CFIUS: Regulations Impacting Foreign Investment in U.S. Real Estate

Michael Rose: Yes, absolutely. But first, thank you, Lisa, for the invitation to discuss this topic today. I have the perfect example to start. Our firm has a new client, which is a boutique investment and advisory firm that focuses on infrastructure and real estate. They also provide advisory services to assist in transaction execution. The company has assisted a foreign investor in a number of real estate deals in the US, in the form of acquiring interest, in buildings and complexes where the US advisor may or may not take an investment interest. Until now the deals have been for apartments or condos and large cities across the US.

And unbeknownst to the advisory firm, the past real estate deals have fallen on their exceptions to the CFIUS regulations. The next deal is for an office complex in a major city. This deal could be covered under the regulations as, although it might not fall directly under the exact criteria as we will discuss later. It will incorporate the national security concerns around critical infrastructure, and can't be considered by CFIUS as a national security risk.

The office complex will house one of the largest energy infrastructure, fiber optics, and telecommunications companies in the US. There will be much risk with this transaction and an assessment will need to be completed to determine if a voluntary filing should be made. Where a foreign investment in the US takes place in real estate transactions. One must look to section 802. They are the regulations for real estate transaction and CFIUS reviews, but must also assess if the transaction could be considered a national security risk around critical technology, critical infrastructure, or sensitive personal data of the US citizens. So the key here is to be familiar with section 802 as deals are being contemplated or during the due diligence process.
LK: So that was helpful. Thank you for clarifying that. And now if you can help clarify the difference between the proposed rules and the final rules, and what we need to be looking out for.
MR: Well, prior to FIRRMA, CFIUS had authority to conduct national security reviews of investments in the United States that resulted in control of a US business. This authority included business acquisitions and investments that potentially implicated what a deemed sensitive real estate. So the real estate transaction really was part of the US business transaction itself or acquisition. FIRRMA expanded CFIUS's jurisdiction to include review of certain non-controlling investments in TID US businesses. That is businesses containing critical technology, critical infrastructure, or sensitive personal data of US citizens, whether they include real estate or not, and jurisdiction to review certain covered real estate transactions.

The final rules clarify CFIUS's expanded jurisdiction and specify the rules and coverage for real estate transactions. So for real estate, the focus for this new review authority is whether the real estate is within a certain distance of identified US ports, military, or government facilities. Other types of national security risk could exist and would be reviewed on a case by case basis, similar to the example I gave earlier. Some of these real estate transactions could touch on office complexes that has governmental infrastructure or technology organizations that could be considered a national security threat.

So now CFIUS can review real estate transactions outside of US business acquisitions. So section 802, as we said, which deals with real estate, will apply to a transaction only if section 800 rules do not. The purchase lease, buy, or concession to a foreign person of certain US real estate will become covered on their CFIUS's jurisdiction, even when no IS business is involved in the transaction. When the real estate is within certain proximity of a coverage site. Now these coverage sites are defined and listed in the final rules.

And the transaction also affords the foreign person three or more of the following property rights, and they are physical access, exclusion of others, improvement or development, and the right to affect structures or objects. There are also exceptions where a transaction involving covered real estate will not be subject to CFIUS jurisdiction under either section 800 or 802. Two of the exceptions are real estate and urbanized areas, unless located within airport or maritime port, or within one mile of a military installation or other sensitive government facility, or a single housing unit.
LK: So Mike, that was a lot of information there. And just to clarify, if you could just help me even understand a little bit better. When looking at the locality of where the real estate is owned and going to be operated, how do people understand where the proximity is going to matter and where these certain covered real estate sites are going to be?
MR:First off, I would go to the final rules and there it defines coverage sites and also it lists the proximity. So it would have a listing of sites that would be within one mile of where the real estate location is, or within 99 miles of other types of military installations. So it kind of lays that out in the final regs. Where situations occur and there's additional concern is where there's potential real estate that is housing certain security type risks outside of what's in the regulations themselves.

So it could be, as we mentioned, critical infrastructure or a technology company, and the building is owned by a foreign investment. Whereby, then certain types of communications or access could be deemed critical and be a concern from a national security risk itself.
LK: Interesting. Thank you. So we're living in unprecedented times as we know, how is CFIUS operating? Or are they operating even under the current COVID environment?
MR:So the CFIUS staff across all of the related agencies are still operating with reduced in office operations as a result of the global pandemic. While we're not aware of any slowdowns at this point, there has the potential to slow transactional reviews where data may be considered sensitive. Which would mandate that all reviews be done and documentation be maintained in a secure government facility. So work from home would not be available to staff members conducting these types of reviews.
LK: Wow. Okay thank you. And can a transaction proceed without CFIUS approval right now?
MR:So it's possible that CFIUS may issue a no action response for a filing. A no actual response indicates that the committee is unable to complete their review. And these normally take place for a voluntary filings because it may not contain, that filing may not contain as much information as an overall written declaration. And that the parties may choose to file that written declaration, if they wish to obtain the statutory safe harbor for their transaction. Or they may choose to proceed to close on the transaction without the safe harbor.

So without the safe harbor, CFIUS could take action later. A quarterly parties will need to evaluate carefully any perceived national security risks that may be presented by the transaction and also their own risk tolerance for closing a transaction without having received formal CFIUS approval.
LK: So is this filing with CFIUS mandatory for real estate transactions?
MR:It is not. It's mandatory for under section 800, for our acquisition of US TID businesses, but it's voluntary for real estate transactions.
LK: So what are the following five areas that should be considered for real estate transactions?
MR:Let me go back a little bit. Well the treasury department has whittled down some of the final regulations from the initial proposals. There are still potential for unpleasant surprises for real estate under section 802. There's 31 pages of final rules governing real estate on their FIRRMA. So filing with CFIUS for covered real estate transactions, as we said, is voluntary. But as it is not mandatory, following requirements for CFIUS consideration should absolutely be part of the purchase or lease checklist.

However, obtaining pre-clearance provides parties to the transaction with a regulatory safe harbor, as we talked about. And the points I'd like to summarize that we discussed earlier really are those five points that you're asking. And it's a foreign company doesn't need to acquire a U.S. company to be covered by the new rules for CFIUS review of a real estate transaction. CFIUS can only review deals that give investors three of the four property rights that we discussed earlier.

The treasury department is providing investors with definitions around close proximity and extended coverage, as we also discussed. And there are fairly broad exceptions under the new rules for single family housing units and commercial office space. Now, one thing to keep in mind, for example, the DC Metro area and other parts of the country with dense concentration of government and military facilities, may be more effected by these new real estate rules, despite the exceptions for urban clusters and urbanized areas in the regulations. And there are other areas outside of DC, across the country that have similar government and military facilities and concentrations of those.
LK: Thank you. And what should investors or owners or operators or developers do in cases when their transaction that they're looking at is going to fall under these regulations?
MR:So foreign lenders and equity investors should account for CFIUS in the beginning stages of a transaction. And plan to conduct a comprehensive risk assessment to establish whether the transaction falls under CFIUS, as it poses a national security threat in the US. So not only look at the regulations, but also conduct a risk assessment within the company to really determine if they believe, if the company believes that a national security risk or concern could be causes based on the transaction itself.

So EisnerAmper provides independent, third-party assessment and monitoring with respect to CFIUS obligations. Our services are designed to be clearly audible, measurable, and effectively address potential risk points. So we focus on three areas and one of the major areas that we assist companies and also in the early stages of contemplation or due diligence, is what we call the pre-filing transaction risk assessment.

And it really identifies potential risks with the transactions as we alluded to in the first example. Also, if the mitigation agreement is required, we focus on readiness of getting the company in line to be able to comply with the specific articles of the mitigation agreement. And we also provide ongoing analysis, which includes monitoring and audit of the mitigation agreement itself. So if you have any questions, I'd encourage you to visit eisneramper.com/CFIUS to contact us. We'd be happy to discuss any potential deals that are being contemplated.
LK: Michael, thank you so much for sharing the ins and outs of CFIUS and their relation to real estate transactions with us. And thank you all for listening to Breaking Ground, Real Estate Insights from EisnerAmper. Join us for our next podcast and visit eisneramper.com/RE from more real estate news.