On January 13, 2020, the U.S. Treasury Department, as chair of the Committee on Foreign Investment in the United States (“CFIUS” or the “Committee”), issued a final set of regulations (“Real Estate Final Regulations”) to expand its jurisdiction to cover certain transactions by non-U.S. persons involving U.S. real estate – a significant expansion that affects many transactions and transaction parties that previously were outside the scope of CFIUS jurisdiction. These regulations implement real estate-related provisions of the Foreign Risk Review Modernization Act of 2018 ("FIRRMA"), which was enacted in August 2018, that expand the scope of “covered transactions” subject to CFIUS review to include the purchase or lease by, or concession to, a non-U.S. person of certain real estate in the United States. The new regulations, which become effective on February 13, 2020, generally track the proposed regulations published in September 2019 and discussed in our prior OnPoint. CFIUS also published Frequently Asked Questions intended to clarify certain aspects of these regulations.
We cover final regulations implementing the technology, infrastructure and data (“TID”) provisions of FIRRMA published contemporaneously with the Real Estate Final Regulations in a companion OnPoint.
Prior to the enactment of FIRRMA, CFIUS only had the authority to review acquisitions of real estate related to transactions that could result in control by a non-U.S. person of a U.S. business. For example, while the acquisition of a U.S. business and the commercial real estate it holds could be subject to CFIUS review, a stand-alone lease of U.S. real estate that did not involve acquisition of control of a U.S. business would be outside of CFIUS’ scope.
FIRRMA expanded CFIUS’ jurisdiction to include certain types of real estate transactions involving the purchase or lease by, or concession to, a non-U.S. person of certain private or public real estate located in the United States. The Real Estate Final Regulations focus on two categories of real estate, including real estate: (i) that is, is located within, or will function as part of, an air or maritime port; or (ii) that is in close proximity to a U.S. military installation or another facility or property of the U.S. Government that is sensitive for reasons relating to national security.
Highlights from the Real Estate Final Regulations
The Real Estate Final Regulations, which will be implemented at 31 C.F.R. Part 802, include the following highlights:
1. The Expansion of CFIUS Jurisdiction to “Covered Real Estate Transactions”
Most importantly, CFIUS’ jurisdiction now includes certain real estate transactions, which are defined in the Real Estate Final Regulations as “covered real estate transactions.” This term includes:
- Any purchase or lease by, or concession to, a foreign person of “covered real estate” that affords the foreign person at least three of four defined “property rights”;
- Any change in the rights that a foreign person has with respect to “covered real estate” in which the foreign person has an ownership or leasehold interest or concession arrangement, if that change could result in the foreign person having at least three “property rights”; or
- Any other transaction, transfer, agreement, or arrangement, the structure of which is designed or intended to evade or circumvent the application of the CFIUS regulations as relates to real estate.
Definition of “Covered Real Estate”
The Real Estate Final Regulations identify two categories of “covered real estate,” one narrow and one broad. The real estate in question either must be:
(i). Located within, or will function as part of, a “covered port”
- “Covered port” is defined to include:
- “Large hub airports” listed in the Department of Transportation Federal Aviation Administration’s annual final enplanement data;
- “Joint use airports” as defined by the Department of Transportation Federal Aviation Administration;
- Airports with annual aggregate all cargo landed weight of greater than 1.24 billion pounds listed in the Department of Transportation Federal Aviation Administration’s annual final all-cargo landed weight data;
- Commercial strategic seaports within the National Port Readiness Network (as defined by the U.S. Department of Transportation Maritime Administration); and
- The top 25 tonnage, container, or dry bulk ports (as defined by the U.S. Department of Transportation Bureau of Transportation Statistics).
- or -
(ii). Located within:
- “Close proximity” (i.e., one mile from the outer boundary) of more than 100 specified U.S. military installations;
- “Extended range” (i.e., 99 miles outward from the outer boundary or, for ranges that extend offshore, not exceeding the outer limit of the territorial sea of the U.S.) of 32 specified U.S. military installations;
- Specific counties or other geographic areas connected to certain, specified U.S. Air Force bases, military installations in Colorado, Montana, Nebraska, North Dakota, and Wyoming; or
- Any part of 23 specified U.S. military installations and located within the limits of the territorial sea of the U.S.
In order to provide clarity on which airports and maritime ports fall within the definition of “covered ports” the Real Estate Final Regulations identify the relevant lists maintained by the Department of Transportation (“DOT”) that contain the information on which airports and maritime ports are covered. These lists are subject to change, and to provide additional certainty to deal parties, the Real Estate Final Regulations include a provision which states that any airport or maritime port added to the lists maintained by DOT after the effective date of the regulations (February 13, 2020) will not be considered a “covered port” until 30 days after its inclusion. For a specific transaction, the covered ports in effect on the day immediately prior to either (i) the date on which the parties sign an agreement establishing the material terms of the transaction or (ii) the completion date of the transaction (whichever comes first) are what apply for purposes of the transaction. However, when an airport or maritime port no longer meets the definition of a “covered port” under the Final Regulations, the removal of the port in question will be effective immediately upon publication of the updated information by the Department of Transportation. The relevant DOT lists will be linked on the Committee’s webpage.
Appendix A to the Final Regulations includes a list of over two hundred identified bases, ranges, and other military installations the Department of Defense determined meet the definition of “military installation” for purposes of the regulations. This list has been slightly amended from the version released with the Proposed Regulations to further refine the geographic areas covered and is subject to future changes through notices that will be published in the Federal Register. The Treasury Department plans to make available a web-based tool that can be used to understand the geographic coverage of the Real Estate Final Regulations.
Definition of “Property Rights”
To be a “covered real estate transaction,” the transaction must involve “covered real estate” and the non-U.S. person must be afforded at least three of four “property rights.” The four defined “property rights” (whether or not they are exercised) are:
- The right to physically access the real estate;
- The right to exclude others from physical access to the real estate;
- The right to improve or develop the real estate; and
- The right to attach fixed or immovable structures or objects to the real estate.
2. Exceptions from the Scope of “Covered Real Estate Transaction”
The Real Estate Final Regulations include a number of exceptions to the scope of “covered real estate transactions.” These exceptions generally are based either on the identity of the non-U.S. investor or on the type of real estate transaction. In particular, CFIUS will not have jurisdiction to review the following types of real estate transactions:
- Excepted Real Estate Investors: Real estate transactions involving certain “excepted real estate investors” connected to “excepted real estate foreign states” are not subject to CFIUS review. Real estate investors that have a substantial connection to an excepted foreign state and meet other criteria (some of which apply on a forward-looking basis) could be considered “excepted” and their real estate transactions will be outside the scope of CFIUS jurisdiction.
- The U.S. Department of Treasury has initially selected Australia, Canada, and the United Kingdom as the “excepted real estate foreign states.” As discussed in further detail in our companion analysis, these countries were identified due to aspects of their intelligence-sharing and integration of their defense industrial base with the United States. The Committee has also developed a two-criteria test to determine which countries constitute “excepted real estate foreign states” for purpose of the Real Estate Final Regulations. A foreign state will be excepted if (i) it is identified by the Committee as an eligible foreign state and (ii) the Committee determines the foreign state has made significant progress toward establishing and effectively utilizing a robust process to analyze foreign investments for national security risks and to facilitate coordination with the U.S on matters relating to investment security.
- Certain Securities/Lending Transactions: An acquisition of securities in a real estate transaction by a securities underwriter would not be considered a covered transaction as long as such acquisition is in the ordinary course of business and in the process of underwriting. In addition, the extension of a mortgage, loan, or similar financing arrangement by a non-U.S. person to another person for the purpose of the purchase, lease, or concession of covered real estate generally would not be considered a covered transaction. However, if there is a significant possibility that the non-U.S. person might purchase, lease, or be granted a concession to real estate as a result of an imminent or actual default or other condition – or if the non-U.S. person might otherwise be acquiring property rights over covered real estate – such an activity might constitute a covered real estate transaction.
- Urban Real Estate: The purchase, lease, or concession of covered real estate that is within an “urbanized area” or “urbanized cluster” (as defined by the U.S. Census Bureau) generally will not be considered a covered real estate transaction, unless such real estate is located in close proximity to a designated military installation or another sensitive facility or property of the U.S. Government or is within, or will function as part of, an airport or maritime port.
- Transactions that do not Confer Three or more “Property Rights”: Transactions in which a non U.S. person acquires fewer than three of the four “property rights” defined above (i.e., right to access, exclude, improve/develop, or attach fixtures) would not be a covered real estate transaction.
- Retail Trade Leases and Concessions at Ports: The lease by or concession to non-U.S. persons of real estate located within a “covered port” would not be a covered transaction if the real estate can (i) only be used for the purpose of engaging in the retail sale of consumer goods or services (for example, car rentals and parking) to the public, or (ii) is used by a non-U.S. person in relation to its activities as a foreign air carrier (as designated by the Department of Homeland Security Transportation Security Administration).
- Certain Commercial Office Space: A purchase or lease by, or concession to, a non-U.S. person of commercial office space within a multi-unit commercial office building would not be a covered transaction, if, upon the completion of the transaction, the non-U.S. person and its affiliates would not: (i) hold, lease or have a concession with respect to more than 10% of the building’s total square footage; or (ii) represent more than 10% of the building’s tenants.
- The Real Estate Final Regulations clarify that this exception is based on the number of parties that own, lease or have a concession to the commercial space in the building. The Committee provided the following example: if a non-U.S. person leases five percent of the total commercial space in a building that is located 0.5 miles from a military installation identified in Appendix A and there are nine other tenants that have leases for commercial space with the building owner, assuming no other relevant facts, the transaction is not a covered transaction.
- Single Housing Units: A purchase, lease, or concession of covered real estate that is a single housing unit, including fixtures and adjacent land, would not be a covered transaction as long as the land is incidental to the use of the real estate as a single housing unit.
- Land Owned by Native Groups: A purchase, lease, or concession of land owned by or held in trust for certain Alaska Native entities, Native groups, American Indians, Indian tribes, Alaska Natives and Alaska Native entities would not be covered.
- Transactions Captured by Other CFIUS Regulations: Transactions involving real estate that also qualify as investments in U.S. businesses subject to CFIUS’ jurisdiction – such as the acquisition of a U.S. business that includes the acquisition of that business’s facilities – are not covered real estate transactions. They should, however, be assessed under other CFIUS regulations related to the acquisition of control over U.S. businesses and other non-controlling investments involving non-U.S. investors.
3. No Mandatory Filings for Covered Real Estate Transactions – Process Remains Voluntary
While FIRRMA imposes mandatory declaration requirements for certain types of transactions, the Real Estate Final Regulations do not impose any mandatory declaration requirements for covered real estate transactions. The CFIUS process thus will remain voluntary for covered real estate transactions. Moreover, parties to a covered real estate transaction can choose to submit a short-form declaration or a full voluntary notice (similar to the options that were available under the so-called CFIUS “Pilot Program” implemented in November 2018, which is covered in a prior OnPoint). In either case, parties will need to provide specific information related to the covered real estate transaction, including identification of the parties involved, a description of the real estate, and a summary of the rights related to the real estate.
The Real Estate Final Regulations represent a significant expansion of CFIUS jurisdiction to real estate transactions that previously were not subject to national security reviews, including certain “greenfield” investments. While the Real Estate Final Regulations provide meaningful guidance on navigating the expanded CFIUS jurisdiction for real estate transactions, they also add further complexity to the CFIUS review process.
A real estate transaction involving non-U.S. investors should be reviewed carefully to assess whether a voluntary CFIUS filing is advisable, as parties that do not submit a transaction for review will face the possibility of CFIUS initiating a review post-close, which might result in unanticipated mitigation requirements or, in extreme circumstances, a requirement to unwind the deal.