Del Boy vs. The Overworked Bureaucrat: California's Misguided TEA Policy

by Brandon Meyer and Jennielyn Alcarion

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The EB-5 Investor Program allows immigrants to obtain a green card for investing $1,000,000 into a new commercial enterprise and creating ten full time jobs within two years. The minimum investment requirement is lowered to $500,000 when the investment is made within a Targeted Employment Area ("TEA"), where the unemployment rate of the area is at least 150% above the national average, or when the investment is made in a rural area.[1]

Effective April 30, 2012, the State of California modified its policies for certifying TEAs pursuant to 8 CFR Section 204.6(j)(6)(ii)(B), which allows state TEA designation, given a letter from an authorized body of the government of the state in which the new commercial enterprise is located which certifies that the geographic or political subdivision of the metropolitan statistical area or of the city or town with a population of 20,000 or more in which the enterprise is principally doing business has been designated a high unemployment area.[2] Under California's modified TEA certification policies, designated TEA areas include Metropolitan Statistical Areas ("MSAs"), counties and cities with qualifying unemployment rates. California additionally, made changes in June 2012 designating individual census tracts with above a 150% unemployment rate, following an outcry from the California EB-5 community calling for less rigidity in the California TEA certification policies. If a project is not within a qualifying MSA, county city or individual tract designated as a TEA by California, one may apply directly to United States Citizenship and Immigration Services ("USCIS") providing evidence showing that the project is located in an area with the qualifying unemployment rate.

The State of California claimed that these changes in TEA designation procedures were necessitated by the enormous number of TEA requests submitted by interested parties and by the ridiculous nature of some of these requests, such as the request for a designation of a 100-census tract area![3] The poor bureaucrats were being overworked, unable to keep up with the barrage of requests. In the battle between Del Boy and the overworked bureaucrat, there was only going to be one winner, and it was not Del Boy. Unfortunately, Del Boy did not get the message and is in the process of being taught this lesson again by USCIS, as the program remains effectively on hold while a silent cleansing of the EB-5 program takes place.[4]

California's tightened TEA designation procedures followed several major publications criticizing the EB-5 investor program in the previous year. Among these publications included a feature on the EB-5 program by the New York Times in December of 2011.[5] The article exposes the ever-present practice among developers in gerrymandering[6] areas in order to place an EB-5 project in an attractive investment location that otherwise may not possess the qualifying unemployment rate. Specifically, the article focuses on a New York City project that was built in a census tract that had an unemployment tract of zero for the past five years. However, when aggregating adjoining census tracts the project location qualified as a TEA. The publicity of this gerrymandering phenomenon caught the eye of USCIS Director Alejandro Mayorkas, who stated in the New York Times article:

"The question is, are the state authorities adhering to the spirit of the law? […] Where is the project being developed, and where are the jobs being created? Are the people from the areas of high unemployment being employed? Because that's really the purpose." If some project designations were not achieving legislative intent, […] then I think that is something that we need to consider as the laws are reviewed."

The growth of gerrymandering to achieve a project within a TEA comes at the hands of developers who have increasingly turned to the EB-5 program as a means to fund their projects. A number of developers have taken on the role as scamming salesmen, rivaling that of Derek Edward Trotter, better known as "Del Boy"[7] the main character of BBC's Only Fools and Horses. The Del Boys of the EB-5 community make promises of quick green cards to foreign investors in exchange for paying $500,000.00 to fund their projects located in TEAs.[8] Del Boys under the EB-5 program must essentially compete for foreign investors by making their projects more appealing than they otherwise would be in a world of commonsense and due diligence (both of which are often given short shrift in EB-5). They are little different than Del Boy selling "dodgy goods" out of his car or suitcase.[9]

The emerging problem of gerrymandering TEAs has been on the radar of U.S Citizenship and Immigration Service ("USCIS") and the Administrative Appeals Office ("AAO") in the past few years, even before the media attention spurned by the New York Times article. The AAO has previously stated:

"Nothing in the regulation suggests that a petitioner may qualify for the reduced investment amount by seeking government confirmation of the fact that adding several high unemployment wards to a low unemployment ward produces a higher average unemployment rate. Such an analysis renders the reduced investment amount meaningless as any alien could qualify for the reduced amount simply by "gerrymandering" or by adding high unemployment subdivisions to a subdivision that is otherwise not a TEA. Rather, the investment must be in a geographic or political subdivision officially designated as a TEA."[10]

In a later decision, the AAO further opined:

"The director's conclusion that we must accept the designation is a reasonable interpretation of 8 C.F.R. 5 204.6(j)(6)(ii)(B). That said, it is clear that the petitioner's investment of only $500,000 wholly within a ward that is not itself suffering high unemployment completely undermines the congressional intent underlying section 203(b)(5)(C)(ii) of the Act. Specifically, Congress intended that the reduced investment amount would encourage investment in areas that are truly suffering high unemployment. While we are bound by 8 C.F.R. Section 204.6(j)(6)(ii)(B), it would appear that this regulation has produced unintended consequences that are clearly contrary to congressional intent."[11]

Although, the USCIS and the AAO must defer to state designations as a reasonable interpretation under 8 C.F.R. 5 204.6(j)(6)(ii)(B) they expressed to the public their recognition of the gerrymandering problem of TEA designations and their concern that this practice goes beyond the congressional intent of the EB-5 program.

The gerrymandering problem only added to inefficiency of California's previous TEA designation policy. Under California's precursory TEA procedure the California Business, Transportation and Housing Agency ("BTHA") was assigned the burden of designating TEAs. Pre-existing political areas were used to designate TEAs, instead of census tracts. The BTHA faced TEA designation requests of pre-existing political areas made of hundreds of census tracts, creating a nightmare for the BTHA bureaucrats.

The media attention surrounding gerrymandering and the costly time bureaucrats spent designating TEAs ultimately led California to their new TEA policy, this past year. These new procedures are much less demanding on the overworked bureaucrat. Under the current system, TEAs are pre-established and designated by the Governor's Office of Business and Economic Development Website.[12] Applicants must identify their project as located within a pre-designated MSA, county, city or individual census tract with the qualifying unemployment rate utilizing a database from the U.S Census webpage. Essentially, TEA designations in California rest entirely upon the accuracy of the U.S government data on unemployment.

Undoubtedly, this newly rigid TEA designation process concerned those within California's EB-5 community, perhaps more than others, adversely affecting Del Boy developers. However, may the new California TEA policy attack on gerrymandering and inefficiency issues of the previous policy at the cost of legitimate EB-5 project proposals? A pressing concern with the inflexibility of California TEA policy is that investors will be less likely to invest in a state that does not designate as TEAs attractive locations for businesses thereby driving these investors to other states for their business investments. For instance, the MSAs in California with the qualifying unemployment rate overwhelming come from the less urbanized areas of Central California. Undoubtedly, high tourist areas or globally recognized areas, such as San Francisco, San Diego and Los Angeles are much more appealing for immigrant investors to finance than rural areas such as Fresno, Bakersfield or El Centro, that rarely attracts tourists or businesses. If investors are limited to projects located in these areas, they will be attracted to move their ventures to states such as New York and Florida where their TEAs will attract capital for their business investments. Let's face it. Many areas will always be a TEA, because there is little economic rationale for developing anything in them.

The most common proposed solution is to allow for aggregate census tracts or adjoining census tracts to make up a TEA. The rationale behind this being that attractive and globally recognized areas are surrounded by areas with the qualifying unemployment rate, drawing employment among those from the surrounding areas of high unemployment. Other solutions have recommended monitoring employees of the new enterprise to ensure that those hired indeed come from TEAs.

8 CFR Section 204.6(j)(6)(ii)(B) gives States the authority to designate TEAs within their borders. Furthermore, the USCIS and the AAO have expressed that they defer to the States to make these determinations. However, California's newly adopted inactive approach to TEA designation removes the need for critical thinking among bureaucrats to analyze and come to a case-by-case determination that these projects live up to the "spirit of the law", which is to create jobs in areas of high unemployment. California must take on a more active role in their TEA designations to truly evaluate whether projects will have an impact on the unemployment rates in surrounding areas that need the jobs rather than leaving it to government statistical data that may result in failed businesses and further unemployment.

Was there ever any question who was going to win this battle? As it stands, the overworked bureaucrat prevails over the Del Boy under the current California TEA policy. Indeed, California's changes have remedied the Del Boy gerrymandering nuisance however, potentially at the cost of legitimate EB-5 projects and foreign investors turning away from California for more appealing business ventures in other states.

Conclusion

So we have a chicken and egg problem. California has tightened (or better rationalized) their TEA designation procedures in response to the Del Boy phenomenon, but by doing so has made it more difficult for legitimate requests to receive fair consideration. The major problem with this census-tract level analysis for areas not pre-qualified is that such rigidity overwhelms common sense and requires one to accept the omniscience of government data. Such an approach is quite shortsighted. Take for instance one client of this firm. The client sought to develop a project in Anaheim, directly adjacent to Santa Ana. Santa Ana is a pre-qualified TEA, while Anaheim is not. According to the census tract data, the Anaheim census tract where the project was to be located stated that 138 people lived within this census tract, with an unemployment rate of 0%!

A three-minute drive around this rundown industrial area of Anaheim would give one a clear impression that the census tract data is nonsense and otherwise show itself as an area in need of greater economic development. This would be no problem in days gone by, where this Anaheim census tract could be aggregated with a neighboring census tract in Santa Ana to arrive at a qualifying TEA. However, the rigid and thoughtless policy of California, clearly designed for its own convenience, effectively stopped this project in its tracks. How does this help California's chronic and woeful unemployment situation? Not one bit, but at least our government officials won't be overworked in the State of California.


[1] 8 CFR Section 204.6(j)(6)(ii).

[2] See http://business.ca.gov/Programs/EB5Program.aspx, last accessed February 25, 2013.

[3] Catherine Holmes & Victor Shum, EB-5 Alert #3: California Governor's Office Announces changes in California's TEA procedures for EB-5 Immigrant Investor Financing, Global Hospitality Group, (June 20, 2012), http://hotellaw.jmbm.com/2012/06/eb5_lawyer_alert_3_update_on_c.html, last accessed February 25, 2013.

[4] See http://www.sec.gov/litigation/litreleases/2013/lr22615.htm, last accessed February 25, 2013. USCIS apparently played a large role in the SEC action against the developer of the Chicago Convention Center EB-5 project.

[5] Patrick McGeehan & Kirk Semple, Rules Stretched as Green Cards Go to Investors, The New York Times, December 19, 2011, at A1.

[6] According to USlegal.com "gerrymandering" is defined as Gerrymander means to create an artificial civil division within a particular locale for an improper purpose. It refers to the drawing of boundaries of legislative districts to benefit one party or group and handicap another. http://definitions.uslegal.com/g/gerrymander, last accessed February 20, 2013.

[7] "Del Boy", a character of the BBC sitcom Only Fools and Horses, is described in Wikipedia as a lively, happy-go-lucky, confident character. While not always successful, his general confidence and occasional forcefulness often persuade people to believe in him. Del Boy is a petty criminal and makes no attempt to hide it unless directly confronted by the authorities. http://en.wikipedia.org/wiki/Del_Boy, last accessed January 30, 2013.

[8] To all EB-5 Del Boys. Feel free to self-identify. You know who you are.

[9] "Del Boy works as a market trader, running his own company, Trotters Independent Traders (T.I.T.), either from out of a suitcase or from the back of his bright yellow Reliant Regal supervan. With a never-ending supply of get-rich-quick schemes and an inner belief in his ability to sell anything to anyone, he embroils "the firm", as he calls the family business, in a variety of improbable situations. This unwavering confidence had given rise to his oft-proclaimed ambition "This time next year, we'll be millionaires!" http://en.wikipedia.org/wiki/Del_Boy, last accessed January 30, 2013.

[10]Matter of [identifying information redacted by agency], SRC-08-135-50129, 2009, decided March 6, 2009.

[11] Matter of [identifying information redacted by agency], WAC-09-007-51516, 2010, decided September 21, 2010.

[12] http://business.ca.gov/Programs/EB5Program.aspx, last accessed February 20, 2013.


About The Author

Brandon Meyer is Principal of Meyer Law Group, a full-service immigration law firm with offices in San Francisco and Solana Beach, CA and Stamford, CT.

Jennielyn Alcarion is a Law Clerk with Meyer Law Group.


The opinions expressed in this article are those of the author(s) alone and should not be imputed to ILW.COM.