Sep 18, 2015
EB-5 TEA’s: A policy Perspective

Targeted Employment Areas – TEAs – were supposed to be about bringing desperately needed investment capital into economically distressed areas. The thesis goes, create employers in those areas and the jobs are likely to go to those who live there. The current EB-5 program抯 treatment of TEAs, in all but a minority of cases, does anything but that. The current rules allow the combination (gerrymandering) of affluent and distressed areas to create a larger area that satisfies, on average, the TEA unemployment rate requirements. Because of this, as pointed out in the recent Wall Street Journal article, the program抯 capital flows in increasing volumes to high profile construction projects in affluent neighborhoods, such as Hudson Yards on Manhattan’s West Side. The clever counter-argument admits that the neighborhoods benefiting from the EB-5 capital development doesn’t need the money, but that it’s ok, because the people who work in these projects come from the economically distressed areas that we wanted to help in the first place. Ron Klasko published a solution premised on this logic that would allow already accepted “area of intended employment’ to serve as the basis for determining the geographical boundaries of a TEA. (http://discuss.ilw.com/content.php?5030-Article-Some-Ideas-for-Resolving-the-Controversial-Issues-in-the-EB-5-Legislation-By-H-Ronald-Klasko)

But what about the economically distressed neighborhoods? So the workers who travel from them get the jobs in the affluent areas. Under a trickle down (or maybe trickle across) theory of econometrics, these households then spend more money in their downtrodden areas, which is enough to help revitalize the depressed areas. Maybe. Or maybe the workers pick up and leave as soon as they can afford it. Assuming they have enough disposable income (to matter) from their new jobs (assuming the salaries were above subsistence wages), that seems just as likely a result as the trickle-across econometrics. In the end, the distressed neighborhoods stay, well, distressed. Even worse, the most employable of the population demographic have left.

From a policy perspective that result leaves a somewhat unsatisfied feeling. The goal of the TEAs was to bring investment capital into the areas of high unemployment and rural areas to spur the development of those areas. That development would then lead to jobs in those areas, which could even lead to a re-population of those areas by increasingly higher earning cohorts, thus restoring the tax base and supporting the local businesses that exist in those areas and the new ones that might be created to support the upswing. It is the virtuous circle argument that was the focus of an EB-5 policy forum organized by ICIC.org, the leading foundation working on the redevelopment of inner cities (www.icic.org) at Harvard University’s Kennedy School of Government. See their white paper, Increasing Economic Opportunity In Distressed Urban Communities With EB-5 available at the following link: (http://www.icic.org/ee_uploads/publications/ICIC_EB5Impact_Report.pdf)

Labor will always be mobile, but anchoring capital to an area holds the real promise of structural revitalization. The policy to help the area, as originally intended, is sound and the current practice of gerrymandering has completely subverted that policy. Recognizing a static snapshot of commuter patterns as the justification for the gerrymandering leaves things no better off. Maybe it is time to recognize the problem for what it is and not kick the legislative can down the road any longer. If congress wants to create another program to support unemployed (or under-paid or under-employed) workers, then what Mr. Klasko proposes may be a sound proposal, at least in the short term. But if the point is to revitalize the areas, to use the precious foreign direct investment (EB-5 Capital) to help rebuild the downtrodden forgotten and ignored areas of this country and usher in true long term structural improvement, then it will not. Maybe it is time that investors who want to invest in high income areas simply have to pony up a greater investment amount as was always intended by Congress from the get-go. The point of the EB-5 program is not to ensure the supply of development capital for Class A real estate development projects in prime neighborhoods. It is to provide the most bang for the buck for the American people. With respect to TEAs, it was to provide an incentive to invest in the areas that need it the most.

Reprinted with permission.
Originally posted at: ILW.COM EB-5 Blog

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