The Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA) amended the rules governing the Committee on Foreign Investment in the United States (CFIUS) to provide the Committee with the authority to review minority foreign investments in certain U.S. businesses, as well as certain real estate transactions, departing from the traditional focus on foreign control over a U.S. business. FIRRMA also mandated that CFIUS issue new rules governing the scope of its review authority. On Sept. 17, 2019, CFIUS published proposed rules governing the foreign acquisition and ownership of real estate, with far-reaching consequences for both real estate purchasers and would-be landlords to the federal government. Comments on the proposed regulations are due by Oct. 17, 2019, and may be submitted on regulations.gov. CFIUS is considering holding a public teleconference to discuss these regulations; information about this teleconference may be found on the Treasury Department website.
At a high level, the changes introduced by FIRRMA and the proposed rules are: 1) FIRRMA and the proposed rules expand CFIUS jurisdiction with respect to real estate, particularly undeveloped land, and allow CFIUS to make forecasts about future use of undeveloped land; 2) the proposed rules create a set of exceptions, including a new category of excepted real estate investors, favoring U.S. close allies with established investment risk reviews and compliance records; 3) a real estate covered transaction will not trigger a mandatory filing requirement; 4) parties may choose between a short-form declaration and a complete notice, each of which could result in CFIUS concluding all actions under Section 721 of the Defense Production Act; and 5) the CFIUS reform with respect to real estate transactions builds on a trend from the last few years of increased scrutiny in leasing office space from foreign owned or controlled lessors by CFIUS and the federal government.
This Holland & Knight alert addresses the recent changes to the laws governing foreign acquisition of real estate in several parts. Part I describes the current state of the law, with an analysis of the federal government's increased scrutiny of foreign acquisition of U.S. real estate in recent years; Part II analyzes the new rules governing CFIUS expanded jurisdiction over real estate transactions; and Part III discusses the new controls of foreign ownership of federally leased properties.
Congress established CFIUS in 1975, with a mandate to review and – if necessary – block any "covered transactions" involving the acquisition of U.S. businesses that would result in foreign control and might pose a threat to U.S. national security. 50 U.S.C. §4565 et seq. Under the old standard, a "covered transaction" was any transaction that was proposed, pending or concluded by, or with, any foreign person, which could result in control of a U.S. business by a foreign person.
Before the passage of FIRRMA, CFIUS had only limited authority to review real estate transactions. Covered transactions could include the purchase of real estate, but only when such real estate constituted a "U.S. business." For example, the sale of leased property that generates revenue could be determined to be a covered transaction, and indeed that was how CFIUS approached its early real estate oversight responsibilities. Purchases of undeveloped and unleased property were outside the scope of CFIUS jurisdiction.
The first high-profile CFIUS investigation focusing on proximity to a sensitive government facility as opposed to the acquired business itself was the 2012 Ralls Corp. acquisition of a windfarm in Oregon located within a few miles of a U.S. Navy base where the Navy conducted drone tests. The parties did not file with CFIUS until after closing, and only at the direction of CFIUS. On Sept. 28, 2012, President Barack Obama issued an order requiring Ralls, a Chinese-owned entity, to divest itself of ownership of the windfarm within 90 days, and blocked the use of any wind turbines manufactured by Ralls at the sites in question. Furthermore, Ralls was instructed to hire an independent third party, approved by CFIUS, to remove any installations on the land under CFIUS supervision. The unstated concern was that the windfarm was too close to the Navy base and could be used for espionage on Navy operations.
In 2014, the Chinese-owned Anbag Insurance Group purchased the Waldorf Astoria hotel in New York. Learning from the Ralls decision, the parties submitted voluntarily to CFIUS review. Waldorf Astoria serves as the official residence of the U.S. ambassador to the United Nations, and also serves as an unofficial meeting place for diplomats from around the world in town for UN business. In February 2015, CFIUS approved the acquisition.
More recently, in 2017, COSCO Shipping Holdings Co., Ltd. (COSCO), a Chinese shipping company, filed with CFIUS, seeking approval for the acquisition of a controlling interest in Hong Kong-based ocean container shipping company Orient Overseas International Ltd. (OOIL). OOIL had a long-term concession for the operation of a container terminal in Long Beach, California. CFIUS ultimately approved the acquisition on the condition that ownership of the Long Beach terminal would be transferred to a trust whose principal trustee was a U.S. citizen for the purpose of selling to an approved third party.
In all three cases, CFIUS adopted the standard of close proximity to a sensitive facility, either directly occupied by the U.S. government, or being part of a major port. This has become the basis for the expanded CFIUS jurisdiction introduced by FIRRMA.
FIRRMA provided CFIUS with the authority to review real estate transactions – to include leases, sales, and concessions – assuming such transactions involve air or maritime ports or properties that are in "close proximity" to sensitive U.S. government facilities. The proposed rules implement the FIRRMA changes.1 While these are only "proposed" rules, and CFIUS invited the public to comment, it is very likely that the proposed rule with minor, clarifying alterations will become the final version of the rule. The final rule will take effect no later than Feb. 13, 2020.
The proposed rules on real estate transactions follow in structure the existing CFIUS regulations at 31 C.F.R. Part 800. This section summarizes some of the most important changes introduced by FIRRMA and developed in the proposed rules.
Prior to FIRRMA, CFIUS had jurisdiction to review foreign investments in U.S. real estate only in situations of acquisitions resulting in foreign control over a U.S. business. Under FIRRMA, CFIUS jurisdiction is expanded to include transactions involving the purchase or lease by, or a concession to, a foreign person of certain real estate in the United States, even in transactions in which there is no accompanying investment in a U.S. business.
The proposed rule defines "Covered Real Estate Transactions" as any purchase or lease by, or concession to, a foreign person of covered real estate that 1) is, is located within, or will function as part of, an airport or maritime port; or 2) is located within certain proximity of specific military installations or other U.S. government sensitive facilities, and that affords the foreign person at least three of the following property rights, "whether or not shared concurrently" with another party:
a. to physically access the real estate
b. to exclude others from physical access to the real estate
1. Airport or Maritime Port. The proposed rule defines "airport" 4 in two ways a) in reference to annual data reported by the Federal Aviation Administration, as any "large hub airport," as defined in 49 U.S.C. 40102 5 , or any airport with annual aggregate all-cargo landed weight greater than 1.24 billion pounds; or b) any "joint use airport," as defined in 49 U.S.C. 47175 6 that has at least 1.0 percent of the passenger boardings.
The proposed rule defines "maritime ports" 7 as a) a strategic seaport within the National Port Readiness Network, as identified by the U.S. Department of Transportation's Maritime Administration; or b) top 25 tonnage, container, or dry bulk port according to the most recent annual report submitted to Congress by the U.S. Department of Transportation, Bureau of Transportation Statistics pursuant to 49 U.S.C. 6314.
While acquisitions of an airport or a maritime port would have been considered an investment in critical infrastructure under existing CFIUS regulations, FIRRMA and the proposed regulations expand the scope of reviewed transactions significantly to cover the acquisition of real estate located within the port, or that could function as part of or as a port. These changes allow CFIUS to speculate about the future use of undeveloped real estate.
2. Within Close Proximity of Military Installations and Other Sensitive Facilities. To assist the public in identifying the specific sites that meet the definition of "military installation," the names and locations of the military installations are listed in Appendix A to the proposed regulations and cover real estate located within:
The terms "close proximity" and "extended range," which are introduced for the first time in the proposed regulation, apply to specific types of military installations as described in the regulations. Covered real estate transactions include those effected within "close proximity" of 1) naval surface, air and undersea warfare centers and research laboratories and major annexes thereof; as well as 2) Air Force bases administering active Air Force ballistic missile fields, will be deemed covered real estate transactions; and those effected within "extended range" of 1) Army combat training centers located in the continental United States; 2) major range and test facility base activities as defined in 10 U.S.C. 196; 3) military ranges as defined in 10 U.S.C. 101(e)(1) that are owned by the U.S. Navy or U.S. Air Force, or 4) joint forces training centers that are located in any of the following states: Oregon, Nevada, Idaho, Wisconsin, Mississippi, North Carolina or Florida.
The identification of these categories of real estate is noteworthy, reflecting the increased attention paid by various U.S. government agencies, including the Government Accountability Office (GAO) and the General Services Administration (GSA). While the Trump Administration has been firm in its messaging that FIRRMA is meant to "close gaps" between the transactions that CFIUS is currently able to review and transactions it currently cannot review, those "gaps" largely reflect a perceived risk from unique Chinese investment trends, including real estate acquisitions in sensitive areas.
1. Excepted Real Estate Transactions. Both FIRRMA and the proposed regulations 8 provide that certain real estate transactions will be exempt from CFIUS jurisdiction. CFIUS has provided more clarity and detail with respect to exempt transactions, which include:
a. transactions of an excepted real estate investor
b. transactions that are otherwise covered by CFIUS jurisdiction to review a transaction under Part 800
c. with certain limitations, transactions that relate to real estate within urbanized areas or urban centers
d. transactions that relate to a single housing unit, including fixtures and adjacent land as long as the land is incidental to the use of the real estate as a single housing unit
e. the lease or concession of real estate, which according to the terms of the lease or concession, may be used only as a retail trade, accommodation, or food service sector establishment, as described in the North American Industry Classification System Manual Sector 44-45 and 72
f. transactions that relate to commercial office space within a multiunit commercial office building, if such space would not exceed 10 percent of the total square footage of the total commercial space, and the foreign person does not represent more than 10 percent of the total number of tenants in the building, and
g. transactions that relate to land owned by American Indian or Alaska Native groups
Note that just because a real estate transaction might be exempt because the real estate is located within an "urbanized area" or in an "urban cluster," it does not necessarily mean that the transaction would not be covered under CFIUS general jurisdiction to review acquisitions that would result in foreign control over a U.S. business. FIRRMA expanded CFIUS jurisdiction so that the exceptions only apply to qualifying transactions that were captured as a result of the expansion.
In addition to the exceptions identified above, lending or other financing by a foreign person to another person for the purpose of the purchase, lease, or concession of covered real estate will not by itself constitute a covered real estate transaction. 9 Similarly, convertible instruments would be subject to CFIUS review only upon the time of imminent conversion of such interest. 10
2. Excepted Real Estate Investor. Of particular note is the carve-out with respect to "excepted real estate investors". 11 Under the proposed rules, an excepted real estate investor is
Special aggregation rules apply if there are more than one foreign entity party to the transaction. The exception would not apply if the foreign investor has provided false information to CFIUS, violated any mitigation agreement with CFIUS, violated U.S. export control laws, or committed a felony crime in the U.S.
CFIUS will maintain a list of excepted real estate foreign states, which may be updated from time to time, beginning two years after the effective date of the final rule, and to be published in Federal Register. 13 An important factor in determining if a foreign state qualifies to be added to the list will be whether the foreign state has established and is currently using a robust national security review process itself.
Parties to a covered real estate transaction may submit a voluntary declaration under the proposed rules. Unlike Part 800, which contains the proposed rules with regard to other types of "covered transactions," there will be no mandatory reporting requirement. Outside that requirement, the filing process for the two parts is largely the same. Parties may file a full notice, which is the most thorough application for CFIUS review and will provide the parties with a safe harbor following completion of CFIUS review. Alternatively, parties may file a declaration, which is a short filing generally not to exceed five pages.
One potential benefit is that declarations do not require detailed personal information about the directors, officers and owners of the foreign investor, the gathering of which can often delay the filing process. CFIUS has 30 days to review a declaration and decide how it wants to proceed, which allows for the possibility of a shorter review. On the other hand, by filing a declaration as opposed to a complete notice, the parties take the risk that at the end of the 30-day review period, CFIUS might direct the parties to submit a full notice, which will start a new 45-day period of review, which might be followed by a 45-day investigation period. Additionally, CFIUS might decide that the transaction is covered under Part 800 of the CFIUS regulations, and require from the parties information other than that required for real estate covered transactions. According to the proposed rules, a transaction that may be subject to CFIUS review will not be subject under both Parts 800 and 802. A covered transaction under Part 800 that includes the purchase, lease, or concession of covered real estate is not a covered real estate transaction under Part 802. Therefore, if a transaction is subject to Part 800, the parties must determine whether it is appropriate to notify CFIUS of a transaction under those regulations and not under Part 802, even if it includes real estate.
In addition to increased CFIUS scrutiny of real estate transactions, the government has focused more attention on the risks associated with the foreign ownership of property leased to the federal government. The federal government currently leases much more commercial office space than it owns, and the GSA serves as the primary lessee for the government's various agencies, which are tenants in GSA leases.
GAO issued a report in January 2017 that highlighted the risks associated with foreign ownership of real property. In "FEDERAL REAL PROPERTY: GSA Should Inform Tenant Agencies When Leasing High Security Space from Foreign Owners," GAO profiled the risks associated with foreign ownership of federally leased property. GAO concluded with a recommendation "that the Administrator of the [GSA] determine whether the beneficial owner of high-security space that GSA leases is a foreign entity and, if so, share that information with the tenant agencies so they can adequately assess and mitigate any security risks." GSA concurred with this recommendation.
The GSA, as the government's largest lessee of commercial real estate, has since taken at least one concrete step in identifying foreign ownership. As part of GSA's procurement package for federal leases, it now includes a form entitled "Foreign Ownership and Financing Representation (Acquisitions of Leasehold Interests in Real Property)." This form requires would-be lessors to the government to disclose whether there are any foreign persons, foreign-owned entities or foreign governments in the ownership structure of the offeror or its lenders / financers. Other federal government contractors who are required to register in the System for Award Management (SAM) are required to disclose foreign ownership in a less contract-specific manner. Registration requires disclosure of a company's immediate owner and ultimate owner, thus providing the government with some visibility into the existence of foreign ownership. 48 C.F.R. §4.18.
The proposed regulations are likely to have profound impacts on transactions involving U.S. real estate, and are likely to be finalized in a form that is largely similar to the proposed language. The changes to the scope of "covered transactions" has resulted in increased CFIUS jurisdiction. , The "close proximity" definition issued by CFIUS will undoubtedly affect GSA-leased properties and other properties with national security-sensitive U.S. government agencies as tenants. As an addition to the already existing FAR and GSA policy requirements for communicating ownership to the government, expanded CFIUS jurisdiction over real estate transactions will generate additional risk analysis for foreign-affiliated purchasers of federally leased property.
Holland and Knight will continue to monitor and report on these changes. For more information or questions regarding the impact of the proposed CFIUS rules, contact the authors.
1 Proposed new part 31 C.F.R. Part 802
2 Proposed 31 C.F.R. §802.212 and §802.233. Change in a foreign person's ownership rights that would affect any three of the above, or transactions structured to evade CFIUS jurisdiction are also covered transactions.
3 Proposed 31 C.F.R. §802.211
4 Proposed 31 C.F.R. §802.201
5 Any "large hub airport" is defined in 49 U.S.C. 40102 as "a commercial service airport (as defined in section 47102) that has at least 1.0 percent of the passenger boardings."
6 The term "joint use airport" as defined in Section 49 U.S.C. 47175 means an airport owned by the U.S. Department of Defense, at which both military and civilian aircraft make shared use of the airfield.
7 Proposed 31 C.F.R. §802.227
8 Proposed 31 C.F.R. §802.217
9 Proposed 31 C.F.R. §802.303
10 Proposed 31 C.F.R. §802.304
11 Proposed 31 C.F.R. §802.216
12 This rule covers all of the parent companies or individual shareholders that hold 5 percent or more voting power or other control over the foreign entity.
13 Proposed 31 C.F.R. §802.215
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