Projects%20Might%20Look%20Like%20under%20EB5%202.0%20Alternatives%20with%20Maps%20and%20Data%202%206%2016.pdf 4 Jeanne Calderon and Gary Friedland. Reflections on the Judiciary Committee Hearing Reflections on the Judiciary Committee Hearings on EB-5 Reform Part I: Possible TEA Reform by USCIS (February 29, 2016) New York University Stern Center for Real Estate Finance Research. Available at: http://www.stern.nyu.edu/sites/default/files/assets/documents/Reflections%20on%20the%20Judiciary%20Committee%20Hearings%202.29.2016.pdf

3

jobs per investor.5 Its purpose is to stimulate the U.S. economy through job creation and capital investment.6 Underutilized since its enactment in 1990, the EB-5 Program became popular during the financial crisis when conventional sources of capital dried up. As the market has rebounded, EB-5 capital has evolved into a mainstream source of capital, particularly for real estate development projects.7 What is a TEA? The statute provides that “[I]n general,” the minimum amount of capital to be invested by an immigrant seeking an EB-5 visa is $1,000,000. The amount is reduced to $500,000 if the investment is made in a project located in a TEA.8 Thus, a project’s qualification as a TEA determines whether the immigrant can qualify for the EB-5 visa by making an investment of $1,000,000 or $500,000. Investors strongly prefer to minimize the amount they invest in a project utilizing EB-5 capital. They typically accept a rate of return of less than 1% per annum under the typical loan structure because their motive for making the investment is to obtain a visa.9 The statute provides two routes for a project location to qualify as a TEA. First, any project located in a rural area qualifies. In urban areas, a project qualifies only if it is located in “an area which has experienced high unemployment (of at least 150 percent of the national average rate).” 10 We will refer to this as a “high unemployment area.” What Was Congress’ Original Intent in Establishing the TEA Concept? The controversy surrounds the determination of what constitutes a “high unemployment area” in an urban area.11 The statute objectively defines “high unemployment” by reference to the national average unemployment rate. However, the “area” or boundary against which the high unemployment should be measured is not defined in the statute. Presumably, Congress left it to the Federal immigration agency to make this determination. As discussed below in the USCIS section, unfortunately the agency did not take the opportunity to define this. The plain meaning

5 Immigration Act of 1990, Pub. L. 101-649, Stat. (November 29, 1990). 6 USCIS Policy Memorandum (PM-602-0083), May 30, 2013. Available at: https://www.uscis.gov/sites/default/files/USCIS/Laws/Memoranda/2013/May/EB-5%20Adjudications%20PM%20%28Approved%20as%20final%205-30-13%29.pdf 7 See A Roadmap to the Use of EB-5 Capital: An Alternative Financing Tool for Commercial Real Estate Projects. Supra at note 1. 8 INA § 203(b)(5)(C); 8 C.F.R. § 204.6(f). Technically, the statute authorizes a third minimum investment level - an amount up to $3M - for areas of unemployment “significantly below” the national average unemployment rate . INA § 203(b)(5)(C)(iii). 9 See A Roadmap to the Use of EB-5 Capital: An Alternative Financing Tool for Commercial Real Estate Projects. Supra at note 1. 10 INA § 203(b)(5)(B)(ii). 11 Again, a rural area qualifies as a TEA, irrespective of the relevant unemployment rate.

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of the scope of the intended “area” is not clear; thus, we turned to the legislative history to determine Congressional intent. The legislative history is illuminating. The original bill that became the Immigration Act of 1990, S. 35812, included an employment-based visa for immigrants who invest capital in a new commercial enterprise that creates 10 jobs per investor. The required investment amount was set at a single level - $1,000,000.13 On July 13, 1989, the day the Senate bill was later approved by the full Senate, Senators Boschwitz and Gramm introduced an amendment that ultimately became the framework for the TEA definition incorporated in the Immigration Act of 1990 (the “Immigration Act”). This amendment established two-tiers of investment: one at “not less than $1,000,000”, and the other at “not less than $500,000” for investments in “rural areas or areas which have experienced persistently high unemployment…of at least one and one-half times the national average rate.” 14 The Amendment did not use the term “Targeted Employment Area,” but the definition is substantially the same as the language that appears in the EB-5 section of the Immigration Act. Without this amendment, the TEA concept might not exist. Senator Boschwitz’s remarks on the floor of the Senate make clear his purpose in creating the TEA. He opened his remarks by stating that the amendment was offered to “attract significant investment in rural America.” He pointed out that he was “especially concerned with the rural investment this amendment would support.” 15 Senator Boschwitz explained that investments in rural or high unemployment areas were intended for those who invest in “rural or depressed areas.” The Senator continued that he “sees no reason to shut out willing investors while our small towns and inner cities across America are facing hard times.”16 Although the amendment did not include a requirement that the immigrant demonstrate that the enterprise would not otherwise be able to obtain financing, the Senator expressed his concern that “[rural] areas have great difficulty attracting the investment capital so needed for economic growth.” 17 The amendment included a visa reserve or set aside for 2,000 investors in rural areas. The Senator noted that in addition to these reserved visas, the remaining visas could also be used by

12 S. 358, 101st Cong. 1989-1990. 13 Id. 14 Amendment #264 to S. 358 (July 13, 1989) 15 135 Cong. Rec. S7,858-02 et seq. (July 13, 1989) 16 Id. 17 Id. However, the amendment’s text did not include a “but for” test.

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rural investors.18 Senators Boschwitz and Gramm obviously expected greater rural investment participation than the EB-5 Program has achieved. Thus, the Senators created the TEA concept to incentivize rural projects and, to a lesser extent, enterprises in depressed areas or inner cities. Conspicuously absent from the Senator Boschwitz’s extensive remarks was any reference to high unemployment areas. It appears that the amendment inartfully defined depressed areas or inner cities by utilizing the “high unemployment area” concept as a method to define those areas. In connection with the Conference Committee Report to the Immigration Act, Senator Paul Simon echoed Senator Boschwitz’s sentiments: “[W]e are mindful of the need to target investments to rural America and areas with

particularly high unemployment – areas that can use the job creation the most... America’s urban core and rural areas have special job creation needs.”19

Furthermore, Senator Simon recognized the importance of establishing a wide spread between the standard investment amount of $1,000,000 and the reduced amount to attract investors to targeted employment areas: “The Attorney General is authorized to set the required investment at a lower amount but at least $500,000. Clearly, the closer the Attorney General sets this to $500,000, the more we can encourage investments in these critical areas.”20

Finally, when the EB-5 Program was created, Congress expected that most foreign investors would invest at the $1,000,000 amount. Senator Simon continued: “One section of the [Immigration Act of 1990] that I am particularly pleased to have included from my original bill is the employment generating investor visa provision…The general rule – and the vast majority of investor immigrants will fit in this category – is that the investor must invest $1 million and create 10 U.S. jobs.”21 It is obvious that when Senators Boschwitz and Gramm proposed the TEA concept in 1989, and when the law was enacted a year later, Congress did not contemplate the current, predominant use of EB-5 capital. The percentage of projects qualifying as TEAs has skyrocketed from the early years of the Program to the point where almost 98% of EB-5 projects qualify as a TEA.22 We note

18 Id. The Immigration Act increased this reserve to 3,000, when the quota amount increased from 6,800 to 10,000, but maintained essentially the same percentage of visa reserves to the annual quota for this category, 30%). 19 136 Cong. Rec. S 17,106, 17,110 (October 26,1990) 20 Id. 21 Id. 22 The percentage of conditional visas issued based on investing in projects in a TEA rose from 10% in 1992, to 41% in 2002 to an estimated 98% in 2014. See DHS Yearbook of Immigration Statistics (FY1992-FY2013); State Department preliminary data (FY2014). Also see Lazaro Zamora and Theresa Cardinal Brown. EB-5 Program: Successes, Challenges, and Opportunities for States and Localities. (September 2015). Bipartisan Policy Center.

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that each of the 52 projects contained in our combined databases appears to be located in a TEA.23 EB-5 Capital is a Subsidy Available to All Projects, Not Limited to Projects Located in TEAs The required amount invested by the immigrant is typically deployed to the project as a below-market rate loan.24 The immigrant invests in the project solely to qualify for a visa. The visa eligibility motivates the investor to accept negligible returns that result in a below-market interest rate loan being made available to the developer’s project.25 This savings to the developer is the equivalent of a government subsidy that is available because the government is willing to issue an EB-5 visa to the immigrant as the incentive for his investment.26 Although the subsidized, inexpensive capital is accessible to all developers who participate in the EB-5 program, the reduced investment amount ($500,000) is limited to those projects that are located in a TEA. The purpose of the EB-5 program generally is to promote jobs and capital investment by immigrant investors. The purpose of the TEA is to provide a discounted investment amount for only those investors who invest in projects that meet the TEA definition. Yet, over time, the Program’s purpose and the TEA’s purpose - to identify those locations that deserve a special incentive - have become intertwined. However, some developers contend that if the TEA designation were not extended to their projects then, as a practical matter, the government subsidy would not be available to them because immigrant investors would pursue investments only in TEA projects. Given that virtually all projects currently qualify for TEA status, no data exists to support or refute this contention. The Prevalence of Urban Area TEA Projects in Today’s Market Due to the manner in which the TEA rules are applied under the current system (described in the USCIS section below), almost all areas in the entire country qualify as a TEA. Thus, the discounted investment level is available for immigrant investors in essentially all projects.

23 See A Roadmap to the Use of EB-5 Capital: An Alternative Financing Tool for Commercial Real Estate Projects. Supra at note 1. Note that we do not possess a copy of each TEA designation letter issued by the relevant state to verify the TEA status of each project. 24 See A Roadmap to the Use of EB-5 Capital: An Alternative Financing Tool for Commercial Real Estate Projects. Supra at note 1. 25 Id. The proceeds invested in the EB-5 vehicle are typically deployed to the project as a mezzanine loan at a discounted rate compared to the rate charged by conventional mezzanine lenders. 26 The benefit to the U.S. economy is the creation of jobs and capital investment by the immigrant investor. However, a GAO Report points out the USCIS methodology might overstate some of the economic benefits derived from the EB-5 Program. For example, EB-5 capital is credited with 100% of the jobs created by the project even though the project may be primarily funded with capital from other sources. USCIS does not track whether alternative sources of capital might be available to fund the project if EB-5 capital were not provided. Government Accountability Office. Immigrant Investor Program: Additional Actions Needed to Better Assess Fraud Risks and Report Economic Benefits (August 2015). Available at: http://www.gao.gov/assets/680/671940.pdf.

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Currently, despite the $500,000 statutory spread between the minimum amount required to be invested in a TEA project ($500,000) and a non-TEA project ($1,000,000), in the real world the spread is $0 because virtually all project locations qualify as a TEA. Immigrants have the choice to invest in any project type in any location at the same discounted investment amount of $500,000. Consequently, it is not surprising that a substantial percentage of immigrant investors select projects located in thriving, urban areas by well-financed developers with a strong track record of successfully completed projects. These projects are more likely to be completed, and on time. The investors perceive that these types of projects will accelerate the time frame within which they will secure the visa and safely recover the $500,000 investment. The current trend does not necessarily mean that the immigrants would avoid projects located in rural or depressed areas. Instead, given the same required investment amount, they prefer to invest in projects located in thriving, urban areas. Factors to be Considered by Congress in Redefining TEAs If Congress seeks to limit the project locations that qualify as a TEA, then it must establish clear, unambiguous and objective criteria to determine which locations are deserving of the incentive that permits immigrants to invest a discounted amount. Investors in all other projects would be required to invest at a higher investment amount, so a spread between the minimum investment amounts would be achieved in practice.27 Of course, Congress is not bound or limited by its original intent for establishing the TEA concept with a reduced investment amount. The 2016 reauthorization presents Congress with an opportunity to take a fresh look at the TEA definition. Congress may decide to consider which locations and/or project types should be entitled to the discounted investment amount. In making this determination, Congress might wish to consider the manner in which the EB-5 Program has evolved, as well as how our nation’s cities have changed since 1990. As Congress considers the appropriate revisions to the TEA definition, it should be mindful that the EB-5 Program was woefully underutilized until the Program was liberalized and became more readily available as a funding source for real estate development projects. As recently as 2009, the USCIS Ombudsman conducted a study to determine ways to promote the Program in danger of being terminated for lack of use.28 Furthermore, the increased investment activity under the Program has coincided with the rising percentage of projects that have qualified as a TEA, as well

27 A separate but related issue is the required investment amount for a TEA and a non-TEA project. The last discussion draft based on S.1501 set the amounts at $800,000 and $1,000,000. We believe the spread between the two amounts is more important than the absolute dollars. However, we do not have any data to support the appropriate spread necessary to stimulate investment in TEA projects based on a reduced investment amount, nor the amount that would result in a substantial reduction in investment in non-TEA projects with a greater required investment amount. 28 https://www.dhs.gov/xlibrary/assets/CIS_Ombudsman_EB-5_Recommendation_3_18_09.pdf

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as the rebound in the real estate market.29 Thus, Congress’ proposed action requires a delicate balance between appropriately narrowing the scope of the TEA and building in flexibility to avoid the Program reverting to the underutilized state that existed before 2010. This is particularly important as the current stock market activity may signal more fragile economic conditions on the horizon. The current use of the EB-5 Program is radically different than when it was created in 1990 as a direct investment program. The current EB-5 capital market is dominated by real estate development projects in urban areas, where it is commonplace for EB-5 capital raises to exceed $50M.30 EB-5 capital typically represents less than 30% of such projects’ total capital costs. Similarly, the economic conditions and development patterns in many inner cities in 2016 are much different than those that existed in 1989 and earlier, especially in Gateway cities where immigrants are investing. Congress should take these factors into account as it decides which locations and/or project types deserve the TEA entitlement or equivalent incentives. It is easy to justify extending the TEA discount to certain project types irrespective of location. S. 1501 and the Discussion Drafts proposed that the reduced TEA investment amount be available for certain project types regardless of location, including public infrastructure projects, manufacturing projects and closed military bases.31 This reflects an updated approach to the types of projects to be incentivized. Unlike the urban area TEA definitions contained in S.1501 and the Discussion Drafts, these favored project types apparently did not engender controversy as the bill underwent revision during December of 2015. The challenge is to develop a TEA definition for urban areas that Congress determines is appropriate to incentivize. Our “TEAs under EB-5 2.0” paper explores the three alternatives considered by S. 1501 and the Discussion Drafts.32 We realize, however, that when Congress introduces a new reform bill later this year, the bill might not reflect any of those alternatives. Congress Should Test its Proposed New TEA Definition to Determine its Effectiveness Once Congress determines the approach it intends to follow, we recommend that Congress test whether that approach is likely to be effective to significantly reduce the number of project

29 USCIS’ liberal policy changes in 2009 made EB-5 capital accessible to a wider range of real estate development projects. See A Roadmap to the Use of EB-5 Capital: An Alternative Financing Tool for Commercial Real Estate Projects. Supra at note 1. 30 See A Roadmap to the Use of EB-5 Capital: An Alternative Financing Tool for Commercial Real Estate Projects. Supra at note 1. 31 Public infrastructure projects are particularly appropriate given that in recent years real estate development projects receive the dominant share of EB-5 capital deployment, which, taken together with all types of development, contributes to the increased burden on our nation’s crumbling infrastructure. A liberal interpretation issued by USCIS in 2009 greatly expanded the types of real estate development projects that could utilize EB-5 capital. 32 See What TEA Projects Might Look Like under EB-5 2.0: Alternatives Illustrated with Maps and Data. Supra at note 3.

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locations that qualify as a TEA. This would be similar to the approach we followed in our recent “TEAs under EB-5 2.0” paper. After we reviewed and analyzed the three urban area TEA definitions considered in the Discussion Drafts, we realized that a mere reading of the proposed statutory language would not provide a reasonable basis for determining whether each alternative would be significantly more restrictive than the TEA methodology permitted under the current system. Since NYC is the epicenter of the debate, we decided to measure the potential impact that each alternative would have upon NYC projects. Some of the results were surprising. For example, two of the project locations that the Wall Street Journal cited as illustrations of inappropriate gerrymandering would continue to qualify under some of the TEA alternatives. This would not have been evident by merely reading the language in the Discussion Drafts.33 Congress should apply its proposed TEA approach to existing or completed large-scale real estate projects in major urban areas that have utilized EB-5 capital as part of the capital stack. These types of projects represent a very significant percentage of the EB-5 capital raised nationwide, and thus include a substantial number of the immigrant investors participating in the Program. Like all other EB-5 project locations, virtually all of these large-scale real estate project locations qualify as TEAs under the rules applied by the various states. Most of these projects rely on the unemployment rate experienced by remote tracts to enable the project tract to qualify as a TEA.

As a starting point, we suggest that Congress consider reviewing the 52 large-scale real estate projects in major urban areas that were the subject of our combined databases.34 The TEA designation letter for each project will reveal the combination of tracts that comprise the particular TEA. The focus of the review of the TEA designation letter would depend upon the particular TEA definition to be tested. For example, if Congress were to consider the alternative proposed in the Discussion Drafts that permitted the aggregation of 12 or fewer tracts, USCIS (or whomever Congress designates) presumably would review each project file to determine whether the project location qualified as a TEA based on the aggregation of 12 or fewer tracts, or a greater number of tracts.35 If a high percentage of these project locations or other project locations tested by USCIS qualified as a TEA by combining 12 or fewer tracts, then this would suggest that a different approach should be considered. Otherwise, the proposal would be ineffective to

33 Of course, this anecdotal evidence does not demonstrate that the proposed definitions were or were not appropriate. 34 Although we were able to collect substantial data about these projects from sources other than state or Federal government agencies, we were not able to easily obtain information about the combination of census tracts that formed the TEA or the number of tracts for most of these projects. We believe that most of these projects were not single census tract TEAs, although the San Francisco Shipyard project is probably one of the few exceptions. A Roadmap to the Use of EB-5 Capital: An Alternative Financing Tool for Commercial Real Estate Projects. Supra at Note 1. 35 For purposes of this testing, to keep this simple and to apply the same factor, USCIS should rely upon the same applicable unemployment rates that were used in the applications or petitions relating to these projects.

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remedy the perceived abuse because it would apply different rules but yield the same results. We also suggest that Congress map the locations in key cities, taking into account relevant data, to test whether the coverage would extend only, or at least primarily, to the desired locations. We mapped some of the relevant data for locations in New York City as part of our “TEAs under EB-5 2.0” paper. What is Gerrymandering? Gerrymandering is a pejorative term for census tract aggregation. In urban areas, the determination of whether a project location qualifies as a TEA depends solely on whether the project is located in a “high unemployment area”. As previously explained, the standard is whether the unemployment rate of the “area” is at least equal to 150% of the national average unemployment rate. Although the statute does not refer to census tracts, the unemployment rate is commonly measured by reference to individual census tracts.36 Thus, the census tract in which the project is located is the starting point for the determination of whether a project location qualifies as a TEA. If the census tract in which the project is located (“Project Tract”) meets the TEA’s high unemployment standard, then the Project Tract is a TEA. This is sometimes known as a “single census tract” TEA.37 However, in a thriving, urban area many tracts do not qualify as a single census tract TEA. As a city’s economic conditions improve, unemployment rates decline and fewer tracts meet the high unemployment standard. Thus, the project developer seeks to add contiguous tracts to the Project Tract to expand the boundaries of the combined area against which the high unemployment rate will be measured to determine whether this area will constitute a TEA. The practice has developed where project developers in urban areas add contiguous census tracts to the Project Tract until the combined area achieves a weighted average unemployment rate that meets the high unemployment standard. This assemblage enables the Project Tract to qualify as a TEA. The combination might be as simple as adding a single census tract with a high unemployment rate to the Project Tract (that does not meet the necessary unemployment rate) to qualify the combined area as a TEA. As an example, the project could be located towards the edge of a census tract with less than “high unemployment”. However, the bordering census tract meets the “high unemployment” standard. The combination of these two tracts might enable the Project Tract to qualify as a TEA.38

36 USCIS Policy Memorandum. Supra at note 6. 37 See S.1501 https://www.congress.gov/bill/114th-congress/senate-bill/1501/text 38 Unrelated to a TEA requirement, this activity might produce the ancillary benefit of spurring further economic development in both tracts.

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Often, many more tracts must be combined with the Project Tract to qualify as a TEA in thriving, urban areas. 39 Although the rules vary from state to state as explained in the “USCIS’ Role in Fostering Gerrymandering” section below, the states generally follow a common approach. The combined area that will form the potential TEA starts with the Project Tract. The project developer identifies the closest tracts with high unemployment rates, which in thriving, urban areas are often in more remote locations from the project’s location. The path of the potential TEA follows the shortest route in any direction from the Project Tract to reach the tracts with the highest unemployment rates. Tracts with low unemployment rates are sought to be bypassed because their inclusion would reduce the combined area’s unemployment rate. This could disqualify the combined area as a TEA if the state, such as California, sets a maximum limit on the number of tracts that may be combined.40 In other states, such as Texas, significantly more tracts may be added until the high unemployment standard is met for the combined area.41 As a result, many TEAs take on unnatural, winding configurations, and the route’s direction from the Project Tract varies from TEA to TEA. A criticism lodged by some is that this type of census tract aggregation constitutes gerrymandering because the poor economic conditions (i.e., high unemployment) of distant, remote tracts enable a Project Tract (with low unemployment) to qualify as a TEA. This is perceived to be particularly egregious where the Project Tract and surrounding tracts are “luxury” areas.42 Our “TEAs under EB-5 2.0” paper discusses Senator Flake’s bill that would have tied the TEA definition to commuter traffic patterns relating to the project.43 The proposal implicitly posits that the TEA should be expanded to encompass the geographic area within which the workers commute to the project site. Although this may be consistent with the job creation purpose of the EB-5 Program, it does not reflect the economic condition of the location where the immigrants’ capital investment is made, i.e., the Project Tract.44 If Congress seeks to incentivize development in areas that encounter difficulty in attracting the investment capital needed for economic growth, this would not be an appropriate use. More importantly, this type of standard would likely perpetuate the current practice, with the result that most large projects in luxury areas would continue to qualify for TEA status. Thus, if 39 See, for example, http://www.wsj.com/articles/how-immigrants-cash-funds-luxury-towers-in-the-u-s-1441848965 40 The state of California imposes a maximum of 12 contiguous tracts that may be combined in a TEA. http://business.ca.gov/International/EB5Program.aspx 41 See, for example, http://www.law360.com/articles/726026/group-sues-over-alleged-gerrymandering-in-eb-5-program 42 See http://www.wsj.com/articles/posh-tower-proposed-for-struggling-new-york-neighborhood-central-park-south-1444728781?tesla=y 43 See What TEA Projects Might Look Like under EB-5 2.0: Alternatives Illustrated with Maps and Data. Supra at note 3. 44 Even if this commuter pattern approach were followed, the economic model upon which most job estimates are calculated does not indicate how many workers, if any, commute from residences in high unemployment areas.

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Congress’ intention is to narrow the locations that qualify as a TEA, this standard should not be incorporated. This would be consistent with the sentiments expressed by Senators Simon and Boschwitz in connection with enactment of the original legislation. USCIS’ Role in Fostering Gerrymandering The EB-5 provisions of the Immigration Act and the Immigrant Investor Pilot Program vest the Federal immigration agency - originally the Immigration and Naturalization Service (“INS”) and now USCIS - with the responsibility to administer the EB-5 visa program. This implicitly includes the authority to designate the area that constitutes a high unemployment area for purposes of a TEA. However, in regulations adopted in 1991, in a single paragraph, INS delegated its authority to make TEA designations to the individual states.45 The agency granted blanket authority, without establishing any rules or guidelines, and did not reserve the right to review or audit each state’s TEA determinations.46 We believe that INS’ delegation was appropriate in 1991 because as an immigration agency, with no existing investor program, it lacked experience and personnel with the expertise to make the required economic determinations. In USCIS’ May 30, 2013 comprehensive Policy Memorandum, it acknowledges that the TEA designation is to be limited to enterprises that are doing business, and creating jobs, in the areas of “greatest need.”47 Yet, more than 25 years after INS delegated TEA authority, USCIS continues to defer to state determinations of the appropriate boundaries that constitute TEAs.48 We recognize that if S. 1501 had become law, TEA determinations would be made by USCIS rather than the individual states. USCIS’ continued delegation to the states of the TEA authority without guidelines results in the application of inconsistent rules by the various states. More importantly, each state has the obvious self-interest to promote economic development within its own borders. Delegation presents an opportunity for the states to establish lenient rules to enable project locations to qualify as a TEA. Compounding the problem, often the state agency that is charged with making the TEA determination is the same agency that promotes local economic development. As a consequence, virtually every EB-5 project location qualifies as a TEA.49 Gerrymandering more easily developed because the self-interested individual states were granted the opportunity to establish their own rules without any guidelines or oversight by the Federal government.

45 8 C.F.R. 204.6(i), effective November 29, 1991. 46 Even today, USCIS reserves only the right to review the state’s determination of the unemployment rate and to assess the method by which the state authority obtained the employment statistics. USCIS Policy Memorandum. Supra at note 4. 47 USCIS Policy Memorandum. Supra at note 6. 48 Id. 49 Data is not readily available as to the percentage of TEA determination letter requests that are approved or denied by each state.

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USCIS’ Current Opportunity We assume that USCIS is preparing to take action to reform the TEA designation process, in recognition that Congressional action might not be imminent.50 USCIS has two alternatives. USCIS could formulate uniform and objective TEA standards to be consistently applied by the various states. In addition, presumably USCIS would assume and exercise the powers of oversight, review and audit of state action.51 Alternatively, USCIS could revoke the authority delegated to the states, and assume full responsibility for administering the TEA designation process from its national office in Washington, D.C. We believe that USCIS should administer the entire process, consistent with S. 1501. Unless the revised TEA standards are clear, objective and easily applied, some state agencies that administer the TEA designation process might be tempted to stretch the rules to facilitate economic development within the state, particularly given that in many states the agency charged with TEA designation authority is the same agency that promotes economic development. The states are also susceptible to lobbying efforts on behalf of businesses that have a tremendous financial stake in the outcome. Extensive USCIS oversight would be required to monitor compliance. USCIS is more independent and less likely to be influenced by these factors. Reportedly, the states have developed efficient procedures over the years to quickly process TEA requests. USCIS is currently facing record backlogs in processing petitions. However, if the TEA designation rules are objective and simple, USCIS should be able to streamline the process after a transitional period. According to USCIS, staffing of the Immigrant Investor Protection Office (“IPO”) will be dramatically increased this year. The rulemaking process will provide IPO with ample time to gear up for this. Furthermore, USCIS will be able to train its employees to make sure that the new rules are consistently applied. Finally, the cost to administer and process at the national office level might not be substantially higher than the cost of overseeing and coordinating designations being made by the various states. California Approach to TEA Designation – Maximum of 12 Tracts It would not be surprising if USCIS formulates TEA standards tied to the California methodology that allows a maximum of 12 census tracts to be aggregated, given that it is hailed by some as a model.52 The California approach certainly represents an improvement over the approach followed by many states. Limiting a TEA to 12 tracts is an improvement over the virtually unlimited aggregation that is currently permitted by some states.

50 At the Senate and House Judiciary Committee Hearings in February 2016, Chief Colucci was pressed to take action to reform the TEA designation process. 51 Presumably, the individual states would be required to provide periodic reports to USCIS, including a report as to the number of applications or requests filed and the action taken by the state, as well as on a project basis the number of tracts that were aggregated for each project location. 52 http://business.ca.gov/International/EB5Program.aspx

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However, we believe that USCIS should not rush to apply the California approach or any other approach. We have been unable to ascertain California’s rationale to set 12 as the appropriate limitation. More importantly, we are not aware of any evidence that, if this methodology were implemented nationwide, especially in Gateway cities, it would result in a meaningful reduction in the number of project locations qualifying as a TEA.

USCIS Should Test its Proposed New TEA Definition to Determine its Effectiveness Similar to the approach we recommend that Congress pursue, once USCIS determines the approach it intends to follow, it should test whether that approach is likely to be effective to significantly reduce the number of project locations that qualify as a TEA. See the earlier discussion on pages 8 and 9. Application of the California 12 tract approach has led to some surprising results. For example, the Beverly Hills Waldorf Astoria Hotel project located in Beverly Hills 90210, one of the projects included in our database, recently qualified as a TEA location.53 This suggests that the California approach should be further scrutinized before USCIS adopts the 12 census tract model. Alternatively, USCIS might choose to consider one or more of the urban area TEA definitions set forth in the Discussion Drafts.54 USCIS might not have the authority to apply the TEA investment amount to certain project types (such as infrastructure, manufacturing and closed military bases) without regard to location, because the statute defines a TEA by reference to a location, rather than a project type. We also point out that the statute provides for the minimum investment amount for a TEA and a non-TEA project to be increased without Congressional action.55 This is beyond the scope of my testimony. Why Visa Reserves Might Be As or More Important Than TEA Project Qualification A project’s qualification for visa reserves might become as important, or even more important, as a determining factor in the immigrant’s decision to invest in a particular project. This is explained on pages 50 through 54 of our paper, “What TEA Projects Might Look Like under EB-5 2.0: Alternatives Illustrated with Maps and Data.” Visa reserves are an alternative method for Congress to stimulate investment in those locations or project types that Congress may wish to incentivize.56 As the visa waiting periods extend to at least 6 years, the right to move towards the front of the visa line may become more important

53 See page 2 of this article that describes the capital raise of $150M from 300 immigrant investors. http://eb5socal.com/wp-content/uploads/2013/04/Waldorf-Astoria-Beverly-Hills-CaRE-EB-5-Steve-Shpilsky-Los-Angeles-Business-Journal-small-file.pdf#page=2 54 For a discussion of the different approaches, see What TEA Projects Might Look Like under EB-5 2.0: Alternatives Illustrated with Maps and Data. Supra at note 3. If the 12 tract model is pursued by USCIS, the exclusions for “parks” and “bodies of waters” contained in the Discussion Drafts should be incorporated. 55 INA § 203(b)(5)(C); 8 C.F.R. § 204.6(f). 56 What TEA Projects Might Look Like under EB-5 2.0: Alternatives Illustrated with Maps and Data. Supra at note 3.

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than qualifying for an investment at a lesser amount.57 Many wealthy investors will be motivated by the quickest path to securing a visa, than merely qualifying for a lesser investment amount. The Discussion Drafts would have increased the minimum investment amount to $800,000 for projects located in a TEA, while retaining the minimum amount at $1,000,000 for projects not located in a TEA.58 This $200,000 differential would reflect a narrower spread than the $500,000 provided under existing law. However, if the TEA definitions are tightened and strictly enforced, the $200,000 would represent an increase in the “real world” spread.59 Presumably, this would stimulate some investors to select TEA projects, but undoubtedly some of the wealthy investors who utilize this Program will still be attracted to large projects by major developers that the investors perceive to be safer and more likely to be completed. Thus, the narrower spread increases the importance of the visa reserve. Although visa reserves are likely to be an effective tool to stimulate investments in projects that entitle the investors to a visa reserve, Congress should carefully consider the potential impact that the visa reserve may have on those projects that do not qualify. The considerations are similar to those that apply to determining which projects qualify for TEA treatment. Finally, the visa reserves should be carefully coordinated with the new TEA rules to make sure that the reserves do not undermine the TEA incentives. It is important that the two incentives work in tandem to achieve the desired results. Thank you again for the opportunity to appear before this Committee. I would be happy to respond to your questions.

57 The extended waiting period applies particularly to immigrant investors from Mainland China. Also see https://www.uscis.gov/sites/default/files/USCIS/Resources/Reports%20and%20Studies/Immigration%20Forms%20Data/Employment-based/I526_performancedata_fy2016_qtr1.pdf 58 S. 1501 proposed a minimum investment amount of $1,200,000 for a project not located in a TEA. 59 As stated above, the current spread between the minimum investment in TEA and non-TEA projects is $0 because virtually all project locations qualify as a TEA.