EB5: is your investment really in TEA?

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New York Times published an article on December 19, 2011, reporting the EB5 program and how it believed some real estate developers misuse the law to designate the building site as “high unemployment or Target Employment Area or TEA” area in order to qualify for reduced investment amount from $1,000,000 to only $500,000.  The articles says;

The number of foreign applicants, each of whom must invest at least $500,000 in a project, has nearly quadrupled in the last two years, to more than 3,800 in the 2011 fiscal year, officials said. Demand has grown so fast that the Obama administration, which is championing the program, is seeking to streamline the application process.

Still, some critics of the program have described it as an improper use of the immigration system to spur economic development — a cash-for-visas scheme. And an examination of the program by The New York Times suggests that in New York, developers and state officials are stretching the rules to qualify projects for this foreign financing.

These developers are often relying on gerrymandering techniques to create development zones that are supposedly in areas of high unemployment — and thus eligible for special concessions — but actually are in prosperous ones, according to federal and state records.

According to the article, USCIS director has noticed this “issue” and promised to review it more carefully.

As we know, the designation of “high unemployment” area is the function of state government.  The legal standard is 50% higher than the national unemployment rate(at this time it is 8.6%).  However, how to map the area is the responsibility of the state government.  In the past, USCIS tried to challenge some designations.  It is possible that in the future we can see more challenges from the USCIS.

The article specifically mentioned about several New York City EB5 projects as “improper” use of the reduced investment amount(the Brooklyn NBA Arena and the GEM Tower).

It is very important for the EB5 investors to make sure the TEA designation is solid.  Because if not, investors may be forced to withdraw their applications 8 months after the filing and increase their investment from $500,000 to $1,000,000.