As foreign investment in US real estate continues to grow, the Committee on Foreign Investment in the United States (CFIUS or the Committee) increasingly has turned its attention to particular investments by foreign parties that raise potential national security questions. Based on the broad definition of national security applied by CFIUS, foreign and domestic parties to cross-border real estate transactions should take the time to understand the role CFIUS plays in the panoply of applicable regulatory requirements. Parties to those transactions need to seek counsel early in the process to assess the risks and benefits of submitting an investment for CFIUS review. This approach is particularly beneficial to real estate transactions given the limited potential to mitigate or address national security concerns when issues arise because of where real estate may be located.
As a legislatively mandated executive branch committee, CFIUS retains broad authority to review, approve, mitigate, restructure, block, or unwind transactions, even for those transactions that appear distant from national security concerns. Understanding the contours of the Committee’s jurisdiction, the manner in which it conducts its reviews, the requirements to obtain its clearance, and the benefits of a CFIUS decision will assist investors in limiting the potentially negative impact of deals that are not notified to the Committee. The importance of determining how CFIUS exercises its authorities and where the US government places the Committee in terms of the role it plays to protect national security interests is reflected in part by current developments in Congress, where there are anticipated revisions to CFIUS’s authorities and jurisdiction that are currently under review. Several draft bills have been reviewed, revised, and presented to subcommittees, and are soon expected to be forwarded to the full House and Senate. In addition to the considerations provided in this article, parties to cross-border investments need to understand the expected effects of pending legislation.
CFIUS is an interagency committee responsible for analyzing and investigating foreign investment in the United States to determine potential threats to national security and critical infrastructure. Chaired by the US Treasury secretary and comprised of the heads of various federal departments and offices, CFIUS operates under the cloak of confidentiality and does not issue public decisions or otherwise publish public reports on specific investigations or findings.
The Defense Production Act of 1950, as amended by the Foreign Investment and National Security Act of 2007 (as amended, the Act), authorizes the president to take any action deemed appropriate to suspend or prohibit a “covered transaction” that threatens US national security and/or adversely affects critical infrastructure. The president has largely delegated these duties to CFIUS, under the leadership of the Department of the Treasury, the Chair of the Committee. If the Committee determines that a transaction poses potential threats, it may require the parties to take certain actions to mitigate the risks, including divestment of specific assets, restructuring, or elimination of particular requirements such as board seats, or it may recommend that the president block the transaction entirely. The president may even order a purchaser of real estate to divest the asset after the closing if he determines that a consummated covered transaction poses a threat to national security.
To avoid a potential presidential challenge, parties to a covered transaction can file a voluntary notice with CFIUS to clear the transaction, which helps manage the risk of the president or CFIUS blocking the closing or, in the real estate context, ordering that the asset be divested at a later date. While the president retains the discretion to pursue either of these resolutions to a transaction, filing a voluntary notice and working cooperatively with the Committee assists greatly in resolving mitigation issues. Foreign parties seeking to invest in the United States could find the CFIUS process beneficial during due diligence and CFIUS clearance beneficial in limiting post-closing changes to a completed transaction. The Committee retains the authority—and has exercised that authority in the past—to investigate transactions even if the transaction parties do not file a notice, although CFIUS will usually reach out to those parties and encourage them to file voluntarily.
The president’s powers under the Act—and therefore the scope of CFIUS review—are usually limited to “covered transactions.” A covered transaction is generally defined as any merger, acquisition, or takeover by or with any foreign person that could result in foreign control of a US business.
Detailed regulations govern whether a transaction would result in foreign “control,” but broadly speaking such control could arise if, after the consummation of the transaction, the foreign person can cause the US business to either take an action or refrain from taking action related to the management, operations, or disposition of assets of the business. But CFIUS is not limited in its review powers to only mergers, acquisitions, or takeovers. The form of the investment vehicle is not dispositive. The Committee examines the practical and actual control of the US business. CFIUS will review joint ventures if the US person contributes existing US business assets to the venture and the foreign person gains, or may gain, control over such US business assets as a result of the joint venture. CFIUS also will review long-term leases if the foreign person will have powers similar to an owner to make substantially all business decisions of the leased business. However, loans or similar financings generally would not be considered covered transactions unless the foreign person would acquire financial or governance rights in a US business comparable to an equity investment.
The Committee also extends its reach to cross-border transactions involving minimal investments (i.e., less than 5% or 10%), choosing to examine the transaction as a whole to assess what authorities a foreign person may exercise (whether directly or indirectly) as part of the investment. Parties sometimes refer to a “10% rule” under CFIUS regulations that appears to identify investments of 10% or less as “passive” and therefore not covered by CFIUS. This interpretation, however, does not factor in the Committee’s “totality of the transaction” approach that looks to direct and indirect factors to identify the roles foreign persons play within the transaction. Thus there is no bright line indicating that if an investment by a foreign person is 10% or less it is automatically a passive investment and therefore not within CFIUS’s purview.
CFIUS reviews covered transactions that threaten to impair national security. The Act does not define the term “national security” but provides a list of factors the president and CFIUS may consider in determining whether a transaction poses a national security risk, including, among others, the transaction’s potential effects on (i) critical infrastructure, including major energy assets, (ii) critical technologies, (iii) domestic production required for projected national defense needs, (iv) control of domestic industries that may affect the capacity of the US to meet its national security needs; and/or location or co-location near assets of interest to the US government—whether government-controlled assets or those within the organization in which the foreign person is investing.
Location is of particular concern to a national security assessment, in part because it is challenging (if not impossible) to move facilities, land, or other physical assets to eliminate or mitigate a co-location concern. This issue arose in several public transactions recently reviewed by CFIUS, including the purchase by a Chinese company of wind farms near Fallon Air Base in Nevada and the purchase by a major Chinese company of a US company’s computer business that was co-located with facilities that serviced sensitive federal programs and activities. Real estate transactions reviewed in the past have included the acquisition of port facility leases in several important US cities by a United Arab Emirates company and the acquisition by a Chinese insurance company of the Waldorf-Astoria hotel in New York, where the official residence of the US ambassador to the United Nations was then located.
In most instances, the review process begins with the transaction parties jointly filing a draft notice with CFIUS to allow the Committee to review and understand the transaction. The Committee may take the time it needs to assess the scope of the transaction and upon completion of its review of the draft, CFIUS advises the parties that they may formally file the notice. The parties then file voluntary notice with attachments and personal identifier information with the Committee.
The voluntary notice may be filed at any time—before or after a transaction is completed—although it is recommended that the notice be filed prior to closing to avoid a post-closing unwinding or restructuring of a transaction. If the parties choose not to file a notice, the Committee retains the discretion to request a filing, review the transaction without the participation of the parties, or take actions regarding the transaction. It is usually better to file a notice prior to closing a deal. Given the breadth of the Committee’s authority—and its demonstrated willingness to affect a transaction after closing—the parties enhance the risks of uncertainty in the deal by choosing not to submit a CFIUS notice.
The CFIUS regulations provide guidance on the type of information required to be submitted in the voluntary notice. Required information includes, but is not limited to, a description of the transaction and detailed corporate and personal identification information for the transaction parties as well as all entities in the proposed ownership structure. It also includes the foreign entity’s plans for the business being acquired, the transaction value, the location of the assets in relation to US government facilities of interest or importance to national security or critical infrastructure, cybersecurity plans, and the nature of the foreign purchaser (e.g., foreign government owner, private party, or hybrid).
As noted earlier, transaction parties should consult with CFIUS in advance of filing a notice and/or pre-file a draft notice at least 30 business days before the filing of the voluntary notice to enhance CFIUS’s understanding of the transaction and allow CFIUS the opportunity to request additional information be included in the actual notice. Information submitted to CFIUS is confidential and exempt from disclosure under the Freedom of Information Act.
Once CFIUS determines the formal filing is complete, the review process starts with an official letter from the Committee chairman and a designation of the start date of the review period. Generally, CFIUS has 30 days to review the notice and make its determinations. During the review, CFIUS may meet with the transaction parties or request additional information.
At the end of the 30-day review period, CFIUS has three options. First, it may determine that the transaction is not a covered transaction and therefore falls outside of CFIUS jurisdiction, and will notify the parties in writing of its “no action” determination.
Alternatively, CFIUS may determine that the transaction is a covered transaction but either does not pose a threat to national security or the threat can be adequately mitigated, in which case CFIUS will enter into a mitigation agreement with the parties. Mitigation essentially involves restructuring the transaction to limit or eliminate the foreign party’s ability to control any asset or business operation that raises concerns for CFIUS. CFIUS will send a letter notifying the parties of its determination, which serves as a “safe harbor” and terminates the president’s authority to prevent or unwind the transaction, unless the parties omitted material information or provided false statements in submissions, responses to Committee questions, or through engagement with CFIUS members. Most of the voluntary notices submitted to CFIUS clear at this stage.
CFIUS may also decide that the transaction involves national security risks warranting further investigation and may therefore extend the review into an investigation period. CFIUS must complete its investigation within 45 days, during which it may continue to request additional information or meetings with the transaction parties. During this period, CFIUS may determine that the national security risks can be mitigated and will enter into a mitigation agreement with the parties or otherwise impose conditions on the transaction. In this case, CFIUS will notify the parties that its investigation has concluded. Alternatively, if CFIUS is deadlocked or has determined that mitigation cannot resolve the concerns raised by Committee members, it may refer the transaction to the president for a determination as to whether the transaction should be blocked or unwound. The president has 15 days after referral from CFIUS to make a final decision.
The decision whether to file a CFIUS voluntary notice is complex and based on a variety of factors. Filings can be expensive and time-consuming, but the risks associated with failure to file—including unwinding of a consummated transaction—can be high. It is important that parties to a US real estate transaction involving foreign entities consult with counsel at the outset to determine whether the transaction would trigger CFIUS review and, if so, whether the parties should voluntarily file.
Certain factors to consider when evaluating this decision include, but are not limited to, the purchaser’s nationality, including whether it is a government-controlled entity, and the proximity of the subject real estate to US military, sensitive installations, critical infrastructure, or national security infrastructure. Purchasers from countries with sensitive diplomatic relations with the United States, such as China, Russia, and some Middle East countries, may prompt greater CFIUS scrutiny.
Voluntary filing may establish goodwill with CFIUS and its member agencies and would allow the parties to frame the issues. If any other regulatory approvals are required as part of the business, clearing the transaction through CFIUS may speed up that process. Given the lack of precedent and binding guidelines, the Trump administration may use CFIUS review as a tool to limit foreign involvement in the US economy.