New EB-5 Rules Make Gerrymandering More Difficult, Not Impossible

By David North on July 26, 2019

The new regulations for the immigrant investor (EB-5) program make the economic gerrymandering of its past more difficult, but not impossible. They will tend to move at least some projects out of glitzy downtown areas of big cities and into less urban settings.

Historical Perspective 

But before getting into the details, let's take a step backward and think about how the U.S. government has aided depressed areas in the past, and more precisely, how it defined the areas of need.

Did FDR ask business to define the precise areas where the aid was to be spent? No, thinking big the New Deal decided, for example, that the whole Tennessee River Valley needed economic help and created the Tennessee Valley Authority, which built a massive series of dams, power stations, and canals that are useful to this day.

In order to bind the nation together more tightly, and to open rural areas to more development President Eisenhower created the network of interstate highways.

President Kennedy's Area Redevelopment Administration brought aid to government-designated counties that needed economic assistance.

Similarly, the Appalachian Regional Commission, which is still barely alive, signed into law by President Johnson in 1965, dealt with all of West Virginia, and the depressed areas of 12 other states in Appalachia, following county lines. A project had to be within the borders of Appalachia and meet other criteria.

But the EB-5 program allowed profit-making entities to define Targeted Employment Areas that consisted of strings of census tracts (with an aggregate unemployment rate 150% of the nation's average) and then gave the review of these boundaries to the states, which routinely rubber-stamped them.

Any improvement of this process—which appears to have taken place in the new regulations—is a good thing, but it is taking place within a framework where funds, raised under a federal law, are used to meet private desires, and, one hopes, stir some economic opportunity where they (the EB-5 funds) are spent. It is a far cry from the broader, more policy-centered economic development efforts of the past, and this point is rarely raised.

The New EB-5 Regs 

But within the context of current EB-5 policy, as we noted earlier, the new system of reviewing the TEAs at the federal, rather than the state level, is a thoroughly good move.

As for the definition of the TEAs, we have this from the pertinent part of the July 24 Federal Register (p. 35799):

"Specifically, DHS will allow for a high unemployment area to consist of an area comprised of the census tract(s) in which the new commercial enterprise is principally doing business, including any and all adjacent tracts, if the weighted average of the unemployment rate for all included tracts is at least 150 percent of the national average."

Playing the role of the linguistic detective, I interpret this to mean that the TEA can be the single census tract in which the money is to be invested, or the multiple tracts that can be tied directly to the investment, plus one or more adjacent tracts chosen by the developer. This gives some room for manipulation on the part of the developer, but not the unlimited room currently available.

Under the new rules, for example, one apparently could put the planed hotel in one census tract, the hotel's valet parking lot in a second tract, and the hotel's warehouse and stand-by generator, for example in a third, and then select from the bordering census tracts to create a TEA with the right level of unemployment. This is still more restrictive than the current rules.

Good News

Buried on the same page in the Federal Register, and in turgid prose, is a bit of agency analysis of how its new rules would have impacted a sampling of the EB-5 projects on the books in 2016; it seems to say that of some $13 billion in projects under way at the time more than $7 billion of them would be "potentially affected by the rule".

By this I think they mean negatively affected; and that would mean that most of the then current projects would, potentially, have been ruled ineligible.

If I am reading that correctly, that's very good news indeed.

Frankly, I think it is contrary to public policy to sell visas to anyone, and the whole EB-5 program should be terminated. But if it is going to continue, the new rules suggest that more money may actually go to more deserving areas than now, and that's a big step forward.