How to Set Up a Regional Center?
With US economic decline in recent years, investment developers in the U.S. have lost the ability to rely primarily on domestic investment and funding sources. Foreign capital is becoming increasingly needed and investment developers today are turning to immigration lawyers with questions about how to set up the EB-5 regional center program.
Most developers with rich investing experience and available investors do not know how to obtain the EB5 projects. Lawyer Zhou points out that the major thing the developer clients need to do is having a viable, reasonable and profitable business plan first; clearly, logically demonstrate the plan on a proposal to show it may create direct, indirect and induced jobs for US, and then submit the proposal to USCIS’s California Service Center.
When the proposal meets all of the requirements for EB 5 projects as USCIS regulated. USCIS will give an approval of the projects. Therefore, the key point is that those developer clients interested in creating a designated regional center must know what to do for the business plan to meet all of requirements. Now lawyer Zhou will go through all the important details about what the developers should do to get success.
There are 3 primary issues the developers usually keep in mind: 1) how to inject foreign capital into their project, 2) how to ensure investors obtain lawful permanent residence (green card), and 3) what projects are viable and sound with low risk for regional center designation. The 3rd issue is the key for developers to address the first two concerns and develop a successful program, because EB-5 investors must put those funds at total risk. If the project fails, the investor loses the investment and cannot obtain the green card. It means in EB-5 developers and investors take their respective due diligence on their own. Therefore, structuring an outstanding regional center system to reduce the risk is the key for the success for both the developers and the investors.
Work That Developers Must Do
A very successful businessman developer A came to seek lawyers to secure regional center designation covering several ongoing developing sites with each ranging from $100 million to $900 million in NYC 5 boroughs, or Tristate areas surrounding Manhattan.
First of all, a developer client has to pick the appropriate industries (it is called “entity” in EB5 legal terminology) for the regional center. The developer has to choose an entity in accordance with USCIS industries requirement list. However, the developer shall be advised that he or she is not limited to the ones he or she has chosen because the developer client is better off to target those related industries for possible expansion for the business. The regional center may invest in the following industries or projects:
- Developing and constructing office buildings;
- SOHO (Small Office and Home Office) Condo;
- Leasehold improvements to fixed asset;
- Office Leasing;
- hotels and Hospitality Establishments;
- Sports & Recreation Centers;
- retail spaces;
- Retail shopping centers;
- Public Sector Space;
- Medical care facilities;
- Support Services;
- Community services;
- Civic buildings;
- Entertainment complexes and culture center;
- Commercial and retail property development and management;
- Construction, Development and Management of Medical Offices;
- Farmland and agricultural facilities;
- Greenhouse farming;
- Green energy research and manufacturing;
- Green lifestyle restaurant center;
- Retail automotive dealerships;
- Nursing home and assisted living facilities/Senior Living Facilities;
- Solar energy generation;
- Solar Panel Manufacturing, Distribution, and service;
- Renewable Energy Technologies;
- Clean energy;
- Alternative Energy;
- Green Energy;
- Information Technology;
- Higher education;
- Biotechnology and Related High Technology Manufacturing;
- Capital infrastructure;
- Small business financing;
- Financial Services;
- Capital, Loans or Investments to businesses;
- Restaurants and Dining establishments;
- Water Treatment Plants;
- Mixed use I (hotel, retail, apartments), Mixed use II (office buildings/retail/condominiums);
- industrial space;
- Conference space, etc.
The immigration lawyer should sit down with the developer client to explore the entities related to the industries the developer client has invested before. One way is to pick those related to those industries. For example, in the event that the developer client has built office buildings containing medical offices, retail spaces, community service spaces, professional office spaces, dinning establishment, banking establishment, etc. before, the lawyer shall help the developer in expanding the related industries such as hotels and Hospitality Establishments, Sports & Recreation Centers, Support Services, Entertainment complexes and culture center, Commercial and retail property development and management, Construction, Development and Management of Medical Offices, Green lifestyle restaurant center, Mixed use I (hotel, retail, apartments), Mixed use II (office buildings/retail/condominiums), conference space or conference center, etc. as listed above.
Secondly, the developer client has to decide whether or not to make the traditional structure such as construction and commercial redevelopment. The developer client may also be advised to include Capital infrastructure, Small business financing, Financial Services, Capital, Loans or Investments to businesses, in order to gain the regional center’s flexibility to turn around to another type of business, although the developer client is definitely more in demand of funds than financing others’ projects. Of course, the developer client shall be advised that the traditional structure such as construction and commercial redevelopment was predominantly utilized by regional centers.
The second model of structuring entities involves a loan to a third party developer. A regional center makes a loan to a job creating business. It can be any kind of business, such as hotel/resort development and transportation or airport infrastructure. The investor functions as a lender and the developer is a borrower. This model is particularly useful when the developer client has not identified any viable commercial redevelopment project or just finished the current one while searching other development projects, but can’t keep the investors’ money in the escrow account doing no business.
The third model is a “fund” model in the investment. The investors with pooled capital may diversify the funds into a variety of businesses and assets including commercial development, hotel/resort, and city/county redevelopment, assisted living facilities, etc. The concept is to allow the investors’ funds allocated into a variety of business operations instead of infusing all the capital into one specific project, with reduced and diversified risks for the investment. Although the developer client may not ultimately choose the third model, it is advised that the developer is accurately presented with this option for consideration.
The lawyer shall explain the pros and cons with all three models. The developer client shall understand with the lawyer’s explanation that the bottom line is how to attract investors willing to place the required amount of capital at risk for the purpose of job creating activities. The developer client may not have ever thought about any other model except the traditional commercial redevelopment, he or she should be informed that it is the loan model that seems to appeal to educated investors. As to the fund investment, it is not so clear in a current test stage whether or not it will become popular.
For instance, with lawyer suggesting and research, the developer A is structuring a 100,000 sf building as rehab/renovation center and one as 60k sf hotel in operation together with additional 48 acres for further development in NYC and other New York state territories.
Thirdly, the developer client has to decide geographical area for the regional center. It means after pick the entities you need to choose where to set up your project. There are two essential issues in this part. First, it is the requirement that the geographical area in regional center must be contiguous. The counties or cities identified by the developer client have to be bothered with one another without any break geographically. But the lawyer may tell the developer clients that the contiguous geographical area is not intervened by administrative geographical area border. It means the EB5 contiguous geographical area can go cross the states line and a contiguous geographical area may cover areas over the two or three states.
Then developers have to keep two big issues to consider: 1) how to set up regional center including TEA (Targeted Employment Areas). Why TEA has to be considered? The immigration lawyer has to make sure that the developer client understand the advantages of investing in a TEA. One of the advantages is that under the EB5 law, the alien investor must make a minimum investment of $1,000,000 unless the investment is made in or including a Targeted Employment Area (TEA). If the investment is made in a TEA, a reduced $500,000 investment is allowed.
TEA is defined as either: 1) a high unemployment area experiencing 150% of the national average unemployment rate; or 2) a rural area with a population fewer than 20,000; or 3) A letter from a state government agency certifying that the area in which the new commercial enterprise is located has been designated a high unemployment area.
2) how to include TEAs in metropolitan area such as in New York 5 boroughs (e.g. Flushing, Manhattan, Bronx). In the past, TEAs have been focused on rural locations, however with the economic downturn recently in US, typically prosperous metropolitan neighborhoods may now qualify for the reduced threshold investment based on increased unemployment rates. For example, New York City has been called the “financial capital of the world” in the past, but in October of 2008, USCIS approved the New York City Regional Center as a designated regional center. NYC Regional Center’s first project is the redevelopment of the Brooklyn Navy Yard.
In order to include TEAs into metropolitan area, the developer clients need to ask a letter from a state government agency certifying that the area in which the new commercial enterprise is located has been designated a high unemployment area. In order to prove that the proposed regional center is located in an area of high unemployment, the proposal must either submit unemployment rate data or obtain a letter from an authorized State agent certifying that the area has been designated as having a high rate of unemployment.
For example, the developer A, who is interested in setting up regional centers in Flushing, Queens County, or Manhattan or Bronx metropolitan areas, cannot meet the demands of the first two requirements of TEAs. But he/she can take the third measure to ask a certification from New York state agency to show the regional center has high unemployment rate in the proposal for USCIS.
In the business plan, it is advisable to include both TEA and non TEA at the time of applying for regional center designation, in anticipation that today’s non TEA may turn into a TEA at the time of investment. It will be a nightmare for a developer that the regional center only includes TEA at the time of applying for regional center designation, but the TEA turns into a non TEA at the time of investment.
Take the developer A as an instance, lawyer may suggest the developer A cover the entities in possible territories in Sullivan, Orange, Rockland of New York state, then 5 boroughs, plus a few counties across Hudson river in NJ side contiguous geographical area because these areas benefit the TEA concept if and when the TEA does not always apply in NYC.
The last key point for the developer client’s geographical area identification is to make full use of the definition of “area”, which means the area in which the new commercial enterprise is “principally” doing business. Therefore, in the event that an enterprise has multiple operations in multiple locations, the regional center still qualifies for the TEA $500,000 as long as the enterprise’s principal business operation is located in the TEA and the multiple operations in multiple locations are under a single for-profit entity.
Also it is a common sense to put the regional center in the TEA, A reduction in the investor’s capital outlay to $500,000 will obviously increase the number of interested investors and in turn increase the overall success of the project. But it is not mandating, in considering attract more affordable and diversified alien investors.
According to the consensus amongst EB-5 experts, the investments requiring the $1 million may fail miserably and the Regional Center will ultimately lose its designation for failure to fulfill its obligation to stimulate the economy and create jobs.
In light of above-mentioned TEA issue, it is important for developers to be aware that at the time of investment, the contiguous geographical area identified in proposal will still include TEA qualification in considering the unemployment may change.
After all of these, many developer clients may wish to leave heavy details of the economic impact reports to economists or lawyers in the proposed plan, and this is permissible.
After the Regional Center Designation Is Approved
Approval of the regional center application is just the beginning. EB-5 developers still have responsibility to fulfill reporting requirements. It includes furnishing information about investors, specifics of USCIS filings, updated job counts, and allocation of capital to each target industry within the regional center. These are to ensure that the project is going well and investors can obtain the green card.