Commentary

Who’s Your New Neighbor?

New Statute May Subject Foreign Buyers and Tenants to CFIUS Review

The Committee on Foreign Investment in the United States (“CFIUS”) has long scrutinized foreign investments in U.S. real estate businesses with properties located in close proximity to sensitive U.S. government installations.  Other investments in businesses of any stripe located in close proximity to national security assets also got a close look – the most notorious being a Chinese-controlled investment in wind farms located near a sensitive Navy facility.  That deal was vetoed by President Obama. 
 
Now comes the Foreign Investment Risk Review Modernization Act (“FIRRMA”), enacted in August of 2018, which greatly expands the ability of CFIUS to look at real estate investments.  No longer is CFIUS confined to foreign investments in U.S. businesses and their related real estate.  Now, CFIUS has the authority to look at any purchase of real estate.  Moreover, for the first time, the investment need not involve the purchase of anything – a lease may trigger review.  Finally, the investment might not entail the purchase or lease of real estate, but instead the acquisition of a real estate “concession” – for example, a parking lot or an airport kiosk.
 
Not all real estate investments, however, will need to undergo CFIUS review.  “Single housing units” are exempt outright.  Real estate in “urbanized areas” is also exempt – although Congress authorized CFIUS to carve out exemptions from the exemption (for example, it is fair to assume that the purchase of a hotel overlooking the White House will not be exempt). Congress also directed CFIUS to limit the application of this provision to “certain categories” of foreign persons, taking into account their connection to a foreign country or government, and whether the connection may affect U.S. national security.  These regulations have yet to be published. 

To be covered, a purchase, lease, or concession to a person of private or public[1] real estate must be:
 

  1. located in the United States;
  2. located within, or function as part of, an air or maritime port; or in close proximity to a United States military installation or another facility or property of the United States government “that is sensitive for reasons relating to national security;”
  3. reasonably capable of providing the foreign person the ability to collect intelligence on activities being conducted at such an installation, facility, or property; or otherwise expose national security activities at such an installation, facility, or property to the risk of foreign surveillance; and
  4. meet such other criteria as the Committee prescribes by regulation.[2]
 
The precise scope of this provision must still be defined by regulation before it can take effect, but the statute is clear that the first three criteria must be met, together with whatever additional conditions CFIUS may impose.  So, for example, proximity to any government office will not suffice to establish jurisdiction – the office must be a U.S. government office – and must be sensitive for reasons relating to national security.  That said, it is important to note that ports – sea or air – will always make the grade.[3]
  
There is a third criterion, however.  Even if the target real estate is in close proximity to a sensitive government installation, it must still be “reasonably capable of [1] providing the foreign person the ability to collect intelligence on activities being conducted at such an installation, facility, or property; or [2] otherwise expose national security activities at such an installation, facility, or property to the risk of foreign surveillance.”
 
What does this mean?  Plainly that the provision captures visual access.  Moreover, in the case of airports and seaports and military installations, all of which are expressly called out in the statute, it likely captures virtually any activity by a foreign-controlled entity with access to the facility – especially access that provides the ability to eavesdrop on air traffic controllers, sea traffic management, or military security.  But it might not reach the lease of an airport newsstand that provides no greater insight into airport security than the information any traveler might obtain by checking the schedule of arrivals and departures. 
 
Recognizing that the term “close proximity” is not self-defining, FIRRMA requires CFIUS to write regulations to ensure that the term “refers only to a distance or distances within which the purchase, lease, or concession of real estate could pose a national security risk” in connection with a sensitive U.S. government facility, the implication being that CFIUS should draw boundary lines, although the committee could presumably extend the boundaries to encompass electronic surveillance.
 
A recent CFIUS case may serve to demonstrate that “proximity” can no longer be measured in feet and yards.  In late October, 2018, CFIUS was reported to have blocked Lixil Group, a Japanese building supplies firm, from selling its Italian subsidiary to a Chinese company.  The subsidiary, among other things, supplied window glass to One World Trade Center.  https://asia.nikkei.com/Economy/Trade-War/US-blocks-Japan-s-Lixil-from-selling-building-unit-to-China Some commentators noted that audio technology allows building materials to be modified for surveillance – among other things, by monitoring window vibrations.  See, https://www.schneier.com/blog/archives/2005/10/eavesdropping_t.html
 
CFIUS has until March of 2020 to write final regulations implementing FIRRMA – but regulations could very well issue before then.  CFIUS also has authority to establish pilot programs to give its new authorities a “test run” before finalizing regulations.  The real estate provisions, which are more complex than they may appear on first reading, could be a candidate for such a pilot program.

This article is for general information purposes only. It is not intended as legal advice, and you should not consider it as such.

[1] Presumably this is intended to reach such investments as lease of public lands for mining or grazing, concessions in publicly-owned train stations or post offices, and like activities.  
[2] CFIUS can’t use this authority to expand the categories of covered real estate.
[3] Proximity to a local government office may figure into a national security analysis, even if it is not the primary basis for CFIUS jurisdiction.  (For example, proximity to New York Police Department (“NYPD”) facilities could be a consideration, given the NYPD’s frequent role in high profile national security investigations.)