Tag: CFIUS

Foreign Ownership of Real Estate Under New CFIUS Regulations

In September 2019, the U.S. Department of the Treasury issued proposed regulations to implement the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA). Part of those proposed real estate transactions passing ownership to a foreign person near critical locations. The final regulations came out and are largely unchanged.

The regulations extend CFIUS jurisdiction to cover the purchase or lease by, or a concession to, a foreign person of real estate in and/or around specific airports, maritime ports and military installations. The restricted areas depending on the type of critical real estate.

The specific restricted areas are:

  1. Within one mile of any of the 100 identified military installations
  2. Within 99 miles of any of 32 identified military installations
  3. Any county or other geographic area identified in connection with certain Air Force bases located in Colorado, Montana, Nebraska, North Dakota, and Wyoming;
  4. Any part of 23 identified military installations and located within 12 nautical miles of the U.S. coast
  5. Located within or will function as part of an airport or maritime port

Arnold & Porter put together this map of its applicability:

That’s a lot of real estate covered by this rule assuming its accurate. The rule talks about the creation of tool to make this more certain.

One of the exceptions is urbanized areas. Unless the real estate is in “close proximity” of an identified military installation or is part of a covered port, the rule provide an exception for transactions that involve real estate located within an “urbanized area” or “urban cluster.” Those two terms: “urbanized area” or “urban cluster” are defined by the Census Bureau based on population density. Hopefully, most major cities inside all of those problematic areas in the map will fall under this exception. The question will be how far does the urbanized area extend outside the CBD.

Another exception is if your foreign investor is from Australia, Canada or the United Kingdom. Apparently, the Trump administration likes these countries and investors from those three get a pass from CFIUS on real estate transaction. The rules do allow for other countries to be added to the list.

Leases are also excluded from CFIUS as long as the lease is for less than 10% of the building and there are at least 9 other tenants.

Real estate transactions are not subject to mandatory CFIUS filings. Of course you risk having the transaction fall apart if CFIUS comes in later to undo the transaction.

The new rules give you the option of filing a short-form “declaration” rather than the longer, traditional form of “notice.”  That also means a shorter 30-day review period.

Sources:

New Restrictions on Foreign Ownership of Real Estate

On September 17, 2019, the U.S. Department of the Treasury issued proposed regulations to implement the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA). The proposed regulations would expands the jurisdiction of the Committee on Foreign Investment in the United States (CFIUS) to review foreign investments and mitigate any potential national security concerns regarding some technology and real estate

The proposed regulations extend CFIUS jurisdiction to cover the purchase or lease by, or a concession to, a foreign person of real estate in and/or around specific airports, maritime ports and military installations. The locations are listed in an annex to the proposed rules. 

The description of the rights given to the foreign person or entity under the definition of a real estate transaction reads like a law school class on property. The foreign person must be given three or more of the following property rights:

  • the right to physically access,
  • the right to exclude others from access,
  • the right to improve or develop or
  • the right to affix permanent structures or objects.  

The specific restricted areas are:

  1. Within one mile of any of the 100 identified military installations
  2. Within 99 miles of any of 32 identified military installations
  3. Any county or other geographic area identified in connection with certain Air Force bases located in Colorado, Montana, Nebraska, North Dakota, and Wyoming;
  4. Any part of 23 identified military installations and located within 12 nautical miles of the U.S. coast
  5. Located within or will function as part of an airport or maritime port

Looking at my headquarters in New England, Hanscom Air Force Base is listed in Part 1, restricting subjecting any foreign ownership within 1 mile of the base to CFIUS oversight. I have to admit that I don’t know the exact boundaries of the base, just the general area. But just staring at the map, it looks like there is a whole lot of real estate, including a stretch of Interstate 95 that will fall into that review area.

Sources:

CFIUS Annual Report on National Security Transactions

The Committee on Foreign Investment in the United States is a multi-agency regulatory body empowered to review transactions involving a foreign person and a U.S. business that may affect national security. On November 14, 2008, the Department of the Treasury issued its final rule to implement the Foreign Investment and National Security Act of 2007, which provided guidelines for the Committee on Foreign Investment in the United States when reviewing investments by foreign persons in U.S. businesses for national security issues.

If your transaction has implications for national security and your investment vehicle has significant foreign ownership of the party or the other side has significant foreign ownership, they you need to pay attention to CFIUS. There has been little guidance on what level of control and what would be a threat to national security.

Recently, CFIUS delivered its unclassified Annual Report to Congress for the calendar year 2009 and it offers some insight into the breadth and power of this little known agency.

In 2009, 65 CFIUS notices were filed and determined to describe “covered transactions” within their regulatory review.

Of the 65 notices filed, 7 were voluntarily withdrawn from CFIUS consideration the initial review and investigation phases. New notices were filed in 3 transactions and 3 transactions were abandoned. The seventh withdrew the transaction with the declared intent of re-filing a CFIUS notice.

Twenty-five of the covered transactions were subject to investigation, extending the period of delay for the transaction.

In 2009, CFIUS agencies negotiated, and parties adopted, mitigation measures for five different covered transactions. These measures involved acquisitions of U.S. companies in the computer software, telecommunications, and energy sectors. No transaction was blocked.

In a key finding, the CFIUS judged that judge that foreign governments are “extremely likely” to continue to use a range of collection methods to obtain critical U.S. technologies. Sources:

The Ins and Outs of CFIUS Filing

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The Foreign Investment and National Security Act of 2007 applies to takeovers of U.S. businesses by non-U.S. persons. That law formalized the Committee on Foreign Investment in the United States to review foreign investments that could impair national security

Back in November, I was looking at how the new CFIUS regulations would affect real estate investors with significant foreign ownership. it seems clear the purchase of a building could be considered a purchase US business. The issue would be whether the tenants in the building are government tenants and how the ownership of the building could implicate national security.

William A. Newman, of Sullivan & Worcester LLP in New York, put together an article on process for making a CFIUS application filing: The Ins and Outs of CFIUS Filing. He does not paint a pretty picture. CFIUS has estimated that the average filing requires about 100 hours.

Mr. Newman also contributes to the USA Inbound Acquisitions & Investments Blog.

Previous Posts:

GAO Report on Sovereign Wealth Funds

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The U.S. Government Accountability Office has released its second report on Sovereign Wealth Funds: Laws Limiting Foreign Investment Affect Certain U.S. Assets and Agencies Have Various Enforcement Processes (.pdf). This report was sent to the Committee on Banking, Housing, and Urban Affairs in the U.S. Senate.

The Report found the United States is generally open to foreign investment, except for sector-specific restrictions. The banking, agriculture, transportation, natural resources and energy, communications, and defense sectors have federal laws that apply to foreign investment specifically. These sectors have laws that contain provisions that either restrict the level of foreign investment, limit the use of a foreign-owned asset, or at least require approval or disclosure of any foreign investments.

In addition to these specific limitations, there is the broad power under the Defense Production Act of 1950 granted to the CFIUS to review a foreign acquisition, merger, or takeover of a U.S. business that is determined to threaten the national security of the United States.

Restrictions on foreign investment in real estate also exist in many states. According to a Alien Land Ownership Guide from the National Association of Realtors, 37 U.S. states had some type of law affecting foreign ownership of real estate. Most of the laws are merely a requirement that a foreign investor register as a company doing business in the state before purchasing property. Some states specifically prohibit foreign ownership of certain types of land. One common type of real property restriction was for agricultural land. Fifteen states having some law governing foreign ownership in this area.

The Report’s recommendation for Executive Action:

To enhance their oversight of sectors subject to laws restricting or requiring disclosure of foreign investments, we recommend that the Chairman of the FCC and the Secretaries of Agriculture and Transportation review the current sources of the information their agencies currently monitor to detect changes in ownership of U.S. assets— which are subject to restriction or disclosure requirements applicable to foreign investors—and assess the value of supplementing these sources with information from other government and private data sources on investment transactions.

References:

Guidance Concerning the National Security Review Conducted by the Committee on Foreign Investment in the United States

On December 8, the Committee on Committee on Foreign Investment in the United States published a notice in the Federal Register of that provides guidance to U.S. businesses and foreign persons that are parties to transactions that are covered by section 721 of the Defense Production Act of 1950, as amended by the Foreign Investment and National Security Act of 2007, and the regulations at 31 CFR part 800.

Section 721 requires CFIUS to review covered transactions notified to it ‘‘to determine the effects of the transaction[s] on the national security of the United States,’’ but does not define ‘‘national security,’’ other than to note that the term includes issues relating to homeland security. Instead, section 721 provides an illustrative list of factors, listed below, for CFIUS to consider.

This notice provides examples and insight into what types of transaction could trigger a CFIUS review.

CFIUS notes that a just because a transaction presents national security considerations does not mean that CFIUS will necessarily determine that the transaction poses national security risk.

See:

Implementation of Foreign Investment and National Security Act

Davis Polk & Wardwell attorneys Margaret M. Ayres and Jeanine P. McGuinness prepared a memorandum entitled FINSA Final Regulations (.pdf) discussing the final regulations issued by the U.S. Department of the Treasury to implement the Foreign Investment and National Security Act of 2007. That law amended the 1988 “Exon-Florio” statute and made significant changes to the scope of review and process for evaluating foreign acquisitions of U.S. businesses for national security risks. The regulations also codify recent improvements to the practices of the Committee on Foreign Investment in the United States.

The new regulations include the concept of a “covered transaction” and give additional guidance on key terms, including “control.”

A “covered transaction” is a transaction that could result in control of a U.S. businesss by a foreign person.

“Transaction” is broadly defined [§800.224] to include acquisitions, mergers, joint ventures and long term leases.

“U.S. Business” is also broadly defined [§800.226] to include any entity engaged in interstate commerce in the U.S. For real estate that excluded raw land and equipment. If contracts go along with the assets, then you could have a U.S. Business. Although raw land is excluded a leased building probably would be a U.S. business.

“Control” is broadly defined [§800.204] to give the CFIUS broad discretion. A list of minority shareholder protections are listed in §800.204(c) as not in themselves conferring control. This list is fairly short compared to most minority shareholder protections. There is another relatively safe harbor in §800.302(b) that a transaction with a foreign person holding 10% or less of the voting interest and holding that interest solely for passive investment will not be a covered transaction.

The final regulations were published in the Federal Register on November 21 and will become effective on December 22, 2008.

Comments on CFIUS

Over at Sheppard Mullin’s Government Contracts Blog, Lucantonio N. Salvi put together a summary of comments to the draft CFIUS regulations: Comments On Proposed CFIUS Rules Range From Cautious Praise To Outright Criticism.

[T]he U.S. Department of the Treasury published on April 21, 2008 proposed rules designed to strengthen the process by which the Committee on Foreign Investment in the United States (“CFIUS”) reviews and approves certain business transactions involving foreign investment. The proposed rules were issued under the Foreign Investment and National Security Act of 2007, Pub. L. No. 110-49 (“FINSA”), which requires a more intense CFIUS process that allows the government more discretion in investigating and altering business transactions that may impact national security. The U.S. Department of the Treasury invited comments on the proposed rules through June 9, 2008. Now that the comment period is over, we thought it might be worthwhile to see what types of comments were received. Not surprisingly, it is a mixed bag.

The final regulations are now ready for publishing in the Federal Register and will go into afect thirty days after publication.

See also:

Control under FINSA and CFIUS

On November 14, 2008, the Department of the Treasury issued its final rule to implement the Foreign Investment and National Security Act of 2007, which provided guidelines for the Committee on Foreign Investment in the United States when reviewing investments by foreign persons in U.S. businesses for national security issues. The final regulations go into effect 30 days after publication in the Federal Register: Regulations Pertaining to Mergers, Acquisitions, and Takeovers by Foreign Persons. (.pdf) That means they should be in effect by the end of the year.

One issue with the law and regulations is the uncertainty of when notification is required under FINSA.

Under §800.207:

The term covered transaction means any transaction that is proposed or pending
after August 23, 1988, by or with any foreign person, which could result in control of a
U.S. business by a foreign person.

The issue then is what is meant by “control” under FINSA?

The final regulations do not offer much help:

The Final Rule maintains the long-standing approach of defining “control” in functional terms as the ability to exercise certain powers over important matters affecting an entity. Specifically, “control” is defined as the “power, direct or indirect, whether or not exercised, through the ownership of a majority or a dominant minority of the total outstanding voting interest in an entity, board representation, proxy voting, a special share, contractual arrangements, formal or informal arrangements to act in concert, or other means, to determine, direct, or decide important matters affecting an entity; in particular, but without limitation, to determine, direct, take, reach, or cause decisions regarding the [matters listed in §800.204(a)], or any other similarly important matters affecting an entity.” See §800.204(a). Two points should be emphasized concerning this definition. First, it eschews bright lines. Consistent with the existing regulations, control is not defined in terms of a specified percentage of shares or number of board seats. Although share holding and board seats are relevant to a control analysis, neither factor on its own is necessarily determinative. Instead, all relevant factors are considered together in light of their potential impact on a foreign person’s ability to determine,
direct, or decide important matters affecting an entity.

One useful carve-out is under §800.302(b) that transactions that are not covered transactions include:

A transaction that results in a foreign person holding ten percent or less of the outstanding voting interest in a U.S. business (regardless of the dollar value of the interest so acquired), but only if the transaction is solely for the purpose of passive investment. (See §800.223.)

See my prior blog posts: