ANALYSIS: CFIUS Real Estate Rules Will Impact Entire Industry

Lawyers and agents working on real estate transactions across the United States have about a month to get up to speed on new foreign investment rules that—for the first time—potentially impact them. The Committee on Foreign Investment in the U.S. (CFIUS) now has jurisdiction over certain real estate transactions, including leases, purchases, and concessions not part of an M&A deal, in which the location of the real estate renders it a national security risk. Real estate located within certain ranges of proximity to, or inside, airports, maritime ports, military installations, and other identified facilities are now subject to CFIUS review.

The geographical areas and locations covered are so vast that Treasury is developing an online tool akin to the U.S. Census’s TIGERweb (Topologically Integrated Geographic Encoding and Referencing database) to assist the public in understanding what real estate is covered. The finalized CFIUS real estate regulations, covered in their own separate and concurrent regulations (to be codified at 31 CFR part 802) and issued this week, go into effect on February 13, 2020.

The New Rules Impact Parties “Who Have Not Traditionally Had Reason to File with CFIUS”

The drastic expansion of CFIUS jurisdiction to real estate transactions unlinked to an investment in a corporate entity was enacted in the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA). FIRRMA also significantly expanded the scope of covered non-real estate investments, which are discussed in a separate analysis. While the real estate rules do adopt many similar constructs present in the non-real-estate rules, e.g. excepted foreign states and excepted investors, Treasury explains in the final rules that it “determined that the technical and procedural aspects of CFIUS’s review of transactions involving real estate are sufficiently distinct from those related to control transactions and certain non-controlling investments to warrant separate rulemaking.” In other words—and this really cannot be overemphasized—CFIUS is very serious about implementing its new authority under FIRRMA to review real estate transactions, so much so that it is subject to its own separate 140-page rulemaking.

Treasury warns that the new real estate rules will impact a universe of transaction parties most likely unfamiliar with CFIUS to date, stating in the Background section of the final regulations that: “The Treasury Department recognizes that FIRRMA’s expansion of the Committee’s jurisdiction over certain real estate transactions may impact parties who have not traditionally had reason to file with CFIUS. This rule therefore seeks to provide clarity to the business and investment communities with respect to the types of real estate transactions that are covered by the new authority under FIRRMA.”

A proposed version of the real estate regulations was released for comment in September 2019 and received 23 comments. The final regulations, in response to comments received, contain “additional clarification in the text of the rule,” “more illustrative examples” and “edits […] for consistency and clarity.” (See a blackline comparing the proposed and final versions of the real estate rules here).

“Appendix A to Part 802—List of Military Installations and Other U.S. Government Sites”

The definition of “covered real estate” refers in part to specifically identified “bases, ranges, and other installations [and] related counties or other geographic areas throughout the United States” which are listed in Appendix A to the rules entitled “List of Military Installations and Other U.S. Government Sites.” As described further below, this appendix may be amended from time to time in the future, and practitioners need to stay abreast of such developments.

There are varying degrees of covered geographical radii surrounding the sensitive locations identified under the rules. The 5 categories of geographical radii or locations covered, include real estate that is:

1) “located within, or will function as part of, a covered port”;

2) within “close proximity” meaning “the area that extends outward one mile from the boundary of such military installation, facility, or property”;

3) within “extended range” meaning “the area that extends 99 miles outward from the outer boundary of close proximity to such military installation, but, where applicable, not exceeding the outer limit of the territorial sea of the United States”;

4) within “[a]ny county or other geographic area identified in connection with any military installation described in § 802.227(a)”; or

5) within “[a]ny part of a military installation described in § 802.227(p), as identified at part 4 of appendix A to this part, to the extent located within the limits of the territorial sea of the United States.”

The ports, locations, and geographical areas covered by these rules are so numerous that Treasury, in response to comments requesting the creation of an online resource, “anticipates making available a web-based tool to help the public understand the geographic coverage of the rule.” Treasury goes on to refer to existing online map tools of other agencies until such a tool is rolled out:

“In the meantime, information relevant to certain aspects of the rule is available online. For example, the Census Bureau within the Department of Commerce maintains a web-based system, TIGERweb, which allows users to select features (e.g., military installations, urbanized areas, and urban clusters) and view such attributes on a map. Additionally, each of the National Oceanic and Atmospheric Administration and the Bureau of Ocean Energy Management maintains a web-based map delineating U.S. maritime boundaries, including the territorial sea and other attributes relevant to the geographic coverage under the rule.”

The Complex Relationship Between the Rules for Real Estate and the Non-Real Estate Rules

It is critical to take note that there is a complex interrelationship between the non-real-estate regulations and the real estate regulations. Real estate transaction parties need to closely examine the context of the real estate transaction at hand to understand which rules apply to them. Treasury states that “Parties should be aware that certain transactions involving real estate could be covered transactions under the part 800 rule.” In Section 802.216 entitled “Excepted real estate transaction” the following is, among other things, listed as falling under that excepted category: “A covered transaction as defined in part 800 of this chapter that includes the purchase, lease, or concession of covered real estate.” Just for more of a taste of the complexity at play, at the end of section 802.216, 11 illustrative examples are included, the first two of which are as follows:

Example 1. Corporation A, a foreign person, proposes to purchase all of the shares of Corporation X, a U.S. business. Corporation X is in the business of owning and leasing real estate, including real estate properties that are in close proximity to military installations identified in part 1 and part 2 of appendix A to this part. As the sole owner of Corporation X, Corporation A will have control over Corporation X. The proposed transaction is not a covered real estate transaction but is a covered transaction under part 800 of this chapter.

Example 2. Same facts as [Example 1] of this section. After the transaction contemplated in Example 1 of this section is completed, Corporation X leases from another person a tract of land that is in close proximity to a military installation identified in part 1 of appendix A to this part. Assuming no other relevant facts, the proposed transaction is a covered real estate transaction but only with respect to the new lease.

Final Rules Leave Room for Further Tweaks

Unusually, the rules are so complex that Treasury expresses its intent (sometimes repetitively) to fine-tune the regulations over time. The Background section of the final regulations makes this clear in several places, for example:

“The Treasury Department anticipates that it will periodically review, and as necessary, make changes to the regulations, (and any appendices), consistent with applicable law, and when appropriate, will provide the public an opportunity to comment.”

“Given the specificity of certain provisions of this rule, the Treasury Department anticipates that it will periodically review, and when necessary, amend the regulations to address changes in the national security landscape.”

“The particular military installations listed in the appendix and the covered distances defined in the regulations were determined by the Department of Defense based upon an evaluation of national security considerations. The Department of Defense will continue on an ongoing basis to assess its military installations and the geographic scope set under the rule to ensure appropriate application in light of national security considerations”

“The Treasury Department anticipates updating appendix A, as appropriate, through notices published in the Federal Register.”

To warn yet again that the rules are complicated is probably an understatement. My recommendation to anyone involved in real estate transactions: (1) print out the regulations and read them like a book before February 13, 2020, and (2) submit your questions to CFIUS.FIRRMA@treasury.gov.