For EB-5 investors, job creation is the primary criteria that must be met in order to obtain a Green Card. While various types of jobs can be counted in job creation calculations, many EB-5 projects today rely on construction activity to generate the necessary 10 jobs per EB-5 investor—some projects even rely solely on construction jobs. In particular, mixed-use developments and hotels often rely heavily on construction activity for EB-5 job creation.
For today’s EB-5 practitioners, understanding how to calculate construction jobs for EB-5 projects is vital. In this article, we’ll discuss whether a project is allowed to count direct construction jobs, what types of construction expenditures can be included in job creation estimates, the importance of timing for construction jobs, and some other factors that must be considered when calculating jobs from construction spending.
Including Direct Construction Jobs
EB-5 projects sponsored by regional centers typically use economic models to estimate job creation. These economic models break jobs down into three categories: direct, indirect, and induced jobs. Direct jobs are those created by a project itself. Indirect jobs, on the other hand, are created by the economic impact of the project on the regional economy—for example, when the project purchases goods in the region and pays for local services. Induced jobs are like indirect jobs in that they are created as a result of the project but not by the project itself; unlike indirect jobs, however, induced jobs are created when employees of the project and supporting industries spend wages in the local economy.
While EB-5 projects can always include indirect and induced jobs created by construction expenditures in their job creation calculation, projects may only include direct construction jobs if the construction activities last for at least 24 months. Construction activities are typically considered to begin at ground breaking and to end when the structure is finished and is given its certificate of occupancy.
Because direct construction jobs may be included in job creation estimates only if a project’s construction continues for more than 24 months, a project’s timeline is incredibly important to the overall job creation calculation. Construction projects that last only 23 months, for example, result in far fewer EB-5 eligible jobs than those that last 24 months. In such cases, one month may mean the difference between subscribing 5 EB-5 investors and 20 EB-5 investors.
Estimating Jobs from Construction Expenditures
In addition to determining whether direct construction jobs may be included in an EB-5 job creation estimate, the project must determine which specific construction expenditures may be included when estimating economic impact.
Construction jobs are calculated using economic input-output models, such as RIMS II and IMPLAN, which use financial inputs and outputs to generate a final demand multiplier that is then used to determine job creation from spending. Generally speaking, these models produce estimates ranging from 10 and 15 jobs for every $1 million in construction spend. Of course, job creation figures are influenced by many variables, including the project’s region, the nature of the construction activities, and the types of structures being built, and so job creation estimates can vary significantly from project to project.
For EB-5 projects, not all construction expenditures may be used by the economic model to determine EB-5 eligible job creation—only certain expenses will be accepted by United States Citizenship and Immigration Services (USCIS) for EB-5 job creation purposes. As a result, it is vital to understand which expenditures qualify and which do not. Typically, determining which construction expenditures to include and exclude from a project’s economic impact analysis is the job of the economist hired to assess the project’s economic impact. Since job creation calculations are used to determine how many EB-5 investors can subscribe to a given project, an accurate economic analysis based on the right expenditures is essential to an EB-5 project’s success. Some expenses are safe to include, some are risky, and some are simply cannot be included in the economic analysis when determining EB-5 job creation.
Most of a project’s hard construction costs, such as those for materials (e.g., lumber, cement, steel, etc.) and labor, are EB-5 eligible expenditures. This includes demolition, excavation, and all site work. Many soft construction costs—such as expenditures related to design, engineering, architecture, attorney fees, and marketing—can also be used when calculating EB-5 job creation. Additionally, furniture, fixtures, and equipment (FF&E) costs can also be included.
Some expenditures carry a higher risk of being rejected by USCIS—either because they do not result in the creation of EB-5 eligible jobs or because they are difficult to prove—and as a result, great care should be exercised when using these costs as part of an EB-5 project’s job creation calculation.
These higher-risk costs include general conditions and hard cost contingency fees because such expenditures may be more difficult to prove in I-829 Petitions. Jobs calculated from insurance and financing costs are also higher risk because they tend to be incurred before construction begins—whether or not they will be allowed in the jobs calculation will depend largely on the USCIS adjudicator assigned to the case. Costs related to third-party tenant improvements also carry higher risk.
EB-5 investors’ Green Cards depend on job creation, and if expenditures are rejected by USCIS, the total number of jobs will be reduced. If the number of jobs falls below 10 per investor, one or more investors will have their I-829 Petitions denied, which means the termination of their lawful permanent resident status.
This does not, however, mean, higher-risk expenditures cannot be included in certain circumstances. EB-5 projects must determine how much risk the expenditures pose on a project-by-project basis and weigh whether the additional jobs created by such expenditures are worth the extra risk. In many cases, the jobs gained are minimal but the added risk is significant.
Permits, taxes, and other local, regional, or state fees are not eligible for inclusion as EB-5 expenditures. Also, while EB-5 capital can be used in purchasing land, land acquisition costs cannot be included in an EB-5 job creation calculation because a real estate purchase does not create any new EB-5 eligible jobs.
Job Creation Timing
For EB-5 purposes, job creation must be accomplished within a specific timeframe, and this is an important consideration when including construction jobs in an EB-5 project. Each EB-5 investment must result in the creation of 10 or more permanent, full-time jobs for U.S. workers, and these jobs should be created no later than two-and-a-half years after an investor’s I-526 approval. This means that sufficient spending must take place to create the necessary number of jobs within the necessary timeframe. Also, if operations jobs are going to be included in the job creation calculation, construction must be completed with time for those operations jobs to get started. The key is to carefully examine how many jobs a project will create, what type of jobs they are (i.e., construction vs. operational), and when these jobs will be created.
As a result of these potential issues, the use of EB-5 capital creates a somewhat narrow window for construction of no longer than about four years, which may not be well suited to some projects. For example, in order to meet its financing needs while being sensitive to the timing of job creation for EB-5 investors, a larger development with a longer construction timetable and multiple gaps in activity may need to be split into multiple EB-5 offerings that represent separate phases of job creation.
Also note that in most circumstances, construction jobs that are created by a project before EB-5 investors subscribe to that project can be credited toward those investors’ EB-5 job creation requirement. For investors, such a project would carry less or even no real immigration risk because of the number of jobs that will have already been created. For the project, having a sufficient number of jobs created before or early in the EB-5 subscription process means fewer limitations related to the project’s timeline.
In the end, the primary concern is that the EB-5 investor’s capital investment has indeed created the required 10 jobs by the time his or her I-829 Petition is adjudicated by USCIS. Since jobs are calculated based on expenditures, this means that the necessary spending has taken place.
Adjust for Inflation
Once all EB-5 eligible expenditures have been identified, the current dollar values of each cost must be either inflated or deflated to match the dollar values of the data by base year. For example, the base year for RIMS II regional data is currently 2015. As a result, the dollar values in an economic analysis would need to be adjusted to match 2015 dollars. Since a project’s initial economic analysis is actually a forward-looking assessment of future changes in final demand, the dollar values of expenditures will also need to be adjusted to match the year in which those costs will be incurred. Future dollar values should be determined using a credible inflation forecast—and at the I-829 stage, these estimated values will need to be replaced with actual values. The key is having an accurate estimate because an incorrect estimate based, for instance, on historical inflation averages (which is less reliable than credible forecasting) might result in fewer jobs being created than originally expected. Such a change in job creation could adversely affect EB-5 investors.
When preparing a job creation total from a project’s expenditures, all the foregoing considerations must be carefully observed. To summarize, direct construction jobs may only be included if construction lasts at least 24 months, certain costs carry higher risk or do not qualify as EB-5 expenditures, jobs must be created no later than about two-and-a-half years after an investor’s I-526 approval date, and all monetary figures must be properly inflated or deflated to represent the dollar values used in the economic model’s data.
The job creation figures calculated through economic modeling should be presented by the North American Industry Classification System (NAICS) code of the expenditure—and then the job creation numbers for all the NAICS categories should be totaled to give an aggregate number of created jobs. Note that these job creation figures are given as final values; they are not multiplied by project duration (i.e., job-years). The economic impact report must clearly state the total number of jobs created by the project and detail how it arrived at these values by showing each year’s inputs. Additionally, the report must delineate between the total number of jobs and those that meet the requirements of the EB-5 Program and can thus be attributed to EB-5 investors.