Real Estate Transactions Impacted by New CFIUS Regulations

On September 17, 2019, the U.S. Department of the Treasury announced proposed regulations to “comprehensively implement the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA).” Key provisions of the proposed regulations affect certain real estate transactions. Under the new regulations, even without taking an ownership interest in a U.S. business, your lease agreement or purchase of land could still be subject to CFIUS jurisdiction. A covered real estate transaction is any transaction in which a “foreign person” “purchases,” “leases,” or is granted a “concession” of “covered real estate” that affords a foreign person certain “property rights.”

Previously, CFIUS jurisdiction over real estate transactions required that a foreign person have the ability to control a U.S. business, for example, a foreign purchase of a commercial property with ongoing lease arrangements. However, the new regulations could provide CFIUS jurisdiction to review a simple purchase of land or the ability of a potential foreign tenant, having no ownership interest in a building, to enter into a lease for occupancy of that building. Existing regulations define a “foreign person” to include foreign nationals, foreign entities or any U.S. entities controlled by a foreign national. As a result, a host of commonplace non-controlling real estate transactions involving U.S. subsidiaries of foreign persons could now come under CFIUS jurisdiction.

The Department of Defense has long been concerned with foreign persons in proximity to sensitive locations that might afford an adversary the ability to set up collection activities near military training or other sensitive locations. In reviewing these types of risks, CFIUS was limited to reviews of foreign purchases or foreign investments in existing U.S. businesses.  Recognizing that, among other things, a foreign person could simply establish a greenfield investment next door to such sensitive locations, Congress expanded jurisdiction to include these real estate transactions, closing the regulatory gap.

The specific real estate covered by the new regulations includes the property of certain large airports and maritime ports, and property in “proximity” to any one of 190 military installations and ranges.  The relevant installations and ranges are listed in an annex that serves to define “covered real estate” for purposes of the regulations. The proposed regulations provide a breakdown that identifies what radius of miles from a sensitive location is considered covered real estate. Depending on the circumstances, covered real estate might exist within only a 1-mile radius of the sensitive location, or it could extend to real estate within a 99-mile radius. In some cases, real estate up to 12 nautical miles into the outer continental shelf could come under CFIUS scrutiny.

It is important to note that whether a transaction qualifies as a covered real estate transaction will depend on whether a foreign person will obtain at least three of the four relevant property rights through its lease, purchase, or concession of real estate (regardless of whether those rights are exercised).  These rights include:

• – the ability to physically access the real estate,
• – the ability to exclude others from physical access to the real estate,
• – the ability to improve or develop the real estate, or
• – the ability to attach fixed or immovable structures or objects to the real estate.

CFIUS may potentially exempt certain investors from its jurisdiction to review such real estate transactions. The exception would apply to a small number of listed foreign states, and the exception could only be used by foreign persons (including entities) if they meet strict citizenship criteria and are from listed countries. The proposed rules did not release the country list yet but did identify the restrictive citizenship criteria for a foreign investor to be granted excepted status.

Finally, note that the proposed regulations do provide general exemptions, including exemptions for real estate in urbanized areas, “urbanized clusters,” retail chains, limited commercial office space, and Indian lands, as well as for the purchase, lease, or concession of a single-family unit.

Treasury has requested comments on the regulations, and it will be important to submit concerns about the proposed regulations by October 17, 2019.