On January 3, 2017, the United States Government Accountability Office (GAO) delivered a report to Congress recommending that the General Services Administration (GSA) inform tenant agencies when leasing high-security space from foreign owners. This report follows several years of heightened scrutiny by federal agencies over foreign ownership of real estate that houses U.S. Government entities, to include at least one high-profile review by the Committee on Foreign Investment in the United States (CFIUS). GAO’s recommendation may lead to further oversight and review for would-be lessors to the federal government.

Foreign Ownership Concerns

GAO noted in its report that foreign ownership elevates the government’s exposure to espionage, including intrusions into government information systems. GAO also noted the government’s interest in knowing whether its lease payments where unwittingly being used to support money laundering operations by undisclosed beneficial owners.

Existing Authorities and Recommended Changes to Current Practices

GAO noted that GSA’s leasing policies and procedures do not distinguish between leasing from domestic or foreign companies. GSA currently only checks to ensure potential lessors are not on the Excluded Parties List and Treasury’s Specially Designated Nationals and Blocked Persons List. However, GSA has now agreed to begin determining 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. While the FAR requires disclosure of highest level ownership of the offeror, it is unclear how GSA will collect additional information from lessors—particularly with respect to those leases effective prior to November 1, 2014 when the requirement to include higher level owners was added. In some cases, the “highest level ownership” for purposes of FAR may have numerous, passive owners whose identity is not a matter of public record.

Purchases, Sales, and Novations

Additional scrutiny on foreign ownership poses a particular risk to asset transfers. Buyers and Sellers of commercial real estate with government tenants should consider any potential foreign ownership issues prior to entering into purchase and sale agreements. The standard GSA provision governing the assignment of the government lease and recognition of a purchaser as a successor in interest (a "novation") provides that "If the [Contracting Officer] determines that recognizing the Transferee as the Lessor will not be in the Government's interest, the Transferor shall remain fully liable to the Government for the Transferee's performance of obligations under the Lease, notwithstanding the transfer." While outright refusals to acknowledge successors in interest is uncommon, Contracting Officers will often require additional assurances from purchasers, and this report may lead GSA to insist on additional guarantees where national security, law enforcement, or homeland security entities are involved.

What’s Coming Next

Commercial real estate owners, lessors, and developers should expect a continued focus on foreign ownership of commercial real estate, particularly when national or homeland security interests are implicated.