Proposed Rule Expands CFIUS Jurisdiction to Real Estate Investments That Pose a National Security Risk; Could Have Major Impacts on Dealmaking
What is CFIUS? The Committee on Foreign Investment in the United States, or CFIUS, is an interagency committee chaired by the Secretary of the Treasury which is authorized to review and approve transactions involving foreign investment in the United States that could impact U.S. national security.
Expanded Jurisdiction. The Treasury Department has issued a new proposed rule (Proposed Rule) conferring jurisdiction on CFIUS for specific real estate transactions in the U.S. subject to certain exceptions and carve-outs. While CFIUS previously considered real estate investments on an ad hoc basis, the new rule codifies CFIUS jurisdiction and the scope of its review for real estate transactions involving foreign buyers/investors.
Location, Location, Location. CFIUS review will focus on real estate near airports, maritime ports, U.S. military installations, and other facilities or properties of the U.S. Government.
Exceptions for Certain Real Properties. CFIUS generally will not review real estate transactions involving a single housing unit or real estate in “urbanized areas.”
To File or Not to File. The decision whether to file or not to file a notice with CFIUS for a real estate transaction will be voluntary. Thus, parties to a real estate transaction involving foreign buyers/investors cannot be found to violate the law for failure to file a CFIUS notice. However, if parties to a real estate transaction where CFIUS has jurisdiction do not file a notice and obtain clearance from CFIUS, they risk action by CFIUS at any time in the future, including a forced unwinding of the transaction. Accordingly, many parties may prefer the “safe harbor” of obtaining CFIUS clearance because CFIUS is precluded from re-examining a cleared transaction.
Public Comment Period Now Open. Members of the public can comment on the Proposed Rule now through October 17, 2019. Final regulations will become effective no later than February 13, 2020
Historically, CFIUS was limited to reviewing a real estate acquisition only if it were part of a transaction that otherwise could result in control by a foreign person of a U.S. business. In 2018, Congress passed the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA), which broadened the authority of CFIUS to review two new categories of deals that could impact U.S. national security: (i) non-controlling investments; and (ii) real estate transactions. The Proposed Rule will implement FIRRMA by expanding the jurisdiction of CFIUS to include the purchase, lease, or concession by foreign persons of certain real estate located in the United States. Real estate transactions that may be subject to CFIUS jurisdiction will fall into the following categories:
- Real estate located within or functioning as part of an airport or maritime port.
- Real estate located near specific U.S. military installations and possibly other U.S. government properties that are sensitive for national security reasons.
Similar to Treasury’s proposed rule regarding non-controlling investments, discussed in a separate article here, the Proposed Rule will also create a “Pre-Approved List” of certain countries where purchasers of real estate may be excepted from CFIUS review as well. The Proposed Rule also streamlines the filing process for covered real estate transactions with some slight modifications to declaration guidelines.
Introducing “Covered Real Estate Transactions”
CFIUS will still exercise jurisdiction over any transaction resulting in a foreign person acquiring control of a U.S. business. Additionally, under the Proposed Rule, CFIUS would have the authority to review transactions that include particular types of real estate. A Covered Real Estate Transaction includes the purchase or lease by, or concession to, a foreign person of covered real estate that gives that foreign person three of the following four rights to the covered real estate:a. Physical access;
b. Excluding others from access;
c. Making improvements or developments; or
d. Attaching fixed or immovable structures or objects.
Covered Real Estate
The Proposed Rule increases the jurisdiction of CFIUS, but is limited to certain categories of real estate. Covered real estate includes (1) airports and maritime ports, (2) close proximity military installations, (3) extended range military installations, and (4) coastal military installations, as described below.a. Airports and Maritime PortsCFIUS review of real estate transactions in this category is generally limited to large airports and maritime ports. Airports subject to review include those classified as (i) a “large hub airport,” as defined in 49 U.S.C. 40102, (ii) any airport with an annual aggregate all-cargo landed weight greater than 1.24 billion pounds, or (iii) any “joint use airport,” as defined in 49 U.S.C. 47175. Maritime ports are also limited to only include (i) any strategic seaport within the National Port Readiness Network and (ii) any of the top 25 tonnage, container, or dry bulk ports according to the Department of Transportation.b. Military InstallationsNot all military installations are created equal according to the Proposed Rule. The Appendix to the rule lists all military installations implicating covered real estate and separates them into parts. Real estate near military installations is only covered by CFIUS if it falls into one of the four categories below as characterized by a certain proximity to the military installations listed in the Appendix to the rule found here.i. Close Proximity. Any real estate that is within one mile of all military installations listed in part 1 or part 2 of the Appendix.ii. Extended Range. Any real estate extending 99 miles outward from the close proximity boundary of military installations listed in part 2 of the Appendix. But, it does not extend further than 12 miles seaward of the U.S. coastline.iii. Counties or Geographic Areas. Any real estate identified in connection with military installations listed in part 3 of the Appendix.
iv. Coastal. Any real estate located within 12 nautical miles of any military installation listed in part 4 of the Appendix.
- Exceptions to the Real Estate Proposed Rule
a. Country-Based Exceptions
The regulations create an exception from “covered real estate transactions” for certain foreign persons defined as “excepted real estate investors.” The scope and intended target of the excepted real estate investor definition will be taken up in greater detail in a subsequent blog post, but for the moment suffice it to say that any private equity group with significant foreign investors or any foreign entity that is or wants to be a repeat player in M&A markets in the U.S. will be well-advised to pay careful attention to this aspect of the Proposed Rule. The definition of “excepted real estate investor” incorporates the familiar five percent threshold that CFIUS practitioners have come to know as the level of investment CFIUS generally tracks closely. And the definition of “minimum excepted ownership” includes a nod to the familiar 10% safe harbor for private equity investors. The overriding issue with the definition of “excepted real estate investors” will be which countries will be listed as “excepted real estate foreign states,” and no one knows how long that process may take.
b. Real Estate-Based Exceptions
Fortunately for certain foreign real estate investors, there are additional exceptions to the rule which are defined as “excepted real estate transactions.” Those transactions include:
- The purchase, lease, or concession of covered real estate to an excepted real estate investor as described above in 3.1 (Country-Based Exceptions).
- A “Covered Transaction” as defined by Part 800 of the CFIUS regulations if it includes the purchase, lease, or concession of covered real estate. In other words, the traditional CFIUS process should still be followed in deals that otherwise would involve a CFIUS review irrespective of the real estate piece.
- The purchase, lease, or concession of some types of covered real estate that is within an “urbanized area” or “urban cluster,” not to include those in close proximity to military installations listed in the Appendix.
- The purchase, lease, or concession of covered real estate that is a single “housing unit.”
- The lease by or concession to a foreign person of covered real estate that, according to the terms of the transaction, may be used only as a retail trade, accommodation, or food service sector establishment.
- The purchase, lease, or concession of commercial office space within a multi-unit commercial office building by a foreign person if (1) the foreign person and its affiliates do not in aggregate hold or lease more than 10 percent of the total square footage of the office space, and (2) the foreign person and its affiliates do not represent more than 10 percent of the total number of tenants in the building.
- The purchase, lease, or concession of land that is either owned by an Alaskan Native village, group, or corporation, or held in trust by the U.S. for American Indians, tribes, and other natives.
Streamlining the CFIUS Process
The Proposed Rule allows parties to a real estate transaction subject to CFIUS jurisdiction to file a short-form “declaration,” as opposed to a long-form “notice.” The benefit of a declaration is that it utilizes an abbreviated fillable form for filing and requires a response within 30 days from CFIUS. Thus, a declaration may shorten the ultimate timeline for CFIUS clearance as compared to a long-form notice (which utilizes a much longer format for the filing and has longer timelines for CFIUS action).
More to Come
The Proposed Rule introduces a new area of jurisdiction for CFIUS by specifying what real estate in the U.S. will now be covered, as well as clarifying certain exceptions and carve-outs. We will report on any developments as the Proposed Rule proceeds to its final form and becomes fully effective by February 2020.