As mandated by the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA), the Committee on Foreign Investment in the United States (CFIUS) has issued new regulations (the Regulations) that will become effective on February 13 (the Effective Date) and will apply to all purchases, leases or concessions involving “covered real estate” that become legally effective or result in a change in rights on or after that date, unless the parties have entered into a binding written agreement establishing the material terms of the transaction prior to the Effective Date. Consistent with the new authority granted to CFIUS by FIRRMA, the Regulations provide for review of transactions that afford a foreign person specified property rights in real estate that is within certain distances from airports, maritime ports and military installations, irrespective of whether control of a U.S. business is conferred. There are limited exceptions to the authority of CFIUS to review such transactions, including if the foreign real estate investor qualifies as an “excepted real estate investor” – i.e., an investor from Australia, Canada or the United Kingdom who meets specified criteria.
Under FIRRMA, CFIUS also gained authority to review certain “covered investments” that do not result in control by a foreign person but which involve U.S. critical technology or infrastructure, certain personal data, or foreign government or state-owned investors. The new rules governing covered investments and other transactions subject to CFIUS jurisdictions are also scheduled to come into force on the Effective Date and are the subject of a separate alert that can be viewed here.
Unlike with respect to some covered investments, there is no mandatory filing requirement for purchases, leases or concessions involving covered real estate. However, as FIRRMA provides CFIUS the authority to impose conditions on transactions to mitigate risk and, albeit in rare instances, recommend to the President that transactions be blocked, there may be advantages to voluntarily filing notice to CFIUS of a pending transaction so as to prevent retroactive review of the transaction and other consequences.
Covered real estate
Prior to FIRRMA’s passage, CFIUS only affected foreign investment in U.S. real estate if a foreign person obtained “control” over a U.S. business that involved such real estate. Now, as of the Effective Date, any “purchase or lease by, or a concession to” a foreign company or individual of covered real estate will be subject to CFIUS jurisdiction, meaning CFIUS has the power to review the transaction and any national security risk it may pose.
Under the Regulations, covered real estate comprises two broad categories of real estate:
- real estate that is within or that “will function as part of” an airport or maritime port; and
- real estate that is within specified distances of certain U.S. military installations that are identified in the Appendix to the Regulations.
This second category of covered real estate includes real estate (including subsurface and submerged land) that is:
- within “close proximity” (i.e., one mile) of an installation listed in Part 1 of the Appendix;
- within an “extended range” (i.e., 100 miles) of an installation listed in Part 2 of the Appendix;
- within specified counties or other geographic areas near missile ranges listed in Part 3 of the Appendix; or
- within 12 nautical miles of the U.S. coastline near off-shore range complexes and operating areas listed in Part 4 of the Appendix.
At the moment, the Appendix includes only U.S. military installations, but according to CFIUS, could be expanded to include “other facilities or properties of the U.S. Government” that are sensitive for national security reasons.
Covered real estate transactions
Purchases, leases (including subleases) or concessions (of covered real estate) are “covered real estate transactions” under the Regulations and thus trigger CFIUS review jurisdiction (unless subject to the carveouts discussed below) if the transaction results in a foreign person (other than an excepted real estate investor) acquiring three of the following four property rights:
- the right to physical access;
- the right to exclude others from physical access;
- the right to improve or develop the property; and/or
- the right to attach structures or objects to the property.
It does not matter if these rights are “shared concurrently” with another party – so long as a foreign person has three of four of these rights, the transaction is covered.
Although the definition of covered real estate transaction does not automatically include mortgages or other lending transactions, such transactions could be covered if there is “a significant possibility,” because of “imminent or actual default or other condition,” that the lending transaction could result in a foreign person gaining three of the four property rights described above. According to the Regulations, CFIUS, in determining whether a lending transaction is a covered real estate transaction, “will take into account whether the foreign person has made any arrangements to transfer the ownership and property rights over the covered real estate to U.S. nationals or excepted real estate investors” (a concept discussed below).
Exceptions to CFIUS review
Importantly, the final rules do contain some carveouts, including for excepted real estate investors and certain types of real estate that would otherwise be covered.
The excepted real estate investor exception applies only to certain investors from “excepted real estate foreign states” (currently, only Australia, Canada and the United Kingdom), including
- the governments thereof;
- nationals thereof who are not also nationals of any other state; and
- entities organized in any such country or the United States whose principal place of business is in any such country or the United States, provided that certain requirements are met.
These requirements include limitations on the level of participation of investors, board members and observers from nonexcepted foreign states.
In addition, any foreign person who would otherwise qualify as an excepted investor will be disqualified if such person or certain affiliates are listed on either the Bureau of Industry and Security’s Unverified List or the Entity List, or within the five years preceding the completion of the transaction, have
- been involved in enforcement proceedings before the Office of Foreign Assets Control, the Department of State, the Department of Commerce, the Department of Energy or CFIUS; or
- been subject to a divestiture order in previous proceedings before CFIUS.
On an interim basis, CFIUS has defined “principal place of business” to be “the primary location where an entity’s management directs, controls, or coordinates the entity’s activities, or, in the case of an investment fund, where the fund’s activities and investments are primarily directed, controlled, or coordinated by or on behalf of the general partner, managing member, or equivalent,” provided that any different principal place of business outside the United States provided in any government filing will take precedence over any U.S. principal place of business identified for CFIUS purposes.
In addition, there are carveouts for real estate that is within an “urbanized area” or “urban cluster,” as defined by the U.S. Census Bureau, unless the real estate is within “close proximity,” i.e., one mile, from a military installation or is within, or functioning as part of, an airport or maritime port. There are also carveouts for
- retail trade, accommodation or food sector establishments at airport and maritime ports where the terms of the lease restrict use of the real estate for purposes of engaging in the retail sale of consumer goods and services;
- “foreign air carriers” as defined under 49 C.F.R. § 1546.105 that have leases or concessions related to their activities as foreign air carriers and for which the Department of Homeland Security’s Transportation Safety Administration has accepted a security program under 49 C.F.R. § 1546.105;
- commercial office space in which a foreign person has an interest in no more than 10 percent of the total square footage of the building and of which foreign persons would represent no more than 10 percent of the total number of tenants in the building;
- single “housing units” as defined by the U.S. Census Bureau, including fixtures on adjacent land incidental to the use of the land as a single housing unit; and
- land held in trust for American Indians, Indian tribes, Alaska Natives and Alaskan native entities.
Importantly, it should be noted that if a potentially covered real estate transaction is subject to CFIUS review as a part of a covered investment or “covered control transaction,” the Regulations make clear that the transaction would be subject to the rules governing transactions involving U.S. businesses (see here). In such cases, therefore, the exceptions to CFIUS review authority provided in the Regulations will not apply.
Filing notice to CFIUS
Although parties to covered real estate transactions are not required to make CFIUS filings unless specifically requested to do so by CFIUS, as previously mentioned, it may be advantageous that they do so in order to enjoy safe harbor from later CFIUS review. Parties have the option of either filing short-form declarations or full traditional notices. In assessing cases filed pursuant to the declaration process, CFIUS has the option of advising the parties that it cannot conclude action under Section 721 of the Defense Production Act, as amended by FIRRMA, on the basis of the declaration, in which case the parties would not obtain the safe harbor from an order suspending or prohibiting the transaction or requiring unwinding or divestment unless the traditional notice procedure is undertaken.
On the other hand, traditional notices may be filed in any case, so that the parties to a transaction may decide to forgo the somewhat faster declaration process in favor of the additional certainty that may be offered by the traditional notice process.
Transitional matters, and more changes to come
The Regulations take effect February 13, 2020, but do not apply to transactions with respect to which any of the following occur prior to February 13:
- the completion date; or
- the execution of a binding written agreement establishing the material terms of the transaction.
In addition to ensuring that they evaluate their transactions under the applicable set of regulations, parties to real estate transactions that may involve foreign investors should note the potential for new rules regarding matters such as CFIUS filing fees and changes to the definition of “principal place of business,” which has been adopted as an interim final rule that remains subject to public comment.
Furthermore, the Department of Defense will continue to develop the list of military installations and applicable distances set forth in the Appendix. There is also a potential for the Appendix to include “other facilities or properties of the U.S. Government” that, while not military installations, may be deemed sensitive for national security reasons such that real estate within “close proximity” would become covered real estate.
As noted above, the initial list of “excepted real estate foreign states” includes Australia, Canada and the United Kingdom, and CFIUS has signaled that it may expand the list in the future to include other countries with “robust intelligence-sharing and defense industrial base integration mechanisms with the United States.” However, even the currently excepted countries will not enjoy this status beyond February 13, 2022, if CFIUS has not determined that they have made “significant progress toward establishing and effectively utilizing a robust process to analyze foreign investments for national security risks and to facilitate coordination with the United States on matters related to investment security.” In this regard, CFIUS has announced its intention to publish a list of factors that CFIUS will consider when making such determinations.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.