Co-written by Janice Kim, Summer Associate
On July 19, 2024, the U.S. Department of the Treasury published a Proposed Rule after first issuing a Notice of Proposed Rulemaking on July 8. The rule seeks to expand the jurisdiction that the Committee on Foreign Investment in the United States (CFIUS) has to review and potentially prohibit or otherwise restrict investments and other transactions made by foreign parties involving certain real estate located in the United States that could have adverse national security implications. If enacted, the Proposed Rule would expand CFIUS’s oversight to transactions and other investments in real estate that is located from within one mile to up to one hundred miles of 59 additional military installations across 30 states.
Background of CFIUS
CFIUS is an interagency committee comprised of the leaders of several federal executive departments and agencies that have a national security focus, including the Secretaries of State, Defense, Homeland Security, Energy, Commerce, Treasury and Labor, as well as the Director of National Intelligence, that is tasked with reviewing whether an investment by “foreign persons” in businesses or real estate within the U.S. has the potential to threaten national security.
Until 2018, when Congress passed the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA), CFIUS did not have direct jurisdiction to review real estate transactions or investments. Prior to FIRRMA, CFIUS’s authority focused only on transactions that could result in control of a “U.S. business” by foreign adversaries, not of real estate. The regulations promulgated in 2020 that gave FIRRMA its teeth authorized CFIUS to review for national security risks the purchase or lease by, or the grant of a concession to, a “foreign person” of real estate that is located within, or will function as a part of, an air or maritime port or is located within a range of one to one hundred miles of certain specified U.S. military installations or other facilities that “are sensitive for reasons of national security.”
The addition of 59 military installations to the current list (which currently includes 107 ports and 242 military and other sensitive sites) would result in a substantial increase in the number of past and future real estate transactions in the United States that would become subject to CFIUS review and, potentially, action by the President. Of the 59 proposed new sites, 40 would be added to the one-mile list and the remaining 19 would be added to the more significant one-hundred-mile list, where CFIUS’s jurisdiction extends in a one-hundred-mile radius around the applicable facility. Due to the “off-the-radar” nature of many of our nation’s most sensitive facilities, owners of commercial real estate in the U.S. may not be aware that their properties are located within a mile of such a site, let alone within one hundred miles.
Effects of the CFIUS’s Review of Real Estate Transactions
After taking the advice of CFIUS, if the President finds there is sufficient evidence to believe that a covered foreign-party real estate transaction or investment threatens national security, the President may seek appropriate relief, including blocking a pending transaction from closing, or ordering divestment or even unwinding a deal if the closing has already occurred.
There have been a few notable instances recently where real estate transactions have been proscribed by CFIUS. This past May, after receiving a tip from the public about a 2022 transaction involving real estate within CFIUS’s jurisdiction, President Biden blocked the acquisition of real estate located within one mile of a strategic missile base in Wyoming by a British Virgin Islands (BVI) company that is majority-owned by Chinese nationals that acquired the real estate and developed and sought to operate a cryptocurrency mining facility there.
The President’s action took place after negotiations over potential mitigation between the government and the ownership group of the BVI company had failed to resolve CFIUS’s national security concerns. Since the deal had already closed and improvements had already been constructed on the site by the time the President acted, President Biden ordered the divestment of all ownership interests, direct and indirect, and legal and beneficial, along with the divestment of any other rights in the real estate. Additionally, since the equipment installed in the property included some that was found to be “potentially capable of facilitating surveillance and espionage activities,” all equipment installed—and all other improvements made to the real estate by the company—were ordered to be removed.
The Wyoming case was just the sixth instance of a Presidential order blocking a transaction under CFIUS since 2013, but it shows that CFIUS is willing to use its authority to block or dismantle real estate transactions regardless of the fact that the underlying transaction had already closed or that substantial resources had already been spent on improving the real estate for a particular purpose.
Interestingly, pursuant to the regulations promulgated under FIRRMA, CFIUS is authorized to review potential real estate transactions that are voluntarily “declared” to it by the participants so that the Committee may determine whether there are adverse national security implications. Had the buyer of the Wyoming site highlighted above availed itself of the opportunity to declare its proposed transaction and seek CFIUS review before closing, it would have saved its investors from the significant financial and other losses they suffered because of the President’s order.
The financial risks for not notifying CFIUS of a transaction involving foreign investment falling within its jurisdiction can be severe. In the Wyoming case described above, if the transaction had been a 20-year lease transaction and the landlord entity had paid for the tenant improvement work and the tenant’s expensive equipment as part of the deal, the President’s order blocking the transaction would have likely wiped out the landlord’s rental stream, as well as the landlord’s means to recoup its investment in the tenant’s buildout and equipping of the site. In this scenario, the landlord could have avoided its loss by “declaring” the transaction to the Committee and seeking CFIUS review prior to closing on the lease and financially committing itself to a doomed transaction.
Next Steps
The Proposed Rule is currently open for public comments until August 19, 2024. Once final, the Proposed Rule will expand CFIUS’s jurisdiction to review many more past and future foreign-party real estate investments and transactions, some with respect to property located as far as one hundred miles away from a military installation or other sensitive national security site.
Owners and operators of real property must be mindful of the potential risks associated with their investments in real estate located within the area of CFIUS’s potentially expanding authority. If CFIUS has not been on your radar yet and your organization owns, leases, operates, or has an interest in a real estate portfolio with assets that might be included within CFIUS’s area of authority, you need to take heed and get up to speed.
To help your organization determine whether (1) its assets are within CFIUS’s jurisdiction, (2) its past, pending or future transactions are at risk of being unwound or blocked, or (3) voluntarily “declaring” a potential transaction and seeking CFIUS review beforehand is in its best interests, clients are advised to reach out to Ted Hunter of Manatt’s Real Estate Transactions and Finance practice and Andrew Zimmitti of Manatt’s Investigations, Compliance and White Collar Defense practice for a consult. Ted, Andrew and their team at Manatt are experienced in counselling real estate investors and managers in all aspects involving their portfolios, from acquisition and financing to leasing and navigating the growing regulatory burdens on commercial real estate investors, including successfully navigating clients through the voluntary CFIUS notification and review procedures to make sure that their transactions and investments are on solid footing from a national security risk perspective. In particular, the Manatt team has extensive experience representing clients in connection with real estate investments involving or near military bases and ports.
Meanwhile, Manatt will closely monitor the status of the Proposed Rule and other developments related to foreign investments within the U.S. that may affect the real estate landscape.