CFIUS’s new role in real estate transactions

Construction worker at a building construction site



On February 13, 2020, two sets of enhanced regulations governing the Committee on Foreign Investment in the United States (CFIUS) became effective, implementing the Foreign Investment Risk Review Modernization Act (FIRRMA) – one covering certain real estate transactions and one covering other investments involving US businesses.  CFIUS is an interagency committee chaired by the US Department of the Treasury and charged with evaluating and mitigating the US national security risks posed by foreign investments.  As discussed in our overview of the new rules when they were first published, these regulations strengthen CFIUS’s authority and broaden its jurisdiction to review a wider variety of US investments, including certain non-controlling investments in US businesses and real estate transactions.

This note outlines CFIUS’s new authority to review foreign investment in US real estate and explains how this review process will impact real estate investors who have not previously dealt with CFIUS risk.

CFIUS’s authority to review real estate transactions

CFIUS has long had an interest in transactions that may present an opportunity for a foreign person to gain access to real estate located near sensitive US military and government facilities.  But, prior to the new regulations, CFIUS’s ability to review real estate investments was limited to instances where such real estate was associated with a foreign investment in a US business.  As codified in 31 C.F.R. Part 802 (the CFIUS provisions specific to real estate transactions), CFIUS now has jurisdiction to review purchases, leases and concessions of real estate by foreign persons – including Real Estate Investment Trusts (REITs) – irrespective of whether such transactions involve a US business. Investors should be mindful, however, that this expanded authority to review “greenfield” investments (ie, those real estate transactions that do not involve a US business) does not supplant CFIUS’s preexisting jurisdiction to review transactions that could result in foreign control of, or certain non-controlling foreign investments in, a US entity engaged in interstate commerce that also owns or leases real estate.

CFIUS’s expanded authority to review real estate transactions is limited to those transactions involving property near sensitive US locations, such as airports, maritime ports, and military installations, and that afford the foreign investor with certain rights related to the property.  Specifically, the real estate transaction must provide a foreign person with at least three of the following property rights:

  •  physical access to the property
  • exclusion of others from physically accessing the property
  • improvement or development of the property and/or
  • affix structures or objects to the property.

CFIUS’s authority to review real estate transactions does not extend to investments in all types of real estate.  Instead, the new regulations cover investments in real estate that are:

  •  located within, or will function as part of, an air or maritime port identified by the Department of Transportation (a “covered port”)[1]
  •  located in “close proximity” (ie, within one mile) of any US military installations or other sensitive US government facilities, as identified in an appendix to the regulations
  • within the “extended range” (ie, within 100 miles and, where applicable, within the limits of the US territorial sea) of specified US military training centers, ranges and testing centers
  • within any county or other geographic area identified near active US Air Force ballistic missile fields in Colorado, Montana, Nebraska, North Dakota, and Wyoming or
  • within any part of US Navy off-shore ranges or operating areas within the limits of the US territorial sea, as identified in the appendix to the regulations.

Exclusions – real estate transactions not subject to CFIUS jurisdiction

The new regulations exclude from CFIUS jurisdiction certain categories of real estate transactions that are less likely to pose a national security risk.  As with the broader CFIUS regulations for investments in US businesses (31 C.F.R Part 800), the real estate regulations (Part 802) exclude from jurisdiction certain facilitating roles in transactions.  For example, the extension of financing by a foreign person for the purchase, lease or concession of covered real estate is not itself subject to CFIUS jurisdiction, even when accompanied by a secured interest in the real estate. Likewise, CFIUS does not have jurisdiction over a foreign person underwriting or providing fidelity, surety, or casualty insurance for transactions involving covered real estate. 

Part 802 contains several other unique exclusions from CFIUS’s real estate jurisdiction,[2] including:

  • Urban centers:  Real estate within an “urbanized area” or “urban cluster” (as defined by the US Census Bureau), unless it is within a covered port or within one mile of a US military installation
  • Single housing units:  The purchase, lease or concession of a single “housing unit,” including the fixtures and adjacent land incidental to use as a single housing unit
  • Commercial office space:  Commercial office space in multiunit buildings if the foreign person does not (a) hold more than 10 percent of the total square footage of commercial office space in the building; or (b) represent more than 10 percent of the total number of tenants for commercial space in the building
  • Retail space:  The lease by or concession to a foreign person of real estate that may be used only for the purpose of engaging in the retail sale of consumer goods or services to the public
  • Air carriers:  The lease by or concession to a foreign air carrier approved by the US Department of Homeland Security and in furtherance of its activities as an air carrier
  • Tribal organizations:  The purchase or lease by, or a concession to, a foreign person of real estate owned by or held in a trust on behalf of a tribal organization

As discussed in our prior alert, the CFIUS regulations have introduced the concept of “excepted foreign states” and “excepted investors.”  Investors from an excepted foreign state that satisfy several criteria are exempt entirely from CFIUS jurisdiction with respect to covered real estate transactions.  CFIUS has initially designated Australia, Canada, and the United Kingdom as excepted foreign states, but only a narrow subset of potential investors from these countries are likely to satisfy the numerous requirements to qualify as an excepted investor.

Notifying CFIUS of real estate transactions

Although the broader CFIUS regulations include mandatory filing provisions, CFIUS filings for covered real estate transactions are voluntary.  Parties to a covered real estate transaction should carefully weigh the benefits of voluntarily filing with CFIUS against the ongoing risk exposure of choosing not to file.

CFIUS may review covered transactions at any time, including transactions that have already been consummated.  CFIUS actively seeks out transactions about which it was not notified.  Accordingly, parties have an incentive to voluntarily undergo CFIUS review in exchange for eliminating the risk of future CFIUS review and mitigation, which can include unwinding the transaction.  This future CFIUS risk for completed transactions should be a key consideration for private equity and other repeat investors.

Parties filing with CFIUS may opt to file either a voluntary “notice” of the covered transaction, which is a lengthy and detailed submission, or a short-form “declaration.”  The new short-form declaration is an abbreviated five-page filing intended to reduce the burden on parties.  Unlike the voluntary notice process, where CFIUS has 45 days to review (with a possible 45-day extension to investigate), CFIUS has only 30 days to assess a voluntary declaration before it must decide how to proceed. CFIUS, however, will not mitigate national security risks through the declaration process and may request the parties file a voluntary notice if there is a concern with the transaction.  Thus, for investments in US real estate that involve greater sensitivity or complexity, a full notice, rather than a declaration, may be warranted.

Final thoughts

Since the enactment of the bi-partisan FIRRMA, CFIUS has increased its staffing considerably and is intent on asserting its authority to identify and review foreign investment in US real estate.  The creation of separate regulations specific to CFIUS’s review of real estate transactions strongly suggests that the US government is focused on this potential threat to national security and intends for CFIUS to exercise its new authority.  Foreign investors in US real estate will benefit from considering CFIUS implications early in securing funding and structuring transactions, particularly if the real estate is located close to a sensitive US military or government site identified in the regulations.

[1] Covered ports include “large hub airports” as defined in 49 U.S.C. § 40102; airports with annual aggregate all-cargo landed weight greater than 1.24 billion pounds; “joint use airports” as defined in 49 U.S.C. § 47175; commercial strategic seaports within the National Port Readiness Network; and the top 25 tonnage, container, or dry bulk ports.

[2] Investors should be careful to note that an exclusion from the CFIUS real estate regulations (Part 802) is not determinative of whether the broader CFIUS regulations for US investments (Part 800) apply.