Hotel Lawyers on EB-5 issues.The California governor's office has just taken action that will make California much more competitive with New York and other states in seeking foreign investment capital to create jobs and facilitate construction financing for hotels and other projects.

On May 6, 2013, Paul Oliva, Deputy Director of International Affairs and Business Development at the Governor's Office of Business and Economic Development (also know as "GoBiz") held an open conference call to discuss the implementation of a new Special Targeted Employment Areas or TEA certification process to supplement the existing eligible TEA designations and provide more flexibility to hotel and other business developers seeking financing through the EB-5 immigrant investor program. As our readers know, TEA designation is critical to the ability of most developers to raise financing through the EB-5 program.

The new policy is a welcome addition and we commend the Governor's Office . . .The EB-5 immigrant investor visa program allows non-U.S. persons to obtain United States permanent residency (green card) if they invest $1,000,000 in a new commercial enterprise that creates at least 10 new, permanent, full-time jobs per investor. If the new commercial enterprise is located within a TEA, the required investment is reduced to the $500,000 level (while still creating 10 full-time jobs). If a project in not located within a TEA, then the project is for practical purposes shut out of the competitive market for EB-5 financing in China, because EB-5 investors will not want to invest at the $1,000,000 level when other projects are available at the reduced $500,000 threshold.

Since April 2012, California would issue TEA designations only to individual census tracts, cities, towns, counties, census designated places (CDP), metropolitan statistical areas (MSA) and rural areas that met the requisite unemployment threshold. If the EB-5 project was located within one of these approved areas, then the project location qualified for TEA designation. However, if the project was not located in one of the pre-approved areas, California would not consider issuance of a TEA even if the area surrounding the project location would meet the criteria for designation as a TEA.

Prior to April 2012, California had a different policy that permitted designation of TEAs in other geographic areas such as enterprise zones, but GoBiz found that the process was cumbersome and time-consuming.

We had previously suggested that the Governor's Office consider and adopt a broader TEA designation policy that was similar to that used in many other states, permitting combinations of contiguous census tracts with an average unemployment rate in excess of 150% of the national average. However, because of various considerations at the time, including workload and a desire to streamline the TEA certification process, the Governor's Office elected not to permit census tract combinations at that time.

The new Special TEA designation policy, effective as of May 1, 2013, supplements the existing designation of cities, counties, individual census tracts and rural areas, and is a welcome addition to EB-5 stakeholders in California. If the project location does not qualify under California's published TEA list, then an applicant may apply for Special TEA designation under the new policy. Under the new Special TEA designation process, a project location can receive TEA certification if it is located within an area of twelve or fewer contiguous census tracts with a total average unemployment rate of 150% of the national average.

The request for Special TEA designation must include a table listing each census tract with its corresponding unemployment rate and a map showing the project address. Interestingly, the Special TEA designation process requires a letter of support from the local Economic Development Corporation (EDC), County or City in which the project is to be located. The letter, a template of which is provided by the Governor's Office, must concur that the proposed TEA census tracts will reasonably be a source of workforce for the project. The rationale from the Governor's Office is to provide local input from the communities most affected by the project. The letter will also likely to serve as a deterrent on arbitrary Special TEA designation requests because of the requirement for an additional level of agency approval.

The conference call evidenced a refreshing commitment by the Governor's Office to the EB-5 Program . . .In discussing the rationale for the new policy, the Governor's Office noted that over the past year, it received input from EB-5 stakeholders, studied the TEA policies of other states, and evaluated the potential benefit of special TEA designation against the additional workload and potential delays in completing TEA certifications. The new Special TEA policy recognizes the reality that job creation occurs not only when a project is located in an area of high unemployment, but also when a project is located in an area of lower unemployment but which creates jobs from the surrounding communities that have higher unemployment. The new policy is a welcome addition and we commend the Governor's Office for leveling the playing field against other states in the quest for foreign investment and job creation in a time of economic distress.

In addition to presenting the Special TEA designation procedure, the Governor's Office also presented the new TEA list to be used for TEA certifications between May 1, 2013 and April 30, 2014. The list is based on unemployment rates calculated by the California Employment Development Department using federal Bureau of Labor Statistics data. Of note is that the qualifying 2012 unemployment rates for TEA designation has been reduced to 12.1% (from 13.4% in 2011). Also, because of the reduced unemployment rate, certain areas such as San Bernardino County and the cities of Los Angeles and Long Beach no longer qualify as automatic TEAs.

However, there are still opportunities for EB-5 projects located within these areas to qualify as TEAs either through smaller subdivisions located within these counties or cities (i.e. 19 cities, towns and CDPs in San Bernardino county qualify as TEAs) or through the Special TEA designation process which can qualify areas that are marginally below the unemployment rate threshold.

The Governor's Office has asked all California regional centers and stakeholders to provide them with their contact information at [email protected] so that the Governor's Office can work with stakeholders to improve access to the EB-5 Program. Interestingly, the Governor's Office noted that the USCIS declined to provide them with the contact information for California regional centers. The conference call evidenced a refreshing commitment by the Governor's Office to the EB-5 Program and also to job creation and foreign investment -- particularly from China -- and we look forward to more job creation in California through increased access to EB-5 financing as a result of the new Special TEA designation policy announced by GoBiz.

Yes, EB-5 financing is real! In a time where debt is difficult to secure, it can play a meaningful role in the capital stack. But EB-5 financing must be used appropriately and its requirements (set forth by the U.S. Citizen and Immigration Services or USCIS) are very specific.

My partners, Catherine Holmes and Victor Shum, have written some great articles on various key aspects of the EB-5 Immigrant Investor Visa Program and regularly help hotel developers take advantage of this opportunity where it is appropriate. We invite you to take a look at the free information on EB-5 financing for hotel development and to call us if you would like to discuss it further.

Catherine Holmes is a transaction and finance partner with JMBM's Global Hospitality Group® and Chinese Investment Group™ and specializes in resort and hotel purchase and sale transactions, resort and urban mixed-use financing and development, hotel management and franchise agreements, and hospitality asset workouts. With her background in securities transactions, she also assists hotel developers with public and private offerings of securities. For more information, please contact Catherine Holmes at +1 310.201.3553 or [email protected]

Victor Shum is a corporate and securities partner in JMBM's Global Hospitality Group® and Chinese Investment Group™. He has advised clients on EB-5 matters since 1999 and assists hotel developers on EB-5 financing as well as public and private securities, mergers and acquisitions, cross-border issues, and other strategic business transactions, including real estate transactions and intellectual property and technology licensing matters. For more information, please contact Victor Shum at +1 415.984.9611 or [email protected]

This is Jim Butler, author of www.HotelLawBlog.com and hotel lawyer, signing off. We've done more than $60 billion of hotel transactions and have developed innovative solutions to help investors be successful in bidding for hotel acquisitions, and helping investors and lenders to unlock value from troubled hotel transactions. Who's your hotel lawyer?

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