By Doreen M. Edelman, Ted Hunter, Abbey E. Baker, and Christian C. Contardo
Could your upcoming commercial real estate transaction or investment raise national security concerns?
Under recently developed federal law, the Committee on Foreign Investment in the United States (CFIUS), a long-standing interagency committee chaired by the Department of the Treasury that was formed under federal law in the 1950’s, is now charged with considering this question; if it determines that there are national security implications to your real estate deal, the federal government may have the right to prevent the deal from happening, order that it be unwound, or impose penalties if it has already closed.
In February 2020, new regulations issued by Department of the Treasury granted the U.S. government broad authority to intervene in a wide variety of real estate transactions involving foreign investors if CFIUS identifies a national security concern related to the transaction.
However, CFIUS’s regulations do not clearly define what constitutes a national security concern and the law is evolving rapidly to address emerging national security trends.
This lack of clarity can challenge companies trying to determine if transactions or investments involving their real estate, products, technology, non-real estate based businesses, or investments could trigger a CFIUS review.
CFIUS’s mandate has only recently expanded into exploring the national security implications of a wide range of real estate investments by foreign persons or entities; outside of the real estate context CFIUS has long reviewed deals where critical or emerging technology that may have military applications are involved, as well as deals involving critical infrastructure like electric grids, telecommunications systems, or sensitive data about U.S. citizens which in the wrong hands could harm U.S. national security interests.
The February 2020 changes to the regulations represent an expansion of CFIUS’s jurisdiction beyond its traditional scope of reviewing foreign acquisitions of U.S. businesses, including acquisitions of real estate.
Due to evolving concerns about information sharing among partners or co-investors, CFIUS’s authority has now expanded to include not only direct foreign control of sensitive real estate but also passive foreign investment in real estate, including the acquisition of even non-controlling equity interest in a business that owns real estate that could have national security implications.
In addition, almost every kind of commercial real estate transaction is now subject to review, including the purchase or lease of real property to a foreign-owned investor or company that could raise national security concerns, as well as the granting of any right or concession that conveys to a foreign-owned party rights which include physical access to such a property, the right to exclude others from that property, the ability to improve or develop that property, or the ability to attach fixed or immovable structures on that property.
Real estate that could raise national security concerns include any kind of property that is proximate to certain governmental or law enforcement agencies, including U.S. military installations and Department of Defense facilities, air and sea ports, production and research and development facilities used by defense contractors, and law enforcement or intelligence agencies such as the FBI, CIA and NSA, to name a few.
As a result of this expansion, foreign-owned companies and foreign investors seeking to acquire even a non-controlling interest in U.S. real estate and U.S. owners planning to sell majority or minority interests in real estate to a foreign buyer, not to mention owners of real estate in proximity to a national security sensitive facility who are looking either to enter into leases of space in their building or sell their property or grant concessions or interests therein to foreign-owned companies or persons, now need to be aware of and structure their deals around the potential for a CFIUS review of their transactions and its potential implications.
If a landlord leases space in its building to the FBI or a defense contractor, for example, their leases with other tenants could have national security implications under the new regulations.
Impacted companies and investors should consider filing a notice with CFIUS to obtain a safe harbor ruling prior to the closing of their deals because the downside to not doing so could result in CFIUS review that leads to an order unwinding the deal. In addition, CFIUS can also:
- Impose penalties;
- Block a transaction;
- Force the foreign purchaser or investor to divest its interests in U.S. real estate or a U.S. company; or
- Require the parties to alter the transaction to mitigate any national security concerns.
While submitting a notice for CFIUS review is technically voluntary and there are filing fees associated with the review, parties choosing not to file for review remain vulnerable to a unilateral CFIUS review and the consequences thereof at any time, even after a transaction has closed.
There are also a number of exceptions that have been identified that will make some investors happy, such as exempting from CFIUS’s review the sale or lease of most individual housing units, real estate transactions in most urban centers, as well as real estate transactions with certain investors from Australia, Canada and the United Kingdom.
However, due to the fact that this is an emerging area of the law and the consequences of not obtaining a safe harbor could be severe, we expect that most prudent companies and investors will opt to engage sophisticated counsel to help them robustly investigate whether their transaction could have national security implications and, if so, to explore any applicable exemptions.
Counsel will also be able to help the parties craft their deal documents in a manner which protects them against the consequences of an adverse CFIUS determination.
- Doreen M. Edelman, Abbey E. Baker, and Christian C. Contardo are members of Lowenstein Sandler’s Global Trade & Policy Practice. Ted Hunter is chair of Lowenstein Sandler’s Real Estate practice.