Changes on the Horizon: The TEA Overhaul That Almost Happened, Part 3

 Today we conclude our deep look into the TEA Overhaul proposed in Discussion Draft MDM15J40, as introduced in Part 1 here. In Part 2, we discussed three of the five new types of Targeted Employment Areas (TEAs): Military Base Areas, Rural Areas, and Non-Urban Special Areas. Here, in Part 3, we discuss the remaining two types of TEAs: Priority Urban Investment Areas and Special Investment Zones.

There is a flowchart for the proposed TEA reforms to help navigate the complex web of these new definitions (and you can also consult our flowchart for TEAs under current practice).

As in Part 2, this post describes the proposed legislation as if it has passed – however, MDM15J40 did not pass into law, and therefore all changes in this article are hypothetical. As we think it’s likely that the final TEA reform will be influenced by the legislation in MDM15J40, though, it is worth deciphering this proposed bill to understand its possible influence on the future and true legislation.

TEA Overhaul for MSAs and Other Locations

Previously, we discussed TEA types for projects that are not located within a Metropolitan Statistical Area (MSA). There are two more types of TEAs, though – one for projects specifically in MSAs and one that can be used for MSA-based projects or non-MSA-based projects. The criteria for these TEA types are based on unemployment, poverty, and/or income levels.

Priority Urban Investment Area (PUI) (New)
The Priority Urban Investment Area (PUI) is a new TEA type and is designed specifically for projects within MSAs. At its most basic, a project’s location can qualify as a PUI if it meets one or more of the following requirements:

  1. an unemployment rate that is at least 150% of the national average;
  2. a poverty rate that is at least 20%; or
  3. a low median family income, defined as 80% of either the statewide median family income or the MSA median family income, whichever is greater.

The PUI can be built out of one or more census tracts, and each of the census tracts must be within the MSA.

Unfortunately, the nitty gritty details of the legislation regarding the PUI are very confusing, to say the least.

The first problem is that the definition of the geographic area of the PUI ultimately does not make sense. The definition states that a PUI can consist of “one or more census tracts” – so it is clear that a PUI is built on census tracts. Furthermore, the definition makes it clear that a PUI can technically be created by combining census tracts.

However, the language also says that “each” of those census tracts must meet the stated criteria – which means that combining census tracts is ultimately pointless. Why bother to connect the project’s census tract to another one, when the Project’s census tract must already meet the criteria?

The specific definition of Criteria I (the unemployment criteria) offers a possible loophole to the combination dilemma. For a project location to qualify in terms of unemployment, the definition reads as follows:

“..an area consisting of a census tract or tracts…each of which has an unemployment rate that is at least 150 percent of the national average unemployment rate, which may also include a census tract bordering the tract with the requisite unemployment rate”

Hence, it appears that a PUI can be created by combining a census tract that has the requisite unemployment rate with one other census tract that shares a border. This interpretation would allow a project that is located in a census tract without the requisite unemployment rate to qualify as a PUI if a bordering census tract does meet the 150% unemployment rate criteria. However, it appears that the PUI would be limited to two census tracts.

Notably, it is possible that the intention behind the definition is actually to allow the employment/unemployment of both census tracts to be combined, and that the combined unemployment rate of the two together must meet the requisite unemployment rate (similar to the previous High Unemployment Area definition). Clarification on this issue will hopefully be resolved either by revised legislation and/or by USCIS at some point.

The second problem is that the current language in the legislation is unclear as to exactly how many criteria must be met. Either of the following two interpretations could be correct:

  1. the census tract(s) must meet only one of the three criteria, or
  2. the census tract(s) must meet both Criteria #1 and at least one of the other two.

As shown in the flowchart for the proposed TEA reforms, my personal interpretation is option (a) – that the location must meet only one of the three – based on the following observations:

  1. Basic grammar rules: The bill does not have an “or” between Criteria I and II and does have an “or” between Criteria II and III, indicating that one of any of the three options is sufficient.
  2. The numeration of the criteria list: Each criterion has its own roman numeral, as opposed to sublevels under a roman numeral, such as being written as (I) unemployment rate and (II) (aa) poverty rate or (bb) median income requirement instead (as in the definition of the Rural area).

However, obviously we will have to wait and see to be sure. Again, hopefully clarification will be provided by revised legislation and/or USCIS guidance.

Special Investment Zone (Revised)
Finally, the last TEA option does not require any criteria related to urban or rural location. It is essentially a revision of the previous High Unemployment TEA definition and relies solely on unemployment rates – except for some new, stringent criteria regarding physical characteristics of census tracts included in the area.

A Special Investment Zone is an area, which can consist of a county, a city, or a group of census tracts, that has an unemployment rate that is at least 150% of the national average. If the Special Investment zone is made of census tracts, then they must all be contiguous, there cannot be more than 12, and the combined area must meet some physical characteristics requirements.

At the easiest level, if a county or a city has, in its entirety, an unemployment rate that is at least as high as the required rate, then that county or city qualifies as a Special Investment Zone.

However, as EB-5 stakeholders know, TEAs are most often created by combing census tracts. The average unemployment rate of these combined tracts must meet the unemployment rate criteria. Again, they must be contiguous, and the area cannot exceed a total of 12 census tracts.

There are some new limitations applied to this relatively simple definition, which now requires that the area of combined census tracts must meet certain physical characteristics. This additional level of criteria is designed to limit the inclusion of areas that are potentially unrelated to the workforce, such as census tracts covering bodies of water, parks, airports, industrial zones, etc… Let’s call these “nonresidential tracts.” [1]

Fortunately, the characteristics do not apply to the project’s census tract, so a project can still locate in a “nonresidential tract” – for example, a project can locate in the same census tract as an airport, as long as the rest of the tracts in the area meet the criteria.

So, what are these specific criteria? There are just two, and the area (that is, all census tracts except for the project’s census tract) must meet both of them. The following table outlines the criteria and gives an example for each.

Table 1: Special Investment Zone Physical Characteristics Criteria
Criteria Example
(1) the area cannot include a “nonresidential tract” that is completely unrelated to economic activity – e.g., a census tract covering a public park, public forest, or large body of water; Census Tract 143 in New York, covering Central Park, cannot be included in the grouping of tracts, as this is a “nonresidential tract” that is a public park. (Note, however, that a project could still technically locate in Central Park, as the criteria only applies to the tracts combined with the project’s tract.)
(2) the area cannot include more than one “nonresidential tract” that is related to economic activity – e.g., a census tract containing primarily business, industrial, or other commercial uses. A “nonresidential tract” in the Brooklyn Navy Yard can be included in the grouping of tracts, as it is a census tract primarily dedicated to industrial and/or commercial uses.

While the language seems pretty clear, it is ultimately fairly limited and will not address the realities of TEA creation.

The language in the legislation says only “little to no residential population” when defining the special, “nonresidential tracts,” so we will need to know if there is a specific population threshold. For example, if a census tract has a total labor force of 1,400, will it be considered a “nonresidential tract”? What about a labor force of 990?

The current definition also does not provide an answer for when a “nonresidential tract” is both related to economic activity and covers a non-economic space such as a park.

Census Tract 426, Queens County
Census Tract 426, Queens County, NY
impactdatasource.com/map

To illustrate, let’s look at Census Tract 426 in Queens County, New York, shown to the right. Census Tract 426 contains a labor force of 6 and is therefore subject to the special characteristics rules listed above. Census Tract 426 is physically comprised of Roy Wilkins Park and St. Albans Community Living Center, possibly along with some other small businesses as well.

If Census Tract 426 is considered a park, then it cannot be included at all in a grouping of tracts to form a Special Investment Zone; but if it is considered to contain primarily commercial uses, then it can be included. The current language does not provide insight into how this type of sort of issue would be judged by USCIS.

Hopefully, some clarification will eventually be issued that addresses these concerns.

The Shape of TEAs to Come

If MDM15J40 had passed in December, then these five areas would be the new TEAs for EB-5 projects. Additionally, there would probably be quite a bit of confusion on some of them, and it would likely take some time for USCIS to clarify all of the details. Hopefully, some of these concerns can be addressed in the next iteration of this bill.

That said, we have not heard much discussion of this bill since December – and two days after Congress passed the omnibus that extended EB-5 without changes for another nine months, a new bill was proposed by Senators Flake, Cornyn, and Schumer. The EB-5 Integrity Act of 2015 does not introduce any changes to TEA definitions – but we think it is unlikely that any final law would actually exclude TEA reform. It is likely that the final legislation, whenever it is passed, will include TEA reforms similar to the definitions discussed in these two blog posts. Of course, only the time will tell – but it is good to be prepared.

 


[1] The language in the legislation defines this type of area as “an area with special characteristics and little or no residential population.”

 

Banner Photo Credit: FreeImages.com/Irum Shahid