Foreign Investment 2020 (Part 2): Proposed Regulations Would Expand CFIUS Review Of Real Estate Transactions, Provide More Certainty For The Investment Community - Inward/ Foreign Investment

This is the second in our multipart series of alerts addressing proposed regulations published in the Federal Register on September 24, 2019, for the Committee on Foreign Investment in the United States (CFIUS) to implement the Foreign Investment Risk Review Modernization Act (FIRRMA).

One of FIRRMA’s many noteworthy changes was to expand the types of real estate transactions CFIUS can review beyond those that result in control of a U.S. business, to include leases, concessions, and acquisitions of real estate (developed and undeveloped) in proximity to military and other specified installations. Under the regulations proposed by the U.S. Department of the Treasury (“Treasury”) in 31 C.F.R. Parts 800 and 802, real estate transactions could be subject to CFIUS review in several ways:

Traditional “Control” of a U.S. Business: A real estate transaction that results in foreign “control” of a U.S. business (e.g., acquisition, controlling minority investment, some long-term leases) is a covered transaction under the Part 800 regulations, in much the same way as under the existing CFIUS regulations.
New Regulations for TID U.S. Businesses: A real estate transaction that does not provide foreign control of a U.S. business (i.e., a non-controlling minority investment), but does provide a foreign person certain rights in a U.S. business involving critical technology, critical infrastructure, or sensitive personal data of U.S. citizens (“TID U.S. businesses”), is a covered transaction under the proposed Part 800 regulations, similar in many respects to the existing CFIUS pilot program for critical technologies.
New Regulations for Other Real Estate Transactions: A real estate transaction that is neither of the above is a “covered real estate transaction” under the new proposed Part 802 if it is a purchase, lease by, or concession to a foreign person that:
- Involves real estate located in an airport or maritime port, or in proximity to military or other U.S. government facilities, as these terms are (more clearly) defined in the proposed regulations; and
- Provides the foreign person certain specified rights in this property.

Proximity to designated military and government facilities is a key component of whether a transaction is a covered real estate transaction under Part 802. For transactions under Part 800, proximity is not a determinant of whether the transaction is a covered transaction, but will likely continue to be a factor in CFIUS’s risk-based analysis of whether a covered transaction poses national security concerns.

This alert focuses on transactions that would be subject to Part 802 of the proposed CFIUS regulations. Although they would expand the scope of real estate transactions CFIUS can review, these regulations also provide needed clarity for the real estate investment community, and reflect CFIUS’s efforts to narrow the scope of its review to transactions that could present national security concerns.

The major takeaways from the proposed CFIUS real estate regulations are:

New Category of CFIUS Covered Transactions: CFIUS proposes to regulate covered real estate transactions under a new set of regulations codified under 31 C.F.R. Part 802. The provisions of CFIUS’s general regulations in Part 800 will remain in effect and applicable to real estate transactions that involve covered transactions as defined under Part 800. Indeed, real estate transactions covered under Part 800 are expressly excepted from CFIUS reviews under the new Part 802.
More Types of Real Estate Transactions Subject to Review: “Covered real estate transactions” can include purchases, leases, or concession contracts of real estate, including undeveloped or unused land. Prior to the proposed regulations, CFIUS’s jurisdiction generally only covered acquisitions of ownership interests in real estate where there was an active U.S. business.
CFIUS Filings Remain Voluntary, and Abbreviated Declarations Available: Notice to CFIUS in connection with covered real estate transactions under Part 802 is voluntary in all cases, and parties may file a short-form declaration or a traditional longer-form notice. The process and timing for declarations and notices under Part 802 are the same as they are for transactions under Part 800.
“Close Proximity” More Clearly Defined: Transactions involving real estate in close proximity to sensitive military and government facilities have been a core CFIUS concern. Prior to these proposed regulations, however, parties were left to their own (imperfect) devices to ascertain whether real estate was in close proximity to such sensitive facilities. The proposed regulations include an appendix that identifies these installations by name and the regulations clearly define “close proximity” in this context for purposes of determining Part 802 covered real estate transactions.
Property Rights Also a Key Consideration: In addition to proximity, CFIUS’s jurisdiction under Part 802 depends on the “property rights” the foreign person obtains as a result of the transaction. The sensitivity of a particular property’s tenants or what the property is used for are not considerations in determining whether a transaction is covered under Part 802, though these factors will likely continue to be relevant to CFIUS’s national security reviews of covered transactions under both Parts 800 and 802.
Exceptions for Certain Real Estate Transactions: The proposed regulations include important exceptions for transactions involving, among other things: real estate in “urbanized areas,” acquisitions of single housing units, leases or concessions of property used only for certain commercial purposes, and certain transactions involving relatively small-scale commercial office space.

What Is a Covered Real Estate Transaction?

Whether the new regulations in Part 802 will apply to a particular transaction involving real estate in the United States is determined by the following definitions and analysis:

Covered real estate transactions: Subject to the exceptions described below, a covered real estate transaction is:
- a purchase or lease by, or concession to, a foreign person of covered real estate
- that affords the foreign person at least three property rights, as defined in the regulations.
Also, a change in the existing property rights of a foreign person may be a covered real estate transaction if such change would afford the foreign person at least three of the property rights listed below, regardless of whether there is a purchase, lease, or concession associated with the change.
Covered real estate is real estate that: (i) is or is located in an airport or maritime port as those are defined in the regulations, or (ii) is located within:
- close proximity (i.e., one mile) of certain U.S. government facilities identified in Parts 1 and 2 of Appendix A of the proposed regulations;
- the extended range (i.e., 99 miles) of more sensitive installations identified in Part 2 of Appendix A;
- any county or geographic area in connection with installations identified in Part 3 of Appendix A; or
- 12 nautical miles seaward of installations identified in Part 4 of Appendix A.
Property rights are the following rights and abilities, whether or not exercised, and whether or not shared concurrently with any other person, to:
- physically access the real estate;
- exclude others from physical access to the real estate;
- improve or develop the real estate; or
- attach fixed or immovable structures or objects to the real estate.
Again, to be a real estate covered transaction, the foreign person must obtain at least three of these rights.

Which Real Estate Transactions Are Not Covered by the Proposed Regulations?

A real estate transaction is not subject to the proposed CFIUS regulations in Part 802 if it is not a “covered real estate transaction” as defined above, or if it is an “excepted real estate transaction.”

In addition to transactions that do not meet the proximity or property rights criteria of the “covered real estate transaction” definition, the following types of transactions also are not covered real estate transactions under Part 802:

The acquisition of securities by a person acting as a securities underwriter;
Ordinary course contracts of insurance relating to fidelity, surety, or casualty obligations; or
The extension of a mortgage, loan, or similar financing arrangement by a foreign person for the purpose of the purchase, lease, or concession of covered real estate, unless an imminent or actual default or other condition creates a significant possibility the foreign person will obtain interests and rights in a manner that would constitute a covered real estate transaction.

“Excepted real estate transactions” include:

A purchase or lease by, or concession to, an “excepted real estate investor,” which, subject to the definition’s numerous conditions, is generally an investor from one or more foreign countries designated by CFIUS as an “excepted real estate foreign state.”
A real estate transaction covered under Part 800 of the CFIUS regulations—i.e., a real estate transaction through which a foreign person (1) obtains “control” of a U.S. business, and/or (2) pursuant to the proposed regulations for Part 800, obtains through an investment certain rights with respect to U.S. businesses involving critical technologies, critical infrastructure, or sensitive personal data.
A transaction involving covered real estate that is within an “urbanized area or urban cluster,” unless the real estate is or is within an airport or maritime port or in “close proximity” (one mile) of the installations identified in Parts 1 and 2 of Appendix A.
A transaction involving a single housing unit.
A lease by or concession to a foreign person in an airport or maritime port, where the contract limits the use of the property for retail trade, accommodation, or food service.
Certain transactions of relatively smaller-scale interests in commercial office space. For example, a lease by a foreign person of less than 10% of a building’s square footage and less than 10% of the building’s tenants.
Transactions involving real estate owned by or held in trust for certain Native American groups.

Several of these exceptions provide meaningful relief for both real estate investors and foreign businesses acquiring real estate for operations in the United States. For example, the exception for transactions in urbanized areas and urban clusters will provide clarity for certain real estate transactions that would otherwise be covered by Part 802 because of their proximity to military or sensitive facilities near urban areas. In addition, excepted transactions involving single housing units and smaller-scale interests in commercial office space will exclude routine commercial transactions from the jurisdictional reach of Part 802.

As noted, however, it is still necessary to evaluate a real estate transaction for potential national security concerns subject to CFIUS’s jurisdiction under its other regulatory authorities (e.g., an acquisition of control by a foreign person over a U.S. business). CFIUS may also assert jurisdiction over transactions that are designed to evade or circumvent CFIUS jurisdiction.

Opportunity for Public Comment

The proposed rules are not yet in effect; rather, they are open for public comment through October 17, 2019. Senior Treasury officials hosted a public teleconference briefing on Part 802 on September 27, 2019, to provide an overview of the proposed real estate rules and answer questions. This alert takes into account the information provided in the Treasury briefing. After the “notice and comment” period, Treasury will develop and publish final rules expected to take effect by February 2020.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.