New CFIUS Rules for Real Estate Transactions
On January 13, 2020, the Committee on Foreign Investment in the United States (CFIUS) released final regulations implementing real estate-related provisions of the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA), which substantially amended section 721 of the Defense Production Act of 1950 (Section 721)—the principal law governing CFIUS. These new provisions will be effective for real estate transactions starting February 13, 2020.
Under the regulations, CFIUS jurisdiction will now extend to real estate purchases, leases, and certain concessions if the subject properties are in or near facilities or activities that are sensitive for national security reasons. Before FIRRMA, CFIUS only considered national security issues associated with acquisitions or investments in U.S. businesses that held or used potentially sensitive real estate. The FIRRMA amendments represent a significant expansion of CFIUS jurisdiction with respect to all types of real estate transactions.
This note provides an overview of key real estate-related provisions of the new regulations. Future notes, to be published in the coming days, will provide more detailed information on the regulations provisions governing U.S.-managed investment funds, mandatory CFIUS filings, and investors from excepted countries.
We summarize below the key jurisdictional and procedural elements of Part 802.
Relevant types of real estate transactions
Part 802 applies generally to any purchase, lease, or concession in or near “covered real estate” (described below) if the transaction affords a foreign person at least three of the following four property rights:
- Physical access to the property,
- Exclusion of others from access to the property,
- Improvement or development of the property, or
- Attachment of fixed or immovable structures or objects to the property.
Part 802 does not apply to foreign investments in U.S. businesses that happen to have these rights with respect to U.S. real estate; such investments, however, may be subject to CFIUS jurisdiction (and even mandatory CFIUS filings) pursuant to new FIRRMA regulations codified at 31 CFR Part 800. Please see our separate alert on the new regulations applicable to foreign investments in U.S. businesses.
Also, “concession” has a narrower meaning under Part 802 than in other contexts. For purposes of CFIUS jurisdiction, a concession is limited to a right, granted directly or indirectly by a public entity, to use real estate for the purpose of developing or operating infrastructure for an airport or maritime port.
Notably, Part 802 applies to “greenfield” real estate transactions, and should therefore be taken into account by foreign real estate investors even if there is no immediate plan to develop a previously unused plot of land.
Part 802 applies generally to real estate transactions by foreign persons, including foreign nationals, governments, or entities, as well as entities (including U.S.-domiciled entities) over which control is exercised or exercisable by foreign nationals, governments, or entities. FIRRMA has authorized CFIUS to designate certain countries as “excepted real estate foreign states” and certain parties from those countries as “excepted real estate investors” who are not subject to CFIUS jurisdiction under Part 802.
- For CFIUS to designate a country as an excepted real estate foreign state, two thirds of the voting members of CFIUS (i.e., at least six of the current voting CFIUS agencies) must agree. CFIUS has initially determined that only Australia, Canada, and the United Kingdom are eligible, though it expects to add other countries over time. In addition, by February 2022, CFIUS must determine that each designated country has made significant process towards establishing a “robust” process for (i) assessing national security risks arising from foreign investments and (ii) coordinating with the U.S. government on national security issues.
- To be designated an excepted real estate investor, Part 802 generally requires the foreign party to be (i) the government of an excepted real estate foreign state, (ii) a national of an excepted real estate foreign state and/or the United States (other than individuals who hold dual nationality in another country that is not an excepted real estate foreign state), or (iii) any entity organized and headquartered in the United States or an excepted real estate foreign state for which (x) at least 75 percent of the voting members and 75 percent of the observers on the board of directors are from excepted real estate foreign states and/or the United States and (y) anyone holding at least 10 percent of the entity is also from excepted real estate foreign states and/or the United States.If a 10 percent owner is itself an entity, the regulations impose additional indirect ownership requirements.
The final FIRRMA regulations loosened the board membership and significant ownership qualifications for entities; under the draft regulations, the entire board of directors and all owners of 5 percent or more of the entity had to come from excepted real estate foreign states and/or the United States.
- Certain disqualifiers apply if the foreign party has, for example, violated U.S. export control or sanctions laws, or made a material misstatement or omission to CFIUS.
- Importantly, CFIUS has the ability to assert jurisdiction after closing. For up to three years after completion of the transaction, if a party to a real estate transaction no longer meets the qualifications to be an excepted real estate investor (apart from those relating to direct or indirect ownership of the foreign party), a CFIUS agency may then initiate its own review of the transaction if the parties do not file a post-completion notice of the transaction with CFIUS voluntarily or upon the request of CFIUS.
Relevant real estate
Part 802 permits CFIUS to review real estate transactions in or near “covered real estate,” including “covered ports” (i.e., certain airports and maritime ports, described below) as well as military installations and other U.S. government facilities that are sensitive for national security reasons.
- Covered ports: Airports subject to CFIUS jurisdiction include major passenger and cargo airports in the United States based on volume, as well as “joint use airports” at which military and civilian aircrafts share use of a military airfield. Lists of large hub airports, airports handling more than 1.24 billion pounds of cargo, and joint use airports subject to Part 802 are published by the Federal Aviation Administration.Similarly, lists ofcommercially strategic seaports and top 25 tonnage, container, or dry bulk seaports that are within the scope of Part 802 are published by the U.S. Department of Transportation.
- Sensitive U.S. government facilities: FIRRMA permits CFIUS to review transactions involving real estate “in close proximity to a . . . facility . . . of the United States Government that is sensitive for reasons relating to national security.” An appendix to Part 802 lists specific facilities and related properties to be protected by this provision; currently, all of the listed facilities are military sites, but CFIUS reserves the right to add other sensitive facilities in the future.Part 802 defines “close proximity” as one mile from certain listed facilities. In addition, CFIUS jurisdiction under Part 802 also covers real estate within an “extended range” from sensitive U.S. government sites, up to a distance of 100 miles, if the real estate could “reasonably” provide a foreign person with the ability to collect intelligence or expose national security activities to foreign surveillance related to the U.S. government site. Part 802 extends CFIUS’s jurisdiction to include all or part of the counties in which intercontinental ballistic missile fields are located. For sensitive sites near the U.S. coast, Part 802 also extends (or in some cases, limits) CFIUS’s jurisdiction to the outer limit of the territorial sea of the United States (i.e., the maritime zone extending 12 nautical miles from the coastline, including the airspace above the water and the seabed below).
- Excepted real estate: In addition to the exemptions for certain activities within airports and maritime ports described above, certain other types of property are excluded from CFIUS jurisdiction under Part 802:
- Real estate within an “urban cluster” or “urbanized area,” as defined by the U.S. Census, as long as the subject property is not within a covered port or within one mile of government facilities to which the “close proximity” rule applies.
- A single housing unit, if used as such. This exemption includes a single family home, townhouse, mobile home or trailer, apartment, group of rooms, or single room intended for occupancy as separate living quarters. The exemption also includes adjacent land, so long as it is incidental to the use of the property as a single housing unit.
- Commercial office space within a multi-unit commercial office building, if the foreign person and its affiliates do not hold or lease more than 10 percent of the total square footage of commercial office space in the subject building or represent more than 10 percent of the building’s tenants.
- Land owned by an Alaska Native village, Native group, or Native corporation, or held in trust by the United States for any of those entities or for American Indians, Indian tribes, or Alaska Natives.
Process and timeline
- Voluntary filing: CFIUS does not require parties to submit filings for transactions subject to Part 802. If, however, CFIUS has jurisdiction under Part 802 and a CFIUS member agency suspects the transaction may raise national security concerns, that agency may initiate its own review of the transaction. Although the CFIUS process is generally voluntary, Part 802 offers parties a “carrot” for participating; once CFIUS has cleared a transaction, CFIUS will not be able to revisit its decision unless the parties’ submission included a material misstatement or omission, or the parties have materially breached a mitigation condition required by CFIUS.
- Full notice: Parties may submit a voluntary, detailed written notice to CFIUS regarding a transaction subject to Part 802. To ensure that the parties have included all the appropriate information in the voluntary notice, the parties may (and are encouraged to) submit a draft notice to CFIUS for preliminary review. CFIUS may reject the notice for failure to provide all of the information required under Part 802 or if CFIUS learns at any time of any material misstatements or omissions.
- Once a voluntary filing is made and CFIUS accepts the notice after confirming that it contains all the required details, CFIUS has 45 calendar days to conduct an initial review of the transaction, during which CFIUS will assess the risk to U.S. national security posed by the transaction.
- If CFIUS needs additional time to complete its work, the review period is followed by a second-stage, 45-calendar day investigation phase, which can be extended by 15 calendar days for “extraordinary circumstances.”
- During the review and investigation phases, parties may be asked for additional information from CFIUS; in most cases, the parties will have three business days to respond to such requests.
- Upon completion of the investigation phase, CFIUS must either (i) issue a notice to the parties that the transaction is not subject to CFIUS jurisdiction or that CFIUS has concluded all action under Section 721 (i.e., “clear” the transaction, sometimes subject to risk mitigation conditions), or (ii) send a report to the President requesting the President’s decision on the matter.
- FIRRMA authorizes CFIUS to collect fees in connection with the filing of full notices, but Part 802 does not provide for the calculation or payment of filing fees. CFIUS is expected to address filing fees in a future rulemaking; under FIRRMA, these fees will be calculated on a sliding scale, up to a maximum of the lesser of 1 percent of the value of the transaction or US$300k (adjusted annually for inflation).
- Short-form declaration: As an alternative to a full notice, parties may submit abbreviated filings in the form of a declaration for any transactions subject to Part 802. These abbreviated forms generally do not exceed five pages; CFIUS is expected to provide a fillable form on its website.
- Once the declaration is submitted, CFIUS conducts an abbreviated assessment lasting up to 30 calendar days. During this assessment period, CFIUS will confirm that the declaration is complete (if it is not, it may be rejected) and assess possible national security risks arising from the transaction.
- Upon completion of the assessment, CFIUS must respond in one of four ways: (i) request the parties to file a full notice; (ii) make no determination on the basis of a declaration on whether CFIUS will take action pursuant to Section 721; (iii) initiate its own full review of the transaction; or (iv) notify the parties that CFIUS has concluded all action under Section 721 (i.e., cleared the transaction).
- If CFIUS declines to issue a response that it has cleared the transaction, the parties may file a full notice seeking a conclusive CFIUS response.
CFIUS is unlikely to conclusively clear a real estate transaction subject to Part 802 within 30 calendar days if the foreign party presents, or comes from a country that presents, a perceived intelligence collection or other national security threat. In such cases, the parties should consider filing a full CFIUS notice in lieu of a short-form declaration.
While Part 802 covers certain real estate transactions, others may nonetheless be subject to CFIUS jurisdiction under other provisions of the new FIRRMA regulations. Parties should therefore consider the entirety of CFIUS’s final regulations when contemplating transactions involving non-U.S. purchases, leases, or concessions of U.S. real estate. Moreover, Part 802, like the other FIRRMA regulations, includes many nuances that need to be interpreted in the context of the facts of each transaction. Parties engaged in cross-border transactions involving U.S. real estate should therefore seek qualified counsel for assistance.