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December 10, 2020

Stroock Client Alert

By: Jeffrey R. Keitelman, Kim Pagotto, Seamus Curley

There is a new bill circulating through Congress that could have significant implications for foreign-owned building owners who lease to high-security federal agencies.

The new Secure Federal Leases from Espionage And Suspicious Entanglements Act (“Secure Federal LEASEs Act” or the “Act”) was passed by the Senate in March, and the House in November. It is now back at the Senate for another vote to reconcile differences from the House version. If reconciled, President Trump could sign it into law before the expiration of his term.

The Act was proposed in response to a January 2017 Government Accountability Office report which determined that several “high-security” office space leases were in buildings that were foreign-owned and the occupying tenant agency (i.e., the agency that is actually housed in the leased facility, which often is different from the federal agency that signs the lease) was not aware of the foreign ownership.

The Act requires that before entering into a new lease or approving a novation agreement for a “high security facility,” the General Services Administration (GSA) (or any other agency acting on its own independent statutory leasing authority except for Department of Defense (DOD) or intelligence agencies) must require the owner to identify and disclose whether the “immediate owner” (or its “highest level owner”) and any lender is a foreign entity and the country of origin of any such foreign entity. Such identification and disclosure is required by each owner each year.

If a foreign ownership disclosure is required, the tenant agency must be consulted with respect to potential security concerns and, if they exist, appropriate mitigation measures. The lease must also include details regarding physical access (or limitations or restrictions to the same) to high security spaces for the foreign entity.

In the most recent version of the Act:

  • An “immediate owner” is an entity other than the offeror for a lease (which tend to be special purpose entities, the sole asset of which is the building being offered) which has direct control of the offeror. The “highest level owner” means the entity that owns or controls an immediate owner. Detailed ownership information is not required if the foreign entity is “widely held” (i.e., has 100 natural persons or more as direct or indirect investors, such as mutual funds, trusts, and other pooled investment vehicles).
     
  • A “beneficial owner” would be any natural person who (a) exercises “control” over the covered entity or (b) has a substantial interest in or receives substantial economic benefits from the assets of the covered entity. Currently “creditors” are considered an exception, but if the creditor meets the requirements of (a) or (b) above, it could be covered depending on the terms of the applicable loan or credit facility. Also, if a creditor were to foreclose on an asset, a novation would be required so the disclosure requirement would eventually apply.
     
  • “Substantial economic benefits” means having an entitlement to the funds or assets of an entity that, “as a practical matter,” enables the entity to control, manage or direct a covered entity. “Control” means (i) having the authority or ability to determine how a covered entity is utilized or (ii) having some decision-making power for the use of a covered entity.
     
  • “High security facilities” are those with an Interagency Security Committee (ISC) designation of Level III, IV or V. The ISC security designation is based on an evaluation of several applicable factors, such as mission criticality, symbolism, facility population, facility size, whether it is part of a federal center or complex, and integration of countermeasures. While Level V (i.e., the highest security rated level) leased facilities are rare, Level III and Level IV facilities are more common and the requirements will affect a significant number of leases.

Currently, the Act includes exceptions for DOD and intelligence agencies, but it is unclear why these are excepted. One theory is that, to the extent that such agencies may be directly entering into leases under their own independent statutory leasing authority, such agencies do (or should be expected to) perform their own due diligence on the nature of the ownership of any such leased facility.

The Act requires that the GSA develop a government-wide plan for the collection of required information. The GSA has one year from the date of enactment of the Act to present its proposed plan to Congress and not later than two years from the date of enactment of the Act to implement the plan. This means the Act’s impact could be felt on new leases and novation agreements as soon as the end of 2022, so government lessors would do well to begin evaluating ownership structures, the issue of substantial economic benefit, and financing sources on current and prospective government leases.

While the Act does not specifically dictate what the plan should be and how GSA should implement the plan, the Act does acknowledge that GSA currently collects highest level and immediate ownership information through the System for Award Management (SAM) but without a foreign entity disclosure. SAM registration is required in order to receive funds from a federal contract (including leases) so it would seem likely that GSA will utilize the current SAM infrastructure and add the disclosure requirements there. Further, SAM registration must be updated annually already, so the terms of the Act could be implemented easily in that regard.

It is important to note that the requirements set forth in the Act are solely independent of (and in addition to) any applicable regulations with respect to the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA) or oversight by the Committee on Foreign Investment in the United States (CFIUS).

Learn more about Stroock’s Government Real Estate and National Security practices.

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For More Information:

Jeff Keitelman

Kim Pagotto

Seamus Curley

This Stroock publication offers general information and should not be taken or used as legal advice for specific situations, which depend on the evaluation of precise factual circumstances. Please note that Stroock does not undertake to update its publications after their publication date to reflect subsequent developments. This Stroock publication may contain attorney advertising. Prior results do not guarantee a similar outcome

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