New Markets Tax Credits and EB-5: Combining Two Programs for One Goal

New Markets Tax Credits and EB-5: Combining Two Programs for One Goal Justin G. Persaud I. Introduction... 249 II. NMTC Background and Regulatory Structure... 251 A. Basic NMTC Transaction...252 B. Low-Income Communities...252 C. Community Development Entities...253 D. Qualified Equity Investments...254 1. Qualified Low-Income Community Investments... 254 2. Qualified Active Low-Income Community Businesses... 255 E. Gap Financing...255 F. Risk of Recapture...255 III. New Way for Financing and Investment in the United States... 256 A. Fifth Employment-Based Preference (EB-5)...256 1. Job Creation Requirement... 257 2. Capital Investment Requirement... 257 3. Regional Centers... 259 4. Procedural Requirements... 260 B. Integration: EB-5 and NMTCs...261 C. Need for an Integrated NMTC and EB-5 Model...262 D. Potential Challenges...263 IV. Conclusion... 264 I. Introduction In 2008, the global market crashed, forcing the jobless rate into the double digits in the United States. In August 2011, the American credit rating was downgraded from AAA to AA+ for the first time in the history of the United States. In 2010, the hardest-hit areas were rural manufacturing communities in Ohio, Michigan, and Rhode Island. 1 Evidently, the rural 1. Geography of a Recession, N.Y. TIMES (May 3, 2010), http://www.nytimes. com/interactive/2009/03/03/us/20090303_leonhardt.html. Justin G. Persaud is an LLM candidate specializing in securities law at Osgoode Hall Law School in Toronto, Ontario, and expects to receive his degree in May 2013. He is a member in good standing with the New Jersey State Bar and has passed the New York State Bar Exam. He received his J.D., cum laude, from Thomas M. Cooley Law School in Lansing, Michigan. 249

250 Journal of Affordable Housing Volume 21, Number 2 areas are experiencing the brunt of the economic collapse. The American market is in dire need of a transaction that will spur foreign investment into those communities fraught with the most hardships. This article demonstrates the creative use of the law to design a lucrative transaction that stimulates new investment capital into those areas of the United States hit hardest by the recession. The law is too often seen as a hindrance to the fostering of financial transactions. This article will bring together the New Markets Tax Credits and the Fifth Employment- Based visa programs to produce a financial transaction that creates value where it s most needed. The U.S. Congress enacted the New Markets Tax Credit (NMTC) program in December 2000 as part of the Community Renewal Tax Relief Act. The point of offering the NMTC is to stimulate and increase investment in low-income communities (LICs) 2 by encouraging private investors, through the use of tax credits, to invest in those communities. It was designed to give private investors the financial incentive to invest in LICs. In fact, according to a 2007 study conducted by the Government Accountability Office, 88 percent of the NMTC investors surveyed stated that they would not have made the same investment into such a community had it not been for the NMTC program. 3 Since the first allocation of tax credits in 2003, the program has raised over $16 billion in private investment. 4 Essentially, the program promises a thirty-nine percent federal tax credit for qualified equity investments (QEIs) made through investment vehicles known as community development entities (CDEs). The CDEs then use the capital derived from the QEI to make investments in businesses and projects in LICs. The second incentive program that will be discussed is the Fifth Employment-Based (EB-5) visa. The EB-5 visa is enacted for the purpose of attracting foreign direct investment into the American market. Essentially, the immigrant seeking this type of visa must make an investment into the American economy and create ten full-time jobs for Americans. EB-5 capital injections coupled with the NMTC structure create an integrated transaction that focuses foreign investments into targeted hard-hit areas in the United States. This article has three goals. First, it demonstrates that the use of the NMTC transaction is a successful government incentive program that has helped several communities. Second, it introduces the reader to EB-5 visas as a tool for spurring new investment capital into the U.S. economy. Third, it combines the NMTC transaction with the EB-5 immigration program into an integrated transaction. The integrated transaction will create 2. 26 U.S.C. 45D(d)(1). 3. NEW MARKETS TAX CREDIT COALITION, THE NEW MARKETS TAX CREDIT: PROGRESS REPORT 2010 (July 2010). 4. Id.

New Markets Tax Credits and EB-5 251 new jobs in the American market, introduce new investment capital, and target LICs. 5 II. NMTC Background and Regulatory Structure The 106th Congress created the NMTC program to stimulate the investment of private equity capital into low-income urban and rural America. It allows a tax credit 6 in the amount of thirty-nine percent of a taxpayer s equity investment over a seven-year period if that taxpayer invested in LICs. 7 In the years 2002 to 2007, the federal treasury had authority to issue tax credits to investors equaling thirty-nine percent. 8 Credits are distributed on rounds based on the size and equity commitments by qualified investor groups. The treasury delegated the responsibility for distribution and administration of the program to the Community Development Financial Institutions (CDFI) Fund. 9 Projects that have typically received NMTC allocations include renovations or construction of office buildings, commercial and retail buildings, shopping centers, hotels, art centers, charter schools, hospitals, college campuses, high-tech and biotech facilities, homeless shelters, transitional housing, facilities to assist educating the homeless, and assistance with home ownership. Private investors are attracted to the tax credits. By reducing an investor s tax liability, the economic return on the investment in the lowincome area is increased in a manner akin to the successful Low-Income Housing Tax Credit (LIHTC) program. 10 The desired by-product of the transaction is a spur of equity investment and restored commerce within low-income communities. 5. 26 U.S.C. 45D(e). 6. In order to understand the value of the NMTC transaction, a basic understanding of the difference between a deduction and a tax credit should be clarified. A deduction in tax language refers to an expenditure that may be taken out of the gross income. A deduction will reduce money from your taxable income, so the tax bracket the taxpayer is in is important. Deductions are a matter of congressional grace. Depending on the tax bracket the business or individuals are in, they will realize the savings according to their bracket. A tax credit is a legislated benefit offered by the government for allocating funds towards a certain purpose. A tax credit is a dollar-for-dollar direct reduction in the amount of one s tax liability. 7. 26 U.S.C. 45D(a)(2)(A) (B), which provides for a credit of five percent of the equity investment for the first three years, then a six percent credit for the remaining years. 8. Id. 45D(f )(1)(A) (D). 9. Internal Revenue Serv., Dep t of the Treasury, New Markets Tax Credit, 69 Fed. Reg. 77,625 (Dec. 28, 2004). 10. See 26 U.S.C. 1437f. LIHTC provides approximately nine percent tax credits for new construction or rehabilitation expenditures for low-income households over a ten-year period.

252 Journal of Affordable Housing Volume 21, Number 2 The basic NMTC transaction can be described as follows: 1. An investor must invest a QEI into a qualified CDE. 2. The CDE then takes the investor s QEI and invests those sums into a qualified low-income community investment (QLICI), either directly or through a qualified low-income community-based organization (QLICB) or other approved entities that serve the lowincome area. 3. The credit is considered for the period commencing with the date of the initial investment and for each of the six anniversary dates thereafter. The credit is five percent for the initial three years and six percent for the remaining four years, equaling thirty-nine percent over the span of seven years. A. Basic NMTC Transaction The transaction should begin with an interested and informed investor. This program is convoluted and is not known by many investors. Once an investor learns of the tax credit opportunity and the ability to earn Community Reinvestment Act (CRA) compliance credits (if that investor is a bank), the investor will push for this transaction to move forward. The basic transaction will involve the creation of a limited partnership, limited liability company, subsidiary company, or not-for-profit entity to apply for qualified CDE status and an allocation of NMTCs. If the CDE is allocated tax credits, it is then known as an allocatee and investors such as local corporations, banks, insurance companies, or individuals will invest in the CDE allocatee by contributing cash. The CDE allocatee will then use the cash from the investment to invest in qualifying businesses. The investment in qualifying businesses may be in the form of capital or equity investment or loans to the qualifying businesses. 11 B. Low-Income Communities It is important to first examine the type of distressed LICs that NMTCs seek to invest in. LICs are those communities with a poverty rate of at least twenty percent or, for those communities in a rural area, where the median family income does not exceed eighty percent of the statewide median family income. 12 NMTC transactions attract equity capital into those targeted LICs. 13 11. NMTC Transactional Structures, CITY SCAPE CAPITAL GROUP, LLC, http:// www.historicequity.com/nmtctransactionalstructures.php (last visited June 11, 2012). 12. 26 U.S.C. 45D(e). 13. Bruce K. Mulock, RL30597: Renewal Communities and New Markets Initiatives: Legislation in the 106th Congress, NAT L COUNCIL FOR SCI. & THE ENV T, http:// www.ncseonline.org/nle/crsreports/economics/econ-73.cfm (originally published by the Congressional Research Serv. 2005; updated Nov. 3, 2005).

New Markets Tax Credits and EB-5 253 An area may qualify for the NMTC project even though it may not be located in an LIC but is located in a distressed area. The CDFI Fund has allowed the allocation of NMTCs to investors who invest in projects located in areas that have been especially hard-hit but do not meet the LIC criteria. There are two different ways for an area to qualify. The first way for a distressed area to qualify for the NMTC program is that the area must meet at least one of the following: (1) census tract with thirty percent or higher poverty rate; (2) census tract with median family income of sixty percent or higher of the median family income; or (3) census tract with an unemployment rate more than 1.5% of the national average. 14 The second way for a distressed area to qualify for the NMTC program is that the area must meet at least two or more of fourteen different requirements. 15 The proposed areas must exhibit at least two of the following: 1. More than twenty-five percent poverty rate; 2. Federally designated empowerment zone; 3. Small Business Administration HUB zone; 4. Brownfield site; 5. HOPE VI redevelopment; 6. Native American or Alaskan Native area or Hawaiian homelands; 7. Appalachian Regional Commission or Delta Regional Authority; 8. Colonial area designated by HUD; 9. Federally designated medically underserved area; 10. Targeted populations in nonmetro areas, or sixty percent owned by low-income persons (LIPs); 11. High-migration rural county; 12. State/local economic zones program; 13. Nonmetropolitan counties; and/or 14. FEMA-designated major disaster areas. Therefore, a proposed area may qualify for the NMTC program based on either the LIC formulation or the distressed area formulation. C. Community Development Entities As an important actor in the NMTC transactions, the CDE receives its tax credit allocation from the CDFI Fund through a highly competitive application process. The CDE also receives the investor taxpayer s QEI. The QEI is redirected from a QLICI to a QLICB. As such, the qualified CDE distributes the credits to the investors. A CDE receives an allocation of tax credits from the CDFI Fund in a highly competitive process. In order to earn an allocation from the CDFI 14. 26 U.S.C. 45 D. 15. Id.

254 Journal of Affordable Housing Volume 21, Number 2 Fund, a CDE must satisfy three requirements. First, its primary mission must be serving or providing investment capital for LICs or LIPs. Second, a CDE must provide for low-income resident representation on any governing board of the entity or on any advisory board to the entity. Finally, the director of the CDFI Fund must formally certify the CDE. Tax credits are only provided to investors in exchange for a QEI. The CDE must use substantially all of the cash for QLICIs to qualify as an equity investment. In construing the requirement that substantially all of the QEI must be for LIC investments, the final regulations provide that eighty-five percent of the gross assets must be so directed and that the requirement be satisfied for each annual period in the seven years available for the tax credit. 16 A qualified CDE is any domestic corporation or partnership whose primary mission is to serve or provide investment capital for LICs or LIPs that maintain accountability to residents of LICs through their representation on any governing board of or any advisory board to the CDE and that is certified by the Secretary as being a qualified CDE. 17 D. Qualified Equity Investments CDEs must substantially invest all the proceeds from QEIs to make QLICIs in qualified active low-income community businesses (QALICBs) located in LICs. A QEI is defined in the Code as any equity investment in a qualified CDE if it is cash, substantially all of such cash is used by the CDE to make the QLICIs, and that investment meets the purposes required by the Code. 18 A QEI means stock in a corporation or a capital interest in a partnership that is acquired directly from a CDE for cash and includes an investment of a subsequent purchaser if such investment was a QEI in the hands of the prior holder. 19 Substantially all of the investment proceeds must be used by the CDE to make QLICIs. QLICIs include capital or equity investments in, or loans to, QALICBs; certain financial counseling and other services to businesses and residents in LICs; the purchase from another CDE of any loan made by such entity that is a QLICI; or an equity investment in, or loan to, another CDE. 20 1. Qualified Low-Income Community Investments A QLICI includes any capital or equity investment in any QALICB; the purchase from another qualified CDE of any loan that is a QLICI; financial counseling and other services provided in regulations prescribed by the 16. 26 U.S.C. 45D. 17. Id. 45D(c). 18. Id. 45D(b)(1). 19. Id. 45D(b). 20. Id. 45D(d).

New Markets Tax Credits and EB-5 255 secretary to businesses in LICs; and any equity investment or loan to any qualified CDE. 21 2. Qualified Active Low-Income Community Businesses The qualified active low-income community investment (QALICI) is passed to the QALICB for use in the community. The Code provides a very specific definition of a QALICB. There are several requirements that must be met before a business is considered a QALICB for a qualified CDE to make a QALICB in. A QALICB must: (1) have at least fifty percent of its total gross income derived from any LIC, (2) be substantially located in the LIC, (3) substantially perform its services in the LIC, (4) have less than five percent of the average of the aggregate unadjusted bases of the property attributable to collectibles that are held primarily for sale to customers, and (5) have less than five percent of the average of the aggregate unadjusted bases of the property of the entity attributable to nonqualified financial property. As contemplated by the statute, the QALICB will then pass on the QALICI through to the community in the form of economic stimulus. The QALICB will take the earnings and repay the investments. The QALICB will then repay the QLICI through rent, proceeds, etc. The qualified CDE will then take the returns from the QALICB and repay the investors. Each investor will be paid according to the contracted investment. E. Gap Financing Developments are rarely financed entirely from one private investor. Usually, a combination of private investors pool their funds into an investment fund for use by the qualified CDE to make a QLICI into a QLICB. Any shortfall in these funds is referred to, intuitively, as the gap that needs to be financed. Gap financing is a broad term. A NMTC transaction could be used as gap financing. 22 F. Risk of Recapture Generally, the NMTC transaction has been hailed as a very safe investment for private investors. However, like any other transaction, there are 21. Id. 45D(b)(2)(d). 22. For example, the project renovation of the Kiel Opera House in St. Louis, Missouri. This opera house underwent a $74 million renovation. Of the $74 million, $2.7 million was financed through NMTCs. The difference between the $71.3 million and the required $74 million represents the gap financing. DEV. PLANNING & FIN. GRP., INC., NATIONAL RESEARCH PROJECT: MUNICIPAL FINANCE DEVELOPMENT TOOLS AFTER THE GREAT RECESSION 15 ( Jan. 23, 2012), http://www.nahb.org/fileupload_ details.aspx?contentid=175847.

256 Journal of Affordable Housing Volume 21, Number 2 associated risks. The private investor should be aware that there is a risk of recapture. The tax credits will be recaptured by the Internal Revenue Service if the CDE ceases to be a qualified CDE, if the QEIs are not substantially used for QLICIs, or if the CDE redeems any equity investment. 23 This risk of recapture will remain for seven years after the first date of the QEI. It should be noted that even if a CDE fails to allocate the correct amount towards the QLICB, the CDE has a six-month window to correct. Ultimately, with due diligence, the risk of recapture is low in NMTC transactions. III. New Way for Financing and Investment in the United States It is not difficult to understand or explain that the current market is plagued by one of the worst downward trends since the 1929 crash. Domestic private gap financing is not easily obtained when capital is in such short supply. Furthermore, obtaining foreign private investment to help finance a deal is not easy. The current recession is a global pandemic. Yet, investor interest in the U.S. economy and stability is an inelastic demand. The strict adherence to the law in the United States and protections the United States offers to its citizens by protecting fundamental liberties such as property is unparalleled around the world. An immigrant seeking permanent residency status in the United States generally looks to one or more of three general categories: employmentbased U.S. immigration, family-based U.S. immigration, and diversity immigration lottery. 24 This discussion will focus on employment-based U.S. immigration categories. Employment-based immigration is aptly named because it seeks to allow immigrants to obtain permanent residence in the United States based on their ability to contribute to the national economy. Employment-based immigration consists of five preferential categories: priority workers, professionals holding advanced degrees, skilled workers, other special immigrants, and immigrant investors. A. Fifth Employment-Based Preference (EB-5) Congress enacted the Fifth Employment-Based Preference program in 1990 to help stimulate the economy through the promulgation of job crea- 23. 26 U.S.C. 45D(g)(3) (recapture event). 24. The family-based immigration route may be an attractive vehicle for immediate relatives of U.S. citizens to seek permanent residency in the United States. However, this hinges on (1) their being a U.S. citizen and (2) the relative who is seeking permanent residency status being an immediate relative of the U.S. citizen. Evidently, family-based immigration may only be possible for those immigrants who are immediate relatives of an American citizen. Another category, the diversity visa lottery program, offers applicants who meet strict but simple eligibility requirements the ability to obtain permanent residency status, provided they are selected by a computer-generated lottery. For obvious reasons, the lottery may be unattractive.

New Markets Tax Credits and EB-5 257 tion and capital investment by foreign immigrant investors. Title 8 U.S.C. 1153 controls the immigrant employment visa program. 25 This program imposes several requirements upon the immigrant investor, such as job creation and an at risk investment into the U.S. market. This is one of the most complex areas of immigration law and warrants a close examination. 1. Job Creation Requirement An immigrant investor seeking the EB-5 investor status must create or preserve at least ten full-time jobs for qualifying U.S. workers within two years of the immigrant s admission to the United States as a conditional permanent resident. There are three requirements pursuant to this rule. First, in the case of job preservation, the job must be in a troubled business. Second, the job must be preserved or created in favor of a qualified employee. Third, the job created or preserved must be full time. The immigrant investor must create or preserve at least one job. Any job preserved must be in a troubled business. A troubled business is a firm that has been in existence for at least two years and has acquired a net loss during the twelve- or twenty-four-month period prior to the priority date on the immigrant investor s Form I-526. 26 Therefore an immigrant investor will not be deemed to have preserved a job when the business is thriving that is, not operating at a net loss even though the employee may lose his or her job without the investment. The immigrant investor must create or preserve a job for a qualified U.S. employee. 27 This requirement is designed to make these jobs available for U.S. citizens, permanent residents, or other immigrants authorized to work in the United States. The jobs created do not include those jobs created in favor of the immigrant investor or his or her spouse, sons, or daughters. Furthermore, this does not include any individual who is not authorized to work in the United States. To meet the visa threshold, the immigrant investor must create or preserve at least ten full-time jobs for qualified U.S. employees. Full-time is determined by how many hours that employee works in a week. To be qualified as a full-time position, the position must require a minimum of thirty-five working hours a week. 2. Capital Investment Requirement The immigrant investor must make a capital investment into the U.S. market. The capital investment must be at least $1 million, or $500,000 in rural or targeted employment areas (TEAs). The immigrant investor 25. INA: Act 203 Allocation of Immigrant Visas, USCIS.GOV, http://www.uscis. gov/ilink/docview/slb/html/slb/0-0-0-1/0-0-0-29/0-0-0-1059.html (last visited May 13, 2012). 26. 8 U.S.C. 204.6(e) (troubled business). 27. 8 U.S.C. 204.6(e) (qualifying employee).

258 Journal of Affordable Housing Volume 21, Number 2 cannot use investment capital that is borrowed unless it is secured by the immigrant investor s own foreign assets as collateral. Furthermore, the immigrant investor must make an at risk investment. The immigrant investor must make a capital investment into the U.S. market. Capital is any cash, equipment, inventory, or other tangible property; cash equivalents; and indebtedness secured by assets owned by the alien immigrant investor. 28 For the case of indebtedness, the immigrant investor must be personally and primarily liable and any of the assets acquired are not used to secure the indebtedness. All capital is to be determined by the fair market value of the U.S. dollar. Any assets acquired by unlawful means shall not be considered capital for the purpose of 203(b)(5) of the Act. The immigrant investor may elect to make a capital investment of $500,000 in a rural area or TEA. There are 10,000 visas allotted to the EB-5 designation each year; of those 10,000 at least 3,000 visas must be allocated toward immigrant investors who will make an investment in a TEA. A TEA is a rural area or an area experiencing unemployment of at least 150 percent of the national average rate. 29 A rural area is any area determined by the decennial census to be outside the metropolitan statistical area or outside the boundary of any city or town having a population of 20,000 or more. 30 The immigrant investor must make an at risk investment. 31 This requirement has been set so that the immigrant investor actually does make an investment into the U.S. market. Therefore, any evidence indicating mere intent or prospective investment arrangements that do not evidence a present commitment will not suffice to fulfill the at risk requirement. The types of evidence that will be sufficient include (1) bank statement(s) indicating the amount(s) deposited in U.S. business account(s) for the enterprise; 32 (2) invoices, sales receipts, and purchase contracts of assets that have been purchased for use in the U.S. enterprise; 33 (3) USCIS entry documents, bills of lading, and transit insurance policies of property transferred from abroad for use by the U.S. business; 34 (4) any evidence of monies transferred or committed to be transferred to the new commercial enterprise in exchange for shares of stock; 35 or (5) any loan or mortgage agreement, promissory note, or security agreement for which the immigrant investor is personally and primarily liable. 36 28. 9 FAM 42.32(e) N3.1 (definition of capital ). 29. 9 FAM 42.32(e) N5.1 (definition of Targeted Employment Area ). 30. Id. N5.2 (definition of Rural Area ). 31. 8 C.F.R. 204.6(j)(2). 32. Id. 204.6(j)(2)(i). 33. Id. 204.6(j)(2)(ii). 34. Id. 204.6(j)(2)(iii). 35. Id. 204.6(j)(2)(iv). 36. Id. 204.6(j)(2)(v).

New Markets Tax Credits and EB-5 259 3. Regional Centers While the EB-5 program has been very successful at attracting foreign investment into the U.S. market, investors have remained wary of making these investments due to the job creation requirement imposed by this code. The wariness is caused by the liability issues that are associated with any employment creation. In October 1992, Congress sought to alleviate this deterrent by implementing a program that would allow immigrant investors to create jobs directly or indirectly through the use of regional centers. 37 There are at least 3,000 immigrant visas annually set aside for immigrant investors who make qualifying investments in a commercial enterprise located in regional centers in the United States. 38 The regional center program has been a huge success. 39 A regional center is any economic entity public or private that promotes the economic growth, improves regional productivity and job creation, and increases domestic capital investment. 40 Regional centers generally operate with the similar structure of a mutual fund. The regional center must make the investment in a business located in the rural area or TEA. The immigrant investor must find a regional center. The immigrant investor will enter into a subscription agreement with the regional center. The immigrant investor s capital will be placed into an escrow account, pending I-526 approval. The immigrant investor will then need to obtain the I-526 Conditional Permanent Resident classification from USCIS. The immigrant investor will then release the capital investment into the regional center. The regional center must then appropriately invest the capital provided by the immigrant investor into the TEA or rural area in order to satisfy the job creation and investment requirement on behalf of the immigrant investor. Regional centers allow the immigrant investor to qualify for the indirect creation of ten full-time jobs without inheriting any of the associated liability. The regional center will still be required to satisfy the job creation requirement from the capital invested on behalf of the immigrant investor. The regional center will be able to satisfy the job creation requirement with a showing of reasonable methodologies. 41 37. Regional centers allow the immigrant investor to assume less liability as regional centers have targeted plans to create jobs and help rejuvenate a targeted community. A regional center s plan is designed to mitigate the risk so that the immigrant investor is able to fulfill its EB-5 requirements. 38. 8 C.F.R. 1153(b)(5). 39. According to the Association to Invest in USA, regional centers have invested over $3.1 billion of foreign capital in the U.S. economy, creating over 65,000 jobs for American workers without any costs to American taxpayers. ASS N TO INVEST IN USA, https://iiusa.org/ (last visited June 11, 2012). 40. 8 C.F.R. 204.6(e) (definition of Regional Center ). 41. Id. 204.6(j)(4)(iii).

260 Journal of Affordable Housing Volume 21, Number 2 Reasonable methodologies include using multiplier tables, feasibility studies, analyses of foreign and domestic markets for goods or services exported, or other economically or statistically valid forecasting devices that indicate the likelihood that the business will result in increased employment. Immigrant investors are not limited to the investment made by the regional center but can also show, using reasonable methodologies, that jobs were indirectly created by the investment from the regional center into the business. The regional center will obtain its designation as a regional center after it submits a detailed application to the USCIS. The application must include (1) the type of businesses that will receive capital from the immigrant investors; (2) the jobs that will be created directly or indirectly from the investment of capital; and (3) any other positive impacts that will result from the investment of the capital. If USCIS approves the application submitted, then when the immigrant investor invests through the regional center, the reasonable methodologies element has been met since the regional center has already submitted the types of jobs that will be generated from such investment. Essentially, the regional center allows the immigrant investor to make a capital investment into the regional center that will then make a direct or indirect investment into a qualifying business in a TEA or rural area; the immigrant investor can then use any of the reasonable methodologies to prove that it has complied with the job creation requirement. 4. Procedural Requirements The immigrant investor will usually follow this procedure. After due diligence in selecting an appropriate regional center, the immigrant investor will sign a subscription agreement with a regional center. The immigrant investor will then release the US$500,000 42 in escrow 43 to the regional center. 44 The immigrant may then obtain approval from USCIS for the status of immigrant investor under 203(b)(5) by filing Form I-526, the Immigrant Petition by Alien Entrepreneur. 45 This form must be filed with supporting documents that demonstrate that the immigrant s investment meets the requirements of the Code, be accompanied by the filing fee, 42. This amount is contingent on where the capital will be allocated. If the capital will be allocated to any area other than a TEA or rural area, then the amount to be placed in escrow may be $1 million. 43. The funds must be held in escrow for I-526 approval. If USCIS denies the I-526 application, the funds are released back to the immigrant investor. 44. It is worth noting the location of the immigrant investor at this point. Pursuant to securities law, if the immigrant investor is located within the United States, then he must be classified as an accredited investor to be eligible for this private placement. 45. 8 C.F.R. 204.6(a).

New Markets Tax Credits and EB-5 261 and be signed by the immigrant/petitioner. 46 The date upon which the form has been properly filed is the priority date. 47 Once the I-526 has been approved, the immigrant investor may apply for status as a conditional permanent resident. Upon approval as a conditional permanent resident, the immigrant investor has two years to comply with the investment requirements. The immigrant investor must file Form I-485, the Application to Register Permanent Residence or Adjust Status. Finally, to become a lawful permanent resident, the immigrant investor must file Form I-829, the Petition by Entrepreneur to Remove Conditions. This form must be filed ninety days before the second anniversary of the immigrant investor s admission to the United States as a conditional resident. Finally, depending on the terms of the subscription agreement between the immigrant investor and the regional center, the immigrant investor will usually receive his/her principal plus any interest. The earliest the immigrant investor may realize his capital returned is when the conditions to his permanent residency status have been removed. However, many regional centers require a term of five years. The most recent affirmation of using EB-5 funding to help fund a large project is evidenced by the Flats East Bank project located in the City of Cleveland. This project acquired $20 million in EB-5 funding from the Cleveland International Fund. 48 This $500 49 million project will create 540 new jobs and expects to retain at least 1,080 existing jobs. 50 Phase I of this project broke ground in December 2010. 51 B. Integration: EB-5 and NMTCs NMTCs and EB-5 are two public initiatives designed to import capital into targeted geographic areas that have the strongest need for rejuvenation. The EB-5 program encourages immigrant investors to provide capital to rural areas or TEAs, whereas the NMTC program provides tax credits to those initiatives that are situated in LICs. Even if the geographic area does not qualify as an LIC, the NMTC program is flexible in allowing areas to qualify if that area meets at least two of fourteen factors making that area a distressed area. 52 The basic transaction may occur in one of two ways. It depends on whether the NMTC transaction is a leveraged or nonleveraged transaction. In the leveraged transaction, the regional center may play the role of 46. Id. 47. 8 U.S.C. 204.6(d). 48. DEV. PLANNING &FIN. GRP., supra note 22. 49. Id. 50. DEP T OF ECON. DEV., CITY OF CLEVELAND, MAJOR PROJECT REPORT 12 (2011). 51. The first phase will include an 18-story office tower, a 150-room high-tech A Loft boutique hotel, a 16,000 square foot health club, and a 1,200 foot riverfront boardwalk. DEV. PLANNING &FIN. GRP., supra note 22, at 13. 52. Id. at 12.

262 Journal of Affordable Housing Volume 21, Number 2 the leveraged lender. The leveraged lender bears the project credit risks but gets 100% of the cash flow. The leveraged lender receives no allocation of tax credits or tax savings. The immigrant investor will contact the regional center and begin the process to make the $500,000 capital investment. The regional center will then take the investment capital and make a loan to the investment fund. The investment fund will then make a QEI into a qualified CDE. The qualified CDE will then make a QLICI into the community through a QALICB. The immigrant investor will be able to prove that he/she has complied with the requirements of the Code by showing through reasonable methodologies that the loan made would produce ten permanent full-time jobs within the community. Given that the NMTC program develops projects in the community that exist for creating jobs, proving job creation will not be difficult. The NMTC investor will receive his/her tax credits annually provided no recapture event should occur. The end result will be that the tax credit investor will earn tax credits, the immigrant investor will earn permanent residency status in the United States, and the U.S. economy has rejuvenated an LIC. The most recent success story of this combination may be seen with the proposed downtown Marriott hotel in Milwaukee in September 2011. The financing for this project was provided through FirstPathway Partners, a Milwaukee regional center, 53 and the Wisconsin Community Development Legacy Fund (WCDLF) new markets tax credits CDE. 54 WCDLF is a partnership between Legacy Bank and the Wisconsin Housing and Economic Development Authority that has been allocated over $400 million in NMTCs since 2003. 55 This nine-story hotel is expected to create 230 56 jobs and revitalize the surrounding area. C. Need for an Integrated NMTC and EB-5 Model The integration of EB-5 capital into NMTC transactions is a very new model. There are four prevailing reasons for integrating the EB-5 and NMTC programs. First, the integration of these programs offers a greater degree of certainty to the parties that the program requirements will be satisfied. Second, the integration of these programs should lower transaction costs. Third, the investors will be exposed to a lesser degree of risk on their returns. Finally, EB-5 capital provides funding and incentives directly to developers to target and develop those rural or low-income areas. 53. Marriott Hotel Developers Close on Property, BIZTIMES (Sept. 1, 2011), http:// www.biztimes.com/daily/2011/9/1/marriott-hotel-developers-close-on-property. 54. Waveland Community Development, WAVELAND VENTURES, http://www.wave landventures.com/newmarkettaxcredit.php (last visited June 11, 2012). 55. Id. 56. Id.

New Markets Tax Credits and EB-5 263 Through an integrated model, the EB-5 immigrant investor may realize a greater degree of certainty that the EB-5 requirements will be fulfilled. In this model, the regional center will be investing in a qualified CDE/ allocatee. Therefore, the capital invested by the immigrant investor will indirectly be used to create jobs and invest in a rural area. 57 When the immigrant investor is reviewing the prospectus offered by the regional center, the investor should be reassured that the regional center will be investing in a CDE/allocatee (through the investment fund). Given the contractual structure already in place through the NMTC transaction, the immigrant investor may be reassured that the risk in the investment has been allocated so that the risk is mitigated. From a transactional viewpoint, oversight is a cost that is built in to any regional center due to the need for the regional center to find and vet those businesses to ensure that they comply with EB-5 requirements. Through the use of NMTC existing structures where a CDE/allocatee has been established, the regional center may invest in the CDE. The only other task left for the regional center in ways of compliance and oversight is to ensure that the CDE/allocatee is investing in a geographic area that meets the EB-5 area requirements. This reduction in oversight may decrease the costs of regional centers. Why does the EB-5 immigrant investor need to use the NMTC program? The reason is simply put: because of risk. NMTC projects seldom go to foreclosure and have a high success rate of repayment. Furthermore, the EB-5 investor is conferred the benefit of making an at risk loan when engaging in the NMTC program. The NMTC program is perhaps the most risk-averse way to satisfy the at risk requirement that an immigrant investor must perform. Finally, finding funding for a project is not easy for developers, especially as the American economy has been faced with a recession unseen since the Great Depression. The EB-5 program is obtaining capital from those immigrant investors who have the primary goal of seeking American permanent residency. The NMTC structure seeks capital to finance those projects that are in low-income areas. This model integrates the supply of capital from the EB-5 program with the demand for capital from NMTC developers. D. Potential Challenges While this integrated model is ripe for targeted capital injections into low-income areas in the United States, it is not without latent issues. The complexity of this integrated model cannot be overemphasized. Essentially, these are two of the most complex areas of real estate and 57. The immigrant investor need only ensure that the regional center is investing in those geographic areas required by the EB-5 program.

264 Journal of Affordable Housing Volume 21, Number 2 immigration law aptly fit into one structure. Therefore, this model is not without latent issues. First, the immigrant investor would have to be willing to have its capital tied up for a longer time than required by the EB-5 program. Generally, the EB-5 program requires approximately three years to complete, that is, before the conditions are removed. However, most regional centers tie up the immigrant investor s capital for five to six years. 58 The NMTC transaction takes seven years through to completion. As previously stated, through a coordinated effort, the integrated EB-5 and NMTC transaction may yield decreased transactional costs for the immigrant investor, thus encouraging the immigrant investor into this investment. The second issue involves the effect a recapture event on the NMTC side of transaction would have on the EB-5 side. There are many variables that must be considered. For example, in the event that the geographic area being invested in is no longer classified as an LIC or rural area for NMTC purposes, yet remains a rural area or TEA for EB-5 purposes, would this event trigger a recapture, and, if so, what would be the effect on the immigrant investor s ability to fulfill the EB-5 job creation requirement? These concerns will require careful consideration when selecting a geographic area and selecting a CDE/allocatee. These are merely two issues that have been presented along with two very broad solutions. While there are many other issues that may result from this complex transaction, they may be circumvented through careful and strategic coordination between the regional center and the CDE/ allocatee. While this is a complex transaction, the benefits of this integrated model exceed these issues. IV. Conclusion With a possible double dip looming on the markets, the raising of the debt ceiling, and the downgrade of the American credit from AAA to AA+ according to Moody s, the United States is in dire need of transactions such as this to stimulate those areas hardest hit by the recession. The law has generally earned a reputation as being merely a hindrance to financial transactions. The aforementioned transaction goes against that grain. The use of the NMTC program with the EB-5 program to form one transaction that will attract foreign direct investment is exactly the type of legal transactional work that needs to be exhibited. The NMTC and EB-5 integrated transaction is a very practical solution to the current market debacle. 58. EB-5 Investment Visa for US Green Cards (Permanent Residence) by Immigrant Investment into the Most Popular Government-Approved EB5 Regional Center, AM. LIFE INC., http://www.eb5-visa.net/ (last visited June 11, 2012).