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On January 13, 2020, the U.S. Department of the Treasury issued its final rules (following publication last September of proposed regulations) pursuant to 2018’s Foreign Investment Risk Review Modernization Act (FIRRMA), which governs foreign investment in the United States subject to review by the Committee on Foreign Investment in the United States (CFIUS or “Committee”). A set of these pertains specifically to cross-border investment in U.S. real estate. Due to close and long-standing security relationships with the U.S., under these rules, Canada, Australia and the United Kingdom are designated as “excepted real estate foreign state(s),” rendering their nationals eligible to be “excepted real estate investors” exempt from certain CFIUS review and filing requirements. This status and exemption is not automatic, however, and is subject to qualifying requirements and continuing review (see below).

New Regulations

FIRRMA significantly broadened the scope of cross-border investments – in U.S. companies, assets, technology and real estate – subject to review by CFIUS. The Treasury Department’s proposed implementing regulations detailing the application of these new authorities will become final by February 12, 2020.

When these rules become final, virtually any investment, including most noncontrolling investments, by a non-U.S. person (not otherwise “excepted”) in a U.S. business involved in critical technology, infrastructure, personal data or certain real estate that in any way implicates U.S. national security (broadly defined) concerns will be subject to review and to CFIUS’ authority to block or even force unwinding of the transaction. Additionally, CFIUS will be authorized to impose significant civil penalties on both sides of the deal up to the total value of the transaction should the required notices not be filed in a timely manner.

Real Estate

Until now, noncontrolling investments in real estate have largely been insulated from national security review. The proposed rules add to current CFIUS regulations at 31 C.F.R. Part 800 a new Part 802 covering certain real estate transactions.

Covered transactions include any investment that gives a foreign investor the direct or indirect right to any three of the following four: (a) physical access; (b) exclude others from; (c) improve or develop; or (d) attach fixed structures to “covered real estate.” “Covered real estate” includes land or buildings that are:

Within or will function as part of a maritime port or airport, including “joint use (military and civilian) airports”;
Within any of 57 specified counties, areas or offshore (within 12 nautical miles) military zones;
Within a mile of any of 164 specified military installations; or
Within 100 miles of 32 enumerated military facilities.

Exemptions are possible for single-family housing units, certain types of urbanized areas (as defined by the Census Bureau), some types of commercial office space, and for certain retail trade or food service establishments.

“Excepted” Real Estate Foreign States/Investors

The regulations published in September broke new ground by proposing the identification of “excepted” foreign states and investors, whose noncontrolling investments would be conditionally exempt from CFIUS review. The Committee noted that due to national security implications, this “white list” would be kept very limited, especially at the outset. The eligibility criteria were two-pronged:

National security interests closely aligned with those of the U.S., with a record of close cooperation in security matters; and
Within two years, demonstrable establishment of an internal national security investment review process similar to CFIUS regarding investment in their own countries, which would share information with U.S. authorities.

Unsurprisingly, then, the first named to this list are the United Kingdom, Australia and Canada, which the Committee identified due to “aspects of their robust intelligence-sharing and defense industrial base integration mechanisms with the United States.”

Note that this “excepted” status is subject to review after a mandatory two-year period.

To be eligible as an “excepted real estate investor” under Part 802, a person or entity must not be otherwise disqualified and must have a robust connection with an excepted foreign state, so that:

The entity must be incorporated in the excepted foreign state or in the U.S., with its principal place of business in one or the other, or if a natural person, be a national of the excepted state;
Any board of directors must be comprised of no more than 25 percent representation by foreign nationals of non-excepted states;
Such foreign nationals may hold no more than a 10 percent voting interest in the entity; and
Such investors must not have in the past violated any CFIUS requirements or U.S. laws or regulations.

Any change in the above factors may risk “excepted status” and prompt CFIUS review.

Filing

Part 802 provides investors with greater clarity as to which investments may be “covered.” Filing with CFIUS regarding a noncontrolling investment remains voluntary</em>; the decision to file rests with the parties to a deal. However, note that even without a filing, CFIUS retains the authority on its own to initiate a review and impose conditions upon, block or unwind covered transactions.

Takeaway

These new rules clearly indicate that investors will face heightened scrutiny and new regulatory hurdles even for noncontrolling cross-border real estate transactions. Parties would be well advised to consult with counsel early in evaluating such transactions to assess, notwithstanding “excepted” origin, whether the excepted foreign state investment provisions apply, and plan (if appropriate) for the risks and costs associated with CFIUS review.\