You Can't Always Get What You Want: The AAO and Material Change
"But if you try sometimes, you just might find…" you get the appropriate result. While the Rolling Stones may not appreciate the alteration of their song lyrics in this manner, the underlying point deserves appreciation by EB-5 practitioners and Regional Center operators. Consider the vexing issue of "material change" which has riled the EB-5 community since the AAO issued its April 23, 2010 decision in Matter of WAC-09-039-51806. The procedural history goes something like this.
On May 27, 2005, the ultimately unfortunate petitioner filed an I-526 petition on the basis of a $500,000 investment into a Tommy D's, a home improvement chain[i]. The investment was to fund the purchase and renovation of a Tommy D's warehouse through a loan made by a partnership entity in which the investor was a limited partner.[ii] The investor's I-526 petition was approved, and conditional permanent residence was subsequently obtained.
Unfortunately, Tommy D's failed to generate sufficient jobs necessary for its EB-5 investors to meet their job creation requirements.[iii]Failure of Tommy D's to create sufficient jobs triggered a default clause in the loan agreement between the Limited Partnership and Tommy D's, requiring Tommy D's to repay the EB-5 investor's loan funds.[iv] After the default clause was triggered, the partnership decided to make an alternative investment in a Butcher & Singer restaurant located in Philadelphia. However, Tommy D's did not immediately repay the loan funds to the partnership, and instead planned to do so over the course of several years.[vi]
So how would the partnership effectuate its investment into Butcher & Singer if Tommy D's had not returned the investor's principal? Would the investor's be required to contribute additional capital to the partnership? No. Instead, the Regional Center operator (Philadelphia Industrial Development Corporation), not the partnership or the investors, made a $1.5 million bridge loan to the new project on September 10, 2008.[vii] Further complicating this issue was the fact that no explanation was provided explaining where the $1.5 million loan funds originated. With the source of these funds unclear, the AAO properly raised the issue of which investors should be allowed to take credit for any subsequent job creation by Butcher & Singer.[viii]
Unimpressed, USCIS denied the investor's I-829 petition on August 3, 2009, finding that the petitioner had impermissibly changed the EB-5 investment in a material manner. USCIS further found that the PIDC loan to Butcher & Singer and the failure of Tommy D's to fully repay the loan made it difficult to link the investors with subsequent job creation, and also noted the dearth of evidence indicating that the Butcher & Singer site was located within a Targeted Employment Area ("TEA"). [ix]
Procedurally, I-829 denials cannot be appealed per 8 C.F.R. § 216.6(d)(2). However, USCIS opted to send the Tommy D's decision to AAO for certification per 8 C.F.R. §103.4(a)(4) and (5), which allows USCIS to forward certain matters to the AAO for which there is no appeal procedure.
The AAO concurred that shifting from Tommy D's to Butcher & Singer was a material change to the investor's I-526 petition. The AAO also found that the investment could not be made in a Regional Center project that had not been previously reviewed by USCIS, and that the project did not properly implement its business plan.[x] As a side issue, the AAO noted that the submitted TEA evidence was for an address different than the actual Butcher & Singer location.[xi] Since it emerged that the Butcher & Singer location was not within a TEA, each investor, assuming all other requirements were met, would need to invest $1,000,000 into the project.
Regardless of the merits of the material change 'doctrine', the time has come to accept the Tommy D's decision is settled law. Consequently, Regional Center operators should utilize the I-924 amendment process (hardly ideal, given the outrageous $6,230 required filing fee and the more slothfully-than-promised "pace" of adjudication by USCIS) to gain review and approval of new projects (Butcher & Singer) and whenever changes to existing projects (Tommy D's) may trigger a subsequent finding of material change. This requires some advance planning and honest advice, otherwise the investor and Regional Center open themselves up to the impression they are engaging in bait and switch tactics. The integrity of the Regional Center program is not strengthened by such impressions.
It is difficult to understand why this issue has generated so much controversy. Critics of the AAO cite no credible provision of law to support their position,[xii] relying on seemingly commonsense business arguments along the lines of "it makes sense to abandon failed businesses and reinvest in more promising businesses." While such sentiments are perfectly reasonable in the real world, EB-5 practice is not the real world, but instead exists in a parallel "Alice in Wonderland" universe. EB-5 practitioners should instead concentrate on helping clients avoid falling into the material change trap, instead of trying to devise ways to obfuscate material change situations. Fighting the futile counteroffensive against the "material change" doctrine will not prove successful.
USCIS and the AAO are not stating that an EB-5 investor cannot change course if economic or business reasons otherwise justify a switch. Rather, the EB-5 investor must notify USCIS of a change in their investment through the submission of a new I-526 petition. While filing a new I-526 petition is unedifying for many different reasons (potential impact on the investor's conditional permanent residence, potential for denial of the new I-526 petition, the paying of a second round of hefty USCIS filing fees, not to mention the pure wastage of time in navigating the I-526 process a second time), this USCIS requirement is perfecting reasonable.
For USCIS and/or the AAO to permit Regional Center operators or EB-5 investors to engage in the material change activities described in Tommy D's is to encourage chaos and open the door to a never-ending series of questionable business practices, fraud, and misrepresentation. The I-526 and I-829 processes would become meaningless exercises, as investors and Regional Centers could just chop and change their investment and Regional Center charters at will. If investors could hop around from project to project with no oversight, the prospect for fraud and abuse are just too tempting. The entire EB-5 process, despite all its faults and contradictions, would collapse under its own weight.
EB-5 practice is largely unsettled given how USCIS mismanages the program, seems unsure of how to administer the program, and frequently changes interpretations of basic program principles. Anybody who listened to the USCIS EB-5 Stakeholders call on June 30, 2011 will be struck about how unsure the USCIS seemed in answering basic questions. Whenever the questioning was deemed too difficult, further inquiry was slammed down under the frequently dubious excuse that the questioner was asking a "case specific question" or "was trying to present a convoluted scenario," presumably to "trick" USCIS into providing a favorable answer to some crazy underlying scheme. Anyone who systematically reviews the notes of past EB-5 stakeholder meeting will note that USCIS answers to same or similar questions often change over time. Therefore, it's no wonder that the EB-5 practitioner or Regional Center operator (new or experienced) is often unsure what is and is not permissible on any given day. Nevertheless, the AAO has spoken on material change, so it's time to move on.
Brandon Meyer is Principal of Meyer Law Group, which has offices in Stamford, CT and Solana Beach, CA. This article is drawn from "Bad Cases Make Bad Law: The AAO and EB-5," published in the June 2011 issue of Immigration Briefings.
The opinions expressed in this article do not necessarily reflect the opinion of ILW.COM.