training for economists in the eb-5 program · training for economists in the eb-5 program . ......

TRAINING FOR ECONOMISTS IN THE EB-5 PROGRAM .

DRAFT DELIBERATIVE MATERIAL

NOT FOR DISSEMINATION

288

www.iiusa.org - via FOIA

What Economists Do

While we do not assess the reJqtive quality or risk of an investment for ' '

individual investors, we do determine:

• If a Project (investment} has a plausible and credible business plan

•. If the sponsor has complied with USC IS policy, regulations and precedent decisions

• If there is cohesion between the business plan and the economic analysis ,

• If the forecast of job creation uses a credible model or method and is based on plausible business plan projections

y---. ---~~--,--:-----~-,--. -. - ----~-~- ' ~

I While we do not judge the suitability of an investment for investors we .. 1

do examine Investor m·aterial·s (PPM, loan agreements, .etc.) to ensure I

, consistency i.n Project documents regarding:. . .I L...:-.~-~-~-~-· ------------------'-· ~

• Specifics of the Investment/Project

• Distribution of net revenues

• Collateral

• Fees charged to investors

I . v.s .. Citizen~p . ~d Immlgratfon

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289


Investment Using the Regional Center Model

Equity-Type Project in a Regional Center

Loan-Type Project in a Regional Center

fB·Sinvestor s Cap1tallnvestment (Determined by TEA status)

> /·:$1·.mlflion .in·a. Regional' : · :..:·:$SQO)QQOJn:lR~g!o:na.~: .. :·· ' ·.·::·. .. :·:::. center': · ... '," "' . . . " . . . . . .

DRAFT DEliBERATIVE MATERIALNOT FOR DISSEMINATION

290


Regional Center Structures

• As described above, the NCE must be for-profit and it must . .

be new. (Exceptions to an NCE include a restructuring or reorganization, as we will discuss) .

. . . • Investments, consisting of investor contributions of capital, are made in exchange for ownership of the NCE.

• Immigrant entrepreneur must be engaged in the . management of the NCE. In practice, many are limited partners, as LP agreements provide investors with certain rights, powers and duties, and the liP considers a LP as sufficiently engaged .

. ~. US •. Citize11$hip . · . ~d Immigration

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291


Relationship Between RC, EB-Sinvestors, the NCE and Projects

· • The RC has to be in place to be able to set up an NCE · that aggregates EB-5 investment for projects.

• The RC attracts investors, helps promote individual · projects, and also checks on source of funds from investors.

• It used to be common for the RC and theNCE to be the same entity, but because of conflicts of interest .· . and potential risk, the practice today is that they are separate business structures.

u~ Citizenship ~d lmmigrauon

.. u ----... , Services DRAFT DELIBERATIVE MATERIALNOT FOR DISSEMINATION

292


Role of the NCE

• The typical role of the NCE is to attract and aggregate capital (including EB-5 capital) to invest in · the projects (either through loans or equity investments) and to manage the projects.

· • Aside from EB-5 investments, the NCE can also rely on equity or commercial loans to finance the project. · ·

• There are no requirements for owner of the NCE or the developer to own equity in the project or JCE.

•. Sometimes, the JCE will rely on bridge financing to fund the project until it is able to access EB-5 and other sources of capital.

DRAFT DELIBERATIVE MATERIALNOT FOR DISSEMINATION

293


\

· EB-Sinvestments

• There are DQ threshold rules regarding amount of investment {rang~ from >0% -100%) and regardless of amountinvested, EB-5 investors can be credited with the

· ·. full number of jobs created by the project. f

• The only rule is that the same EB-5 investors cannot be credited with the same jobs (i.e., if there are 2 EB-5 . investors, project has to create at least 20 jobs). ·

• EB-5 capital~ be used to repay bridge financing if the EB-5 investment was already foreseen or project is gill under way and jobs are still being created.

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294


NCE Documents

• Date NCE established

• Organizational structure: operating agreement; partnership agreement; subscription agreement, and

· · · · . ·· · escrow agreement and instructions.

• Project/investment documents:

. i. Business plan,

ii. Private placement memorandum (PPM), ..

iii. Economic study of job creation estimates.

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295


Economist's Due Diligence Review

Regional Center Applications I Documents

,~New·~p;n;~~~a~···.,~,,·~··.·:···,:·:·

:: JnterprJ~e or orstressed./: : ~xpan~~n/ . , . . . . .~eorganitatlon.or. .. .....

.. Restructure ~ .,, ,. I t I' < ~ I'' • ·~

•iEA~t~t~.s yer~ed: ..• ·. : . . •iuhe investmentoUB·S .,~~pitaf~~ rlsk'(#o.impllclt· ... ·:.:<* e~pUqfgu~ran~eed·· '· ·i~~~m~L· ;, ... · .: : . :.-- .. ·. ·;. ~Are admJn~trative fees:

:·· PIY.abl.e tothe..NEC an_d. > . n~ sijq~ur~<~tQ ens'Ur~ ' .:, ·:)h~~·th~y do ~t ~rlginat~. · .. ••from m.s'(apttat · :; •. · · · ,-~······' • ,• 1" •• ,, •)> "' I;

Business Plans

~:oescrlpt~n·ot"actlvltv ~r · · ; ; ., activltle,s of th~ pro~ct . . ':'~the ~toduq9t ·service ·: ~ ··provided by the Pr~Jeet · . ld.entlfied: .. · .. '. · ~,.. · · :·:.

•fs, the ·~rreni, ~ze ·at:the·· .. ·:: ~a'rk~'ld~ntfffed :~~ns . ·:

· :with ... pro!ect~dtrenas: ·• · : .. ·::· •Is theTmormation .·· ·

' ' \ . ~

:c'tedlbfe.{ex.Jhird patty· . .~tUdle·s} ... ·, . .. .

·~Are.~ompetitqrs ~·· ···idehtified . ·.· :" ·•. · •ij.a .taigJt ~,inQ8f~Rhlc · .. : ... '::rqentiijed · . ·.: · .~:::·_ . ~IS a ¢ausible marketin~g· · .,:strategy:descdbed~:: . · · .. -. . suffic~rit4eta~ ·. . : ··.·~ie' ~dr· -~.~~ .. o·.rma .. ,fl.,n~n..c.~l.:a.··ls ::···; ~rovt ad that ~upport · ·. ··

1 :reasonibt~ eNJectatlons · , ~~or·c6-~tructi6h.:or~<::·:. · . · Umi~d· durat!dn pr:o}eetS:·.:: .~re dtie~ Jobi.cau.nted· .. on1y if ~he pr~ect · ··: ·

.• ·~~uratil)n is >;:·'2 years ·.

Economic Impact Analysis

•Whaffnethodology of . ;estlmatingjob.creatlpn ·.·

_JJas used· · · ··Was the methodology. . · .::v.sed cQrfectlv:. . :~ ·.. · ~ , iW!re the mulflp1ier~- .: ·· .•· · .. ' used in· job creation:· ..

.. :·estln1alfon·cp·rr~Gt..and. ·· · · · c~rectly apptf~d · -·•wer~Jntermediate goodr

used as mod~Hnput$· .:·.: .. "~pproPfi~tefy.pric~d: .... • .. ·. :~. ~ff t~ni~t,decu~in~·ls · · · · · .;:.used'as~aJGb treation .. . ·:input~:li·it~~: corr~.ctly ·· ... "

< ,' "I f " " ~

•DJd theJnputsto the job , :~:crf8tron :madeL · · :. ~ .: ..aceurat~lvret1ect the. · · ,:~·b·usl~~§spl~n:. · · · ·. . ~Are the:c~killations : .. ~ ·

., .

wrreot: · : ... · . . :, ' ~· I !) ' 1

.:.were.Qhly eUgib'lf;· ~. :: :, , ·expenses os~!s lnp~ts: ... •:!sthe-~pmberof ss;s ''' ~~:; :~liglbl~ jobs s~fficieht f¢.f

. )~e nu~ber ~,fEB~s :. , . .. . · lnvestots

Conclusion and Recommendations

:~Are .tMbusiness plan and': ·eeonomican~ysis· .. , ... ··· cohesive . · ·.: ·

> <·:•1 '·''

iAre th~ .~arculatioris and· ~ · .:explanation·s wfficiently: ; . ;transparent-t~:acoept th·e:. ~tondusions-drawn· from: ... ·

: 1hern:::,_. · .. ,·· .. ·; :.".:· .. :~is any·tu~r:edi~~tion:·'; required from ·the : ·

.: ·_~ppli;nt and if sa·~ .. · ·: · .. ; ' ol

Htsta11··q~stions:to.be . : :.:·Jnc: lud"e· ·~ In· ~~ .. oF£~~. ::~·: ... :;_: <·: , . ':u. ,.!4.1U:I ..•• ,"


296


Economist's Due Diligence Review · • General Rule: New Commercial Enterprise

- Established after November 29, 1990 · . - Commercial = for profit - Creates a minimum 10 jobs per EB·S investor

• Exception 1: Distressed Company Troubled business that has been existence for at least two years

- and has incurred a loss during the 12 to 24 month period prior to EB·S investment

- and the loss was at least 20% of the business net worth prior to the loss

- EB·S investment preserves or maintains the current level of employment with a minimum of 10 jobs per EB·S investor

Exception 2: Expansion/Reorganization/ Restructure - Exception to the establishment date of November 29, 1990 if:

• EB·S investment will substantially change the business (ex. Change or expansion of product/service line)

• or the EB·S investment expands either the pre· investment net worth or pre-investment employment by 40% '

• TEA Status - EB·S minimum investment of $1 million unless the commercial

enterprise receiving the investment is within a TEA, then the minimum investment is $500,000

• Use of EBWS capital - Whole of the $1 million or $500,000 EB·S investment placed 'at

risk' - Administrative fees of the Regional Center must be paid

separately


297


Economist's Due Diligence Review • Matter of Ho Compliance

- The business plan should contain: • a market analysis, including the names of competing

businesses and their relative strengths and weaknesses, a comparison of the competition's products and pricing structures, and a description of the target market/prospective customers,

• a list of the required permits· and licenses obtained or needed,

• a description of the manufacturing or production process , the materials required and sources of supply(if applicable);

• information concerning any contracts executed for ~he ·supply of materials and/or the distribution of the products;

• a discussion of the marketing strategy of the business · including pricing advertising and servicing;

• Information on the business's organizational structure and its personnel's experience,

• an explanation of the business's staffing requirement and a timetable for hiring and job descriptions,

• sales, costs, and income projections (pro forma) with information on the derivation .of those projections.

The business is not required to have every item listed above.

Above all, the business plan must be credible.


298


Economist's Due Diligence Review • Methodology

- What methodology was used to estimate job creation?

• Economic model (RIMS II,IMPLAN etc.) • Feasibility study • Projection of direct hires • Other

- Are the results of the methodology credible? • Were the correct multipliers used (ex. employment/earnings

and Final Demand/Direct) • Are the calculations mathematically correct

• If direct jobs are not allowab!e, were they subtracted from the . estimate by the Final Employment Demand Multiplier

• Are only eligible costs used to estimate job creation

• Were goods used as i~puts (intermediate versus final) Gorrectly priced

- Are the inputs into the job creation calculations consistent with the information in the business plan?

- Was the job creation calculation bifurcated between backward and forward linkages?


299


Economist's Due Diligence Review

• Concluding statement - Brief

- Unambiguous

- Note any weaknesses in the business plan or economic impact analysis identified

- Accuracy of calculations and forecasts verified

• Requests for Evidence (RFE's) - Questions for applicants should be:

•. In plain language

• Unambiguous

· - Reasons for the RFEs are identified

- Justification for the RFEs are cited from policy (work with your adjudicator)


300


'

I-

,...

-

Business Plans

~~~~~~~ ,,

'' '•

Describes the industry categories and/or · business focuses of EB·S capital investments.

Contains valid inputs (i.e., either total expenditures or total direct jobs) to be used in the economic analysis to make projections of total job creation.

Should be submitted for each industry category. I

,,

~

-~®lr ~~~ .~~

..... The business plan and eco.nomic analysis must make a ~ohesive argument.

~

~

..

·' ' •.

:lfl®~ ' '

Hypothetical

Actual

Actual with Exemplar


301


Employment Verification {e.g., for 1-829) ,

"' ,

~~~ ~~~WU®~ .

~ :J \._ .

, ,

Documents: ~

1·9, W-2, W.~4 and tax forms

\. ~

r ' -

- Application: Verification of direct jobs of the NCE

\.. ~

,

~©Q)~@WU~~ WUOO®~

IIIII-

-

I •• ;0

11

I 1

.,

j

I ,

Input-Output Models OJ other economically and statistically valid forecasting methods

\. J

, ' Applications:

Direct jobs of a JCE that is not also an NCE

Forecast and verification of indirect and induced jobs

\._ ~

DRAFT DELIBERATIVE MATERIALNOT FOR DISSEMINATION I

302


.. ~ .

'""·· ' '

· Economic Models and the Forecast of Job Creation

The purpose of the petitioner1s economic impact analysis is to ·forecast the number of jobs that the Project] as stated in the. business plan1 will create.

· Standard economic _models do not: distinguish betw~en full· and part -time jobs; .or distinguish permanent from temporary, intermittent, seasonal or

transient jobs. Standard economic models estimate FTE based on the average full/part· time and permanent/temporary com·binations that exist in the particular

· area.

DRAFT DELIBERATIVE MATERIALNOT FOR DISSEMINATION .

303


~~@~@m~~ ~~~~w~~~

q Economic Models '

NAICS Codes q Multipliers q

Inputs- Eligibility/ q Ineligibility

q Calculating the Results

Process flow The types of models

What are they? Why·are they important?

What are they? How do they relate to NAIC s codes?

Is there a difference in eligi bility us the for use of EB·S funding vers

calculation of jobs created? How do we determine whic his which?

How is the output calculate d?


304


r

\.

Input-Output Analysis Models

r

' 1

\.

' ·r'u··

DRAFT DELIBERATIVE MATERIAL .. NOT FOR DISSEMINATION

305


v'

"' , ' ' .~

1c$ '' ' Developed by the Bureau of · ,l;J..

l ; ' ·, J ~ f.'

Economic Analysis. BEA creates .. ,, ,, ,,

RIMS II· multipliers for different NAICS All models ope rate

' '

un~_er the prin cipl.e codes specific to a defined that the total geographic area. impact may be greater than t he · ··. . ·~ initial change

~ because: IMP LAN Commercial software products.

-industries u se the Each has its own proprietary products of ot her method of examining inter· industries as industry transactions within a intermediate goods defined geographic area (region) in the produc tion of ,

to estimate the region-wide effect their own pro ducts

c9 that an initial change (what we

and REM I call an 'input') has on that region's

·the earn in gs of economy. Most create their own those employ edin multipliers using matrix the initial ind ustry calculations that start with the are used to b uy national system of industrial goods and se rvices ,

account relationships and then by consumer s:

~ adjust for intra-regional

REDYN purchasing propensities. ·'

DRAFT DELl BERATIVE MATERIAL-NOT FOR DISSEMINATION

306


NAI CS codes -What are they?

Non·r~sidential constrvction = NAICS Non-residential constructionlndustria.l · ·. . Non-residential construction Commercial• · ·, · .. · · ·code:-2362 ~uildlngs = ~ICS code 23621 :. · .·: Buildings = NAICS code 23622 . . ·

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307


NAICS Major Industry Groups

,.~.,.fl u.s .. Otizell$hip . ~d Immigration

Services

11

21

22

23

31-33

42

44-45

48-49

51 '

52

53

54

55

56

61

62

71

72

81

92

~;~,)-~ .. ~··~~:~«·~ ttJ, .. ,\;~_ .. , ···> ·• "r',;• ",{%/';;,: \•:iJM~\·· (;j ~·::::5~'."i!.::;:D~tion~ ·~: .. : .. :·:;.A1~

..;_~ t.l.. "' " -'-" ol~ >I ...

Agriculture, Forestry, Fishing and Hunting

Minint Quanying, and Oil and Gas Extraction

Utilities

Construction

Manufacturing

Wholesale Trade

Retail Trade

Transportation and Warehousing

Information

Finance and Insurance

Real Estate and Rental and Leasing

Professlonat Sclentifl~ and Technical Services

Management of Companies and Enterprises

Administrative and Support and Waste Manasement and Remediation Services

Educational Services

Health care and Social Assistance

Arts, Entertalnmen~ and Recreation

Accommodation and food Services

Other Services (except Public Admlnisntlon)

Public Administration


308


Using the Correct Level of NAICS Code

3361 Motor Vehicle Manufacturing

....... ____ ..... 1 33611 Automobile & Light Duty Motor Vehicle Manufacturing '1 336111 Automobile Manufacturing. 1 336112 Light Duty Motor Vehicle Manufacturing

~-------t3362 Motor Vehicle Body and Trainer Manufacturing

~-------t3363 Motor Vehicle Parts Manufacturing

t------...... 3364 Aerospace Product and Parts Manufacturing

..... ----...... 3365 Railroad and Rolling Stock Manufacturing

..... ----...... 3366 Ship and Boat Building


309


Why are NAICS codes important? The Values of Multipliers Vary with Industry Types (NAICS)

Industry Na~e ·--.. ···-·--.... -.. ---,_,_,_ ... ~ .. ~--·--,--., .......... -...... __ .... _____ .............. ___ .......................... _. ............ ~--................... _ ..... Muuiplier.:··-·· .. 1

Apparel a_ccessories and o~er app~rel manufacturing 22.366183 Womens and girls cut and sew apparel manufacturing 16.832977 State and local government passenger transit ·14.395380 Funds, trust~, and other financial vehicle~ 13.942007 Other cut and sew apparel ma.nuf~ctunng 7;507311 Seasoning· and dressing manufacturing 6.008439 Mens and· boy.s cut. and sew apparel manufacturing 5.93.0808 Cable ahd other subscription programming 5.852920 Appare.l knitting mills 5.633810 Iron and steel mills and ferroalloy manufacturing 5:560445 Sound recording industries · ::· ·~4~62.3385 ~: j

Light truck and util~ vehicle manufacturing 4.4·32847 · Electronic computer manufacturing 4.247339 Electromedical & electrotherapeutlc apparatus manufacturing 3.616844 SemicOnductor and related device. manufacturing 3.430749 Motion picture and video .industries :, .... · · ··:1256365: ~· Other electronic·component manufa.cturing 3.149088 Cattle ranching and farming 3.148039 Guided missile and space vehicle rilanufa~uring.. 3.031587 Software, audio, and video media·for reproduction 3.0189.81 Search, detection, and navigation instruments manufacturing 2.871064 Aircraft e~gi_ne.a~d engine· parts m~nufactunng 2.769946 Data proces$ing, hosting, ISP, web search portals and related services~ 2·.583975 Construction of ne~ residential permanent site single· and multi-family structures 2.524a87 Telecommunications 2.342494 Pharmaceutical preparation manufacturing 2.303522 ·Retail Stores·· Food and beverage 1.831242 Source: Minnesota 1M PLAN Group, Type SAM muttipliers, ESI Corp


310


. Multipliers as Measurements of the Type of Effect

r , .., ;

lW~®l '·,

::1 ,,, •

1W~®~ ~' ,'

MM~~~~~~®~ .· MM~~~~~~®~ " \..

.., r ..,

Measure Direct Measure Direct,

-- and Indirect - Indirect and · Effects Induced Effects

" ~

Direct economic impacts are those attributable to the initial economic activity. For example, an operation with ten full· time employees creates ten direct jobs. Indirect economic impacts are those economic activities undertaken by vendors and suppliers within the supply chain of the direct activity as a result of the initial economic activity. For example, suppliers of goods, materials, and services used in the direct activities· produce indirect economic impacts. Induced economic impacts result from the spending of wages paid to employees in local industries involved in direct and indirect activities. These wages, which are analogous to household spending, support additional local activities, such as the purchase of goods and services within the region.ln turn, that portion of spending that accrues to local businesses and employees is once again recirculated within the local economy, producing additional activity.


311


Multipliers as Measurements of the Value of the Effects

Qu cumu ative effects on total industry

output, earnings, employment, or value

added that result from a change in final demand measured as a monetary

in ut.

Direct Effect. ·Multipliers

Quantifies the changes in earnings or jobs based on

the initial change in earnings or jobs.

Final-demand output= Total industry output per $1 change in final demand. Final-demand earnings= Total household earnings per $1 change in final demand. Final-demand value added= Total value added per $1 change in final demand. Final-demand employment= Total number of jobs per $1 million change in final demand. Direct-effect earnings =Total household earnings per $1 initial change in household earnings. Direct-effect employment= Total number of jobs per initial change in jobs. ·


312


Multipliers as a measurement of the value of the effects

Multipliers from , · · . Expenditures · . ·.

Output- Total industry o.utput per Sl change in final demand

Value added- Total value added per Sl change in final

demand·

Earnings· Total earnings added per Sl change in final

demand

Employment -Total. employment added per Sl

million change in final demand

r·--'--M'-----------, ":' -·--1

~~ltipllersfr~m Jobj

Output- Total industry output per additional employee in final

demand industry

Value added· Total value added per additional employee in final

demand industry

Earnings· Total earnings added per additional employee in final

demand industry

Employment· Total jobs added · per additional employee in final

demand industry


313


Multipliers as a measurement of impacts-. Example 1

' .

. Final Demand Type 2 Output Multiplier Measuring Changes in Total Industrial Output

r\ L(

[J~~ lhdustnal

I 1. output

cha.nges ·~so mfllionx . 1.9279::

~96.4 million


.>

v•'

I 314


Multipliers as a measurement of impactsExample 2

Final Demand Type 2 Employment Multiplier · Measuring Changes in Total Employment ·


315


Multipliers· as a measurement of impactsExample 3

Final Demand Type 2 and Direct Demand Employment Multipliers

Measuring Changes in Indirect and Induced ' J

Employment


316


Process Flow of the $50 million Investment in Coal Mining

. DRAFT DELIBERATIVE MATERIALNOT FOR DISSEMINATION

317


Process Flow of the $50 million Investment in Coal Mining


318


Alternatively-If I know my direct · employment


319


RIMS II Example Example:

$50 million investment in a fish processing factory that is restructured to process and package shrimp and crabs, of which $25 million will come from 25 EB-5 immigrant investors and $25 rlliiHon will come from a commercial loan.

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320


RIMS II Example • RIMS II yields the following multipliers:

Table 1.5. Total Muffipllers Bellingham, WA MetropoiHan Statistical fliea (Type II)

Anaklemand Flnaklemand Final-demand Final-demand

Industry OulputM/ Earnings I2J Employment 131 Value-added 141

(dollars) (dollars) (number of (dollars) jobs)

Olred·effed Olred-effed Earnings 151 Employmenl/61

(dollars) (number of jobs)

311615 Poultry processing 1.0000 0,0000 0.0000 0.0000 0.0000 0.0000 A

311700 Seafood produd preparation and packaging 1.5311 0.2898 6.5286 0.4628 ~0526

311810 Bread and bake~ produd manufaauring 1.6185 0.4347 13.2728 0.6976 1.6738 311820 Coo~e. aacker. and pasta manutaaunng 1.4656 0.2657 5.6478 0.5629 1.9273

S50 m x 6.5286 = 326.43 jobs (or 13.06 (= 326.43/25) jobs per investor)

2.2974 I 1.5461 ~2998 IS

1,..11

• If instead they claim (and it is probably true) that there will be 150 employees hired in the plant, the direct· effect employment multiplier can be used:

150 x 2.2974 = 344.61 jobs (or 13.78 (= 344.61/25) per investor)

I U.S. Citizenship \a and Immigration ~ Services DRAFT DELIBERATIVE MATERIAL


321


1M PLAN Example

• The petitioner estimates that the project will cost approx. ~30.6 mil. of which ~22 mil. will be from 44 investors and generate approx. 478 jobs (10.86 per investor)

• Proposed project: Retail/Office Complex, using following NAICS codes in exemplar:

- 5311· Lessors of Real Estate (census.gov)

- 4529 ·Other General Merchandise Stores (census.gov) The results of the analysis are summarized in the table below.

lliPLAN Mala,ier Total Jobs Activltl II put

SectoreD

$24.9 millioD

ill hard Implied CoDa~D 112.3'

coutruction at 4.o1

expellditwes

Retail Operations Not Prorided 40.8 1.04 10.3

OSee Operations Note Provided 169.8 1.80 296J

'ODJs iAUect jobs &rt counted

~ ~.. US. Citizenship \tl and Immigration ~ Services

DRAFT DELIBERATIVE MATERIAL-NOT FOR DISSEMINATION

322


Multiplier Ranges

• Multipliers will range in value and qepend on model. Typical ranges for RIMS II are:

-Output-to-jobs: 5.0 to 30.0

-Jobs-to-jobs: 1.0 to 3.5

• This is because every local economy is different .. and has different interactions and RPCs.

• At the same time, projects occur in different :, sectors and some sectors will have fewer or more t backward linkages than others:

• What areas might have higher multipliers than others? .

U.S .. Citizenship ~d Immigration

\fl~\)J Services DRAFT DELIBERATIVE MATERIALNOT FOR DISSEMINATION

323


'

,

...

Limitations of Input-Output Models -1 . '

•If an industry increases its production, there will be increased demand on the industries that produce the intermediate inputs lbGckwarrl linkages). c::>

•Assumes that inputs are used in fixed proportion, without any substitution of inputs, across a wide range of production levels. In others words, the model assumes that an industry must dou~ inputs to double its output without substitution. L--y'

•Assumes that all firms within an industry are characterized by a common production process.

If an industry increases its production, there will also be an increased supply of output for other industries to use in their production lforward /inkages).lnput·Output models do not capture forward linkages

The assumption of fixed production patterns relates to labor inputs as weii.I·O models typically assume that changes in output will result in a proportional change in jobs based on the average production patterns for the industries in a local economy. However, if an industry can increase its output by extending mainly the number of hours that existing employees work, then the results estimated with RIMS II multipliers will overstate the actual increase in local employment.

If t~e production structure of the initially-affected local firm is not consistent with the average relationships of the firms that make up the industry in the 1·0 accounts, then the impact of the change on the local economy will differ from that implied by a regional multiplier.


324


Limitations of Input-Output Models- 2

•1-0 models are typically~ referred to as fixed-price models because they assume there will be no price adjustment in response to supply constraints or other factors. In other words, firms can increase their use of inputs, including labor, as needed to meet additional demand for their products.

•1·0 models ignore any feedback effects that may exist among regions.

[~~-~ II . l • The length of time that it takes for the economy to settle at its new equilibrium after an initial change in economic activity is unclear because time is not explicitly included in regionall-0 models.

The model assumes that the firms in the local economy are not operating at full capacity. If a company needs to hire additional workers to meet an increase in sales, the model assumes that these employees are available for hire at the existing wage rate.

Example: If a construction project in region A requires the materials from region B, then this purchase is a leakage from region A. The purchases of goods and services associated with the production of the materials from region B are excluded from the multiplier. ·If, for example, the producer of materials in region B requires accounting services from region A, then the impact of the increase in demand foraccounting services from region A is also excluded from the multiplier because the multiplier does not include feedback effects.

Most analysts assume the adjustment will be completed in one year because the flows in the underlying industry data are me~sured over the same length of time. However, if an initial change is not persistent, as may be the case with a short ·term special event or construction project, then firms in the local area may increase output without hiring as many additional employees or buying as many additional inputs from the local economy as the model assumes.

DRAFT DELIBERATIVE MATERIAL NOT FOR DISSEMINATION

325


Limitations of Input-Output Models -3

• This means that the same quantity of inputs is needed per unit of output, regardless of the level of production. In other words, if output increases by 10%, inp.ut requirements will also increase by 10%.

~©9iu·~~~~ ~~Ulill©t~~

j .,.

•Changes in the economy will affect the industry's output but not the mix of commodities and services it requires to make its products.

Some industries have increasing returns to scale where the increase in output is greater that the proportional increase in inputs = declining average costs. Example: software manufacturing where the largest costs are in R&D and the and the average cost of each copy of the software. program falls as more copies are produced. Some industries have decreasing returns to scale where firms see an increase in marginal cost when output is increased. Example: commercial fishing where a doubling of the number of fishing vessels will not double because the availability of fish may decrease when fishing. is carried out on an increasing scale.·

The model assumes there can be no substitution of inputs in response to a change in output.


326



328


tonstruction Expenses- Working with Varying Degrees of Information

In the planning and design stages of a project, different estimates are prepared as the planning and design stage progresses:

..........--~-·-----· -------·--·---~------, \ (' ' ' . ' ' ' .

a screening estimate or order of. magnitude estim~te is a pre·design esti.mate that relies on historical cost information from slmi.larfacilitie.s;

,..------. ~---~ .. : ~-- . ·. ~---·-~--~ .. ---~~--~----.. · l r . I . .

I a preliminary estimate or conceptual estimate is based on a conceptual design and the 1

level of detail is very general;

:--.._ ____ _ I --- _____ _j

a detailed estimate or definitive estimate .is made when the detailed design has been . developed and the scope of work identifies the essential features of the ]acility.


329


Detailed Engineering Estimates Engineer1

S estimate The engineer1

S estimate is a highly detailed estimate that breaKs down cost estimates from the more general categories to specific items, quantities and unit prices. Example (partial):

P-152·1 Embankment CY 80,000 P-154·1 Excavation CY 16,000 P-157·1 Full-depth asphalt removal SY 5,000 P-211·1 Sub-base course (12 in. thick) SY 31,000 P211·2 Limerock base course (17 in. thick) SY 5,000 P-401·1 Bituminous surlace coat SY 10,000 P-602·1 Runway paving with reflective TON

43,000 beads

T-901·1 Hydroseeding SY 200,000 T·905·1 Sodding SY 12,000 l-105·2 Temporary electrical service lS

1 controls 000

L·108·1 1/C L-824 No.8 5KV cab!e lS 9,000 . S13 5oo L-108·2 1/C No. 2 counterpoise cable LF 9,000 s1s,ooo L-108·3 Ground rods LF 50

Subtotal Grading/Paving/Lighting


330


Bid Estimates --·-· ----

AIRPORT RUNWAY ~XTENSION PROJECT Runway extension (without shoulders)

1,733 Runway extension, grading, paving, lighting ~6,158,000

15% Contingency 924,000 Total Runway extension (without shoulders) $7,082,000 Runway extension shoulders

Shoulders for 1,733 runway extension 402,000 15% Contingency

' ' 60,000 Total Shoulders for runway extension $462,000 Taxiway extension (w~hout shoulders)

Taxiway extension, grading, paving, lighting 2,522,000

15% Contingency 383,000 Total Taxiway extension (without shoulders) $2,935,000 Taxiway extension shoulders

Shoulders for taxiway extension 522,000 15% Contingency 78,000

Total for taxiway extension shoulders $600,000 Service Road Relocation

Service road relocation and security modifications 1,725,000 15% Contingency 259,000

Total Service Road Relocation $1,984,000 Drainage

- Drainage canal relocation 2,411,000 20% contingency 482,000

Total Drainage $2,893,000 Reconstruction portions of existing Taxiway

· Realignment and strengthening of Existing Taxiway 2,333,000

15% Contingency 349,967

Total Reconstruction of portions of existing Taxiway $2,683,000

AIRPORT RUNWAY EXTENSION PROJECT COSTS (Continued):

~rofe!~onal fees

~lannin~[nvironmen~l anal~i~ " ~~~,00~

De~i~n en~ineenn~ fm (7%) u~~,ml0

~ermittin~, te~tin& ~urve~in~ (~%) . ~n,oo~

c~~ an~ ~~~ ~erAce~ (7%) l,jO~;~OO

c~~ te~in~ (~%) ~n,oo~

Total ~ofe~sional ~es ~1,~~~~~00

~nd a~ui~ltlon

Co~~ for acquinn~ lot~ ~, ~A, 1~,11 c,oo~,~oo

Total ~nd acqu~~ion ~,000,000

Rnancln! fees

loan ori~ination fee ~00,00~

Clo~in~ co~t~ 1~,ml0

Valuation fee~ lMOO

(ontin~en~ fee~ 11,~00

~ona (lo~n) in)u~nce ~~~~~

lntere~t ~unn~ ton)truction (1.4 ~r). at~%) l,~~~,b~

Total financing fees l,~,~o

Total Runwa~ fxtension ~roject ~~~~~,1~


331


Construction Expenses- Working with Varying Degrees of Information

' .

· AIRPORT RUNWAY EXTENSION PROJECT ·Project extends Runway XYZby 1, 773 feet to a total length of 7,775 · feet. Costs:

~6,000,000 for land acquisition ~11,079,000 for extension of the runway and its shoulders

I . , .

! and the supporting taxiw~y ~2,8931000 for pre~des.ign conceptual drainage ~2,683,000 for reconstructing portions ofthe taxiway ~1,984,000 for relocation of the service road ~3,656j000 for professional fees

Total: ~28,295,000 Timeframe:

4 weeks to conclude negotiations for land acquisition 3 weeks for permitting

· 3 weeks for design development · 2 weeks for revisions

58 weeks for construction 2 weeks for post constructio'n testing.

~:---~~-"-. ---. ---~--~ I .Are the costs delineated well 1!

enough to permit us to verify the , eligible constructi-on costs for job treat ion estimation? · ·

rhe timeframe forth; pr;ctl sufficient to allow for the . 1

inclusion of 'direct jobs' as eligible 'j

jobsfor EB,S purposes. I '--~----~·---..:-~..,. ____ j

DRAFT DELIBERATIVE MATERIALNOT FOR DISSEMINATION ·

332


Tenant Occupancy ·

• Can jobs created by the tenants in commercial construction projects

·which would be forward linkages . to the project, be credited as EB-5 ·

jobs? ·

• In principle, the answer is yes because jobs created by the tenants are indirect jobs through ,. , forward linkages.

:'~,f 1 '

• Tenant jobs are being questioned:

l. In instances when construction of the office space/mall when

_ finished stays permanently vacant and is never leased out.

2. When there is a concern that · project may simply displace tenants from other spaces in the same geographical region, . thus not adding new activity to the area.

333


Tenant Occu ancy


334


Hotel Visitor Spending

• The following factors, if present, support counting tenant jobs for EB-5 job creation purposes:

i. Evidence of low vacancy rates in hotels in the geograp~ical area.

ii. Evidence of specialized amenities and facilities in the hotel or a new class of hotel (differentiated product).

iii. Evidence of growing trends in n,umber of visitors due to business or tourism in the geographical region from the business plan.

iv. A completely ·new resort is built where none existed before. ·


335


MISUSES OF 1-0 MODELS

· Averaging Multi~liers:

- Multipliers cannot be averaged across different regions.

- Rather, the model has to be estimated for the specific region if two counties instead of one are being considered as the investment area, in order to account for industry interactions in the bigger region.

. tlS~Citiztn$bdp . ~d Immigration

,~,_.}¥, Services DRAFT DELIBERATIVE MATERIALNOT FOR DISSEMINATION

336
