The CFIUS real estate regulations reflect a new emphasis on real estate transactions based on proximity to military installations and certain critical infrastructure, requiring careful analysis when deciding whether a real estate transaction is subject to CFIUS review.
For more than 30 years, the Committee on Foreign Investment in the United States (CFIUS or the Committee) has reviewed investments that resulted in, or could result in, foreign control of a US business. If foreign control presented a threat to national security, CFIUS could order mitigation measures and, if no mitigation could address the threat, block the transaction (or order divestiture if the transaction had already occurred).
Before Congress passed the Foreign Investment Risk Review and Modernization Act of 2018 (FIRRMA) in August 2018, real estate transactions were subject to CFIUS review only if CFIUS determined that the transaction would result in the control (as broadly defined) of a US business. If the US business was a real estate business, that was not an obstacle to CFIUS jurisdiction. Similarly, a US business’s real estate assets might play a factor in CFIUS’s analysis of the national security threat. However, absent one of these jurisdictional hooks, real estate transactions were outside CFIUS’s purview.
In 2018, FIRRMA both formalized and expanded CFIUS’s jurisdiction to review a range of real estate transactions by defining “covered transactions” to include the following:
On February 13, 2020, the US Department of Treasury’s final rules implementing FIRRMA became effective. A new Part 802 (31 CFR Part 802) was added to the CFIUS regulations to address CFIUS’s broadened real estate transaction authority, recognizing that CFIUS reviews of covered real estate transactions would be similar to, but also different from, its reviews of other transactions. Since then, CFIUS has provided links, and most recently a tool, designed to assist parties with the difficult process of deciding whether their real estate transaction is in fact “covered” by the regulations.
FIRRMA’s expansion of the Committee’s jurisdiction over real estate transactions does not mean CFIUS was previously without authority in this area. Before FIRRMA, several of the most notable actions by CFIUS concerned significant real estate transactions or holdings; for example:
Focus on Two Categories: ‘Covered Ports’ and Properties in ‘Close Proximity’ to US Military Installations
FIRRMA conferred fairly broad authority to CFIUS with respect to certain types of real estate transactions. In crafting the new real estate transaction regulations, CFIUS went to significant lengths to provide some clarity on what real estate transactions are covered, but the rules require careful consideration of the precise geographic location of real estate involved in a transaction when assessing that jurisdiction.
Under the new regulations, not all real estate is equal, even among ports and military installations. This is reflected in the manner in which the regulations define “covered real estate” as any property that meets any one of the following definitions:
The list of covered ports will be revised in accordance with changes made by DOT, although any port added to the list after February 13, 2020 will not be considered a covered port until 30 days after its inclusion. If a port is removed by DOT from the list of covered ports, the removal will take effect immediately.
CFIUS also may assess the covered list of military installations and make any changes it deems necessary, likely through further rule making.
To assist parties in assessing what real estate transactions qualify as “covered real estate transactions,” and are therefore subject to CFIUS review, Treasury has provided links to the US government websites cross-referenced in the regulations, and recently introduced the Geographic Reference Tool, which is similar to the US Census Bureau’s TIGERweb.
Investors should also be cognizant of CFIUS’s traditional concern with investments in or acquisitions of entities with facilities in close geographic proximity to various infrastructure, intelligence, or nuclear generation facilities, each of which has sparked CFIUS reviews in the past.
Excepted Real Estate Transactions: More and Broadened Exceptions from Coverage
The real estate regulations identify certain “excepted real estate transactions” over which CFIUS does not have jurisdiction, including the following:
Despite the prohibition against structuring transactions designed to “avoid” CFIUS review, we expect foreign investors in real estate will explore various ways to structure their transactions to place their deals outside the definition of a covered real estate transaction.
In a nod to the FAA’s exclusive jurisdiction over certain air and flight matters, the real estate regulations also added a new exception for real estate transactions where the foreign person is a “foreign air carrier,” as defined in 49 USC § 40102(a)(21), for whom the Transportation Security Administration has accepted a security program under 49 CFR § 1546.1 (but only to the extent that the lease or concession is in furtherance of the foreign person’s activities as a foreign air carrier).
Excepted Real Estate Investors
Similar to the revisions in Part 800, Part 802 implements the concept of excepted real estate foreign states and excepted real estate investors. The listed of excepted states is the same for the real estate regulations as it is for the general regulations. Thus, CFIUS’s determination to initially identify Australia, Canada, and the United Kingdom as excepted real estate foreign states is consistent with its determination with respect to other transactions.
A number of other US allied countries seek to be designated as excepted states, given the potential benefit to businesses domiciled there that are interested in US investment. As with the general CFIUS regulations, a private party must be from an excepted state and must also meet the extensive requirements in the definition of “excepted foreign real estate investor” detailed in Section 802.215. While these requirements are too lengthy to list here, notably, various violations of export, sanctions, Foreign Corrupt Practices Act, and other laws will disqualify the investor from this privilege.
Private Equity Fund Exemption
Part 802 also parallels Part 800 with respect to foreign investors that invest as limited partners through a private equity fund. This provision, like that in Part 800, centers on the foreign investor’s status as a passive investor.
The real estate regulations also carry over existing exclusions of purely lending transactions, such as a standard mortgage on real estate, which is not a covered transaction unless there is a significant possibility that a purchase or lease by, concession to, or change in rights involving a foreign person may result from the default or similar condition in the mortgage instrument.
Transaction May Still Be Caught by Non–Real Estate–Related CFIUS Regulations
Parties to a real estate deal must also closely examine the context of their transaction given that it could still be within the general CFIUS regulations relating to controlling and noncontrolling investments in industries containing critical technology, critical infrastructure, and sensitive personal data (TID). In certain cases, these transactions may be subject to mandatory filing requirements.
The real estate regulations confirm that covered real estate transactions are not subject to a mandatory filing requirement. Thus, unless a transaction is also within the requirements of Part 800 covering investments in TID industries, parties remain free to weigh the costs and benefits of either filing a short-form declaration or a long-form submission to CFIUS, or simply not filing a notice to CFIUS.
Part 802 does not change the basic calculus: whether to take advantage of the safe harbor that applies once CFIUS clears a transaction, or whether to abstain from voluntarily notifying a transaction, knowing that later CFIUS interest could expose the deal to a postclosing review and a requirement of some form of mitigation of national security issues or, in an extreme case, divestiture.
If the parties ultimately elect to submit their real estate transaction for review by CFIUS, Part 802 requires that they provide certain information different from regular transactions, in recognition of the unique nature of the real estate reviews, including the following:
While the short-form declaration, which requires a response from CFIUS within 30 days of submission, may have a certain appeal, at the end of the 30-day period CFIUS may require a long-form submission. Consequently, the short-form declaration should only be used when the parties are confident that the transaction will not require a more in-depth review.
Since Part 802 does not include a mandatory declaration provision, investors should continue to analyze the risks of CFIUS requesting review of a non-notified transaction, and further, whether CFIUS will determine that there are national security issues that require remediation (as well as the type of mitigation that will be acceptable, short of blocking the transaction). This analysis will follow the familiar threat, vulnerability, and consequences analysis applied in the national security field, which considers the identity and nationality of the foreign investor and the characteristics of the particular real estate in question.
With increased resources at its disposal as a result of FIRRMA and subsequent funding measures, CFIUS has begun to build its enforcement staff and related resources, which will soon turn to increasing scrutiny over non-notified transactions, including those in the real estate arena.
If you have any questions or would like more information on the issues discussed in this LawFlash, please contact the authors or any of the following Morgan Lewis lawyers: