Facing FIRRMA: Expanded CFIUS Jurisdiction Over Real Estate Transactions

The U.S. real estate sector has traditionally operated largely outside the jurisdiction of CFIUS, a Treasury-chaired interagency body charged with reviewing foreign investments for national security concerns. Historically, CFIUS could review (and seek to impose conditions on or block) an acquisition of real estate only if it resulted in control by a foreign party of a U.S. business engaged in interstate commerce in the United States. The Foreign Investment Risk Review Modernization Act ("FIRRMA"), signed into law in August 2018, expanded the Committee's jurisdiction to review transactions where a foreign person purchases, leases, or receives a concession to certain private or public real estate in the United States.

On September 18, 2019, Treasury proposed new regulations that outline the government's ability to suspend or prohibit real estate transactions involving foreign persons if it determines that the transaction would threaten to impair U.S. national security. Treasury issued this Proposed Rule in conjunction with another set of proposed regulations implementing FIRRMA provisions concerning the Committee's jurisdiction over certain foreign investments in sensitive U.S. businesses (which we recently discussed in our Commentary, "Facing FIRRMA: Proposed Regulations Expand Scope of CFIUS National Security Review Process"), with the net effect being the most significant and comprehensive expansion of the CFIUS process in recent memory.

The Proposed Rule grants CFIUS broad authority to review certain real estate transactions in sensitive locations. However, while FIRRMA mandates notices to CFIUS in a few other contexts, no real estate transactions are subject to a mandatory notice. Thus, each transaction must be considered on its facts to determine the likelihood that CFIUS would be interested in the transaction, while recognizing that CFIUS retains the authority to initiate a review of non-notified transactions even after closing.

Below we discuss the contours of the Committee's jurisdiction, the covered transactions that the Proposed Rule would except from CFIUS scrutiny, and the process by which parties to a covered transaction may voluntarily seek clearance from the Committee.

What Is Covered?

The Proposed Rule grants CFIUS the authority to review foreign investments in real estate that: (i) is located within, or will function as part of, an airport or maritime port; (ii) is in close proximity to a U.S. military installation or another facility or property of the United States government that is sensitive for reasons relating to national security; (iii) could reasonably provide the foreign person the ability to collect intelligence on activities being conducted at such an installation, facility, or property; or (iv) could otherwise expose national security activities at an installation, facility, or property to the risk of foreign surveillance if the investment gives the foreign investor certain property rights (discussed below).

The Proposed Rule groups military bases and sensitive locations into four categories:

• Real estate situated within one mile of certain bases, including property that is situated in urbanized areas as defined by the Census Bureau;
• Real estate situated in non-urbanized areas that is located between one and 100 miles of specified bases;
• Real estate situated in certain counties and geographical areas surrounding specified Air Force ballistic missile fields; and
• Real estate situated within certain off-shore ranges, including the portions of the offshore ranges that are 12 nautical miles seaward of the coastline of the United States.

Should a proposed real estate transaction involving a foreign investor operate as a part of an airport or maritime port, or fall within one of the four above categories, the Committee will be authorized to review the purchase, lease, or concession of the location if the foreign person is afforded at least three of the following property rights: (i) to physically access; (ii) to exclude others from physical access; (iii) to improve or develop; or (iv) to attach fixed or immovable structures or objects to any "covered real estate."

In most circumstances, the extension of a mortgage, loan, or similar financial arrangement by a foreign person to another person to secure ownership, a leasehold interest, or a concession arrangement of covered real estate will not be reviewable by the Committee. Only when there is a significant possibility that the foreign person may purchase or lease, or be granted a concession to, the real estate as a result of a default or other condition will the transaction be reviewable. This complex multipart jurisdictional inquiry introduces a new and potentially complicating factor into real estate transactions near sensitive military locations.

What Is Excepted from Coverage?

The Proposed Rule insulates certain transactions from the Committee's purview. For example, CFIUS will not review the acquisition of single housing units and any fixtures or adjacent land incidental to the use of the real estate as a single housing unit. Real estate located within an urbanized area or urban cluster, as defined by the Census Bureau, is exempt, unless the property is situated within one mile of specifically identified military bases.

Additionally, the Proposed Rule sets forth specific criteria for exempting from CFIUS jurisdiction otherwise covered real estate transactions by certain foreign investors with sufficiently close ties to an excepted foreign state. Treasury will designate and maintain a list of excepted foreign states, and excepted foreign investors with a substantial connection to such excepted foreign states that comply with U.S. laws, regulations, and executive orders will be excepted from the Committee's jurisdiction. Finally, certain leases to a foreign person of less than 10% of commercial office space within a multi-unit commercial office building are exempt from CFIUS jurisdiction.

What Is the Process?

Parties to a covered real estate transaction can elect to voluntarily inform the Committee of the transaction by filing a traditional voluntary notice or submitting a shorter declaration prior to closing. Declarations will allow parties to submit basic information regarding a transaction in an abbreviated form. However, after reviewing a declaration, CFIUS can request a full notice regarding a proposed transaction if the Committee requires additional information. Moreover, CFIUS can request a filing for transactions that were not notified to the Committee.

At the conclusion of its review, a process that traditionally can take from three to six months, CFIUS can "clear" or approve the deal, require that the parties enter into an agreement to mitigate any national security concerns, or refer the matter to the President, who can prohibit a proposed transaction or require a buyer to divest its interest post-closing.

Parties to a transaction involving foreign investors should consult counsel early in the deal process to evaluate whether the proposed transaction could be subject to CFIUS jurisdiction, and should carefully consider the allocation of CFIUS risk.